The retail postmortem on holiday sales is a recap of 2013 retail trends: Online traffic and sales are up significantly and store sales are mostly flat, with store profit margins down. Indeed, retailing dynamics have changed more in the last 3 years than the previous 3 decades.
The dramatic shifts in retail are not so much a function of the growth of online retailing, as much as the changing nature and behaviors of the consumer:
Today’s consumers are now empowered by internet mobility, and they are not “going back.”;
Consumers are in charge of their experience and shopping journey, not the retailers; and
Omnichannel is the “new normal” … consumers shop anytime and everywhere.
Amazon has literally become the poster child for innovative, customer centric service, which appeals to the changing behavior of consumers. With the steep curve of online sales volume growth, there is almost a lemming like panic among traditional retailers to rush “online” to stem the tide of eroding volumes. Before chasing razor thin margins that come with online volumes, traditional bricks and mortar retailers would do well to post these famous words in their boardrooms:
DNA Of Online Retailing Is Innovative Change Through A/B Testing IRT
The online retail model is not inherently “better” than traditional retail stores. Nor is online necessarily more cost efficient. A review of Amazon’s financials reveals a SG&A (“Operating Expense”) that is equivalent on a percentage basis to that of Best Buy and most large national retail chains.
There are a host of variables that enable online retail to be flexible and adaptive. There is the “long tail” aspect of breadth of selection. There are the online supply chain dynamics with “virtual inventory” that enable flexible supply for the “long tail”. And, for today’s anytime everywhere consumer, online is open 24/7/365.
But, what is often missed and rarely talked about is the inherent “DNA” of daily innovation testing IRT (In Real Time) that is a part of online retailing strategy, systems, and culture. It is estimated that at least 10% of Amazon’s online pages everyday are “test” pages. They test everything from messages, copy, fonts, layout, images, and of course pricing.
Online Retail Systems Not Only Enable IRT Tests, They Measure Real Time Results
Online retail systems are relatively new, and built from the ground up to track everything … where you entered, where you clicked, shopping cart, abandonment, conversion, dwell time, exit page, and everything in between. Virtually all consumer behavior can be tracked, as well as sales and profitability.
Online retailing was literally built around Darwin’s principle of adapting rapidly to change through thousands of micro A/B tests everyday … without the consumer even being aware of it. If something is not working one hour, the page, price, and even the item tested can be changed the next hour. Said another way, online is winning because they can fail more rapidly to find out what works with consumers, which has become job one in today’s consumer centric marketplace.
Retail Stores Are Not Dead Yet, But Innovation Through Testing Is Not In Their DNA
In their drive to scale to national store chains, the traditional retailer’s approach was SOP (Standard Operating Procedures) to optimize efficiency through standardization. In the process of reducing variability in order to scale, big box retail lost its “soul” … and much of the ability to innovate.
Today’s large retail chains don’t systematically test innovation. They spend countless hours and money researching … then they bet on a “scalable” strategy and go “all in” across many stores. It is expensive, high risk, and about as agile as a freight train running down predestined tracks. The results is that most are very conservative, and don’t want to iterate with rapid, multiple tests in order to “fail” rapidly to find solutions that work.
The Power Of The Store Experience Can’t Be Duplicated Online
Much has been written about today’s fickle consumers “showrooming” in store to purchase at a cheaper price elsewhere. If the consumer experience is only about purchasing a “commodity” at a price, then game over … online retail wins hands down.
But, in almost every category, the 80/20 rule still holds true: 80% of consumers begin their shopping journey online, but only 20 to 25% purchase online. Of course these stats vary by category, but the proportion of consumers purchasing in store reflects the consumers’ perceived value add of store experience, personalization and service. Will traditional retail stores leverage these differentiators by innovatively adapting them, or see them as “cost centers” that can be further trimmed in order to be price competitive with online?
Retail Survival Success Factor: Rapid Adaptation Through Of A/B Innovation Testing IRT
Future success in retail is not an either/or question of online versus stores. Today’s consumers are already voting, and omni-channel will be the new normal. The question of who survives will largely be determined by who develops the critical competencies for rapid, adaptive change.
Online retailers have the “DNA”, systems, and metrics for scenario A vs. B testing daily, and even hourly. Online is both equipped and oriented for high numbers of small iterative tests designed to quickly see what fails in order to successively improve what works.
On the other hand, traditional store based retailers think in terms of large scale innovation adoption. Their heritage systems are designed to put products on the shelf, and “count the beans” when they sell. Traditional retail stores do not have the legacy, “DNA” or skills to run daily tests all of the granular components of their store experience, which differentiates them from online.
John Lewis — A Case Study Of Retail Innovation Through Adaptive A/B Omni-Channel Testing
John Lewis is about as classic of a “traditional” retailer case as you can find. Their heritage was traditional large format department stores on “high street.” To senior management’s credit, they bet on an omni-channel strategy focused on their core consumers.
Most importantly, John Lewis is the retail poster child for conducting lots of granular A/B tests in store displays, staff training, checkout, online shopping, and mobile apps. In a UK market with declining comp store sales, John Lewis is realizing sales gains and increasing profitability from their best customers.
Three Core Darwinian Success Factors For Future Retail Survival
To paraphrase Darwin, a retailer’s potential to survive and thrive in today’s market place does not depend upon size, channel, or even specify strategy or format. Future success depends more upon critical competencies and disciplines that lead to rapid iterations for innovation adaption to rapidly changing consumers.
Real A/B Testing focused on consumer centric experience at a granular level. This is not about adopting a strategy or making investments. It is literally about setting up micro experiments in one aisle, one floor display, one ad or one web page to test variables one at a time.
Approach and permission to fail as rapidly as possible. The most adaptive retailers will iterate as fast as possible, so there will be lots of “failures”. Knowing what doesn’t work is the path to finding what does more quickly.
Measuring results that count. Focus groups and surveys are “nice to have”, but they are not actual consumer behavior. The most important factor is to measure the results that count on the bottom line for financial success … gross profit pays the bills, not unit volume.
Chris H. Petersen, PhD is the CEO of Integrated Marketing Solutions. Petersen is a strategic consultant who specializes in retail, leadership, marketing, and measurement. He has built a legacy through working with Fortune 500 companies to achieve measurable results in improving their performance and partnerships. Petersen is the founder of IMS Retail University, a series of strategic workshops focusing on the critical elements of competing profitably in the increasingly complex retail marketplace.