Javelin Group, part of Accenture Strategy, provides strategy consulting and digital transformation services to the world’s leading retailers and consumer brands. Here you will find advice and insight to help retailers thrive in the new age of retail.
The grocery business is having its moment. Retailers are adapting to the challenge of online faster than many can keep up with. Ocado’s pivot into an e-commerce platform provider and Walmart’s continued heavy investment into digital are just two examples of how the market is responding.
As retailers are forced to consider existing logistics strategies in response to customer demands and fierce competition, new innovative fulfilment models are being explored to address the need to provide fast, cost effective and accurate e-grocery delivery services. The question is if these new operating models can provide an answer to the profitability challenge of e-groceries?
Online is continuing to outperform other grocery channels and there is a renewed focus on how retailers can effectively balance growth with profitability. E-grocery is fundamentally a high volume, low margin logistics business. Its cost base is driven by order fulfilment and last mile delivery which accounts for over 60% of total cost and 80% of variable cost. Choosing the right operating model to most effectively pick and deliver orders is the key that unlocks better profitability and competitive customer propositions.
What is the trade-off with existing e-grocery fulfilment models?
Meeting customer expectations around product choice, availability and delivery without compromising on quality or price is challenging. For traditional bricks-and-mortar retailers, a pick from store model helps to leverage existing property networks, supply chains and management to better utilise existing assets and, being located closer to customers, reduce last-mile costs. However, as volumes rise the benefits are impacted by the manual processes deployed in store which increase the risk of inaccuracy, product damage and impact on the store’s regular shoppers.
Large automated centralised fulfilment models on the other hand provide a method to reduce picking cost and errors whilst improving customer metrics (availability, range and quality). However, this option lacks flexibility and requires significant upfront investment as well as scale to achieve the lower operating cost. Being situated outside of urban areas also results in longer delivery distances from customers, increasing delivery costs.
This is now changing. In the last two years solutions have appeared on the market which can give the benefits of automation at much smaller scale and much lower cost. These new fulfilment operations enable automation to be effectively applied at a store level, combining efficient picking with more local last-mile delivery in what is being referred to as micro-fulfilment.
What is micro-fulfilment and how does it work?
Micro-fulfilment is the term used to describe automated small-scale fulfilment centres that are deployed inside of urban areas, which are naturally closer to customer homes. They’re small enough to be installed at the back of supermarkets, helping to convert unprofitable slow-moving space into profit centres.
Micro-fulfilment potentially offers a winning formula of high-density automated item-picking (reduced picking costs) and in-city deployment (lower delivery costs), providing an opportunity for retailers to reduce total logistics costs whilst improving quality and offering a good product range and short lead-times.
Established retailers are currently claiming a throughput of 3,500 orders per week (60 items per order) within a 1,000 m2 space, handling 10,000 to 12,000 SKUs across three temperature regimes at a productivity of between 130–170 units per hour. Our modelling suggests the saving would be £3 – £5 per order when compared to a traditional pick from store model. If this was to be achieved it would be truly transformative for e-grocery profitability.
Who are the players disrupting e-grocery fulfilment?
Three new start-ups that are making headway in this space are: CommonSense, Alert Innovation and Takeoff. All three have developed solutions that provide efficient, low footprint picking technology that can be quickly installed within existing underutilised space.
Alert Innovation has developed an automated storage and retrieval system called Alphabot specifically designed for online grocery and is currently trialling its solution in a pilot program with Walmart. Its first facility is a 20,000-square foot extension of an existing superstore in New Hampshire and is planned to launch early 2019.
Takeoff, rather than building automation technology in-house, has partnered with Knapp, an established goods to person hardware provider. They are using Knapp’s existing shuttle technology and combining it with an end-to-end e-grocery platform. Using this proven modular technology, they are looking to quickly scale helping retailers to rapidly develop profitable e-grocery offerings at a store level. They have recently announced their first U.S. partnership with the Florida-based grocer, Sedano’s Supermarkets and plan to open their first ‘robotics supermarket’ later this year.
Israel’s CommonSense Robotics, like Alert Innovation has developed its own in-house robotics technology. Unlike other models, the solution is not integrated to stores but runs as an independent service that is fully operated end-to-end by CommonSense. With plans to build an independent integrated network of micro-fulfilment centres they will be announcing their new U.S. partnership over the next few months.
What impact could this have on e-grocery?
On a fully costed basis, online grocery has a net-net margin between +2% (at best) and -10%. Taking £3 – £5 per order out of the logistics costs could transform this margin to be much closer to store only grocery of between 2% and 5%. Therefore, this would make the growth of online much less profit dilutive.
