The retail transformation Cultivating choice, experience, and trust
From the Deloitte Center for the Edge A report in the Future of the Business Landscape series About the authors
John Hagel III (co-chairman, Deloitte Center for the Edge) has nearly 30 years of experience as a management consultant, author, speaker, and entrepreneur. He has helped companies improve per- formance by applying IT to reshape business strategies. In addition to holding significant positions at leading consulting firms and companies throughout his career, Hagel is the author of bestselling business books such as Net Gain, Net Worth, Out of the Box, The Only Sustainable Edge, and The Power of Pull.
John Seely Brown (JSB) (independent co-chairman, Deloitte Center for the Edge) is a prolific writer, speaker, and educator. In addition to his work with the Center for the Edge, JSB is Adviser to the Provost and a visiting scholar at the University of Southern California. This position followed a lengthy tenure at Xerox Corporation, where he was chief scientist and director of the Xerox Palo Alto Research Center. JSB has published more than 100 papers in scientific journals and authored or co-authored seven books, including The Social Life of Information, The Only Sustainable Edge, The Power of Pull, and A New Culture of Learning.
Tamara Samoylova (head of research, Deloitte Center for the Edge) leads the Center’s research agenda and manages rotating teams of Edge Fellows. Prior to joining the Center, Samoylova served as a senior manager in Deloitte Consulting LLP’s Growth and Innovation practice, helping mature companies find new areas of growth by better understanding unmet customer needs, industry dynamics, and competitive moves.
Kasey M. Lobaugh (principal, Deloitte Consulting LLP, chief retail innovation officer) is focused on disruptive technology, innovation, and the strategies required for the next generation of retail. He has spent over 18 years consulting for the world’s largest retailers. He leads strategy and implemen- tation teams focused on transforming large retail organizations’ people, processes, and technologies to support growth and scale at the intersection of digital and physical required in today’s radically changing retail environment. Lobaugh serves on the board of directors for Shop.org and is co-chair of the Cross Channel Consortium.
Neha Goel (research fellow, Deloitte Center for the Edge) is passionate about financial services and payments in particular. As a consultant in Deloitte Consulting LLP’s Strategy and Operations prac- tice, she has worked with banks, credit card companies, and insurance exchanges to develop and implement new strategies that reflect the fast-changing landscape of the industry. She is especially interested in harnessing mobile technology to improve customers’ experiences and relationships with financial institutions. Contents
Executive summary | 2
Back to the future | 3
The Big Shift: Transforming the business landscape | 6
Selling amid the Big Shift: Redefining retail | 10
New entrants are increasing consumer options | 15
The new rules of the game: Choices for retailers | 19
Pragmatic pathways for transformation | 28
Conclusion | 31
Endnotes | 32
Acknowledgements | 36
Contacts | 36 The retail transformation: Cultivating choice, experience, and trust
Executive summary
ODAY’S retail landscape is changing should reimagine how they create and capture Trapidly and dramatically. Driven by the value, thinking past omnichannel positioning Big Shift’s forces, consumers are becoming to examine, and find the best uses for, their far more informed, and product choices are assets. Digital marketplaces with on-demand proliferating rapidly. Technological advances fulfillment can be incredibly well suited to pro- and public policy liberalization are contrib- viding low prices and extensive choice. Brick- uting to new flows of information, knowl- and-mortar assets can serve as a stage for edge, and resources. As a result, retailers face customized consumer experiences that go far new pressures: beyond ambience to surprise and educate the consumer. Done right, these experiences can • Lowered barriers to market entry are bring- become so valuable that they inspire consum- ing in many new small players and frag- ers to choose to pay for them in themselves. menting the retail landscape. Another opportunity for many large retailers is to become industry infrastructure • Online marketplaces are transcending geo- providers. Because sourcing and procurement, graphic proximity and expanding market inventory management, store operations, mar- demand for highly specific offerings. Small keting, and fulfillment become more efficient niche players can reach consumers regard- as they scale, established retailers can extend less of physical location. these capabilities to support smaller, more fragmented niche players. • Technologies such as on-demand fulfill- Traditional retailers can also move to trans- ment are changing how and where retailers form into consumer agents—new entities that hold inventory. use deep understanding of consumers to help them navigate product choices. • New retail models are arising out of new Change is seldom easy, especially when the technologies and new ways to connect future is uncertain. Big changes, especially, with consumers. require commitment and can attract organi- Amid all this change, the retail value chain zational antibodies. To effectively scale new is unbundling, and even remapping. Design, business models, established retailers should sales, and support are less strongly linked, with pursue “small moves, smartly made”—test- small, niche entrants drawing from a range ing, scaling, and incorporating the most of flexible options to execute these activities. successful ideas as foundations for their To compete effectively, traditional retailers evolving businesses.
2 A report in the Future of the Business Landscape series
Back to the future
“Looking for something? Make a request again disrupted in the 1970s and 80s, this time and we’ll find it for you,” promises Operator, a by big-box retailers. Over the next quarter new shopping app, on its website. The service, century, club stores, category killers, and value developed by Uber cofounder Garrett Camp players joined big-box stores to drive more and and former Zynga executive Robin Chan, more smaller merchants out of business. Then, offers a personalized, on-demand shopping at the turn of the century, as Internet access experience that blends the benefits of virtual became mainstream, e-commerce retailers and physical retail. The Operator app responds shook up the sector yet again. The level of dis- to customers’ natural-language-based ques- ruption has been significant: By 2000, seven of tions and requests with pictures and descrip- the eight largest US retailers in 1980 had filed tions of suggested products. The customer can for bankruptcy, been acquired, or lost their buy desired products automatically using a places as major industry players.2 credit card on file. Operator is now in private That’s a lot of change for one century. But beta stage, with more than 85,000 signup each of the transitions described above was requests.1 A wealth of such innovative sales driven by larger technological and social models are expected to emerge as the retail shifts, and each led to fundamental changes in landscape evolves. how people shopped. And every one of them Operator is just one manifestation of what increased consumer choice while reducing is arguably retail’s most fundamental transfor- consumers’ total cost in terms of money, time, mation in a century-long string of changes. In and opportunity. the early 1900s, retail was dominated by local Today, we are on the cusp of yet another mom-and-pop stores, each providing its com- transformation. Technology improvements munity with a highly personalized shopping coupled with shifts in consumer mind-set are experience. Choices were limited by both shelf again changing the nature of retail. Consumers space and the amount that shoppers could have more options, and both switching costs carry home. The invention of the automobile and brand loyalty are low. To survive, many increased the volume of items shoppers could retailers are finding ways to serve individual carry on any one trip, contributing to the rise consumers in ways tailored to their needs of larger general stores and department stores. and desires—transforming both their value The postwar population boom and increasing propositions and their business models. The suburban sprawl, supported by TV advertis- retailers most likely to survive the current ing, prompted retail locations to consolidate shift are those that can provide a tremendous further into indoor and open-air malls, strip variety of offerings while maintaining, or malls, and mass retailers. The status quo was
3 The retail transformation: Cultivating choice, experience, and trust
reviving, the personal touch of a mom-and- options for established retailers in light of these pop corner store. changes, then describe small, smart steps these This report explores emerging trends retailers can take to help position themselves affecting both businesses and consumers, and well for the future landscape. Figure 1 provides considers the ways these trends are manifest- a high-level view of the journey on which this ing in the retail space. We will discuss possible report will take you.
