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The Retail Revolution: Big Changes in Store for 2012

The past few years have not been kind to retailers. Sluggish economies, shrinking margins and a more cost-conscious consumer have taken their proverbial toll.

“We’ve seen retail sales increase by 5 percent to 6 percent, yet profits declined from 3.5 percent to 2 percent.  So, even though stores are selling more, they’re making less,” explained Tanmay Agarwal, global operating leader, Consumer Goods and Retail for Genpact.  “At the same time, consumer behavior has changed. Those who use to buy in bulk are opting for smaller quantities. Those who use to purchase items at full price now wait for promotions and discounts. To survive, retailers have to find new ways to reduce costs.”

But making up for shrinking margins is just one part of the challenge.  The rapid proliferation of mobility is redefining how retailers interact with their buyers. A static website with an e-catalog is no longer enough, nor is a standalone buying channel. In this always-on world, the lines between the physical store and digital world have blurred, and the speed of change is turning the traditional retail model upside-down.

No question, the retail industry is in the midst of a revolution, fueled by consumer expectations and changing market dynamics. However, few companies have the expertise or resources to make this transformation on their own.

As a result, retailers of all types are turning to outsourcing with an urgency we haven’t seen before – with engagements that range from supply chain optimization to BPO; from online enhancements to data analytics – and everything in between. We spoke to some industry experts to gain their insight into the emerging trends.

The Convergence of Physical and Digital Worlds

Not too long ago, a retailer’s online channel was little more than a digital version of a static print catalog. Consumers could browse at their leisure, compare price and eventually head out to the desired store to make their purchase. Online and in-store were two distinct experiences, with two different purposes.

With the proliferation of the smartphone, all of that has changed.

“In the last few years, we’ve seen a significant shift in the way consumers engage with retailers. Now, instead of doing a search online, then driving to a nearby store to make my purchase, I can be in the store, see something I like, Google the product or scan bar codes to find the best price or product information, then purchase that product from someone else online, using my mobile phone,” explained Sunil Oberoi, global head of marketing for Consumer Services, HCL Technologies.  “Today, physical store activity is no longer the source of power. Instead, multi-channel commerce, consumer-centric experiences are becoming the benchmarks of success.”

With today’s advanced mobile technology, the consumer doesn’t even have to be in a physical store to see and research an item to buy.

“Imagine a consumer walking down the street who notices a blue shirt on a person passing by. She points her mobile device at the garment to retrieve product information, including brand, pricing and availability. To purchase, she adds the shirt to a shopping cart, hosted on the cloud, and has it shipped to her home overnight,” said Bhanumurthy B M, senior vice president and chief business operations officer of Wipro. “The barriers of time and location have been eliminated.”

This new “see and search” approach to shopping has prompted retailers to take another look at their online catalogs, often going to experienced outsourcing providers for a cyber makeover.

“Retailers have to take existing product descriptions and make these more appealing to the consumer, while at the same time optimizing key words to generate more hits,” explained Rahul Kanodia, vice chairman and CEO of Datamatics Global Services.

According to Kanodia, retailers must apply technology to quickly decipher what the customer is looking for so the appropriate items are displayed. For example, a “timepiece” could be a watch, a wall clock or a travel alarm. Smart technology and more accurate descriptions could alleviate the confusion.

Retailers also must look beyond the actual word to understand the emotion of the consumer who keyed the word in.

“If a person searches for information on a particular cancer drug, he or she may be a patient who is nervous or afraid, or that person could be a student whose biggest worry is finishing a research paper on time,” Kanodia said. “By reading into the emotion behind the search, companies can better propose appropriate options. There’s a whole science behind that capability that we’re just beginning to explore.”

Extreme Target Marketing and Advanced Analytics

The question becomes: if consumers now have the power of price comparison at their fingertips, and online buying options are a click away, how can retailers differentiate themselves beyond the cost of goods?

Oberoi expects an increase in private labeling and more exclusive branded products at the store level, an approach that’s already proven successful for electronics and soft goods retailers alike. Some department and discount stores are partnering with high-end designers to create limited, “one time only” lines of clothing, accessories or home furnishings to keep consumer interest high.

More importantly, retailers have to find a way to truly engage the customer in this brave, new multi-channel world.

“As consumers, we all have distractions — a multitude of messages. The challenge is, how can a retailer get the consumer’s attention when he or she is already bombarded with data and information, both wanted and unwanted? We believe the answer is personalization — focusing messaging on what is important to each individual consumer,” explained Bhanumurthy. “For example, retailers can provide consumers with an online mechanism to identify what they like and customize subsequent messaging appropriately.  When that customer walks in a store, the phone screen is populated with information or specials around those identified items.”

Although on the surface it appears that this new multi-channel, mobile world makes it difficult for retailers to build relationships and get to know their customers, quite the opposite is true.

“In the traditional in-store model, retailers knew what consumers bought but not who bought it. Now, instead of studying what sold, retailers want to delve deeper into which customer bought which item,” Oberoi said. “Then, using predictive analytics, they can determine other items that customer has a propensity to buy. “

That means, instead of simply matching generic upsell items with specific purchases – socks with shoes, scarves with coats, fries with burgers – every offer is personalized.  By applying psychographics and micro-segmentation, based on documented consumer behavior, outsourcers can help retailers get personal with their customers, driving loyalty and revenue in a way that wasn’t possible in an unconnected world.

“Retailers can also use consolidated analytic data to merchandise their physical stores, devising planograms, store layouts and determining which SKUs should go where to get the greatest visibility and lift,” Agarwal said. “By integrating trends with chat content, social media and data from multiple stores and channels, we can create a Data Factory that transforms consumer behavior into the intelligence that retailers need for more effective strategic planning.”

Cost Control and Sustainability

Even with all of these initiatives in place, retailers won’t soon be able to return to the profit margins of old.  Still bruised from a lackluster world economy, the mid-market buyer continues to seek the most value for his or her hard-earned dollar, euro or yen.

Although they weren’t the first to the outsourcing dance, retailers are quickly recognizing the benefits of shared services to reduce costs in everything from finance and accounting to distribution to personnel management.

They’re also engaging outsourcers to save something just as valuable – natural resources.

“All retailers and manufacturers have to work with constrained resources, like electricity, gasoline and other forms of energy. They want to identify how to consume energy more efficiently,” Bhanumurthy said. “As online purchases increase, so do the transportation costs associated with moving those goods. Retailers are turning to outsourcing to identify how to optimize delivery to consumers and throughout their supply chains to minimize their costs and carbon footprints.”

An Expanding Trend

As the retail industry transforms with the help of its outsourcing partners, other industries are beginning to take notice, and are turning to outsourcing for similar strategies.

“Companies like banks and insurance brokers, where one-on-one consumer interaction is a major part of the sales cycle, could greatly benefit from the way retailers are engaging more personally with their customers,” Kanodia said.

Mass merchandising and the “deals-of-the-day” will fade as the new era of personalization emerges.

“Energy companies, health care organizations, even grocery stores will focus their efforts around enhancing the customer experience through personalization going forward,” Bhanumurthy said.  “The buying public will demand it.”

No matter what the consumer is shopping for, one thing is certain: gone are the days of the mindless ‘mall crawl’ in search of a new coat, TV or shoes. A retail revolution is upon us, bringing new ways to find, compare and purchase the items we need.  The convergence of the physical and digital worlds, and the application of advanced analytics are already transforming the way retailers engage with their customers – with more changes in store in the years to come.