There are also potential additional benefits to introducing a back-of-store order fulfilment capability. Micro-fulfilment changes the sales / sq. ft. equation allowing back-of-store space to more effectively compete with merchandisable store fronts. As a result, it could help transform the in-store experience as we know it. Retailers instead, for example, might focus on fresh and experiential food offerings that would satisfy customers’ unique and ever-changing needs.
The growth of digital has created complex customer journeys and cross-channel behavior, interspersed with disruptive new players looking to capture value from the retailer-consumer relationship; in response, retailers are being forced to evolve and innovate the role of the physical store.
Nowhere else is the impact of the changing role of the store being felt more than by retail real estate investors including shopping malls, retail parks and high streets, and this pace of change is placing real strain on the traditional landlord / tenant commercial business model. To survive and thrive, landlords must go beyond making incremental changes, but instead explore and embrace radical new solutions.
There are three key areas landlords need to explore – creating robust ecosystems, re-purposing space, and developing new leasing models.
1 Online marketplace and ecosystem
eCommerce will continue to grow over the next few years, yet only 17% of consumers are strictly digital-only.1 As the role of the physical store evolves, so too does the physical mall environment, and successful mall operators can bridge the gap between online and offline to create a synchronised shopping experience.
Retailers are exploring marketplace models to vastly increase their assortment, win new customers and have better end-to-end control of the customer experience. One-third of retailers are actively seeking to build robust ecosystems, and 82% of retailers believe ecosystems are critical for disruption.2
This also presents an opportunity for a coordinated digital offering for mall owners to build an online marketplace, which could work in synergy with physical malls to offer a seamless customer experience.
There are several potential B2C and B2B marketplace models for mall owners to consider:
The Traditional Marketplace Model, which enables third-party sellers to sell products on a fixed-price online marketplace. A great example of this is the Amazon Marketplace, which also offers fulfilment by merchant or fulfilment by Amazon. It is key to bear in mind that the marketplace operator, in this case Amazon, owns the customer relationship, including customer service.
The Affiliate Model, which provides an online platform to connect customers with retailers’ websites, such as UK mall operator intu.co.uk, which generated more than £9m in partner retailer sales from over 5m website visitors.
The Integrated model, which provides visibility of stock to the customer through real-time inventory updates, but the retailer completes fulfilment. This presents huge benefits by increasing footfall, however has substantial drawbacks through its increased complexity. ECE’s digital mall, for example, currently lets customers see stock availability and reserve items to purchase in-store. ECE’s app has more than 24 participating retailers integrated. It offers in excess of 500,000 products and generated 300,000 hits in its first year.
It is important to get on the front foot and build robust ecosystems which allow landlords to form relationships with partners, including retailers, technology companies and peers, that will help drive footfall, increase spend and enhance the customer experience.
2 Repurposing Space
Changing consumer behaviour and digital channel shifts are causing declining footfall and rising vacancy rates at malls globally, and the pressures caused by channel shift are only going to intensify. It has been predicted by WEF that digital commerce is expected to account for 40% of consumer spend by 2028 in developed markets.3
Mall owners are now considering various uses to repurpose space. In the UK for example, real estate investors are converting old/closed B&Q stores such as Wandsworth or Trafford into revenue-generating residential developments.
As ‘Fulfilment by Amazon’, which is growing at 38%, is a key driver of revenue growth for Amazon, the business has converted many former mall sites into last mile fulfilment centres. Recently, Amazon has constructed on two shopping centre sites in Ohio. Furthermore, mall operators should explore supporting omni-channel fulfilment.
Mall operators must also respond to some of the major shifts in consumer wants and needs. The shift in spending towards well-being is a great example. To increase visitor frequency, Westfield Topanga Mall expanded into a mixed-use development and introduced The Village – a health-focused area with ‘micro-fitness’ studios, two gyms and a health clinic. The Village increased Topanga’s customer visits by 3.6% in 2017 (an additional 7.5m visits). Other such consumer trends might include healthcare, wealth management and community services.
It is crucial to create the blend of asset usage mix, and there is not a ‘one size fits all’ approach. The drivers for each will be developed on an individual site by site basis.
3 Leasing models
As consumers value experiential over transactional, mall operators face a shift in responsibilities from merely renting space to investing on curated placemaking and should be rewarded accordingly. However, this is also dependent on retailers evolving their organisations and integrating online and offline P&L ownership. Furthermore, the real estate valuation model would need to change (but that is not being discussed here).