Figure 1. The journey through the report
4 A report in the Future of the Business Landscape series
5 The retail transformation: Cultivating choice, experience, and trust
The Big Shift: Transforming the business landscape
EFORE taking a deep dive into the retail and disruption that is shifting the balance of Bsector, let’s explore several large-scale power between individuals and businesses. At dynamics shaping the broader environment the same time as the Big Shift puts pressure on in which retailers operate. Two key forces businesses through increased competition, it are coming together to shape today’s rapidly increases the power of consumers by enabling changing retail environment: better-informed connectedness, knowledge sharing, and trans- consumers and a proliferation of both products parency of choice. and niches. Proliferating products and niches The informed consumer Technological improvements, combined Today’s consumers have more access to with increased access to tools through plat- more information, can instantly compare forms such as TechShop (the “gym for mak- prices and offerings, and can easily switch ers”), can make it easier for new product among brands and products. Moreover, producers, including small, nimble businesses information is increasingly decoupled from and individual craftspeople and inventors, inventory: To learn about products, consumers to enter the market. Technologies such as no longer need to visit stores. In the Deloitte 3D printing enable on-demand, small-batch Center for the Edge Consumer Power survey, production. And marketplaces such as Etsy, approximately 67 percent of US consumers Storenvy, and eBay offer ways for these new surveyed in 2012 either agreed or strongly entrants to reach targeted consumers. As figure agreed that they have a lot more information 3 shows, the rising popularity of the maker about brands than they once had. And 70 per- movement, along with the growing availability cent of respondents agreed or strongly agreed of supporting infrastructures and platforms, that they have many more product choices further increases product diversity and length- than they had in the past.3 ens the tail of demand. This trend is a result of the fundamental As many aspects of production have macroeconomic transformation we call the become more accessible, near-universal Big Shift (see sidebar). Exponential improve- Internet access has allowed shoppers in many ments in the cost and performance of core categories to shift away from a mass-market digital infrastructure, coupled with a general environment to one characterized by a pro- trend toward public policy liberalization, are liferation of accessible niche markets. Chris creating an environment of constant change Anderson’s 2004 Wired article “The long tail”
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THE BIG SHIFT
The Big Shift is a set of fundamental macroeconomic trends that are reshaping the global business landscape and unleashing flows of information, people, and capital (figure 2). These trends give consumers and talent more power through access to information and lower switching costs. At the same time, competition—from both traditional and nontraditional sources—has increased. Many companies configured to operate in the scale-based, efficiency-driven models of the 20th century are now struggling to create value in the rapidly changing world of the Big Shift.
Figure 2. The Big Shift’s trends
The cost of computing power has decreased from $222 per million transistors in 1992 to $0.06 per million transistors in 2012.
ends The cost of data storage has decreased from $569 per gigabyte of storage in 1992 to $0.03 per gigabyte in 2012.
The cost of Internet bandwidth has decreased from $1,245 per 1,000 Mbps in 1999 to $23 per 1,000 Mbps in 2012. oundational tr
F Overall trend of the Index of Economic Freedom, a compilation of 10 indicators measured by the Heritage Foundation, has been increasing since 1995.
Nearly 70 percent of customers agree that they have increased information and choice about brands. ends The compensation gap between the creative class and the rest of the workforce has steadily widened over the past 10 years.
Impact tr The economy wide return on assets (ROA) has declined over the last 47 years, to a quarter of its 1965 level in 2012.
Source: John Hagel, John Seely Brown, Tamara Samoylova, and Matt Frost, 2013 Shift Index metrics: The burdens of the past, Deloitte University Press, November 11, 2013, pp. 9-27, http://dupress.com/articles/the-burdens-of-the-past/. Graphic: Deloitte University Press | DUPress.com
The Big Shift is measured and described through the 25-metric Shift Index, but it can be understood in terms of two fundamental drivers:
1. Technological advances. Exponential improvements in the cost/performance ratio of core digital technologies have led to exponential advances and innovations in other technologies that employ the digital infrastructure, blurring many traditional lines between industries and technologies. 2. Public policy liberalization. Over the past six decades, public policies have broadly trended toward freeing the movement of people, capital, and other resources across geographic and political boundaries, making it generally easier for individuals to start and scale businesses.4 The structures and regulations of specific industries have in some cases accelerated, and in others delayed, the impact of the Big Shift; however, the effects are poised to spread across the economy, in part as new businesses from other industries encroach on traditional industry territory.
7 The retail transformation: Cultivating choice, experience, and trust
Figure 3. Maker movement overview and drivers
Maker Faire attendence Etsy revenue $1.9B 2014 130K 85K $1.3B 2013 120K 64K $895M 2012 110K 50K $525M 97K 2011 27K 2010 83K 23K 74K 2009 Did not exist! 2011 2012 2013 2014 San Francisco Bay Area New York
Kickstarter project hits >1,100 hackerspaces worldwide # of Project Goal Funded backers
Pebble $100K $10.3M 69,000
Oculus rift $250K $2.4M 9,522
Goldieblox $150K $286K 5,519
Safecast $4K $104K 290
Find details at: http://hackerspaces.org/wiki/list_of_hacker_spaces
Sources: Top left: Maker Faire, “Maker Faire overview,” MakezineMakezine, http://cdn.makezine.com/make/sales/Maker-Faire-Overview.pdf,http://cdn.makezine.com/make/sales/Maker-Faire-Overview.pdf, accessed May 18, 2015; Kurt Wagner, “Part Disneyland, part Burningrning Man: MakerMaker Faire turns 10 years old,”old,” Re/codeRe/code, MarchMarch 17, 2015, https://re-https://re- code.net/2015/05/17/part-disneyland-part-burning-man-maker-faire-turns-10-years-old-qa/,n-maker-faire-turns-10-years-old-qa/, accessed MayMay 18, 2015. Top right:right: MattMatthewhew Flamm, “Handmade goes big: Etsy nears $1B in sales,” Crain’s New York BusinessBusiness, January 18, 2013, http:www.crainsnewyork.com/artihttp:www.crainsnewyork.com/arti- cle/20120128/TECHNOLOGY/1301129904, accessed MMayay 18, 2015; Michael Brush, “The hidden problems lurking in Etsy’s ‘feel‘feel good’ IPIPO,”O,” Fiscal Times, April 16, 2015, http://www.thefiscaltimes.com/2015/04/16/Hidden-Problems-Lurking-Etsy-s-Feel-Good-IPO,.com/2015/04/16/Hidden-Problems-Lurking-Etsy-s-Feel-Good-IPO, accessed MaMayy 18, 2015. Bottom left: Kickstarter, “Pressroom,” http://www.kickstarter.com/press?ref=footer,w.kickstarter.com/press?ref=footer, accessed January 14, 2014. Bottom right:right: Hackerspace wiki, “List of hacker spaces,” https://wiki.hackerspaces.org/List_of_Hacker_Spaces,hk /Li tfHk Sd accessed MayM1 18,8 2015.2015
Graphic: Deloitte University Press | DUPress.com
illustrated, and in many ways foresaw, this fashion trends, from Dior’s New Look to the explosion of options: “Now, with online dis- 1980s’ massive shoulder pads. tribution and retail, we are entering a world of abundance.”5 Potential implications Such market fragmentation is affecting for retailers common notions of trends and taste, says former New York Times fashion critic Cathy The rise of better-informed consumers, Horyn. In a recent Atlantic article, Horyn along with product and niche proliferation, admitted that she no longer knew what was is putting pressure on traditional retail roles. trendy: “There is no single trend that demands Historically, retailers have served three main our attention, much less our allegiance, as functions: inspiration, information, and sup- so many options are available to us at once.”6 ply. However, where once consumers may not Contrast this, say, to the ubiquity of earlier have had a precise idea of what they wanted
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until they saw specific items in stores, many of down. Retailers with high fixed-cost structures today’s consumers (especially younger buy- (due to significant brick-and-mortar assets and ers) get inspiration and information largely inventory costs), which compete using only online—and are more likely to limit their inventory at hand, are increasingly losing out interaction with retailers to obtaining already- to competitors with lower fixed-cost structures selected items. A 2013 Ipsos survey ranked the and extensive product assortments. Rather Internet as the primary source of new product than stockpiling inventory, many such retail- and brand discovery for the Millennial con- ers fulfill demand only as orders are received. sumer (ages 18–34), followed by discovery Business models tend to be rooted in few or through friends and family.7 no brick-and-mortar assets, combined with On Instagram, for example, younger con- on-demand fulfillment strategies that help sumers share “outfits of the day,” collecting increase consumer value while decreasing total “likes,” inspiring each other, and often creating costs (in terms of both price and time). For demand. Product review sites such as CNET, example, Amazon operates at an approximately Cars.com, and Amazon can equip shoppers 15 percent price markup, compared with an with information long before they enter a retail average markup of 65 to 80 percent for appeal- location or place an online order. centric retailers.8 The connected consumers who use these In this complex and evolving environ- resources and communities are actively ment, retailers should fundamentally reas- engaged. Through reviews, research, and sess both their roles and the way they create cocreation, they are actively shaping the brand value for consumers. The retailers that will messages of the products they consume. be most effective in today’s marketplace will At the same time, the supply role of retailers likely be those that fundamentally rethink is changing. Without effective product scar- the retail experience, developing business city, and with shoppers less limited to options models that blend physical, virtual, and in local stores, traditional retail models break community experiences.
