CUSTOMER-CENTERED OMNICHANNEL STRATEGY

Retail strategy in the post ‘apocalypse’ and COVID era

The pandemic has accelerated the trends we had seen during the last decade and leading up to the retail apocalypse of 2017. To lead in the new market environment, retailers need to use a combination of enhanced brand positioning, low price, frictionless value delivery, and improved customer experience strategies to find winning positions and deliver on customer demand.

Technology will play a major role in retailers’ post-pandemic transition through the integration of online and offline channels. Furthermore, brands will need to focus on being a force for good, as societal demands are rapidly changing from a ‘ME’ to a ‘WE’ culture.

Photo by Heidi Fin on Unsplash

The ‘Retail Apocalypse’

The last decade was a terrible period for retail with 2017 getting coined as the retail apocalypse at the time, as a record-breaking number of retailers filed for bankruptcy and a record number of retail outlets closed forever. But as the infographic below by CBInsigts shows, 2017 was only the beginning, and consequently, in 2018 and 2019, this trend continued. And due to the impact of the global pandemic, 2020 only turned out worse. So far, 2021 has been better, but there is no indication that this trend of closures and bankruptcies is about to stop.

Retail store closures in the US — 2016–2020 — more than 250k stores closed operations momentarily in 2020 & 2021 due to the impact of COVID-19

List of Retail Company Bankruptcies & Closing Stores | CB Insights Research

Retailers lost in the last decade: Toys R Us, Sports Authority, Blockbuster, Borders, and Payless

While many cite online shopping and the global pandemic as the drivers of this change, the fact that we have built too much physical retail space per capita than needed is also driving this change, as outlined in the article by The Atlantic below.

What in the World Is Causing the Retail Meltdown of 2017?

The impact of COVID-19 on shopper behavior

This is important because the changes brought by COVID have long-term effects on shoppers’ behavior. Once everybody has lived through a year of COVID-19, new habits are eventually formed. However, these trends were happening before the pandemic and it only accelerated store closures. Therefore, retail closures and changes in consumer shopping behavior that may have taken three to five years to occur happened in only several months. Some of the changes that the pandemic brought about include:

• Consumers are much more likely to buy online than in the past. People who were used to buying online shopped more, and those who hadn’t adapted started to make online purchases for the first time. Data indicates that post-COVID, we will experience at least a 10% higher inclination to purchase online than in the past.

Source: Statista — projected growth of online retail sales — various sources indicate higher percentages ranging from 25–40% at times

• The state of Consumer Behavior 2021 report indicates that nearly 50% of consumers will maintain their current levels of online purchases, which is a dramatic increase compared to 2019, and 16% will increase their online purchase levels compared to 2020. However, 25% of consumers are indicating that they will reduce online shopping and move back to physical retail due to several reasons including wanting to touch and feel items, the joy of shopping as an experience, and/or not wanting to wait and/or pay for delivery.

Report: The State of Consumer Behavior 2021 | Raydiant

• Payment processes are becoming more frictionless. While this trend had already started, COVID will further accelerate this transition.
• Consumers have different expectations for physical retail environments. Consumers expect retailers to exercise good hygiene practices, wear masks, have hand sanitizers accessible, enforce social distancing rules, provide gloves for employees, and have disinfection in-store. In short, consumers expect a low-touch environment.
• Flexible working patterns — with more people working from home.
• Retailers are focused on improving offline experiences. 30% of respondents reported that in-store customer service improved in 2020. The report also indicated that 60% of customers believe if they get a great in-store experience, they are more likely to shop offline than online.
• Lacking brand loyalty. 48% of respondents said they have replaced products they typically purchase at physical stores with competitors’ online alternatives. Now, this could be due to lack of availability also. Among those who switched in 2020, 18% said their old brand was unavailable and 16% said a new brand offered a better discount or price than other options
• Omnichannel experience will be key to success. 65% of customers show that a good offline experience will result in more online purchases from the same store/brand and vice versa.
• When asked what drives the customer experience in-store, shoppers indicated product range and variety, quality of customer service, interaction with staff, and convenience factors such as the location and layout or ease of checking out as the main drivers of their experience.
• After reopenings, as shoppers return to purchase in-store, they will tend to spend more time, which results in larger basket sizes.
• Despite the impact of COVID-19 which has caused brand switching, customers still want to remain loyal. 57% of consumers remained loyal to a brand during a chaotic 2020, 45% say they wanted to feel like the brand appreciates them, 14% said they wanted to feel like a brand knows me, and 14% want to feel connected with the brand on a common cause or set of values.