Models are being tested by leading mall developers, which include:
Flexible lease terms for new types of occupiers that are emerging beyond the traditional tenants. Brands appreciate the RISPO (Research In-Store Purchase Online) impact and the importance of having a physical presence. Many landlords are facilitating pop-ups through flexible leasing such as “The Edit” from Simon Property Group, which helps launch pureplay and international brands to consumers.
Evolution of the traditional percentage rent models, from a pure sales volume only based metric, when considering a store’s contribution to an omnichannel sale. Focussing on store sales ignores the multi-functional role of stores, such as click-and-collect and in-store online sales in percentage calculations
Geo-fence percentage rent models include all sales within a geo-coded catchment area. A different percentage rate would be applied to different categories of sale, e.g. click-and-collect, kiosk, etc. to account for the store’s contribution to different touchpoints
Alternative performance metrics to allow mall operators to be rewarded for delivering a stronger customer opportunity. Metrics to be considered could include – net shopping hours, active footfall, lifetime customer value and customer acquisition volume, and basket size
Currently, these models are only theoretical or being tested by a small number of landlords. However, for the long-term success of landlords’ business models, new economic leasing models must be developed.
In the end, shopping destinations will continue to evolve beyond just traditional shopping to survive. New uses are increasing every day, including entertainment, showrooms, pop-ups, fulfillment, F&B, health and lifestyle. The challenge is to find and adopt the right model to facilitate your business to thrive in this era of the new retail normal.
(1) Accenture Strategy 2017 Global Consumer Pulse Research
(2) Accenture Strategy 2018 Ecosystems Research Industry Report
(3) The World Economic Forum, Accenture Strategy 2017 Shaping the Future of Retail Report
Despite a growing number of consumer brands and retailers already working together to step up key business areas, significant collaboration opportunities remain still untapped or not thoroughly exploited for most. While this is not new, collaboration has never been so necessary and complex due to digital disruption.
To provide the advanced omni-channel propositions that customers expect today, it is essential for manufacturers and retailers to team-up and strengthen their ties.
We can distinguish three main levels of collaboration between brands and retailers
1 Transformative: Develop activities to optimise experience and service for consumers, e.g. in the development of assets across channels, service improvements, product or distribution innovation.
2 Traditional: Optimise core areas of current collaboration,e.g. how do brands and retailers think about business planning, trade terms and how do they manage the category and marketing activities?
3 Foundational: Create joint initiatives to build solid omni-channel capabilities and enablers, e.g. aligning operations for maximum efficiency and co-develop (and even embed) technological solutions and data sharing.
…which in turn break down into 12 main support areas enabling omni-channel excellence:
Most often, main collaboration activities revolve around commercial, marketing and merchandising areas, very much focused on the day-to-day trading. On the other hand, collaboration around transformative and foundational areas is generally less explored or short lived despite offering the highest value creation potential. This is mainly due to the higher investments required, the lack of resources committed (and support from leadership), and the often uneven benefit split between retailers and manufacturers (usually benefiting retailers).
Collaborating in foundational areas can be especially critical to enable an advanced and efficient proposition, and many brands and retailers are already reaping its benefits:
Operations & fulfilment: Tracking and sharing of inventories enables advanced omni-channel service and delivery propositions. For brands, this avoids sales losses (having stock where and when needed) and significant operational improvements. For retailers, it offers an easier access to brand’s stock, more flexibility and the incremental sales from brands directing sales to stores.
Best practice in this area are brands providing access to retailer inventory from brand sites, ring-fenced stock, quicker order turnaround, product and packaging innovation, flexible pallet sizes or use of RFID inventory tracking. Gillette US, for example, provides stock availability of its products on Walgreens and Walmart at a store by store level on its brand site.
Omni-channel expertise sharing: Brands can bolster omni-channel and digital expertise at retailers through training, shared best practices, resource sharing or establishing omni-channel specific communities. For brands and retailers, this helps mutually grow omni-channel maturity and deepen understanding of ways of working.
Data, analytics and insights: Shared operational and consumer data enables brands and retailers to make better informed commercial decisions, track effectiveness of activities and improve operational efficiency.
Numerous technology platforms allow brands and retailers to share access to the same information. A major UK grocer, for example, shares real time POS and inventory data with brands, which means both parties can see the same dataset and reporting and analytics, simulate scenarios to plan promotions and shipments, and identify out-of-stocks across channels
Technology strategy: Aligned technology roadmaps allows investments optimisation and implementation success. Brands benefit from early visibility of changes and greater return on aligned investments. For retailers, it allows access to advice and support and best practice insights from other retailers/markets.
Can a direct-to-consumer (DTC) proposition also help brands support their retail partners?
