New Rules, New Tools

New rules, new tools: How to survive the changes coming to retailing

May 12, 2014; 00:12 am by Bill Bishop

Changes in the retail environment are clearly accelerating, and retailing is facing its toughest challenges since the turn of the century.

New business formation has declined by about half since 1978. In the last three years, more new businesses failed than were created – a first according to a just-released Brookings Institute study. In addition:

• Sears Chairman Eddie Lambert, told shareholders this month that "store closings will continue to be part of Sears's future." 
• Office Depot has announced that it will close a quarter of its stores.
• Twelve major retailers have announced the closing of more than a thousand stores earlier this month. Some predict that 30% to 50% of brick and mortar retail space in the U.S. will be shuttered by the end of the next decade.
• Former greats like Woolworth, Circuit City, Montgomery Ward, Blockbuster are no longer with us.

Against this backdrop, we asked Ron Lunde for his thoughts because he is one person we know who can confidently straddle grocery merchandising and how digital is changing the way we communicate. He believes the growth of “behavioral data" and the ability to target customer-specific messaging are the likely keys to retailer survival and growth in the coming years.  

In this interview, he provides provocative perspectives on retailing careers, convergence and divergence, homogeneous vs. heterogeneous markets, how retail competition will change, the significance of targeted messaging, and what he thinks of the term Omnichannel. Ron sees new rules evolving, and new tools to address them. He might be wrong ─ but what if he's right?

Ron Lunde was a senior merchandising executive at Super Valu, Grand Union, and Price Chopper. He also was an SVP with Leo Burnett and more recently has consulted with newspapers on how they should respond to the growth of the digital marketplace.  

1. If you were 23 years old and knew what you know now, would you be looking for a career in retailing?

Most certainly YES! Retailing has never been more exciting, challenging, and rewarding than it will be in the next two decades. It will be a great career for those who are smart and energetic; it will be the epicenter of the convergence and divergence dynamics that will be driving society; and it will be one of the few places where you can connect to and merge the digital ether with tactile experiences. I’m not just referring to start-ups – retailing provides a uniquely challenging and rewarding experience for both the entrepreneurial and the corporate-minded ─ from small shop to big box.

2. Can you help us understand what you mean by convergence and divergence and how you see them being related?

Let’s start with convergence. Advances in technology are driving a convergence of virtually all forms of information ─ the new multiverse of bits and bytes ─ the realm of Zettabytes ─ and these advances are bringing together what used to be separate sources or channels of information. The Smartphone is a good example. Information was once delivered in multiple forms through multiple devices (phone, TV, radio, newspaper, desktop computers, etc.).  Now, the telephone, computer, camera, internet and big data have converged into this single portable, multiverse-driven device.

Ironically, however, this convergence of information is creating the opportunity for ─ and yes, demand for ─ increasingly divergent behavior on the part of consumers.  We are moving away from what retail marketers previously thought of as an essentially homogeneous or “mass” market of products, services, and customers, and toward a heterogeneous, consumer-driven, “divergent marketplace” ─ one that often requires a wider variety of customer-specific products and services. Chris Anderson described the divergent marketplace in his book The Long Tail.

The challenge of this divergent marketplace is that it will be increasingly difficult for retailers to sell what they have bought. Instead, retailers will have to buy what they can sell. That's why mastering Big Data is now a requisite skill.

3. Tell us a bit more about the differences between the homogenous market and the heterogeneous market.

In a homogenous market, products and or services are defined as essentially the same, and there is a tendency for all information about those products to collapse toward price – i.e., information = price. This moves products, services or retail formats towards “commodity” or parity status. As a result, the lowest cost producer or service provider will almost always “win” market share in what ultimately becomes a zero-sum competitive exercise based on price alone.

In a more heterogeneous marketplace, the importance of real differentiation defined through information begins to separate the product from a dependence on price alone. Thus, information emerges as the superordinate variable, because it is information that facilitates the process of matching customers to those differentiated products or services.

We’re entering an era in which the sea change of global technology and consumer expectations now requires retail adapters and adopters to know how to combine product behavior, customer characteristics, pricing techniques and market information in order to create strategic advantage. And that strategic advantage is expressed through the totality of the customer experience.

4. What does this all look like from the customer’s perspective, and how does this affect the way retailers compete?

In the divergent marketplace, customers no longer have to accept the limited choice from retailers in their geographic area, and when consumers have more places to buy the products and services they want, they typically choose the one that has the least “friction” (or customer inconvenience). Think Bezos / Amazon / One-click checkout. So today, one component of competitive advantage is identifying sources of friction that can be eliminated from the transaction or experience.

