Retail Reimagining: Why Being Great Is no Longer Good Enough
Wharton's Barbara Kahn talks
about her new book, 'The Shopping Revolution.'
An edited transcript of the conversation
follows.
Knowledge@Wharton: This
book could easily be titled The Amazon Revolution. What is it that
Amazon knows about consumers that other retailers don’t?
Barbara Kahn: The
interesting thing about Amazon is that they have, as they call it, a maniacal
focus on the consumer. If you look at retailers in the past, the customer was
not part of the proposition. Amazon understood that the customer experience
really matters.
Knowledge@Wharton: Walmart
is also a huge player here. In what ways does Walmart need to copy Amazon, and
in what ways should it follow its own path?
Kahn: Walmart disrupted
the retail industry in the mid-1990s. I wrote a book about it then. It was
called Grocery Revolution. What Walmart did was an operationally
excellent strategy at the time: They evened out demand, got rid of high-low
pricing and went to everyday low pricing. They understood that customers want
low prices, and they really attacked it from an operational point of view. But
what Amazon showed was that it’s not just about price, although price clearly
matters to a certain segment of consumers. But it’s also about convenience.
Frictionless. Make it easy. Walmart hadn’t done that before. In response to the
competition, or the competitive expectations that Amazon has imposed on the
industry, Walmart has to make their world more frictionless. And they have to
embrace online shopping and e-commerce in a way that they hadn’t previously.
Knowledge@Wharton: In
the book, you share a framework for helping to make sense of all these changes
in retail. What are some of the key elements of the framework?
Kahn: I did a lot of
research, and I’ve been studying the industry for a while. [In the book,] there
is a description of some of the different research, but it’s important to lay
it on a framework and to think about the strategic implications. That’s what I
think the value of the book is. So, it’s a very simple framework. It’s
deceptively simple, but it has really strong implications.
I start with two basic principles. The first is the principle of
customer value. In the retail world, it means that customers want to buy
something they value from someone they trust. That forms the columns of my
matrix — product experience and customer experience. The second principle is
the principle of differential advantage. They want to buy from retailers who do
it better than anybody else. How can a retailer do it better? They can either
give more pleasure or take away pain. That provides the rows of the matrix.
Therefore, in my matrix, I have a two by two. On the top row,
which is benefits or pleasure, the product quadrant would be things like brand
or luxury or design or technology or something that’s really super-cool about a
product that you’re willing to pay a premium price or even a luxury price. It’s
the importance of in-store touch and feel. That quadrant would be retailers
like Sephora or Eataly, which provide incredible, state-of-the-art customer
experiences in the store.
On the second row, it’s take away pain. And on one, it’s the
pain of the product’s price. Walmart is an example of take away pain and offer
low price. Walmart, Costco, TJ Maxx would be in that quadrant. Take away the
pain from the customer experience is what Amazon did really differently, and
they made it convenient. They made it frictionless. In Amazon’s case, their
differential advantage is collecting a lot of customer data so that they can
constantly simplify and personalize and customize the experience to make it
easier and easier for the customer. That’s the matrix. That’s how I can define
things. But the strategic implications of the matrix are something else.
Knowledge@Wharton: You
noted in the book that it used to be good enough to just be good at one of
those things. But now, you need to be good at more than one of those things. Is
that one of the implications?
Kahn: Yeah. That’s
something that I discovered when I was trying to map these different strategies
on the matrix. In a lot of marketing strategy frameworks, it’s, “Be the best at
something and good enough at everything else.” That’s a rubric that we’ve used
strategically. But when I was looking at what was happening in retail, it’s an
industry that is being disrupted. It’s very, very hyper-competitive now. If you
can’t make it, you’re really going to go out of business.
When I looked at the winning strategies, each one of the winning
retailers were the best at something. But they leveraged that leadership
advantage to be the best at something else, too. I call that the two-quadrant
strategy. So, you have to be the best at two things and good enough at
everything else. But if you’re in a competitive industry, if everybody’s trying
to be the best at something, what that does is ratchet up customer
expectations. Even when you’re trying to be just good enough at something,
those expectations are constantly going up.