Even if this may sound counterintuitive at first, the development of DTC platforms is often not meant to generate relevant sales volumes, especially in FMCG. Brands understand very well the challenges of making a low margin category profitable and attractive for consumers on DTC. However, despite the limited direct sales potential, its development can enable opportunities for retail partner support:
Consumer insights: As per the earlier point, consumer insights are vital for brands to place their investments and inform their product development pipeline. Retailers often limit the information they share with brands due to lack of capabilities or internal policies. A DTC channel enables brands to directly access consumer insights at a large scale. If shared, this information can also complement retail partners’ own insights, enabling them to further improve their operations.
Product innovation and testing:Introducing a new product represents a logistical hustle and potential opportunity cost risk for retailers, who often demand advantageous commercial terms and high marketing investments. Brands can use DTC models to test new concepts, mitigating risks and financial commitments for both. On DTC channels, brands can be more bold and playful, ‘cheaply’ testing more concepts (also including new omni-channel models) before pushing them to retailers.
Publicity/PR:To cheaply increase their content pool, the media often covers innovative new product launches or distribution methods. A DTC platform can allow brands to showcase their innovations, not only to test them (most of them will never be meant to be commercially viable) but also to generate free publicity, generating brand awareness and ultimately benefiting retailers.
Staying relevant in the digital era by building advanced (and evolving) omni-channel propositions is one of the main challenges retailers and brands are facing today. Exploring and fostering collaboration opportunities across key business areas is a fundamental driver and accelerator of change and innovation.
One of the most significant changes in the consumer goods industry in the last few years has been the emergence of transactional direct-to-consumer (D2C) propositions. These new ventures stand in stark contrast to the traditional route to market for these firms (where brands have sold to wholesalers, distributors and retailers), and offer brands an opportunity to develop a direct relationship with the end consumer.
To this end, it is crucial for all consumer packaged goods (CPG) firms to understand why they should consider D2C, and how they can assess whether it can be a successful strategy for them.
Why consider D2C?
With the CPG landscape changing quicker than ever before, brands are facing multiple pressures:
1 Increasingly competitive landscapes fueled by a lower cost of entry for niche brands: A multitude of niche brands are emerging, particularly in categories where inspiration and emotion play a role in purchase decisions. With greater access and transparency than ever before, new brands with compelling USPs can easily win the hearts and loyalties of consumers. Indeed, according to research by Nielsen, while smaller brands made up just 19% of the US market in 2017, they contributed 53% of market growth.
2 Rise of automatic reordering driving a move to “default” brands for lower engagement purchases: New technologies such as automatic reordering (e.g. Amazon Dash) and voice search (e.g. Alexa, Echo, Google Home, Cortana) are starting to take hold, encouraging consumers to turn to “default” brands for their lower engagement and habitual purchases. This means that unless brands have a voice strategy and engage with these new touchpoints they increasingly run the risk of remaining “cut off” from consumers’ habits and homes.
3 Pressure on margins due to the rise of Amazon and an increasing retailer network: Amazon is becoming ever more powerful (research suggests that 50% of US consumers start product searches on Amazon) whilst the largest retailers are looking at strategic opportunities to increase their dominance through M&A (research by Accenture Strategy found that in the past two years alone, over a third of retailers globally have completed five or more acquisitions). Although the impact of the high profile consolidations has yet to be worked through, it is likely to result in a pressure on brands to squeeze margins or invest more with these players.
Given these trends, it is more important than ever for established brands to become and remain front-of-mind with consumers to drive continued sales. A key way to do this is to establish a direct dialogue with the end consumer and build direct consumer relationships. This blog explores how to assess whether this is a viable option for your brand.
What makes a transactional D2C proposition viable?
D2C offers advantages beyond additional sales, including marketing activation, brand awareness and access to end consumer data – all of which are key building blocks for building stronger brand loyalty. However, while it is relatively straightforward to launch a D2C operation, it is much more challenging to turn it into a scalable and profitable business. Before launching and scaling a D2C proposition, brands need to consider whether it meets two key criteria:
Economic – is there a potential to achieve profitability at an item level?
Consumer proposition criteria – can we be suitably differentiated and distinctive to drive demand?
i Per-item economic viability criteria
Ultimately, transactional direct-to-consumer propositions must be profitable. The economics to drive a profitable D2C proposition are much more complicated than the economics of selling via retail partners, and are often underestimated. Due to high fulfilment costs, premium rather than everyday products tend to make for more viable D2C propositions, although brands can reduce these high costs with optimised packaging, focussing on temperature, size or weight, and increase margins as a result. Brands such as Graze, Bloom & Wild and Splosh, for example, have developed products that can be delivered via Royal Mail through the postal service, at a cheaper cost that courier delivery.