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Selling amid the Big Shift: Redefining retail
Etsy sales alone. She says that her new business HE Big Shift has affected the retail sector has “saved her life.”9 in four main ways: T She’s not the only one. As Gibran’s example demonstrates, barriers to entry have fallen 1. Reduced barriers to market entry are bring- drastically for both producers and sellers of ing in more small players. consumer goods, changing the table stakes of retail and allowing in a flood of new com- 2. Increased access to market demand is tran- petitors.10 Today, it’s possible to set up a retail scending geographic proximity. operation in just a few hours; individuals like Gibran can become niche retail operations 3. On-demand fulfillment is reducing the quickly and easily, adding a new dimension need for retailers to hold inventory. to competition. This change is due largely to the elimination 4. New technologies and customer rela- of the need to own infrastructure—a heavy tionships are opening up new ways of investment usually recouped through scale and creating value. thus difficult for most small players to afford. Together, these changes are placing pres- Using pay-as-you-go services and free or inex- sure on existing retailers while opening up new pensive infrastructure provisioning (such as space in which nontraditional entrants can an Etsy “storefront” instead of a physical one, operate. They are also increasing opportunities or on-demand physical pop-up space rented across the retail landscape and reducing the through Storefront), small merchants can eas- level of investment needed to pursue them. ily enter the market. Retailers need not own or even prerent their infrastructure; instead, Reduced barriers to they can incur costs only as assets are needed, market entry are bringing enabling efficiency at any size. As a result, the retail landscape is fragmenting. Deloitte analy- in more small players sis shows that the top 25 established retailers In 2008, Yokoo Gibran was a copy center today own 2 percent less total market share employee with a passion for knitting. Early that than they did in 2009—a shift of $64 billion.11 year, she began selling her handmade knitwear Digital technology has made many aspects on Etsy. Within a year, she was making enough of retail operations exponentially cheaper and to quit her day job; by December 2009, she was easier. Nearly all areas of business are affected, earning more than $140,000 a year from her from digital storefront costs to back-end
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inventory, order management, and supply not being captured in turn by direct competi- chain infrastructures. As shown in figure 2, tors—indicating that a significant number of the cost/performance ratio of core digital new players are entering the landscape.16 This infrastructure (computing, data storage, and phenomenon is notable not just for the change Internet bandwidth) has improved exponen- in the identity of the top 10 but for the ques- tially since the early 1990s, making these tech- tions it raises about which types of retailers nologies increasingly affordable and accessible. and retail models are most effective in this Even the smallest retailers now have access new landscape. to powerful infrastructure tools that once Reduced barriers to entry also make it required large capital investment, making it easier for manufacturers and makers to sell easier than ever for many individuals and small their products directly to consumers, bypass- entities to form retail businesses and reach ing traditional resellers entirely. For example, markets. Today, to start selling, all a merchant in 2014, 52 percent of US online shoppers needs is a credit card.12 visited brand and manufacturer websites with Cloud services are particularly crucial here, the intent to buy.17 Direct consumer contact as they enable retailers to manage back-end eliminates intermediate steps in the value office operations without investing heavily in chain, boosting profitability. Manufacturers either servers or software. Instead, cloud-based that engage directly with consumers can also programs are run and managed by a third get rich and timely feedback. As more manu- party and accessed online, making it simple facturers enter the retail landscape in this way, for businesses to scale their software use as fragmentation increases. needed. Demand for retail cloud services has grown rapidly and is on track to more than Increased access to market triple from $4.2 billion in 2011 to $15.1 billion demand is transcending in 2015.13 In addition to being less costly, technology geographic proximity infrastructure also tends to be easier to man- Digital technology helps to aggregate age. Requiring no intensive training or dedi- demand beyond geographic areas. Tools such cated IT department, many cloud platforms are as digital platforms and social media can con- fairly simple for nontechnical users to access nect buyers and sellers across regional and and manage. For example, individuals with no even national boundaries. E-commerce enables coding knowledge can create and manage their retailers to connect with consumers from all own websites using platforms such as Wix. over the world, reducing geographic con- Six years after its founding, Wix has amassed straints. Online, a seller’s addressable market is 42 million users from 190 countries, netting effectively the world. revenues of $80.5 million in 2013 and $130 Stores that would not be sustainable in the million in 2014.14 physical world due to a limited number of Lower barriers to entry have allowed a nearby customers can thrive online by reach- large number of new retailers to enter the ing niche customers worldwide. Conversely, space, eager to address fragmenting consumer customers once satisfied with “mainstream” niches. The result is increased competition and options may now enjoy alternatives that they volatility across the sector. For example, 6 of hadn’t known about before. For example, in the 10 top retailers by annual revenue in 1990 1998, the out-of-print mountaineering mem- were no longer in the top 10 as of 2012.15 In oir Touching the Void was recommended by fact, Deloitte analysis reveals that the volatil- Amazon to customers purchasing or viewing ity of retail market share has been increasing the bestseller Into Thin Air, which had kicked rapidly since 2009. Moreover, the share lost is off a mountaineering-related reading wave.
11 The retail transformation: Cultivating choice, experience, and trust
As a result of these automated recommenda- guarantees demand but also enables vendors tions, Touching the Void started to outsell Into and retailers to build a deeper understand- Thin Air two to one.18 By revealing little-known ing of their consumers. San Francisco–based options to customers, e-commerce has helped custom clothing company JAKE, for example, reshape individuals’ preferences. Over half of has completed two crowdfunding campaigns Amazon’s book sales now come from books in its three years of public operations, most outside its top 130,000 titles.19 recently for its capsule collection ROYGBIV. Backers could preorder five essential clothing On-demand fulfillment pieces for men and for women from the collec- is reducing the need tion (figure 4). Once the campaign closed, the company began production, reaching out to to hold inventory each consumer to gather size information and The third identified impact of the Big Shift color preferences plus additional demographic is that supply and demand have been sepa- and psychographic data. rated, with on-demand fulfillment reducing or Another on-demand retail start-up is even eliminating the need to invest in inven- Massdrop, where groups of enthusiasts can tory before selling. In fact, many small retailers purchase products in batches, sometimes need not invest in inventory without guarantee at more than 50 percent off the usual retail of purchase. price. Unlike JAKE, Massdrop is a third- With drop-shipping, for example, retail- party reseller that does not manufacture its ers buy inventory only as it is sold. Retailers own merchandise. Once consumers sign up purchase goods from drop-shippers as con- for Massdrop, they can browse communities sumers order them; drop-shippers then fulfill focused on information and advice on retail orders with white-label delivery service. Drop- areas of interest. Community members can shipping is a huge business: An estimated 93 also participate in group purchases at specified percent of Facebook’s $8 billion ad market, prices, which are activated if and when enough made up of over a million advertisers, is com- buyers sign up. When a group has enough buy- posed of retailers selling by drop-shipping.20 ers, Massdrop approaches the manufacturer to Retailers can also not only buy as they go obtain the items. Purchase categories include but even stockpile orders prior to production. high-end electronics, crafting materials and Crowdfunding-based presales, for example, do-it-yourself tools, watches, accessories, bags, guarantee demand before production starts. and clothing, as well as tea, collectibles such On the crowdfunding platform Kickstarter, as board games and trading cards, fine pens, while many projects have been prototyped and more. Consumers can also vote to request and may even have small lots in production, items they would like to see in future drops.21 an online campaign can provide the infusion The Big Shift has also made it easier for of capital needed to scale production to meet product designers and retailers to manufacture demand or reach a bigger market while guar- to order—for example, using 3D printing tech- anteeing an initial batch of orders. nology. Indeed, while 3D printing still requires Crowdfunding also enables consumers to the purchase of raw materials, home use of 3D offer feedback, in the form of dollars, on prod- printers has created a market for 3D designs uct ideas. Such “voting with their wallets” helps themselves. Early-stage start-up Pinshape, for retailers and even manufacturers float more example, has based its market platform on 3D ideas, pursuing only those that resonate with printing; the company curates a selection of consumers. The crowdfunding process not only 3D printing designs that contributors can sell, or offer for free, through the Pinshape site.
