“… Chances for survival have to be much more than just simply investing in digital strategies and mobile devices or looking at AI and machine learning. You need to have great product first and foremost, and you need to continue to innovate in that great product that people want to buy. You need to have some unique offering around that, those great products. Either you have to be one of the only companies offering it or you have to create packaging and some special brand around that item, that people will come to you and you alone to purchase.”

Transcript:

Mani: Hello, everyone. Welcome to the series of podcasts that Retail Singularity, an offshoot of Litmus7 Systems Consulting, is hosting on the future of the retail industry. We see retail changing very rapidly before our eyes and we want to be a part of the forces that are driving these changes. I am Mani Subramaniam, President, Retail Singularity. In this series of podcasts addressing the future of retail, I’ll be talking to leading retail influencers to understand the direction retail is taking, and to try and evaluate the impact of these changes. Sucharita, good morning. Thank you for joining us on this podcast.

Sucharita: Yeah, my pleasure. I’m glad to be here.

Mani: Wondering about where retail is heading, am I right in sensing that the world of retail is changing much faster now than it has in the last 10, 20, 50 years? If you agree, what are some significant changes that you’re seeing?

Sucharita: Yeah, it certainly has, because of the number of people who have now access to digital devices and the ability to receive information. In times past manufacturing processes are different now and the ability to leverage solutions like marketplaces have really lowered the barriers to entry for reaching customers, for sellers to reach customers. These are definitely changes that have had pretty major shifts in retail.

Sucharita: It gives consumers different access to a new supply of merchandise. It reduces their search costs. You have transparency and information that didn’t exist before. So these, of course these issues put a lot of pressure on retailers because where shoppers are shifting to are often the cheapest seller of a product, and those sellers didn’t exist before because internet marketplaces really didn’t exist before.

Mani: Great. Okay. Thank you. That’s a very interesting perspective. As you are aware, we at Litmus7 consult with some of the world’s top retailers and one of the questions that often comes up is, “What should our retail clients do to thrive and survive in these changing times, and where should their focus be?”

Sucharita: I think it’s important to keep in mind that there are still traditional chains that are thriving, even in this competitive landscape. You have companies like Nike that are doing really, really well in a world of increased competition. You have companies like Lululemon that have found a unique niche targeting a specifically relevant consumer product at this moment in time. There are retailers in highly competitive sectors like grocery and I think of Trader Joe’s as an example, that are thriving.

Sucharita: There are some unique characteristics of those businesses that are important to keep in mind. First is that all of those companies are product-led. They have unique assortments that are special and specific to them. They have a lot of intellectual property and they protect a lot of that intellectual property. They do that often by having basically dominion over their distribution. Their distribution is often vertical. What that means is that they and only they know really what their bestsellers are. They know what drives shoppers into stores, they know what their margins are.

Sucharita: We can sometimes infer that because we may be their customers, or you can just spend a day observing their stores and likely see the same outcome. But a lot of those are trade secrets that a lot of brands and retailers have relinquished over the years to other partners, that have then taken advantage of that information and created private label products or basically knocked off those same efforts. So I think that what I would say for anybody, your chances for survival have to be much more than just simply investing in digital strategies and mobile devices, or looking at AI and machine learning.

Sucharita: You need to have great product first and foremost, and you need to continue to innovate in that great product that people want to buy. You need to have some unique offering around that, those great products. Either you have to be one of the only companies offering it or you have to create packaging and some special brand around that item, that people will come to you and you alone to purchase. I would argue that that’s what Lululemon does really well in a world where there are a lot of companies selling sportswear and athletic wear.

Sucharita: You also need to have a good customer experience, and that means that it should be easy to access your product and it should be easy to find what you’re looking for and complete a transaction with you, whether it’s online or offline. Where digital comes into play is that it can help to facilitate that transaction. Retailers that do invest in tactics like omni-channel and knowing where in a store a product is, how many units are there, is it actually in the store and is it where it’s supposed to be? Those are retailers that are better positioned to survive in the future than those that don’t have access to that information or are not executing that information particularly well.