Selling multiple products in multi-packs or bundles can also work, and this approach is particularly suitable in non-perishable categories with high purchase frequency, such as sports nutrition and personal care. Both Harry’s and Dollar Shave Club for example sell a starter “bundle” with the aim of ensuring the first customer order is profitable.
As well as reducing or covering these costs, brands can also pass them onto the consumer, fully or partially. This will only be possible, however, if the proposition is strong and the price is such that a delivery fee is acceptable. On top of this, order frequency must be sufficiently high not only to compensate for the investment in D2C capabilities, such as technology platforms and operational processes set-up proposition, but also to serve the end goal of consumer-brand relationship building.
ii Consumer proposition criteria
To purchase directly from a brand, consumers need to be offered something that is sufficiently distinctive versus what they are offered by purchasing through a retail partner channel. Are the product and proposition unique, convenient and price-competitive enough to constitute compelling options? Unless the answer is “yes” to at least one of these questions, the proposition will likely struggle to create enough demand to become viable.
Brands can choose to focus on only one of these three aspects as the pillar of their proposition. Leading on convenience is challenging given that consumers likely have near-immediate, cheap access to a grocery store or to Amazon’s next-day and same-day delivery options – for most brands, it would be very costly to match such a proposition. Alternatively, brands can propose a unique, exclusive product for which consumers would be willing to pay a premium and/or wait a little longer.
Naturally, consumer proposition decisions must be tied to consumer research at all stages of the “test & learn journey” – only by using a consumer-first approach can a brand ensure that their D2C proposition is positioned for success.
iii Long-term economic viability criteria
To complement these basic viability criteria, brands must also consider the economics of customer acquisition and D2C set-up. For a D2C opportunity to have merit, consumer lifetime value (CLV) must be greater than these initial costs. Subscription-based D2C models imply a relatively high purchase frequency, and therefore (theoretically) drive higher CLV, which can help offset high acquisition costs.
However, with some high profile subscription-based D2C brands struggling to retain consumers, convenience-focused propositions (replenishment) could be more viable as consumers are less likely to lose interest in the product, to try to drive established behaviours and reduce the likelihood of cancelling.
Other brands are looking to build a strong, loyal community of consumers and use this to drive increased sales. Some sports shoe brands, for example, promote local running and fitness events, driving brand affinity. They utilise their brand websites but also other channels such as Facebook messenger or Instagram to engage and promote their events and brand.
To summarise, CPG businesses and other brands are under immense pressure to act quickly if they wish to survive in an increasingly competitive and digital market. Developing a direct-to-consumer proposition has clear advantages, enabling the brands to hold all of the margin, to stay front-of-mind and to develop a direct relationship with the end consumer. However, it is not the silver bullet that many brands are hoping for, and it is critical to ensure that the proposition is compelling but also economically viable.
As the UK’s high streets change rapidly in the face of shifting consumer trends and digital disruption, retailers need the right insights at their disposal to help inform their retail store location strategy.
To this end, Javelin Group has developed a new report – DESTINYSCORE – to add to its portfolio of retail location intelligence tools, which anticipates the future trajectory of UK urban centres, based on retail, consumer and macro-economic forces.
DESTINYSCORE’s hypothesis is that a strong and sustainable retail offer in a town centre location is the function of a range of factors. Each high street is measured against these factors and categorised from stable to challenged. Stable venues are those with the most positive outlook, whereas challenged venues are those where a significant downturn has begun or a difficult future may lie ahead.
Although DESTINYSCORE focusses on quantifiable factors, qualitative local factors (outside the scope of the study) such as heritage and community, can also play an important and influential role in a town’s fortunes.
It’s unsurprising that the report confirms a swathe of retail venues cutting across the UK will become increasingly threatened by the deep changes that are impacting retail globally, and the North/South divide in the UK is alive and well with a high proportion of challenged venues in the northern regions.
But, there is also good news – five years on from our original study, we find that, whilst structural change in the retail sector at a national level may be irreversible, local outcomes continue to vary.
Where regeneration, investment and community-led initiatives have occurred, many venues have experienced a shift in outlook, representing clear changes in the towns’ fortunes and future prospects.
For example, venues including Richmond (Yorkshire), Nantwich and Hereford have moved from being classed as challenged five years ago into most stable in 2017. Many of those urban centres showing improvements have benefited from targeted investment that has fuelled rejuvenation, resulting in increased occupancy rates in retail, F&B and leisure, which has consequently helped to stabilise the status of these venues.