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Figure 4. ROYGBIV Indiegogo campaign
Customers can purchase the design files or and tailoring options. The company, which order the resulting 3D prints.22 has raised $60 million in funding, reported On-demand fulfillment is affecting luxury approximately $50 million in revenue in 2014 retail as well as mass-market retailers. New and an average order value of almost $2,000.23 York–based Moda Operandi enables consum- Tinker Tailor, meanwhile, takes on-demand ers to order merchandise directly from the fulfillment to the next level. The online luxury runway—entirely bypassing the traditional retailer works with fashion houses, allowing high-fashion retail flow, in which a season’s consumers to customize high-end fashion designs are showcased on the runway and then items. Customers use 3D design and visualiza- selected by retail buyers, who decide which tion tools to modify designs from more than stores will sell which pieces. Moda Operandi 80 designers, including Vivienne Westwood, gives consumers direct access to runway fash- Marchesa, Rodarte, and Giambattista Valli— ion through a digital storefront. Its customers shortening a skirt, modifying a neckline, or can preorder an item as soon as it appears even changing fabric options to create a unique on the runway, paying half up front and the interpretation of a designer’s vision. Customers remainder on receipt of the product (which can also create unique items starting with can take a few months, as runway items are Tinker Tailor’s branded designs and fabrics. essentially samples). Moda Operandi’s per- The buyer signs off on a 3D image of the final sonal stylists advise customers on styles, sizes, product before it goes into production.24
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New technologies and customer company 3D-prints customized earbuds— relationships are opening up in-ear headphones—based on photos taken through its iPhone® mobile app. This model new ways of creating value has three benefits. First, the very act of manu- The Big Shift’s technological advances, facturing to order adds value for consumers besides shaking up the traditional retail in terms of personalization. Second, Normal industry, have also spawned a flood of sellers need not invest in products that may not sell; with new and different business models—for by creating to order, it keeps manufacturing example, digitizing sample sales, selling niche costs to a minimum and maintains the fungi- Japanese barware, offering affordable per- bility of its raw materials. Third, the use of 3D sonalized goods, or mail-ordering stylish yet printing reduces the company’s supply chain affordable eyeglasses. While these models vary costs. Several competitors require professional in execution, each was started by a small team ear molds made by audiologists; the prices of that connected directly with consumers to Normal’s closest competitor start at $400 com- provide an individualized experience. pared with Normal’s $199.27 Take online retailer Gilt Groupe, a mar- Eyewear retailer Warby Parker represents ket entrant whose rise was enabled by digital the fourth observed impact of the Big Shift: technology. Cofounder Kevin Ryan sought to lower costs for both consumers and retailers. digitize sample sales (which are traditionally While traditional eyeglass retailers often sell used to sell excess inventory), democratizing frames for hundreds of dollars, Warby Parker and centralizing access to designer/luxury offers lower-cost, equally fashionable options goods at low prices while retaining the sales’ primarily online, with both samples and sense of urgency and exclusivity.25 Though the finished products shipped directly to consum- idea at first seemed alien to the designers to ers. The company recently opened a handful of whom Ryan pitched the idea, the site quickly brick-and-mortar locations linked to its online took off. presence. These stores distinguish themselves Oakland-based Umami Mart, an inde- from traditional eyeglass retailers with their pendent retailer of Japanese kitchen goods library-inspired design and open access to and barware, illustrates the potential of niche the store’s entire line of glasses. Customers are retailers fueled by digital technology. Umami encouraged to browse and try on as many pairs Mart started as a collaborative blog created by as they want—an added value that comple- chefs and other food industry professionals. ments the online and at-home experiences. As the blog gained a following, its participants Locations also offer eye exams onsite for a and readers began to think about importing low flat fee.28 The company states that most the Japanese kitchen goods they discussed. The customers who purchase glasses in a store go retail component of Umami Mart was born, on to buy a second pair online.29 Warby Parker spurred by online aggregation of demand.26 has raised $115 million from 16 investors over New York–based start-up Normal exem- five rounds, indicating the effectiveness of plifies the role of on-demand fulfillment. The its model.30
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New entrants are increasing consumer options
S discussed previously, more small, Small, fragmented retailers can have the Afragmented merchants targeting niche operations they do—flexible, highly scal- demands are emerging. They are enabled by able, with even international reach—precisely concentrated players (such as digital market- because of their small size and structure. For places) that offer enabling capabilities (such example, an eBay clothing merchant, despite as store operation) as a service, and they often having an infinitely smaller total revenue than operate in fragmented markets that were a large, established retailer, may actually sell previously unsustainable without aggregated across more countries; its small size enables demand. The digital technologies that enable the merchant to enter markets with little brand products to reach consumers not only tend advertising or infrastructure requirements. to lengthen the tail of demand—they also Most of these fragmented players are make its head more shallow and less profit- launching without brick-and-mortar assets; able over time, reducing the size of the “mass they often fulfill orders on demand, enabled market” (see the sidebar “Factors affecting by technological advances and the emergence fragmentation”). of new marketplaces and platforms. Acquiring Consider retail music sales. Thanks to digi- access to brick-and-mortar retail assets tization (mp3s replacing CDs) and the shift of remains challenging for independent niche the music market to online platforms such as retailers due to high, often up-front, costs. the iTunes® program and YouTube, demand for Some, however, find a way, with many using “niche” music has significantly increased. As pop-up retail services such as Storefront. more people become interested in previously lesser-known genres and musicians, these Value chain impact: niches loom larger in the public consciousness. Fragmentation of design, The resulting diversification of what is “popu- lar” has split sales across more albums—a sales, and support trend borne out by the fact that most of the top As the retail landscape fragments, with 50 albums of all time were created in the 1970s more and more smaller retailers serving niche and ’80s, with none made after 2000.31 Instead, markets, so too do many components of the the last decade has seen a fragmentation of retail value chain. Of these, product design, preferences, with more people listening to sales, and support activities are especially vul- more genres. This makes smaller players sus- nerable to fragmentation. tainable in a way not possible without aggre- gated demand enabled by digital technology.
15 The retail transformation: Cultivating choice, experience, and trust
FACTORS AFFECTING FRAGMENTATION: DIFFERENT SPEEDS, SAME DESTINATION
Design, sales, and support activities will fragment faster in some sectors than others. The level of regulation, the availability of online marketplaces, and the value of a unique story are some of the factors affecting a sector’s rate of fragmentation (figure 5). But this doesn’t mean that highly regulated mass-market goods without online marketplaces are safe. As technology continues to advance, and public policy continues its trend toward liberalization, more sectors are likely to be affected by fragmentation.