You can see it in what Amazon’s done to the industry. Say you’re
competing on price, but Amazon is making two-hour deliveries or these kinds of
things that raise customers’ expectations. Just being good enough in that
quadrant of frictionless or convenience is getting harder and harder to do, let
alone being the best the way Amazon is.
Knowledge@Wharton: Are
customer expectations driving a lot of these changes?
Kahn: Five years ago, you
would walk to your grocery store and get groceries. You didn’t think that much
of it. Now, you demand that it’s delivered to you, and it’s got to be delivered
to you at this time. The reason why those customer expectations are higher is
because retailers are delivering to these new values, and customers get used to
it and want everybody to do it.
Knowledge@Wharton: If
you could pick one trend that retailers need to focus on now, what would it be?
Kahn: I do think
understanding the importance of customer experience is really important —
understand that customers now have been catered to. They expect things to be
convenient. They expect the retailer to have an online presence. There are some
retailers who still don’t have an online presence, and I wonder what will
happen to them. Trader Joe’s is a retailer that people just love. It’s a real
niche retailer, but they don’t have much of an online presence. I wonder what
will happen going forward if they don’t rectify that situation.
Knowledge@Wharton: A
lot of legacy retailers are suffering because they have stores and systems that
are outdated. If a retailer is way behind now, how can they catch up?
Kahn: I don’t know. A lot
of retailers that have fallen behind just really haven’t caught up. A couple of
things are driving that. One, Amazon alone has just raised people’s
expectations on e-commerce. But you also see a difference in consumers. A lot
has been written about millennials, but now people are focusing on Generation
Z. These are what people are calling digitally native consumers. They grew up
with the phone in their hand and shop through their phone. They expect online.
If you don’t have a seamless shopping experience that goes across physical
stores, mobile and online, these people are just going to go somewhere else. It
doesn’t make sense for them.
A lot of the legacy retailers understand it. I’m not saying
they’re naive and don’t get the importance of e-commerce. But they have legacy
systems that are hard to integrate. The online and offline have been so
separate that, for some of these retailers, it’s very hard to get up to speed.
That gives an advantage to the digitally native retailers who came in after
expectations. They came in with an online presence, and then they started
opening stores. It was much easier for them to integrate the shopping
experience than the other way around.
Knowledge@Wharton: All
eyes tend to be on Amazon and Walmart because they are the big examples. But
what are some other retailers flying under the radar that are doing things
well?
Kahn: A lot of attention
is being payed to what are called digitally native vertical brands. [One] is
[eyewear company] Warby Parker. Warby Parker is one of the big ones that
started and really got the equation right. What digitally native vertical
brands have in common is an amazing brand that really caters to a customer
segment and really cares about what the customers want. So, they offer
something of value. The other thing that characterizes these digitally native
vertical brands is that they are vertical, which means that they go direct to
the end-user. They can do that because they start out online and don’t need to
go through physical retailers, necessarily. That eliminates layers and offers a
good price. So Warby Parker, as well as Bonobos, Casper, or some of the other
digital native vertical brands, offer really cool customer experience brands,
but they offer it at a lower price. They compete very effectively because they
have that two-quadrant leadership strategy.
Knowledge@Wharton: H&M
is a retailer that became successful riding this wave of fast fashion, but now
it’s sitting on billions in unsold inventory. What do you think went wrong?
What lessons are there for other retailers?
Kahn: Zara is also a
fast-fashion retailer, which I also think of as a vertical brand. It eliminated
the layers, too, and offers a good brand at a low price. H&M and Zara both
did that. Zara is a little higher price point than H&M but still much
cheaper than luxury. What Zara did, which I don’t think H&M did as well,
was it had a better prediction of inventory, of fashion taste. They were right
on top of fashion and managed their inventory well. H&M had a lot of excess
inventory. Once you start doing that, you’re not really on top of what
customers want. Then you get a lot of costs that have to be managed.