Similarly, major conurbations can buck the overall trends of the region in which they are located. Edinburgh is a prime example – with 30% of venues assessed within the conurbation classified as most stable despite Scotland ranking amongst the UK’s most challenged regions. These extreme disparities within regions may require a more radical redistribution of regional investment funds to address the imbalances.
For retailers, DESTINYSCORE can identify stable and challenged venues across the store estate, and help retailers to focus their attention where it is most needed.
How is our current LfL performance tracking against venue health?
Which venues will deliver acceptable sales and profit returns over the next five years?
Where should we fight hardest at lease renewal?
Are we using the best analysis and data to help us understand changing local market dynamics?
Are we taking the right actions today to give us the right store footprint for the future?
We have assessed the store portfolios of 200+ leading UK retailers (each with 50+ stores across the urban centres assessed), identifying those with the most significant bias in their store estate towards challenged venues and those primarily located in stable urban centres.
The list of retailers with high exposure to challenged venues is dominated, perhaps unsurprisingly, by value-oriented formats. However, the question remains whether these venues can continue to attract sufficient shopper numbers to the high street to provide attractive long-term opportunities for these well-adapted formats.
Retailers in these types of locations may need to be thinking about moving to shorter/more flexible leases to provide protection, reducing footprint into smaller store formats and/or managing their operating cost profit carefully. Our experience with many retailers trading across a wide cross-section of location types has tended to confirm this hypothesis with lower growth being consistently delivered out of the most challenged venue classifications, irrespective of the positioning of the retail format.
Whether a retailer’s store estate consists mostly of challenged or stable venues, or a mix of the two, this kind of insight is extremely valuable in understanding the direction of travel of each venue and can be used to strategically inform the future shape of the store estate.
For developers and investors, DESTINYSCORE can highlight the long term commercial viability of venues and consider strategic investment in retail assets.
Is there latent growth potential? Is there a viable turnaround opportunity?
What local competitive threats exist?
Can proactive asset management deliver a more compelling commercial proposition?
Can we communicate a compelling message to local shoppers and target retail tenants?
For Local Authorities, DESTINYSCORE shines a light on those administrative areas that may require the most proactive management.
This could be either to remain commercially viable as retail destinations and/or to plot a course of transition towards a more multi-functional town centre environment with retail becoming a less critical element of the wider urban mix.
This is particularly true for venues that have remained challenged retail destinations for the last five years and continue to be so. In these instances, some local authorities may choose to manage decline in favour of their more stable options. In these venues, local authorities must act strategically, investing proactively where sustainable opportunities can be demonstrated or where political necessity insists.
However, given the national scale of change required, it may not be sufficient or optimal for local authorities to act independently to protect their urban centres. A more strategic region-based approach may be necessary to deliver more sustainable long-term outcomes.
There is certainly no quick fix here, but rather, the findings from this study highlight the need for proactive and strategic intervention from retailers, developers and investors, and local authorities.
DESTINYSCORE should serve as a call to action for some, perhaps a warning to others. Either way, complacency on the high street is not an option.
As many retail venue operators including malls, retail parks and mixed-used locations respond to changing consumer behaviour, they need to reinvent themselves to remain relevant. In this new era of retail, this reinvention must be supported by a strong digital strategy to build lasting and meaningful relationships with customers.
Many retail venue operators have invested in apps or the latest shiny proptech, such asbeacons, but technology on its own does not constitute a digital strategy.
To be successful, operators must have a clear long-term vision, enabled by a coherent roadmap, that puts them on the path to digital readiness, and combines the best of the digital and physical worlds.
1 Customers are both retailers and shoppers
Firstly, and very importantly, venue operators now appreciate their customer is no longer just the retailer. They need to understand their shoppers, which means using the available data to comprehend current behaviours and predict future requirements.
The shopper must be at the heart of any digital strategy. There is now a huge amount of data from a diverse range of sources, such as exit surveys, credit cards, footfall, CRM, social media, and mobile phone movement analytics, as well as traditional catchment data, which can be used to drive decision making.
Using the correct blend of existing and supplementary consumer data to truly understand how your shoppers’ behaviour and requirements are changing is key to building a proposition that will align with their behaviour patterns in the years to come.
New models will need new organisational structures and employee skill-sets as businesses transform into customer-centric, insight-led businesses with strong data analytics and customer insight teams. The key will be building teams with the agility to adapt.
