What Digital Transformation
Actually Means For Retail
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Digital transformation. At its highest level, it
means using digital technologies to create game-changing business innovations
that disrupt existing industries or create whole new ones. That’s a pretty
simple definition, but it quickly gets very difficult to drive that down to specifics.
People point to Spotify or Uber, where technology upended a market. With
Spotify (digital streaming), physical media for delivering music became
irrelevant. With Uber, technology can connect people who need rides with people
who have cars with some ride capacity. In both cases, it changed the
economics of the impacted industry in radical ways.
Retail still has one thing about it that simply
cannot change: retail, in the end, involves transferring possession of physical
goods to a consumer. You can’t (yet) digitize a sweater. I certainly haven’t
found anyone who can beam some cupcakes to my kitchen counter when my daughter
tells me at 7 am that she needs them for school that day.
This one little thing – the transfer of real,
physical goods to a consumer – is both the biggest difference retail faces when
taking on digital transformation, and also the biggest inhibitor that locks
retailers into thinking that digital transformation isn’t going to impact them
like other industries.
Unfortunately, it will impact
them just as much as digital music decimated the music store. When you look at
how consumers acquire products, pretty much every part of the shopper journey
is being digitized, except for that last physical transfer of goods. Probably
the last bastion of the physical is fit for apparel, or “touch and feel” for
non-apparel items. And even fit is rapidly being digitized – it will come. When
stores are designed to deliver the end-to-end shopping experience, where the
retailer held the most product information within the store itself, and now
consumers no longer need that experience, then it’s not surprising that store
traffic is down and store sales are taking a hit.
But it’s more than that – those issues are
surface level issues of a deeper problem, which is the whole retail model to
begin with. Retail has always been product-centric. Everything about retail was
about transferring product from a supplier or factory to a consumer. To be
successful in that model, retailers needed to be very good at buying low,
selling high, and optimizing everything in between.
The profit and differentiation in every one of
those steps is getting picked off by digital transformation. Buying low is
challenging, especially when you’re buying national brands. Unless you’ve got
the volume of Walmart, you’re never going to get a lower price than your
competitors. And designing your own products to sell works for a little while,
until the even cheaper knock-offs start showing up in the market.
Selling high has been equally eroded. Retailers
haven’t been able to succeed selling high since 2007, before the Great
Recession. Retailers can try to support a higher price with service, but
consumer price sensitivity, coupled with short-term profit-seeking has cut
retailers’ ability to provide excellent service deep into the bone. Most
retailers’ definition of service these days has become cheapened to the point
of uselessness to the consumer – having a clean store, or a “short line” to
ring up a purchase has become the standard of good service,
which is actually more like “barely adequate service.” Stores have historically
been designed around trapping consumers inside so that they spend more, instead
of offering convenience as the customer defines it – foundationally, they are
not designed for customer service, in that context.
And when it comes to optimizing everything in between – you simply
can’t do that in a world dominated by Amazon. People write about how
Amazon’s pursuit of randomness in the warehouse upends a
lot of traditional inventory velocity and positioning theory, but it doesn’t
address the efficiency of the order itself. And Amazon is famous for its order
inefficiency – the internet is full of images of stupidly inefficient packaging in boxes shipped to
consumers. I just last week received a box the size of a small dresser which
held a perfectly shippable box of 27 boxes of tissues. It was sent 2-Day,
included in the cost of my Prime membership.
When you face a competitor who gets money from the market for
free, and can subsidize its retail activities with profits from other
businesses, you will never win by optimizing your processes. You can never
optimize enough to beat Amazon, at least not until the market demands that
Amazon play on a level playing field. At this rate, you’ll be out of business
by then.
Digital Transformation For Real
So what does digital transformation mean in retail? It’s about
moving from this obsolete product-centric model to one that is
customer-centric. Again, that’s easy to say, but what does it mean for retail
specifically?
Instead of buy low, sell high, and optimize everything in between
(a supply chain view), retailers need to focus on the digital value chain – one
focused on collecting data (about products, customers, and locations), turning
that data into insights, and then turning those insights into action.