Figure 5. Factors affecting fragmentation
1. Regulatory freedom: Less regulated markets will fragment more quickly. For new entrants, regulations can serve as barriers to entry or commercialization. Low Regulatory freedom High
2. Online marketplaces: Online market- places serve as platforms for new entrants, helping them access customers and enabling operations. Absent Online marketplaces Present
3. Unique story: The more consumers value a unique connection to a product and/or merchant, the more they will seek out niche offerings—and the more they Not Unique “story” Important enable fragmentation. important
Graphic: Deloitte University Press | DUPress.com
Design retro-styled iPad® device cover, at TechShop Enabled by the emergence of platforms and in 2010. Buckley sold $4 million worth of on-demand infrastructures, fragmented play- cases in his first year in business;33 today, ers can design their own goods. Individuals or his 1,000-square-foot San Francisco factory small teams can design and prototype goods at employs 25 people.34 The DODOcase is sold open workshops such as TechShop, a “mak- online by Buckley’s team and carried in J. Crew erspace” community affiliated with the maker stores.35 President Obama is often photo- movement. For a monthly membership fee graphed with his.36 comparable to that of a gym, individuals and Designers can also use crowdsourcing plat- small businesses can use TechShop’s equip- forms to presell items before they are built. For ment, which ranges from milling machines example, the GE FirstBuild online community and lathes to welding equipment, 3D printers, solicits participants and equips them to iden- and industrial sewing machines.32 For example, tify market needs for appliances, work together Patrick Buckley prototyped his DODOcase, a for product development, and even produce
16 A report in the Future of the Business Landscape series
prototypes at a dedicated microfactory. GE engagement around offering advice, sharing has launched this community with the idea of experiences, and collaborating on additional harnessing the huge amount of creativity that it product usage. These ecosystems can help acknowledges resides outside its organization.37 retailers sense shifts in consumer attitude and mind-sets, enabling sellers to continuously Sales adapt their portfolio of offerings. Using online marketplaces such as Etsy, SAP, while not a traditional retailer, has eBay, and Storenvy, individuals and small embraced the idea of creating a robust support businesses can now sell goods without exten- community. In 2003, the multinational soft- sive, expensive store infrastructure. They can ware company launched the SAP Developer also access on-demand payment infrastruc- Network, rebranded in 2007 as the SAP tures such as mobile point of sale (mPOS) Community Network (SCN). This online devices for physical payment and embed- platform attracts more than 2 million unique dable application program interfaces (APIs) monthly visitors, the vast majority of whom for online payment. mPOS devices such as are not SAP employees. They come to address those from Square and PayPal enable anyone both technical and nontechnical issues, to give to accept credit card payments in person. and get help, and to interact through approxi- These devices, or “dongles,” plug into smart- mately 3,000 discussion forum posts and 25 phones and tablets, allowing sellers to accept blog posts each day. The resulting communally credit card payments without the expense of created knowledge base relies on crowdsourced a full POS terminal or the need for a complex content from hundreds of contributors, includ- POS system. ing participants dubbed “SAP mentors.” The Similarly, fragmented players can accept typical time to receive a response on SCN is 17 payments online using digital payment provid- minutes, and more than 85 percent of pre- ers such as PayPal and Stripe that offer embed- sented issues are resolved.39 SAP uses informa- dable Web-based APIs. These providers also tion derived from the community in product help decrease retailers’ liability by removing development, sales, and customer support.40 them from payment processing, eliminating In the retail space, an IKEA “hacker the need to store credit card information. In community” has emerged to innovate and 2014, PayPal alone enabled merchants world- experiment with the company’s furniture. wide to accept $125 billion in purchases.38 Participants share ideas for product modifica- tions, customizations, and enhancements. Such Support ecosystems serve not only as sources for new Support activities, which offer a way to product ideas but also as creators and reinforc- further engage consumers around the prod- ers of customer loyalty—and, for retailers, as uct experience and create relationships across windows into how their products meet or don’t the ecosystem, are poised to become more meet customer needs. important as the retail landscape changes. When retailers build, support, and partici- Traditionally, retail support has been largely pate in such physical and digital platforms, confined to onsite customer service desks and they can cultivate something of increasing toll-free call centers. While these services are value in a transforming economy: ecosystems important in addressing immediate customer where like-minded fragmented entities, includ- questions, there is also an often-untapped ing consumers and third-party players, can opportunity for further meaningful consumer come together to learn from each other and engagement after (and even before) purchase. help address each other’s questions and chal- Retailers that build support ecosystems for lenges. The resulting experience helps form a their customers—and even those of other bedrock of engagement and loyalty. vendors—can derive real value from the
17 The retail transformation: Cultivating choice, experience, and trust
Niche players’ unique stories Retailer Mackenzi Farquer, based in Astoria, NY, says, “My customers shop Target, Fragmented niche retailers most often IKEA, Crate and Barrel, and other big-box compete on specialization or personalization, merchants. I offer items they can’t find in those offering unique or customized goods suited to stores. Plus, I’m not afraid to have the conver- small groups of consumers. These merchants’ sation with my customers on what they may value propositions or personalized experiences have in their homes from these stores, and how offer a way to connect with consumers. Such the items my store carries can complement merchants tend to focus not only on closing them.”42 the sale but also on engaging deeply with their Similarly, Oakland-based independent customers—a relationship that can evolve with retailer Umami Mart, the purveyor of Japanese consumers’ changing tastes, preferences, and kitchen goods and barware, connects with needs. Explains independent floral retailer its customers through its blog, hosted by the Joanne Leiman, who owns FlowersFlowers in owners with guest posts from food industry Evanston, IL, “As a small independent business professionals. In-store events help the busi- owner, I don’t try to ‘compete’ with big-box ness further connect with customers around stores. Instead, I offer individualized customer merchandise and blog themes. service and unmatched quality that simply can’t be found in a big-box chain.”41
18 A report in the Future of the Business Landscape series
The new rules of the game: Choices for retailers
agents—new entities that use deep under- O remain relevant, traditional retailers standing of consumers to help them navigate should define their roles in the new land- T product choices. scape being driven by the Big Shift. To recap the situation: New entrants to the retail space are fragmenting the marketplace, offering more Beyond the online/offline divide highly targeted niche products. These players Today, many consumers care less about help create value by using their understand- whether they’re shopping online or at a physi- ing of consumers to provide high-touch, often cal store than about getting the best deal—no personalized or customized, services that fre- matter what tools they use to reach that goal. quently require deep expertise and knowledge. From the viewpoint of a typical consumer, They are enabled by digital marketplaces and a retailer should offer a seamless shopping supported by sophisticated virtual platforms experience across online and offline channels, that enable plug-and-play online operations integrating its virtual and physical operations without the limits associated with physical so that, for instance, a shopper can return an shelf space. item bought online at a store, or go to a store’s In this rapidly changing environ- website to find out if an item is in stock at the ment, where can traditional retailers find a closest physical store location. Indeed, the place? Constrained by factors such as shelf distinction between online and offline shop- space limits and fixed-cost physical assets, ping is becoming increasingly blurred, if not how can such businesses offer consumers entirely irrelevant. For example, an Apple® distinguishing value? retail store customer can pick up a product It’s not an easy fix. To rise to the challenges and pay for it with his or her Apple ID via an of this rapidly evolving landscape, large retail- iPhone mobile device, leaving without ever ers should revisit the ways they approach both talking with a salesperson. Is this an offline or their online and brick-and-mortar businesses. online transaction? They should then transform their physical The need to integrate virtual and physical stores, focusing not on completing transactions operations to present a single face to the con- but on redefining experiences. Alternatively, sumer may pose a challenge for many retailers. they can look for opportunities to extend their Historically, most retailers have managed their operational and infrastructure capabilities as online and brick-and-mortar businesses as services—essentially becoming service provid- separate entities—sometimes going so far as ers to smaller niche players. Finally, traditional to locate them in different regions and stock- retailers can move to transform into consumer ing them with different inventory. Often, the
19 The retail transformation: Cultivating choice, experience, and trust