Technology, data and analytics need to be used to their full potential, while ensuring they are aligned with and driving the overall strategy. Innovation is key here – adjusting to the new normal will require teams to work at speed through testing and iterative design. Mapping use cases to existing and new technology for specific scenarios, which enhance customer experience or improve operational efficiency, will help with the prioritisation of future investments.
It is clear from recent research that over half of consumers still value the physical store environment.1 Despite the arrival of the online behemoths and the consequential shift in purchase behaviour, only 17% of consumers are digital-only consumers.2
Shopping malls may have challenges, but the varied nature of the landscape offers owners a unique opportunity to use digital to bridge the physical and digital worlds in a way that will excite and engage current and future customers.
Inspired by how retail disrupters operate, a new analytics-driven Buying & Merchandising (B&M) operating model is evolving that is rapidly generating incremental business value.
New analytics applications, delivered with a compelling employee experience (EX) and transformation methods based on agile techniques, are being applied across the end-to-end product lifecycle to deliver both performance uplifts and team benefits.
This blog outlines the five key components of the new operating model, the impact on retail B&M ways of working, team roles, capabilities and solutions, and how transformation can be accelerated in your retail business.
What are the key components of the new analytics-driven B&M operating model?
1 Automation of key meeting reports: Leading retailers are automating reporting for key meetings (e.g. weekly trading meetings, range selection meetings) using new generation data visualisation tools, which enable B&M professionals to become analytics and insights experts, without input from data scientists.
2 Delivering actionable recommendations via analytics platforms: Another key component is the creation of an analytics platform to deliver “next best action” recommendations based on exceptions to business rules and predictive analytics. These platforms support functions, such as range planning and markdown modelling, and can also be used to combine data from standardised spreadsheet templates allowing consolidated cross-category and channel views.
3 Product, channel and customer data blending: New analytics solutions enable the combination of data from different sources to deliver new customer-focused, omni-channel insights for strategic range development and performance optimisation. The tools overcome legacy system constraints and make use of all available data, both internal and external, to look for segments and trends down to a local level. These capabilities can facilitate everything from space optimisation to hyper localisation.
4 Data attributing and quality: Analytics needs high quality, enriched data. The new analytics-driven operating model focuses on data attributing and quality, which ensures that everyone is working from the same “golden record”. Furthermore, the tools built into analytics applications track data quality on an ongoing basis. Data attributing can include product, supplier and customer data.
5 Critical path collaboration: Optimising performance relies on cross-functional communication and collaboration. The new model enables progress tracking via analytics on all key business milestones and critical paths, allowing retailers to address potential problems early.
How does this new operating model impact the B&M team and improve performance?
Adopting the new B&M analytics-driven operating model leads to an enhanced culture and ways of working, which require new skills, capabilities, organisation and tools.
New culture and ways of working: These include changes such as the standardisation of processes across category teams, a more customer-focused planning and forecasting approach and quicker reactions to trends via predictive analytics. Ultimately, a more collaborative mindset is needed when implementing this operating model.
Role and capability changes: Teams become more engaged as repetitive, administrative tasks are reduced through automation, and data from new sources is available. Merchandisers change from “data manipulators” to “analytics and insights experts”; buyers evolve from “supplier managers” to “new product developers”.
Organisation structure development: New skills and capabilities are needed across the business, especially for data quality and governance.
New tools and techniques: New analytics applications require new techniques, eventually facilitating self-service analytics.
How can you accelerate B&M transformation, and ensure user adoption?
Several steps are needed to transform B&M processes. Depending on the size of the team and the scope of the prototypes to be developed, this journey can take from a few intensive days to several weeks:
1 Business engagement and understanding: Start and end with the users, and involve them at all stages of service design to ensure adoption. Conducting research is important to build an understanding of needs, pain points and aspirations, while making sure that stakeholders are fully committed and engaged.
2 Business benefit priorities: Capture KPIs and benchmarks against peers and industry leaders, and model potential benefits of adopting an analytics-driven approach.
3 Data availability and quality assessment: Identify any major data gaps, and be sure to assess data quality using a sample data set, addressing data issues early to ensure project success.
4 B&M analytics strategy and concept ideas: Run a 1-2-day workshop to bring the main stakeholders together to agree the strategy for B&M data and analytics. Generate tangible concepts for analytics applications, and agree the focus for the design sprints and prototype development.
5 Design sprints: Use Design Thinking and agile methodology to create new B&M analytics solutions, working in 2-week sprints to build initial prototypes, validate with users and feedback improvements.
6 Data blending and visualisation: Use new generation analytics tools in prototype development, such as Alteryx and Tableau, to blend data from various sources, create workflows to automate data preparation and present using data visualisation, such as dashboards.
