The fundamental, data-driven shift in retail

Retail is undergoing an enormous change that is just getting started. If you’ve been to Best Buy lately, you’ll notice that selection on the shelves is decreasing and that the chain is moving more toward a two-pronged selling approach. The first is to stock the store with popular items that attract consumers wanting or needing to buy in the moment. There’s always a cable, a router, or any other standard item to be had. Best Buy realizes that consumers in the digital age are buying a smaller set of products from the store.

The second approach is an acknowledgement that customers are increasingly buying a wider variety from the Web, where inventory costs are much lower and shipping is a cost often borne by the buyer. For those buyers, Best Buy is increasingly offering direct-from-supplier shipping under the Best Buy banner as well as their own distribution.

In a world where the consumer is increasingly king, retailers are learning that the old model of choosing products and then pushing them out to retail outlets comes with a high price of discounting when sell-through doesn’t meet expectations. Instead, they’re stocking the no-brainers and holding the rest online-only for the more discriminating (and higher spending) of customers. This is in direct response to the pressures created by:

• Fast-moving technology that causes products to be outdated quickly, before sell through is possible
• Show-rooming, where consumers spot items in the store (with its higher shipping and carrying costs) and simply buy from the lowest online seller
• Customer savvy, meaning that products are researched far more today than ever before. A store is less and less a place to choose, but simply a place to buy after a decision is made.

Navigating the change in retail

These are tough problems to solve, and simply offering an online channel isn’t enough of an answer. Once the consumer is online, price transparency is absolute and they can easily buy from the lowest price seller, not the retailer that ‘got them there’. Success needs to be driven by a great understanding of the customer, products, and the supply chain…in other words, lots of data, moving quickly, supporting loyalty programs, on-the-fly offers, pricing, and inventory decisions. Having back end systems that can support those needs is critical.

The core technologies that support these requirements include (but are certainly not limited to):

• Analytics - The ability to drill into what has happened to better understand what factors to watch for when it comes time to create real-time systems. Analytics are increasingly tools in the hands of business experts and not just data scientists.
• Event processing - The ability to see and respond to the environment that involves the customer, inventory, suppliers, location, pricing and more. Events can come from diverse sources like human interaction (i.e. a customer service situation), sensors (i.e. RFID) and even external forces like weather.
• Business process management - The ability to have pathways for execution that can be triggered by events and constantly refined for increasing efficiency. BPM ends up being like the gears in the clock, but today’s BPM is far more flexible and responsive to events.

The data challenge isn’t just on back end systems, however. There’s a significant need to change out technology and business process on the brick and mortar side. If you think of companies like Zappos or Amazon, they were founded in the digital age and have the systems to collect and put customer data to use. Many retailers still struggle to get their brick and mortar locations into a data mindset: the human side of the business is ill prepared to market face-to-face, regardless of the tools put into their hands.

Ways for retail to differentiate

Differentiation is enormously important in the new retail landscape. Take one look at Amazon Prime and you know that free shipping, next-day (or even same-day) makes online shopping a competitive differentiator. Brick and Mortar retailers have fought back with in-store pickup and are looking at ways to offer same day delivery of their own, though it will be tough to compete in major cities with Amazon’s distribution hubs.

A significant way to differentiate is in loyalty programs, where a retailer offers services that include prestige, discounts and other enticements to keep customers coming back. The more a customer invests in a brand, the more data that brand has to improve marketing, product selection, timing of offers, etc.

Another way to differentiate is to look to the supply chain and find ways to create unique products, on-demand, built to customer specifications. This truly turns the factory-to-showroom model on its head and mandates production that occurs much closer to the point of purchase. Shorter supply chains are more fragile and more expensive unless a great deal more is known about the customer’s needs and the cost at every step.

Just the beginning

Regardless of the approach, the use of data in retailing is going to rise significantly in the coming years. Data generated by customers, by suppliers, and every other touch point in the spectrum from production to consumption will need to be available for analytics, prediction, observation and action. This will require systems that match those requirements. This, in a nutshell, is why retail has only begun the fundamental shift.