two businesses have distinct cultures and even experience, the nature of which will evolve separate profit and loss statements; they might over time. Creating individualized experiences also compete for internal resources. But with traditionally involves investments in fixed more consumers expecting a consistent shop- assets and infrastructure, so existing physical ping experience no matter how they choose to assets can provide an advantage in this strategy. buy, such an approach is becoming less sus- For example, some vertically integrated retail- tainable. To attract shoppers, retailers should ers such as Apple Inc. and Victoria’s Secret move beyond the dualism of digital and physi- command higher prices (and thus margins) by cal channels and instead approach the entire offering exclusive in-store experiences. business holistically, with digital and physical Can retailers that are not now vertically assets efficiently reinforcing one another to integrated pursue an experience-based strategy execute the company’s chosen business model. that captures the value of experience in their What should that business model look like? margins? Doing so may involve a fundamental In part, retailers may want to base that decision shift in a company’s business model. Instead on the extent of their physical asset base—in of attempting to fold the value of experience other words, how heavily they have invested in into a product’s sale price, retailers pursuing building and maintaining physical stores. This an experience-based strategy should focus on is because, for all the ease of going from online creating an experience so valuable that the storefront to physical shop and back again, the consumer will want to pay for it in itself. It’s economics of operating online are very differ- critical to be as helpful as possible to custom- ent from those of operating brick-and-mortar ers, both in terms of increasing their ability to locations. Digital storefronts with unlimited make the right purchase given individual con- “shelf space” and the ability to leverage on- texts and needs, as well as in enhancing their demand fulfillment can operate at relatively ability to get the most value from products low cost while offering consumers more after purchase—and to create truly memorable product choice than even the largest brick- and engaging experiences along the way. This and-mortar store could provide. With their kind of model does not entail inventory turns low fixed-cost structure, and as consumers to capture value. In fact, customers may even continue to use technology to compare prices, be encouraged to purchase items elsewhere— online operations are well suited to making perhaps from a smaller, more nimble retailer money from product-based transactions— or a large digital marketplace. The product, in which are, of course, the retailer’s traditional this scenario, is not the source of profit. When source of profit. Brick-and-mortar retailers done effectively, experience-based selling can that try to compete on the same grounds help boost loyalty, increase the consumer’s (price, speed, ease) in physical stores—for lifetime value, and even be a source of new and example, big-box electronics stores that try to innovative ideas as consumers and ecosystem match prices consumers find online—often partners interact and collaborate. find that such an approach simply accelerates their decline, as they cannot compete effec- “Experience bazaars” that tively on those grounds. surprise and delight consumers On the other hand, physical spaces can become catalysts for engaging consumers The idea of creating unique store experi- and even ecosystems around products and ences using aesthetics and ambience—or with each other—a very different business branded lifestyle products to communicate model from one based solely on product sales. image—is hardly new. But historically, such Retailers with a large physical presence may experiences are essentially “push” market- therefore want to migrate toward a focus on ing—the consumer has little to no direct say in
20 A report in the Future of the Business Landscape series
shaping his or her experience. The experiences opening physical storefronts. Google recently therefore risk becoming quickly outdated, opened its first-ever brick-and-mortar store in as one season’s cutting-edge brand is often London, with Android phones, Chromebook next year’s passing fad. Take clothing retailer laptops, and other products on display.44 And Abercrombie & Fitch, whose wares went from Amazon has debuted pop-up spaces in San hot look to passé in the space of a few years. Francisco, Sacramento, and New York, where The culprits: affordable, stylish “fast fashion” consumers can experience the company’s and a larger cultural/aesthetic shift toward per- Kindle e-reader, Fire phone and tablets, and sonalization and unique self-expression.43 Fire TV.45 Such spaces create a place where Today, however, retailers have an opportu- consumers can experience products in person, nity to create a completely new experience for while online retailers can engage with consum- the consumer—one that can surprise, educate, ers and get direct feedback. The vast majority and delight consumers by inviting them to of these companies’ sales are still online—but select and cocreate their own experiences. This the physical environment creates a meaningful may mean shifting business models, creating consumer touch point. value through engagement, and cultivating Leading retailers are also “renting out” an ecosystem of consumers and partners. For space in their brick-and-mortar stores, afford- example, instead of selling cookware (with ing independent retailers appealing to the peripheral experiential offerings such as classes same consumer group spaces where they can and chef-cooked dinners), a retailer might showcase products and engage with consum- focus on creating a community of consumers ers. Nordstrom, for example, has hosted Etsy who are passionate about cooking, offering designers and retailers in its bridal pop-ups a forum where members can come together and is collaborating with Shoes of Prey, a cus- and share passions and advice. Ideally, such an tom women’s shoe manufacturer. Such oppor- experience—an “experience bazaar”—could tunities give smaller, more fragmented sellers become so valuable that the retailer could a chance to showcase products and engage charge for the experience itself, rather than directly with the consumer, creating tailored the associated products. With the community and engaging experiences. in place, the retailer could suggest tools and Like restaurant dining and movie theaters, products—either its own or competitors’—that physical retail will not go away. But it’s likely may be purchased elsewhere. It could also to transform greatly in both its look and the partner with data aggregation platforms and role it serves. Many consumers will continue personalization solutions to provide a person- to enjoy the social aspect of shopping and the alized experience before, during, and after the experience of discovering new products and interaction, with a focus on helping consum- items. To thrive, retailers should develop new ers get the most value from the products they business models that embrace this enjoyment, have purchased. All aspects of the interaction creating spaces for consumers to explore, learn, would be rooted in deep engagement with and and come together around common interests. understanding of the consumer. Early signs of this transition are emerging. Incumbent retailers as Many physical spaces are hosting demonstra- infrastructure providers tions of online merchandise that consumers want to interact with before purchase. The As some retailers shift the focus of their value of these demonstrations is rooted less physical space toward creating individual expe- in transactions in physical space and more in rience platforms designed to facilitate dis- consumer interactions and engagement. For covery, learning, and interaction, others may example, Warby Parker started as an online- choose to move toward creating value in the only eyewear retailer and then expanded into
21 The retail transformation: Cultivating choice, experience, and trust
Figure 6. The traditional retail value chain
Inventory Sourcing & Store Design management Marketing Sales Fulfillment Support procurement operation & distribution
Product Purchasing or Managing and Managing the Promotion of Execution of Delivering Helping prototyping building distribution of point of sale goods for sale the purchase products to consumer inventory products to be and/or the transaction consumer maximize the sold retailer’s brand value of products Description
Graphic: Deloitte University Press | DUPress.com
business-to-business (B2B) space by providing concentrators—“scale-and-scope” operators infrastructure capabilities to other retailers. able to provide sourcing, inventory manage- Figure 6 shows the traditional retail value ment, store operations, marketing, and fulfill- chain—the general sequence of functions ment capabilities to smaller retailers. needed to move a product from concept to sale and beyond. While retailers have traditionally Sourcing and procurement performed many, if not most, of these func- Today, emerging retailers can contract for tions, technological changes are beginning fully managed sourcing and procurement pro- to break up and recombine the value chain’s cesses once too complex for many small busi- elements, making it newly possible for an nesses to handle. A number of infrastructures organization to perform only a single function, and platforms, including purchasing coopera- or even to reorder the traditional sequence tives and organizations offering e-procurement of activities. tools, provide sourcing and procurement Even as the product design and sales steps services to small retailers. fragment, the value chain’s central functions— Historically, purchasing cooperatives made from sourcing and procurement through procurement easier and helped reduce costs by fulfillment—are, as we describe below, con- buying in bulk, then splitting the goods among centrating, increasing efficiency by leveraging multiple parties. For example, Bay Area chain economies of scale and scope. Because these Cole Hardware, an independently owned local functions can benefit from such economies, business, purchases the majority of its inven- they are likely to continue to concentrate, tory through the Ace Cooperative for hardware offering opportunities for growth to those stores.46 Today, technology enables an even players able to dominate the space. greater variety of sourcing and procurement Concentration refers to the emergence options, including drop-shipping and crowd- of a small number of large-scale players to funding. Drop-shippers handle all sourcing handle an industry’s infrastructure needs, each and procurement for fragmented retail- focused on a single business activity or func- ers, while crowdfunding facilitates presales, tion. These large-scale infrastructure providers enabling extremely accurate demand predic- are enabled by economies of scale and scope, tion. These entities rely on the economics of as well as by the potential for network effects. scope and scale: The more transactions and As the retail industry undergoes concentration, participants they support, the more cost-effec- especially in B2B interaction, established retail- tive each transaction is. ers may have the opportunity to become B2B
22 A report in the Future of the Business Landscape series
Inventory management the majority of commercial retail real estate. and distribution San Francisco Bay Area retailers Umami Rather than having to create or own inven- Mart and Frankie & Myrrh both enjoy spe- tory management and distribution systems, cial deals—Umami Mart with the City of many retailers can now outsource these Oakland,50 and Frankie & Myrrh with the functions entirely or in part, hiring infra- online marketplace Storenvy (which itself structure providers to handle procured and received a discounted rate from the owner of produced goods and send them to stores. For its physical storefront)51—that enable them example, Stitch Labs is a cloud service that to lease brick-and-mortar locations. Beyond can track and manage inventory and sales such deals, the growing popularity of “pop-up across multiple online storefronts. Similarly, retail” enables small retailers to affordably lease drop-shippers fully handle inventory man- space from consolidated players—space that agement, often eliminating the need for store might otherwise be vacant. Established retail- distribution altogether. ers can take the store operation function to the next level by creating the “experience bazaars” Store operation discussed above. Retailers can also hire third-party infra- Beyond provision of physical and digital structure providers to provide storefront space space, other store operation functions include and even manage back-end store operations. traffic analytics and other back-end technical Store operation is the point at which retail- and data resources designed to enhance the ers open up merchandise to the public; the customer experience. These too can be pro- term encompasses both online and physical vided by scale-and-scope operators, freeing stores. In the past, the need for high capital small retailers from the need to own them. investment in physical space made retailing a And they too are consolidating. For example, generally expensive, risky proposition. Online Google Analytics held an 85 percent share of selling supported by virtual storefront provid- the cloud-based analytics market as of 2012,52 ers has removed much of the expense. while Amazon Web Services held a 35 percent Meanwhile, many digital marketplaces are share of the infrastructure-as-a-service market rapidly consolidating. A few key platforms, in 2013, with no other competitor holding including Etsy, eBay, and Amazon, now more than 7 percent.53 dominate the online storefront industry. This concentration creates a virtuous cycle. The Marketing more storefronts a marketplace enables, the Aggregation platforms such as social media more likely users are to gravitate to its site, networks can become a means for marketing. attracted by its variety; the more users come to Fragmented players can use scale-and-scope an online marketplace, the more likely sellers operators such as Facebook to advertise to are to use its digital storefront services. Today, both broad and targeted audiences. While the Etsy is the biggest player in the handmade retailers may create the ads, the aggregation marketplace industry, with 78 percent of the platforms do the work of posting them and tar- worldwide market in 2012.47 Etsy features more geting them to the appropriate audiences—in than 25 million sellers,48 two-thirds of whom short, the bulk of the mechanics of advertising. view their selling on that platform as full- Social media platforms are particularly fledged businesses.49 strong examples of scale-and-scope provid- Physical real estate remains prohibitively ers, as any individual platform’s value grows expensive for many retailers, so most rent with the size of its user base. Used as market- rather than own physical store space, usu- ing platforms, they can drive highly effec- ally from one of the major players controlling tive retail campaigns. For example, women’s
