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Dealing with disruption: Retail's challenge and opportunity

INSIGHT ARTICLE  | 

From the tremendous growth in consumers’ use of e-commerce to the rise of personalized mobile shopping apps and elaborate in-store shopping experiences, retail is in a state of conventional disruption and vital transformation. Thriving brands and retailers are addressing these changes head-on to meet consumer needs, reinvigorate their brands, stay relevant and remain profitable. To get a bead on what’s going on in the fashion and retail industry related to this topic, we visited with two RSM industry insiders. National industry practice leaders, Carol Lapidus, consumer products, and John Nicolopoulos, retail and restaurant, share their insights in the following Q&A.

What’s changed in terms of how retailers are marketing and selling to consumers?

Carol Lapidus: Consumers want convenience and value, and these key preferences are changing the way retailers market, engage and sell to them. For instance, we’re seeing an increase in subscription-based services, particularly for apparel, where apparel and accessories are curated for the individual consumer based on his or her personal choices. This saves consumers time and effort since the shopping is done for them. Companies like Stitch Fix are capitalizing on this trend. They’re appealing to busy consumers because they offer desired products and act as a personal stylist all in one convenient service at a bundled price.

In addition, while we know online shopping is desirable for shoppers, we’re still seeing 70 to 80 percent of shopping at bricks and mortar stores. However, physical stores are not always about vast quantities of products in every size and color. Rather, some innovative stores, like the newly launched Nordstrom Local, have been transformed into experiential showrooms where consumers can meet with a personal stylist, sip a latte, get a manicure and be pampered as they consider clothing purchases. It’s truly a shopping destination, but shopping may not be the primary objective for the consumer. It’s about the memorable experience.

Another interesting way retailers are reaching out and selling to customers is through social media outlets like Snapchat or Instagram. Products are featured on these channels and with a tap, they move on to more information or the ability to purchase the products in a seamless process. Retailers are using this strategy more and more to form connections and provide convenient shopping avenues for their customers.

John Nicolopoulos: Digital media marketing and sales methods like this are essential for today’s retailer. To be successful, retailers need a multipronged strategy to engage and sell to consumers, and an omnichannel approach is key, from interacting with the customer on social media, providing helpful product information and reviews online, to offering a complementary showroom experience.

Likewise, another change or disruptor we’re seeing in retail is the growing importance of social influencers. Consumers are getting inspiration from fashion bloggers, for instance, who might feature an outfit of the day or a limited-supply of an exclusive product. These influencers, sometimes compensated by retailers or apparel manufacturers, churn up excitement and urgency around products and can be drivers for sales. It’s a definite game changer for retail and another way to connect, nurture community, gauge likes and inevitably direct consumers to purchase products.

How are retailers altering their traditional supply chain strategies to enhance customer engagement?

John: Retailers realize there are certain consumers who love the activity of shopping and searching for bargains—treasure hunters, if you will. Retailers like TJ Maxx and other off-price retailers thrive on this and they’re doing extremely well with the value-driven, treasure hunting consumer. These customers know that quantities are typically limited and not replenished, so if they find an item they want, they will likely buy it on the spot, as it will likely be gone the next time they return to the store.

This same sense of urgency is created by fast fashion retailers who bring the latest fashion trends to their customers more quickly and in smaller quantities than their traditional retail competitors. Limiting quantities creates a scarcity of product and a sense of excitement and urgency in customer experience. It also keeps inventory fresher and, as a result, customers’ wardrobes more dynamic, as new inventory is cycling through more frequently.            

Carol: The challenge for companies that supply to retailers is that they must understand and anticipate the changing needs of the retailers and be able to provide the right amount of product, be nimble enough to supply reorders, and not have excess inventory on hand at the end of the season. It’s caused some concerns at the manufacturing and distribution level; what we’ll likely see in the future is that less product will be manufactured. What will be the impact on these suppliers? Smart business owners selling to retailers will increasingly be using business intelligence and other technology tools to better determine the balance which will lead to the highest level of profitability. 

How has the so-called Amazon-effect changed retail?