Knowledge@Wharton: A
lot of luxury retailers are retooling to compete in an even more fickle fashion
world. What does luxury mean now? Does it mean something different than it did
10 years ago?
Kahn: Yeah. Going back to
this epiphany that I had about two-quadrant strategy, luxury used to be good
enough to be just fantastic brands. They didn’t have to compete on price, and
they weren’t convenient. Part of the luxury paradox is that it shouldn’t be
easy to get, so that makes it more valuable. That’s crazy, but that is what
happens.
But now, with people’s expectation of online convenience, even
luxury brands, which went kicking and screaming into this notion of e-commerce,
recognize that e-commerce is starting to be a factor in whether consumers will
buy from you or not. You’re seeing new platforms starting up, like Net-a-Porter
or Farfetch, which are e-commerce platforms trying to cater to the luxury
market. Outside of the U.S., Alibaba is doing that.
Most of the luxury companies or brands do not want to sell on
Amazon because they don’t think that Amazon will give them enough power over
their own brand. Amazon is a very ruthless retailer. But some of the other
platforms are ways for these luxury brands to reach their consumers, protect
their brand mystique and still offer some convenience of e-commerce.
Knowledge@Wharton: This
new era of retail also has implications for commercial real estate. How will
developers have to change their strategy to accommodate this new world?
Kahn: You’re seeing a lot
of interesting changes in physical stores. A lot of the B and C malls, the less
attractive malls, have been closing down. Even when you see the A malls open
up, they are not the same A malls as in the past. A good example is Century
City, one of the new malls that opened up in Los Angeles. It’s a gorgeous mall.
I loved it. One of the anchors is Eataly, which is a food place. They have tons
of restaurants. They have gyms. They have a department store. Nordstrom is
there. But the statistics that I’ve seen is that a lot more of the purchases
used to be made in the department stores, and that’s going way down. It’s much
more experiential. People like to hang out at the malls. They eat, they go to
the movies, they go to gym. There’s still some retail there, but it’s a
different mix of retail.
Knowledge@Wharton: Given
these trends, what do you think the retail experience will be like for the
consumer 10 years from now?
Kahn: That’s hard to
call, for sure. There are other trends. Demographically, a lot of people are
moving into the city, so you’re seeing smaller-footprint stores there. I think
a lot of the retail physical stores are making themselves smaller because
they’re not carrying as much inventory. Some of the retail stores are becoming
showrooms. You can go there to touch and feel the product, and then you order
it online and it’s delivered within two hours. That suggests the store itself
doesn’t have to have the inventory.
I think the importance of this touch-and-feel and really
valuable customer experience is going to matter. It’s not just about food. A
lot of people think customer experience is to offer a cup
of coffee. It’s obviously more than
that. But it has to be a way where you really understand what the customers want
to do in the store.
The other thing that a lot of the retailers are fooling around
with, and it’s very interesting to think about, is health care. That’s also
very high touch. You’re moving into CVS and Walgreens doing a lot more primary
care in their stores, which is an experiential thing. You do have to see
somebody to have them touch you, figure out what’s wrong with you or give you a
shot. Anything that’s experiential might be in these retail stores, not just
pure shopping. I think you’ll see these smaller stores, more experiential,
defined very broadly. If the industry continues to be this competitive, then I
think you’ll see customer expectations constantly being ratcheted up, and
retailers will really have to keep improving and innovating.
Knowledge@Wharton: What
about the fate of big-box stores?
Kahn: A lot of the
closings are big-box retailers: Circuit City, Borders, Toys R Us. Those used to
be called category killers. What they offered was huge assortment at low price,
but online can totally defeat that. That’s just not a winning proposition
anymore. The question is, can department stores exist? They’re trying. Macy’s
has a lot of strategies on the table. They really understand the threat, and
they’re trying to catch up. Time will tell if they can make it.
Knowledge@Wharton: What
are the core tenets of retail that will never change?
Kahn: The irony when I
developed this matrix is that, duh, this is Marketing 101: Give customers what
they want and do it better than the competition. What that means is customer
expectations change. It might mean something different. But really, being
customer-focused I think will always be in style.
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