23 The retail transformation: Cultivating choice, experience, and trust
Figure 7. The traditional retail value chain—consolidation and fragmentation
F C C C C F C F Inventory Sourcing & Store Design management Marketing Sales Fulfillment Support procurement operation & distribution
Product Purchasing or Managing and Managing the Promotion of Execution of Delivering Helping consumer prototyping building distribution of point of sale goods for sale the purchase products to maximize the inventory products to be and/or the transaction consumer value of products sold retailer’s brand Description
Fragmenting, as Consolidating, Consolidating, Consolidating, Consolidating, Fragmenting, Consolidating, Poised to fragment, more and more via via cloud via via social media as more via shipping as peer-to-peer individuals have e-procurement services and marketplaces and online individuals are services and platforms emerge access to and drop- platforms marketing able to drop-shipping to facilitate tatus
S design tools shipping platforms establish retail ecosystems around operations products
GE Firstbuild Drop-shippers Stitch Labs Etsy Facebook mPOS UPS, Deliv, SAP Community Instacart Network Example
F Fragmenting C Consolidating Graphic: Deloitte University Press | DUPress.com
apparel retailer Nasty Gal got its start on the domestic US shipping market.55) A rising force early social media platform Myspace. Founder in this area is same-day delivery services, such Sophia Amoruso fostered a cult following, as those from Google, Deliv, and Instacart, using the site to direct interested custom- that partner with retailers to fulfill remote ers to buy from her eBay page; as Facebook orders. San Francisco–based Cole Hardware, superseded Myspace, she transitioned to that for example, uses Google Shopping Express.56 platform. Nasty Gal took no external financ- Retailers can also rent out their brick-and- ing until 2012, when it accepted a $50 million mortar facilities as fulfillment centers for other investment from Index Ventures and posted players, thus becoming distribution hubs. sales totals of nearly $130 million.54 These examples, several of which are shown in figure 7, illustrate how players looking for Fulfillment growth can position themselves in specific Infrastructure providers can also carry out roles in different parts of the value chain, fulfillment, the act of providing the customer as well as ways that the current market can with his or her purchase. For brick-and-mortar reward scale and scope. By providing infra- purchases, the term is usually synonymous structure, aggregating demand, and con- with sales; in e-commerce, however, it becomes necting retailers with consumers through a distinct step. Fulfillment appears to be con- marketplaces and platforms, scale-and-scope solidating in the form of platforms or services players can benefit from the retail landscape’s that send goods to customers on retailers’ changes—including increased fragmentation behalf. This can take the form of drop-shipping and volatility, new ways to aggregate demand, or mailing via a national service such as USPS, the decoupling of demand from supply, and FedEx, or UPS. (UPS alone holds half of the the emergence of new retail models.
24 A report in the Future of the Business Landscape series
Established retailers agent serves, the more likely it is to recognize as trusted agents patterns and thus improve the quality of its advice. Large established retailers, with their The consumer agent is not a new concept; access to extensive purchase-activity data for a personal shoppers and personal wealth advi- large number of customers, have an advantage sors have existed for decades. However, these in this arena. services have historically been accessible only In today’s retail environment, such retailers to a few wealthy individuals, mainly because may take on new roles as consumer agents— personalized advice is often costly and not entities that use their deep knowledge of indi- 57 easily scalable. But recent advances in core vidual consumers to proactively recommend digital technology have now made it possible the best options for each (figure 8). Effective to develop cost-effective personalized services agent business serve consumers first, focus- that draw on data platforms, big data analytics, ing more on meeting consumer needs than on and machine learning. As products and niches product sales, and tapping a broad network of continue to proliferate, consumers will increas- curators and partners to help connect consum- ingly look for trusted sources that can help ers to preferred niche options. them navigate multiple options and choose Trusted consumer agent businesses are those that fit their needs. This role requires already beginning to emerge. For example, scale to be effective: The more consumers an Amazon’s algorithm-based recommendation
Figure 8. Characteristics of agent businesses
The agent business
Defined as the ability to Recommends services/ Recommends services/ recommend services, offerings, or products from within the products from across the products that are in the best organization’s portfolio whole marketplace interest of the individual—which may extend to recommending Low High options even beyond an Agnosticism organization’s own portfolio
Passively provides Proactively anticipates Defined as the ability to actively services and functions individual needs based on a deep (not passively) recommend not personalized to understanding of the individual services/products to consumers the individual’s needs based on a deep understanding Low High of the individual Anticipation
Accessible only to a limited Easily accessible to a large number of individuals (high number of individuals (low Defined as the accessibility of cost or limited availability) cost and wide availability)
atization agents to individuals with respect to price and availability Low High Democr
Graphic: Deloitte University Press | DUPress.com
25 The retail transformation: Cultivating choice, experience, and trust
system uses a number of simple elements, such Similarly, Stitch Fix, founded in 2011, is as items a user has purchased in the past, items a personal shopping club that sends users in his or her virtual shopping cart, items liked customized boxes of clothing, on demand or or rated, and items that other customers with by subscription. Customers are asked to fill similar purchases have viewed and purchased. out detailed profiles and even share Pinterest The algorithms customize the consumer expe- boards so that the company can assess their rience—and Amazon’s metrics demonstrate style preferences. Stitch Fix uses a combina- that they work. The most recent iteration of the tion of proprietary algorithms and personal company’s recommendation engine contrib- stylists to curate a personalized five-piece uted to a $3 billion, or 29 percent, quarter- assortment of clothing and accessories, which over-quarter sales increase.58 is shipped to the customer along with styling
Figure 9. Sample Stitch Fix customer styling card
26 A report in the Future of the Business Landscape series recommendations (figure 9). The customer can Mobilizing the retail landscape keep all or none of the items in her package, As the retail industry evolves into a land- paying a “styling fee” of $20 only if she pur- scape of niche players connected by “experi- chases nothing from that box. If all the items in ence bazaars” and marketplaces, and enabled a box are purchased, the customer receives a 25 by infrastructure providers, opportunities percent discount. Stitch Fix, which uses very will arise for organizations to act as mobiliz- limited traditional marketing, relying instead ers—entities that bring together elements of on word of mouth and social media tastemak- a rapidly shifting ecosystem to pursue shared ers for promotion, is projected to bring in interests and enable learning, helping to orient more than $200 million in revenue in 2015.59 the industry around common goals. Amazon and Stitch Fix have developed Mobilizers are not a new concept. Retail consumer agent capabilities by leveraging associations such as the National Retail technology to understand consumer needs, Federation provide resources that enable then recommending options that address those participating retailers to adjust and enhance needs. For this model to be effective, con- performance, supporting the industry as a sumers must trust agents deeply—a difficult whole through trade shows, conferences, achievement when the agent recommends only workshops, seminars, thoughtware, legisla- its own products. Knowing this, some agent tive lobbying, and more. However, in times of businesses will suspend reliance on inventory change, new movements and organizations at hand and instead find items that best meet are likely to emerge to address fragmenting consumers’ needs—whatever their source. As consumer interests. For example, the maker such, they will likely have limited, if any, brick- movement encourages hands-on manufactur- and-mortar assets, instead investing heavily ing and tinkering, while “glocalism” encour- in analytics capabilities and relationships with ages consumers to purchase goods that, if not ecosystem partners. Perhaps the most sustain- local, contribute to specific microeconomies able business model for an agent business is to (for example, purchasing items from trade receive payments from customers for services co-ops in East Africa). Entities within these rendered, rather than from advertising revenue movements can take on the role of mobilizers. or markups on products sold, which tend to City governments promoting the purchase of undermine trust. locally made goods to revive their cities’ manu- While change can be challenging, the good facturing industries are acting as mobilizers, news, as we’ve noted, is that agent businesses as are publications that educate individuals on are likely to be driven by powerful economies movements and offer ways to get involved. To of scope and network effects. The more an connect more deeply with their communities agent knows about any individual customer, and understand underlying shifts in consumer the more helpful it can be to that customer. behavior, retailers should pay attention to Just as important, the more customers an mobilizing forces in their environments. agent interacts with, the more it can iden- tify emerging unmet needs across custom- ers—and the more helpful it can be to any individual customer.