Competition today is also about using data to adjust offers quickly. For example: It’s now possible to track the purchases of loyal shoppers and predict when they’ll be back in the market for a personally price-sensitive product, so the retailer or manufacturer can put that product on sale just for them and thus avoid an overall shelf-price markdown. Or, through correlation and affinity studies, the retailer can suggest products for consideration that customers with similar interests have purchased. Kroger recently posted 10 consecutive years of quarterly top-line growth. The vast majority of that growth came from selling existing customers more ─ either products they had never bought before or never bought at a Kroger before.

For retailers, barriers to entry constructed through capital-intensive expenditures are also becoming more difficult to maintain. Nordstrom, for example, is spending 30% of its capital budget on customer-facing technology to build competitive advantage, but Amazon’s offer to provide a sophisticated customer-facing technology in a digital fashion marketplace for any retailer of any size might dilute Nordstrom's advantage.

Levenger, a retailer of stationary and accessories, has three brick and mortar locations, a direct mail catalogue, an internet site designed for PC and mobile, and it’s linked to Amazon. On Amazon, I can buy with one click and receive two-day delivery. Amazon greatly expands the retail footprint  of Levenger and reduces the buying friction. Result? Wherever and whenever I want to buy ─ Levenger is there.

5. You’ve pointed out that targeting messages to shoppers is more feasible today with the proliferation of communication channels, but doesn’t that make it harder to do?

The 1950s formula of mass-market / mass media communication will have to be erased if retailers are to function in this new order of things. For the most part, what worked in the past will not work well in the present, and it probably will not work at all in the future: New tools – new rules.

Today customers leave digital tracks. These tracks can be analyzed for preferences in lifestyle, products, activities, colors, music – a potentially unlimited number of characteristics ─ arranged in virtually limitless permutations.

Nordstrom, for example, has adopted a differentiating customer-centric social media content strategy. Each week, they check Pinterest analytics to see which items from Nordstrom.com are getting the most interactions. Nordstrom has created special Pinterest merchandise product tags and displays. They add these Pins to their “Top Pins” content board and give followers more content like the ones they pinned. Nordstrom also uses Pinterest data to influence decisions that range from buying and marketing to the selection of where they put "hot" items in stores.

Somewhere today . . .

• Someone bright is writing an algorithm that will capture all of that data into an actionable insight.
• A creative team is developing multiple-message digital ads in a personalized context that can be coded and coupled to the right actionable insight.
• Another bright person is writing an app that will deliver the message to shoppers via Smartphone or Google Glass in a way that feels seamless and natural … and "just for me."

6. How would you advise a retailer on how they can be relevant to both Baby Boomers and Millennials?

Stop trying to market by demographic segments alone and focus on customer and cultural behavior. As a Baby Boomer myself, I sometimes function like a Millennial, and I know Millennials who function and purchase as though they were Baby Boomers.

Rather than focusing on traditionally defined segments alone, Baby Boomers, Gen X, Gen Y or Gen Z, retail marketers should create a new segment called Gen C for Generation Customers. Gen C is not solely defined by age, zip code, or income, but also by exhibited behavior and interests from which relevant messaging and targeted delivery can be developed.

Some data analytics will be customer-specific, based on online and off-line purchase records. Some will be segment-based behavior defined by affinities and correlations.

A good place to start is by analyzing both structured and unstructured data that is relevant to the customer in the trade area served. Do focus groups and get exposed to the neighborhoods. Might not be a bad idea to work with a social ethicist and cultural anthropologist. Cultural influence and individual purchase behavior are far more important markers and guidance indicators than traditional demographics alone.  Finally, use those data insights to tune the offerings of goods and services – by store, by customer segment, by specific customer.

Retail messaging or marketing communication has to be targeted to both collective and individual interests. Mindshare leads to market share.

7. How does the term omnichannel strike you? 

Omnichannel seems like a consultant's buzzword. It’s a rather colorless, tasteless, odorless, and passionless word to describe one of the most transformative phases in the history of retail commerce.

We are about to enter an essentially frictionless transfer of goods and services between a retailer and customer on either a segment customization or one-to-one customer-specific platform. New tools ─ New rules.

Good retailers are poised to remake the competitive landscape. We're entering an era where offering innovation and digital technology intersect. Retailers can mine the rich veins of customer data now readily available to create new customer satisfaction.  Those who take advantage of the opportunity to create a customer experience that fuses the best of both brick and mortar and digital will escape being flattened by the commoditization steamroller. Those who discover, design, depict, and deliver innovative offerings will be able to create profitable new value on the retail frontier.

I can assure you this is going to be exciting.  Therefore, I suspect the consumer and the marketplace will create a more contemporary, vibrant term than omnichannel at some point.