7 Analytics-driven operating models: Take the opportunity to think through how these new tools and techniques impact ways of working, and what the new B&M analytics operating model will look like.
8 Prototyping: Focus on delivering rapid prototypes to provide tangible solutions using own data for trialling.
In summary, an analytics-driven operating model, with flexible analytics tools that are implemented using rapid prototyping and a focus on employee experience, is the best way to generate incremental business value and compete with retail disrupters.
Luxury retail brands have always been hesitant to embrace online. Concerns that the internet’s global reach would damage brand exclusivity and diminish luxury cache meant that online was deemed an unsuitable channel from the start. Furthermore, it was previously thought inconceivable that consumers of expensive, high-end goods would ever want to make purchases online.
Over the past decade, however, as luxury destinations such YOOX Net-a-Porter, Farfetch and mytheresa.com have emerged, disrupting the market and creating new ways for consumers to shop, perceptions have gradually changed. Luxury brands have cautiously dipped their toe into online by using these platforms as a testbed for their digital strategy, and as end-to-end third-party service providers.
Today, the global luxury goods market is estimated to be worth $1.5 trillion, and around 10% of all luxury sales take place online. That’s a major change for a market that was expected to be a slow online developer. With online proven as a viable route to market for luxury players, many brands are now confident to scale the opportunity.
However, while growth is a priority, the age-old concern of exclusivity remains an issue. How can luxury players balance growth in the online environment while maintaining control of their brand, the customer experience, and customer relationships?
Luxury’s limitations in multi-brand etailing
While multi-brand etailing sites can act as a springboard for brands looking to quickly engage new audiences in diverse markets, luxury brands have found that they no longer have the same quality of relationships with customers as they’d like, and it’s costing them dearly.
Lack of direct access to customers means they’re unable to deliver the highly personalised, engaging experiences consumers expect of luxury brands. All customers are treated the same when purchasing through multi-brand etailing sites, regardless of which brand they’re buying. Changing that experience for one’s own brand when it is controlled by a third-party is hard and restrictive. Luxury brands increasingly want to take control.
The growth limitations via multi-brand etailing means that many luxury brands are looking to go it alone, bolstering their own ecommerce capabilities by developing in-house teams, their own fulfilment capabilities and their own transactional websites. While the sheer expense and complexity may appear too great given the infrastructure required to serve multi-country, multi-currency customers, cost analysis points to short-term pain for significant longer-term gain.
Taking the plunge
To drive growth online while maintaining control of brand and customer experience, luxury players are investing in their own websites and limiting stock availability on third party sites. Doing so means they can turn an ecommerce offer into an omni-channel offer, integrating their in-store experience and creating extended click & collect services.
In the past 12 months we’ve seen luxury players make bold moves to take control of their brand online. LVMH, the world’s largest luxury goods company, announced plans for its first multi-brand ecommerce site. Offering its own labels as well as distributing non-LVMH brands, it’s effectively going head-to-head with the likes of Net-a-Porter and Farfetch. Others are following suit.
The path forward
With classic routes to market stagnating and growth imperative, luxury brands can no longer afford to hesitate when it comes to online and omni-channel excellence. To drive growth while regaining control over brand and customer experience, luxury players need to rethink their operating model by:
Understanding which brands and markets offer the best opportunity online: Luxury groups with a multitude of brands need to consider which brands in their portfolio have the biggest opportunity for online trading and look to prioritise them. They need to consider the audience they’re selling to, market demand and economic model.
Weighing up the long-term growth potential of setting up owned operations: Building an ecommerce operation from scratch is not for the feint hearted. All operations and technologies – from contact centres, warehouses, fulfilment, invoicing and tariffs, website development, order management and integration with warehouse management – and all ecommerce applications will need to be developed.
Developing in-house digital and trading capabilities: To go it alone, luxury brands need experienced in-house teams to run and manage the new operations and technologies. They need to understand the running of an ecommerce website – from merchandising, web analytics, digital marketing and other related skills. Investing in skills such as analytics, campaign management and search optimisation will be critical to gaining insight into emerging consumer trends which can be fed back into R&D.
Reaffirming their ‘raison d’être’ through digital and in-store brand experiences: Reinventing the brand experience is top of the priority list for luxury players. Flagship store refurbishments and compelling digital experiences will be key to enticing consumers away from competing sites. Furthermore, using digital to enhance cross channel and in-store brand experience through enhanced clienteling or extended click & collect services is key.
By re-evaluating distribution strategies and taking ownership of online, luxury players will have a strong opportunity to drive double-digit growth, cement relationships with customers and drive deeper brand loyalty.