57% of consumers remained loyal to a brand during chaotic 2020, a study finds

Lasting trends

Pre-Covid trends exacerbated by the pandemic

There were three main trends that retailers were observing before the pandemic:

• Pricing transparency. Customers who shop at everyday low price retailers such as Walmart will not appreciate tier discounting or constant promotions due to their adaption to online retailers' transparent pricing.
• Enhanced customer experience. Retailers that have a product-centric sales approach (e.g. cross-sell, upsell) will be at a disadvantage, and those stores whose salespeople serve as a guide or help and provide a shopping experience will be the emerging winners.
• Digital. Is a major force of change at play, with Amazon as the front runner in this revolution.

Post-COVID changes

There are indications that several changes will be observed in retail:

• ‘A’ malls, or luxury malls that are more experiential in nature, will perform better. While ‘B’ and ‘C’ malls were hurt by the COVID with shoppers tending to buy their products online.
• Strip malls or community centers did better than ‘B’ and ‘C’ malls. This is a change as to where people are shopping and shops will most likely move toward strip malls and community centers as business reopens.
• General stores such as Walmart, Amazon, and Target have grown in power. With shoppers increasing their purchases potentially due to convenience and wider assortments.
• New digital native brands such as Dollar Shave Club will be beating established brands such as Gillette. This is due to two underlying drives — first, they have strong brands because they are listening to customers and offering messages that resonate with their communities; second, they are direct-to-consumer which gives them the power to collect first-party (end customer) data to make insightful decisions; and third, they have a subscription pricing model which maximizes value for the customer and increases their lifetime value while traditional brands remain transactional in nature.

Dollar Shave Club founder Michael Dubin on a razor-sharp idea | iConic Conference 2017 | CNBC

The balance in Nike's business is shifting dramatically

Strategic post-COVID-19 changes to retail

We will be seeing several lasting changes in the retail sector post-pandemic:

• Move to customer-centered omnichannel retailing. This is an integrated and seamless multi-channel experience online and offline which will require the integration of supply chain and employee management models on the retailer side of operations and a deep understanding of customer needs and desires.
• Importance of creating an in-store experience that builds trust. Due to the impact of the COVID, customers need to trust stores to deliver their loyalty, which will mean a major shift from discount and product-focused messaging towards a relationship-building one.

The next normal: Retail M&A and partnerships after COVID-19

Photo by Tristan Colangelo on Unsplash

Leading in the new retail environment

Long-term sources of competitive advantage will come in the form of one or several of the following differentiated advantages:

• Brand
• Customer experience
• Frictionless
• Low price

Kahn’s retail success matrix — four strategies for winning in a new retail environment

An aspirational retail strategy should:

1. Establish the minimum requirements for winning in each of the four quadrants above in its marketplace
2. Use the winning capabilities it has in a quadrant of focus and decide which quadrant it wants to establish leadership in
3. Pick a second quadrant that it wants to build an advantage in
4. Deliver at least the minimum deliverables in the other two quadrants

Case example of a retail leader: Amazon

Amazon’s virtuous growth cycle

Priority 1: frictionless strategy

Amazon invented 1-click shopping and patented it in 1997, which did not expire until 2017, for 20 years. If other retailers wanted to use this frictionless method of shopping, then Amazon could sue them. Simply put, Amazon invented frictionless shopping.

Why Amazon's '1-Click' Ordering Was a Game Changer - Knowledge@Wharton

The reason no one else thought of this idea was because of the old notion that ‘the more users spend time in your store’, whether online or offline, then, ‘they would purchase more’. This is why retailers place milk at the furthest location of the store. Amazon’s one-click purchase innovation was an idea that was focused on the customers’ pain rather than a product-centered marketing focus and back then no one had this mentality.

Amazon CEO: Focus on the customer is key — CNN

Amazon’s customer focus mindset has given way to Amazon Prime — customers’ desire to get fast delivery — and Kindle — a pay-as-you-use bookstore. Amazon is using customer data and insights through its web, mobile, and voice platforms to deliver customer-centered innovations. Amazon's customer analytics is its flywheel that is pushing its frictionless advantage further to provide meaningful solutions to customers.