Mani: Great. I take it then that great product, being unique, and then being innovative and also understanding what the customer needs, are some great qualities required.

Sucharita: Right, right, and also diversifying too. There are all kinds of assets that retailers have, from foot traffic to the space in their retail stores to their real estate. There are ways to monetize all of that. It can be adjacencies into new business, it can be leveraging your store as a media property and selling advertising against it. It can be incubating stores within stores.

Sucharita: So there are a lot of different models that extend beyond just simply owning inventory and selling it. Retailers really, really need to rethink, are they just destinations that sell inventory or are they solutions providers, or are they discovery zones for consumers that may want to purchase some items, but there are opportunities to monetize those customers in other ways.

Mani: Thank you so much. Do you see a world where customers these days are more empowered than before? Can you give some examples of that empowerment helping both the retailers and the customers?

Sucharita: Yeah, and some of it is due to just digital solutions, and some of it is due to just the hyper-competitiveness of retail. Customer empowerment certainly comes in the form of just providing shoppers more information. They can check prices. That’s the number one use case actually of shoppers using mobile devices inside or outside stores for shopping purposes, to look at price comparisons, research products, read ratings and reviews. So this is a shopper that is able to come in and know what they want. There’s a lot more knowing before you go, and that’s actually great because the burden is less on store associates to know every single product that’s out there.

Sucharita: You can’t expect, especially in big box retail stores, associates that get paid minimum wage to be informed and educated about every single product that’s there. These are not people that are Apple employees selling iPhones. So to have an empowered employee is … or have an empowered customer is definitely a good thing. The burden is on brands and retailers to make sure that that information that you’re providing customers is accurate, it’s consistent, it’s widely available, and that it’s accessible to everybody, whether it is a customer or an employee, or even somebody on your own merchandising team.

Sucharita: Customers are also empowered because retail is just highly competitive. What that means is that there are lots of businesses fighting for their dollars, and there’s always somebody offering free kids’ meals every day of the week. There’s always somebody offering free shipping on whatever product that it is that you’re looking to buy. Sometimes there’s somebody offering free same-day shipping or next-day shipping. That puts a lot of pressure on anyone competing with those merchants to offer something competitive.

Sucharita: You compete either by having unique products that people want and you have limited supply of it … The restaurant industry is an excellent example, because the best restaurants are those that have their own venues and they’re own ambience, and there’re very specific reasons that people go there. In the rest of physical goods retail, you either have to look to what is your unique offering or you have to basically compete with whoever is the lowest-priced, fastest delivery vehicle, which is often a race to the bottom. But that’s great for customers, customers at the end win in that environment.

Mani: Exactly. Thank you. When you look at retail data that is published, it appears to be very confusing. On the one hand, you read about store closures. On the other hand, retail industry itself is steadily growing around 3% to 3.5%, Sometimes 4% in a month. How do you reconcile those two bits of data?

Sucharita: I think there’s a lot of exaggeration around the bad news associated with store closures. Yes, there are more store closures than there have been in the past, but there are also more store openings then there are net store closures. That’s an important piece to keep in mind, is that … I had an uncle who would always say that statistics are like a bikini, what they reveal is interesting, but what they hide is essential. So you always, always have to step back when somebody is sharing data with you as to, “Well, what’s the denominator and how does this look over time, and what is this saying in the larger scope of things?”

Sucharita: So yes, there are more store closures, we’re over-stored in the United States and we don’t need as many stores as we have anyway. But is this number so remarkable that half of retail should disappear? No, of course not. I think the number of store closures represents less than 1% of the total number of stores. But if you still have store openings, you’re not going to see a shrinking in the total number of stores. So I think that you just have to step back and ask the questions around when people talk about store closures, what percent of all retail is this really encompassing?

Sucharita: There’s certainly a lot of store growth happening in channels like online that are also capturing a significant percent of the growth. So when you look at the growth year over year, half of it typically comes from e-commerce and the other half is coming from physical stores. The e-com growth is disproportionate, so that’s where you see a faster growth. But there is still some stores that are growing. But that said, we’re talking about a small single-digit growth, which is almost in line with inflation.