Carol: Amazon has certainly transformed retail with its e-commerce domination and it has forced other retailers to rethink traditional strategies. Amazon has raised the bar and inspired other retailers to reinvent their online business processes and systems. Retailers are using these best practices to improve their own businesses, such as how to leverage consumer data to engage and sell or how to use technology to streamline supply chains. There is still a place for small and midsized retailers in this diverse marketplace. Amazon’s appeal is certainly price, speed and convenience, but niche products or personalized services have their place, too, for certain consumers. In particular, those brands that can differentiate themselves through customized experiences—whether it’s through interactions delivered via augmented reality or a well-trained and knowledgeable in-store sales staff—can co-exist with Amazon and other mega-retailers and grow in this consumer-engagement environment.

Given this fast-moving climate of change and disruption, are private equity investors investing in retail and if so, where?

John: We all know retail is changing. That frightens those who believe retail is dying and it excites those who equate change with opportunity. We continue to see private equity investment flowing toward retail, although the categories of greatest interest have evolved with consumer spending. For instance, as residential real estate markets have improved, we’ve seen increased investment activity in home furnishing companies as consumers are investing more in their homes. We’ve also seen private equity investment follow consumer spending on health and beauty related retail businesses. Americans are spending more on health clubs, spas and salons and private equity firms are trying to capitalize on those trends. We’re seeing investment in a broader spectrum of retail businesses, far beyond more traditional categories that come to mind when we think of traditional retail. 

We’ve also seen upticks in related businesses that support retail, specifically technology businesses that can support the changing expectations of the U.S. consumer. The digital transformation of the retail environment has spawned the growth of technology companies specializing in this space. We’ve seen investment in these companies come from a variety sources. Although not direct investment in the retailer, we’d be remiss not to acknowledge investments being made in businesses supporting and driving change through the retail industry, whether from venture firms, private equity firms or large strategic acquirers.        

What are malls doing to keep pace with consumer needs?

Carol: Malls are transforming and are not necessarily the location where consumers go to buy the same products as in previous years. Rather, malls are being re-envisioned as entertainment plazas and lifestyle venues, and could include day spas, movie theatres, bowling alleys, gyms, grocery stores, restaurants, and medical and health centers. We are seeing department stores close locations, and often decrease the size of remaining locations by as much as 80 percent. This leaves a great deal of available space for the services consumers want and need. By providing them in one centralized, often climate-controlled location, the mall owner increases the chances that the consumer will spend a significant amount of time at the mall. And the brands, fast fashion and other retailers that remain at the mall locations will benefit from the increased time spent. More and more we are seeing the consumer browsing the stores, then going online to make the purchase. The new mall model is all about consumer engagement and providing the ultimate experience.

John: Retail shopping venues are definitely evolving, but let’s not over generalize. Urban malls and life style centers continue to attract foot traffic and many downtown areas have been revitalized. That said, the large regional malls many of us grew up visiting are undergoing a transformation. Anchor tenants are closing or downsizing and mall operators are trying to creatively fill that vacant space with tenants that will bring foot traffic to other tenants the way their anchors had for many years prior to the recession. They are trying to create destinations for customers to come and spend their day—shop, eat, see a movie or just hang out in comfortable common areas, as opposed to the “running of the bulls” frenzied shopping experience many of us grew up with.

We’re also seeing mall operators using technology to enhance the customer experience and drive traffic as never before, ranging from basic technologies to guide shoppers to vacant parking spaces to ease parking frustration and direct shoppers to merchandise pick-up areas throughout the mall, to more sophisticated technologies that can track shopping behaviors while in the mall. Operators are also creating mall rewards programs to gather data to learn more about their customers and then teaming with their tenants to market to those customers. The landscape has certainly changed, but so has the approach mall operators are taking to marketing their properties.

What must retailers do to survive and thrive in this disruptive industry?

John: It’s essential for retailers to differentiate their brand in today’s competitive retail environment. They must set themselves apart by providing personalized experiences that accommodate the demands of today’s consumer. Much of that comes from knowing precisely who their customers are, what their specific needs and buying preferences are, and then delivering that product or service in the most convenient and authentic way possible. This comes from evaluating customer behaviors and data, and then establishing a comprehensive omnichannel strategy to connect, engage and re-engage with them.

Carol: Retailers and brands must re-examine every part of their strategy, from product design to supply chain and marketing, and explore best practices to increase the effectiveness and efficiency of their systems, operations, plans and approaches to better reach the consumer while still increasing the profitability of their business. Sitting back on yesterday’s wins means your company could be left behind by a consumer seeking the next trending product, personalized service or convenience. Retail and brand executives should be committed to renewal, innovation and continuous engagement with their customers in today’s demanding and dynamic marketplace.


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