Ironically, this is actually Amazon’s game. Amazon Go is but one
example of the concept in play – a store wired up with cameras and sensors that
track a shopper’s every move. The experiment that is Amazon Go is not about the
ROI of a cashier-less store. Considering how much effort had to go into
training the AI involved to recognize specific shopper behaviors (which delayed
opening the store to the public by several months), I seriously doubt the labor
savings of no cashiers in store was ever the driving value from the investment.
But, oh, the data gathered. Every shopper move. Every product
picked up and then dropped in a bag. Every label read and product replaced on
the shelf. Every hesitation, head nod… If that sounds creepy, sure it is. But
it is also an enormous amount of data about the blackest box in retail today:
the store. One thing I’ve learned in my own travels is that innovative
retailers do not define ROI in terms of optimizing processes. Instead, they
look for projects that create opportunities to gather data – all kinds of data,
including the expected and the unexpected.
The value of innovation projects comes from how quickly that data
can be turned into insights, and how quickly those insights can be turned into
actions. It’s those actions that ultimately drive the return on investment, by
creating new services for customers, new kinds of engagement, or capitalizing
on insights into what customers want by more closely meeting their needs.
This is the definition of digital transformation in retail – what
it takes to move from a buy low/sell high model that is product-centric, to an
insight-driven model that is customer-centric.
Retailers fail at making this transition in three ways.
One, they try to protect their existing organizational structure
from radical change. These are the people who veneer their awful processes,
inflexible technology, and competing/contradictory incentives that have
different parts of the business working at cross-purposes. They’re able to make
some progress once, and one time only, because they didn’t put in the flexible
business processes that let them continue to evolve over time.
Two, they don’t develop an insight-driven culture. No unified data
strategy. No emphasis on turning data into insights. They continue to rely on
corporate myths about what customers really want, about what works (which is
based on insights developed twenty years ago), and no single version of the
truth to go to in order to fight back against those corporate myths. Fiefdoms
prevent assembling one version of the truth across the company. And are enabled
by an ROI process that undervalues the contribution of learning something new
about customers or creating a new way to engage with customers because no one
can speak to how it will explicitly move the needle for the business, either on
the revenue side or the cost side. Contrast that with Amazon, which is more
willing to invest in new processes or technologies to see what they can learn –
to collect the data, and then look
for ROI, rather than the other way around. It’s the difference between
investing in order to learn where the value is, vs. never investing because the
value cannot be predicted in the first place. How will you ever learn what you
don’t already know?
Three, they don’t value technology as an enabler. Different
departments run off and buy their own solutions, because the IT department is
so bogged down they face a two-year backlog and very little investment into
innovation. This perpetuates the retailer’s challenge in building an
insight-driven organization, because these new processes are so detached from
the business they can’t connect back into one view of the data. Disconnected
processes lead to a fractured view of data, no insights, and no flexible business
processes to adapt to take advantage of the next round of insights gained.
Bottom Line
Digital transformation is for real. Retail as a business can no
longer be just about products. It has to
be about customers. By extension, that means retailers no longer are going to
make money by optimizing their product-driven processes. Walmart through its
relentless focus on efficiency has sucked all the profit out of product
processes, and Amazon’s low prices (subsidized by its web services business)
has undermined any other profit that was left.
If retailers are going to transform themselves from
product-centric to customer-centric, they must succeed in moving from
efficiency to flexibility, from optimization to inspiration. The money to be
made will come from the volume of customer insights a company can generate and
how quickly they can put those insights into play, not from how fast they can
move product. And most importantly, retail can’t get there by protecting
existing organizations, processes, or even technology investments. That is the retail
apocalypse that we’re seeing in the market, not some “death of retail.” It’s
the difference between retailers who understand that the change they need to
make is far more than hiring a VP of Omnichannel or a Chief Customer Officer
vs. those that hire one of those titles and call it a day.
Radical change – digital transformation – is not coming. It’s
here.
- Nikki Baird
https://www.forbes.com/sites/nikkibaird/2018/03/13/what-digital-transformation-actually-means-for-retail/
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