Sucharita: Retail is a mature industry and what we are seeing is e-commerce cannibalizing a lot of physical stores. That’s part of why we are seeing the shakeout in physical goods retail. Americans spend more than just about anyone else on physical goods. But what we’re seeing is that shift in how shoppers are buying, and that’s why you’re seeing the store closure number that you’re seeing.

Mani: That’s interesting. That leads me to my next question. The traditional metrics of retail no longer hold good, especially because retail stores are either smaller or e-commerce is taking over. What new metrics come to mind when you think of how do you judge retail? How do you measure retail?

Sucharita: I think that sales are still and always will be the most important metric that a retailer is held accountable to. But I think in the future what you may see is revenue versus product sales. Because as I’d mentioned earlier, we may see retailers offering more services. They may offer stores in stores, they may have advertising businesses that are part of their ecosystem. So I think that in the future you will always have some form of revenue coming in as part of the equation.

Sucharita: Hopefully retailers will find ways to, even if their product sales go down, find new profitability, maybe in some higher-profit enterprises like media or some kind of service provisioning. I think that a metric that has become outdated is the notion of same-store sales. That was really relevant when 100% of your sales came from stores. It’s no longer relevant when shoppers are shopping across channels, and you will start to see more of consumers, geographies, data around average lifetime value or geographic trade area strength.

Sucharita: The accounting around stores ends up needing to be shifted as well, where you have loaded costs and overall revenue, and all of this supporting itself. So the three levers of costs for any physical goods retailer are going to be real estate, inventory and labor. There is no doubt that retailers need to figure out how they can reduce the costs associated with all of those just in general, because that’s just the cost of being competitive. You have an increasing share of retail going to online, so you just can’t afford the same cost of retail, inventory and labor.

Sucharita: So are there different ways to have inventory in your physical store? Are there different models for accounting for that? Are there different labor models that you can have? Can brand subsidize more salespeople or do you have a more flexible model? Do you have a remote service model? Do you renegotiate leases? Do you shrink the sizes of your store? Do you lease some part of your store to other tenants? So there are a lot of different approaches to thinking about what’s new and what’s next in retail. No doubt that a large part of how the historic accounting for retail has held retail back … and it’s made it seem as if retail is doomed. It needn’t be that situation.

Mani: Thank you. You bring in some rich perspectives. As you know, Litmus7 is a digital design services provider to the retail online industry. We often are asked the question, what role do you see technology playing in the retail of the future? While it might be dominant, where do you think the role of technology lies?

Sucharita: It’s everywhere and embedded integrally into every operation. Even now, you can’t run a retailer without an inventory management system, an order management system, a POS system, an ERP system. All of these … HR management … every part of your business is tied to technology today. Where technology can continue to empower retailers, I think, is probably more in the cost reduction side and the efficiency side than in the customer acquisition side.

Sucharita: A lot of the last 20 years in retail has been focused on customer acquisition and it’s been focused on digital marketing, investing in Google, investing in Amazon, being on the Amazon marketplace, it’s been about top line. A lot of retailers already have great customer databases. Many of them have loyalty programs and the majority of their revenue was already coming from their loyalty programs. Yet very little is invested in retaining those customers. That is, if you want to talk about growth on the retention side, a lot of it happens there.

Sucharita: That’s where everything from unique sales to those people, first-look sales, special bonuses and benefits and services that they can get as being part of a loyalty program. I’m not worried about that because the playbook for great loyalty has been written by companies ranging from Starbucks to Delta Airlines, and retailers have just been late to the game in adopting those tactics. So for them to think, for anyone to think, that technology alone is going to solve your acquisition problem, I think that that’s a little misguided. But I do think that technology can play a much, much bigger role in the cost-saving side of business.

Sucharita: As I’ve mentioned, just even three areas of retail that are really ripe for disruption are the inventory, real estate, and labor side of the equation. I’ll use one example, is that retailers spend a ton of time thinking that marketplaces, or whether it’s having a presence on Amazon or having a marketplace on your own site, is the magic solution to some problems. But one way to think about marketplaces that I think has been very under-utilized is the idea of marketplaces for labor, and marketplaces for store associates.