27 The retail transformation: Cultivating choice, experience, and trust
Pragmatic pathways for transformation
HE landscape we describe in this report business’s new core. Such an approach can Tchallenges established retailers to dra- help make it possible for retailers to reinvent matically alter both their mind-sets and their themselves while minimizing potential risks business models. But such change can be both and maximizing impact. difficult and risky. How can retailers choose An edge is a growth opportunity that has the right path when the future is uncertain? the potential to scale—so much so that it can Historically, most companies have catalyze change, eventually becoming effective approached major transformation as a large- enough to replace the core of the business. A scale, big-bet investment—one often driven true edge should align with larger trends dis- from the top of the organization, where a large rupting the industry. Edges involve fundamen- investment signals commitment. However, tally different business models and practices less than a third of such big-bet approaches from those of the core. For established retail- to organizational change are effective.60 This ers, potential “edges” could include becoming is not surprising when one considers human an “experience bazaar” for consumers, a B2B psychology: Changing an entire organization infrastructure for fragmented niche retailers, is difficult—and it can be intensely politi- or a trusted consumer agent. cal. When bets are high and the environment uncertain, organizational antibodies can How can retailers scale an edge? emerge to attack the initiative, which competes Once a retailer identifies its edge—what for resources and may be perceived as highly business it wants to be in 5–10 years from risky. It can take a long time to meet ambitious now—it should then make small, smart moves goals, and even supporters can grow impatient. that test and grow that edge. First, the retailer As a result, many such initiatives fail to achieve should design quick prototypes—for example, their initial objectives. pop-up events or informal collaboration agree- ments—and test them rapidly to get feed- Scaling edges for transformation back. The retailer should also find individuals However, there is another approach to who are passionate about the opportunity transformation—one that can be less risky, to lead these edge projects. Here, passion is yet still retains the potential to transform an more important than experience; passionate entire organization. This approach, which people tend to find ways to learn new skills we call “scaling edges,” is based on identify- and capabilities. ing a promising “edge” for the organization, To avoid competition for resources, edge then growing that edge until it becomes the projects should not rely on resources and IT
28 A report in the Future of the Business Landscape series
STEPS TO SCALING EDGES
Identify an edge to explore: Determine what business the company wants to be in 5–10 years from now—one that has a fundamentally different business model from that of the company’s core. Execute and test the edge: Establish a group to carry out the edge business model on a small scale, focusing on rapid prototyping and feedback. Starve the edge: Fund the edge project on a shoestring, encouraging it to find creative ways to meet resource and infrastructure needs other than getting them from the business’s core. Staff for passion: Select individuals for the edge team based on interest in and affinity for the work rather than solely on experience. Passionate people tend to find ways to learn new skills and capabilities. Define success in relative, rather than absolute, terms: Aim for the edge initiative to deliver continuously improving returns—not necessarily large returns in an absolute sense. Scale up: Once the edge initiative gains traction, do not attempt to integrate it into the core of the company. Instead, allow the core to be pulled to the edge (figure 10).
Figure 10. Design principles: How to scale the edge?
Start Organize Amplify Perform
How do you mobilize How do you use How do you measure How do you start? the right resources disruptive technologies success to drive and participants? to grow? improvement?
Focus on edges, not Staff for passion Break dependency on Embrace double the core before skills core IT standards Edge initiative: ______Who within the firm would What new technologies What metrics can we use
ocus be most passionate about can we leverage to amplify to measure progress F potential the edge initiative? our abilities? toward core goals and edge goals? Maximize upside
Look externally, not Starve the edge Mobilize the passion- Measure progress of internally ate outside the firm the ecosystem ed age What external resources, What are the minimum How do we connect with What specific metrics can ecosystems, and partners resources required to get passionate talent outside we use to measure the quir
re can we leverage? started? our organization? health of the edge Minimize Levers instrument
Lever ecosystem?
Learn faster to move Reflect more to move Move from dating to Focus on trajectory, faster faster relationships not position ate es s How can we iterate What can we do to better What platforms and tools How can we assess the quickly to test the edge incorporate learnings along can we use to create rate of learning and initiative? the way? trusted relationships with performance improvement ccler Compr lead times
A ecosystem partners? within the ecosystem?
Graphic: Deloitte University Press | DUPress.com
29 The retail transformation: Cultivating choice, experience, and trust
systems from the business’s current core.61 and regional banking. But market shifts were Along with testing a fundamentally new putting increasing pressure on traditional business model, retailers should tap into banking operations while increasing demand new sources of infrastructure and resources. for scale-intensive back-office processing, a Edge initiatives should also be “starved” with function increasingly challenging for many respect to investment from the core: They are small banks. Noting this, the company built essentially start-ups within a company, and, out its back-office capabilities, outsourcing in general, successful start-ups are not over- them to other financial institutions. It also funded early on.62 To help maximize learn- pushed aggressively into the high-tech process- ing and leverage resources, company leaders ing of transactions related to asset manage- should encourage edge teams to build deep, ment, global custody, 401(k)s, and trusteeship trust-based relationships with ecosystem play- of debt securities based on securitized assets.63 ers. And they should measure results without These initiatives grew so rapidly that State worrying too much about absolute metrics, Street ultimately decided to shut down its com- focusing instead on trajectory. mercial bank operations and focus exclusively It can be instructive to look at compa- on infrastructure outsourcing. Pursuing this nies in other industries that have reinvented edge has paid off for the company, which as of themselves by pursuing promising business the first quarter of 2015 had $28.5 trillion in edges. For example, financial services provider assets under custody and administration and State Street shifted from consumer banking $2.4 trillion under management.64 to become a B2B infrastructure provider for Retail today is at a crossroads. Incremental other financial institutions. Founded in 1792, improvement is not enough—to be effective, State Street Bank started as a commercial most retailers will need to make a fundamental lender. By the mid-1970s, it had developed shift in both mind-set and identity. The good lines of business in commercial banking, news: There is a path forward, but it is one that financial services, investment management, requires both conviction and courage.
30 A report in the Future of the Business Landscape series
Conclusion
ODAY’S retail landscape is in the midst When the future is uncertain, transforma- Tof what is arguably its most fundamental tion can be difficult—and can be met with transformation in a century-long string of internal resistance. At the same time, periods changes. Multiple large-scale dynamics are of uncertainty can offer tremendous possibility shaping the broader environment in which for those able to choose a direction and shape retailers operate, putting pressure on tradi- the opportunity. By driving change at a busi- tional business models. To survive and thrive ness’s “edges,” retailers can prototype and test in this environment, established retailers new business models, gather meaningful feed- should reassess how they create value, adjust- back, and learn and reflect with less internal ing their asset mix to focus on the roles they tension and resistance. Small moves, smartly chose to play. made, can set big things in motion.
31 The retail transformation: Cultivating choice, experience, and trust
Endnotes
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33 The retail transformation: Cultivating choice, experience, and trust
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35 The retail transformation: Cultivating choice, experience, and trust
Acknowledgements
This paper would not have been possible without the support of our colleagues. The authors would like to thank:
Kayoko Akabori Jodi Gray Sarah Qian Nick Alexander Adam Hendle Rachel Smeak Jeanne Allen Julian Ivann Lisa Gluskin Stonestreet Troy Bishop Nathan Johnson Jake Wall Andrew Blau Junko Kaji Kevin Weier Ed Chen Duleesha Kulasooriya Maggie Wooll Austin Dressen Matt Lennert Whitney Young Robert Falcey Alison Paul
Contacts
For more information about this report or about the Center for the Edge, please contact:
André Dennis Dylan Piatti Africa Consumer Business Industry & Africa Consumer Business Chief of Staff Assurance Leader [email protected] [email protected] +27 11 806 6522 +27 11 806 5184
Mike du Toit Africa Consumer Business Consulting Leader [email protected] +27 11 806 5449
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36 A report in the Future of the Business Landscape series
About the Deloitte Center for the Edge
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