Sucharita: In my experience, having been a store manager in my past, is that it’s really, really difficult to find quality store associates. It’s really difficult to make sure that they show up on the days that you need them. You have bursts in demand and you’re constantly, as a store manager, managing your payroll. Stores often have very limited store associates that they work with. You’re hired into store X and you’re on that payroll of store X, and that alone. Why aren’t stores even sharing store associates amongst a chain? That’s a store associate that’s obviously already been trained in the technology tools and solutions.

Sucharita: Why wouldn’t you allow a little bit more flexibility for their needs, especially if it’s a good sales associate who is somebody who is just generally more knowledgeable and more helpful to customers, and more productive overall? Even going beyond that, why can’t there be a marketplace across different stores so that different store associates can get more hours, particularly if they are good store associates who simply want to work like forty hours a week, and maybe split it up amongst four or five chains that may need that support within a region?

Sucharita: There are companies, there are companies already, companies like Shiftgig, that exist to serve exactly that purpose. It baffles me that a company like Shiftgig isn’t the most integrated solution into store operations, HR, throughout the country. Because that idea is incredibly powerful. I don’t know whether it is the execution, the adoption, or it’s some other shortcoming. But the idea is incredibly powerful and that’s really the direction that retailers have to go in.

Sucharita: I always remember a great quote from the CEO of The Container Store, saying that a great store associate, if you just pay them more, can achieve three times what a poor-performing store associate can achieve. I’m a huge, huge believer in that from my own experience as well, is that we don’t need more people running a store. We need more good people running a store. We need more data on who are those good people, we need to pay them decent living wages and healthcare insurance, and give them flexibility and options, and split the cost amongst the retailers that need their services.

Mani: What an interesting perspective. Thank you. Sucharita, when I started working in retail almost 30 years ago, the merchandiser was the king of retail and he or she was almost worshiped, but they were involved in pushing merchandise that they saw during their travels around the world onto the consumers. Is that now changing into a world where consumers now pull merchandise and there’s a world of push retail, and the role of the merchandiser diminishing?

Sucharita: Yes and no. If you listen to the Trader Joe’s podcasts, you find that a significant part of the success of Trader Joe’s is still very much tied to merchandisers traveling the world and finding unique products, and then figuring out ways to source it specifically for Trader Joe’s. I think that that very much shows that there is still a value and a role that product sourcers have. Is merchandising completely going away because Amazon lets anyone be a seller, and you have ratings and reviews that allow products to surface at the top?

Sucharita: I don’t think so because I think Amazon has proven that in a world of no ability to filter results and to not penalize bad actors, that that approach to ‘anything goes’ backfires. What you end up with is a world of a lot of just shady Chinese sellers who buy fake reviews on their website and sell poor-quality products. That is exactly the reason that merchandisers existed in the first place, is to ensure that you as a customer would not be presented with the crap in the first place.

Sucharita: I think that there will always be a role for merchandisers because what has been exposed is that there are nearly a billion products. There’re probably more than a billion products available for sale and either you yourself can go through the search costs of trying to find the best ones, or a merchandiser can do it for you. Can an algorithm always be that vetter of quality? Sometimes. I think for the first few years of the internet when Amazon really took a lot of strong inputs and had higher-quality users on its platform, it was in a better position to let the algorithm be that arbiter. The algorithm can no longer be the arbiter alone.

Sucharita: The algorithm can be the filter, the first round of filtration. But then I think you still need real people to weigh in and who’ve actually used your product, and can speak to its quality, to weigh in and to ultimately be the ones that can speak to the merits of, or the demerits of, a particular good. So I think that merchandising will change and evolve, and it uses data and it will use, and it will continue to use, inputs that are crowdsourced. But there is still going to need to be retailers that stand behind their products. Standing behind your product, I don’t think it can be just purely based on an algorithm.

Mani: Wonderful. Sucharita, I have a number of questions, but we’re running out of time. Thank you so much for your time and your very valuable insights. Appreciate your spending time with us.

Sucharita: My pleasure. Anytime.