Priority 2: low pricing

Furthermore, Amazon’s data analytics are providing it with an optimized supply chain that helps it price according to each customer to maximize retention and minimize costs. When Amazon launched back in 1997, it did not have a low-cost advantage compared to traditional players, especially when considering last-mile delivery costs. Even today Amazon’s profits do not come from retail sales. While retail does account for a major share of Amazon’s top line, its profits come from other services including AWS (Amazon Web Services) which accounts for 60% of total profits and fulfillment, logistics, and advertising services. In short, Amazon does not really make profits from its retail transactions and hence it has the advantage to drop its prices to small margins (i.e. cost-based pricing).

Technology delivered: Implications for cost, customers, and competition in the last-mile ecosystem

Amazon's profits, AWS, and advertising - Benedict Evans

Priority 3: reducing the power of brands

Amazon aims to evaluate the power of established products by lowering customer expectation of perceived value in a brand, which does not seem to be succeeding, yet.

Amazon is taking away the power of brand names, throwing another industry into turmoil

More brands are leaving Amazon, but the strategy could backfire

Priority 4: enhancing customer experience through an omnichannel presence

Amazon is opening up retail stores that foster convenient purchase and checkout processes, just as easy as purchasing online. The interesting point about Amazon’s retail stores is that it collects customers’ offline data and integrates it with online data to provide an enhanced customer experience on both fronts. Furthermore, Amazon’s offline retail move (i.e. Amazon Go) is providing a frictionless experience, which is at the core of its primary retailing strategy.

The Winning Characteristics of Jeff Bezos Behind Amazon’s Success

Curiosity brings out the crowds at the opening of Amazon's first full-size cashier-less grocery store

Kahn’s retail success matrix — Amazon’s retail strategy

Case examples of other retail leaders

Everyday low price retail: Walmart

Walmart has extremely lean business operations that allow it to have low-cost advantages. But Amazon’s entry has pushed it to perform on the frictionless and omnichannel delivery of its retail value and to achieve this goal, Walmart has acquired Jet.com bringing an online product, organizational know-how, and talent to bridge the gap.

This move proved extremely beneficial to Walmart during COVID where its order online and pick up locally at a store gained huge traction in the US, especially when 90% of Americans live only 10 minutes away from a Walmart store — a frictionless and seamless omnichannel experience. Furthermore, for Walmart to gather customer data and create loyalty, it has offered Walmart+, a similar solution to Amazon Prime.

Kahn’s retail success matrix — Walmart’s retail strategy

Everyday low price retail: Target

Target's stores are very well designed with an amazing flow from one category to the other through wide aisles, and great lighting and signage. The sales associates are easily identifiable and help customers solve problems and find solutions, rather than push products onto them. Target also collaborates with brands to bring a fun experience into the store such as with Apple and Missoni. In short, shoppers like to shop at Target because it’s a fun experience and offers product and brand partnerships.

The Genius Of Target's Missoni Madness

Kahn’s retail success matrix — Target’s retail strategy

Everyday low price retail: Costco

Costco started as a warehouse in 1983 in Seattle as a membership club. Its strategy is to make money off of its membership program and guarantee the lowest prices on the market through buying in bulk from suppliers. The downside of this strategy is that Costco has a limited product assortment as it stocks about 4,000 items while Walmart stocks over +100,000 product lines. Costco also employs a treasure hunt or limited stock tactic whereby 20% of its stock may not be available next time shoppers go to its stores which entices an impulse purchase behavior and gives its shoppers a unique and differentiated experience. However, on the downside, Costco does not offer a frictionless experience and this made it lack service during the COVID period and has partnered with Instacart to overcome this lag but it still is not a great solution compared to Amazon. But despite this, CostCo still managed to do well as it has a loyal base of customers who enjoy the experience and the low-cost bulk buying approach.

Costco's Sales Get Another Boost From Pandemic Buying

Kahn’s retail success matrix — Costco’s retail strategy

The case of luxury retail

Kahn’s retail success matrix — Luxury’s retail strategy

Luxury aims to provide an expensive and exclusive brand with a pleasurable experience, and today, it’s aiming to go directly to end customers (D2C). To do this, pre-COVID, luxury had started to build flagship stores with amazing customer experiences to build a brand through the inside store experience. Moving forward, stores will still be important to luxury as customers need to build affinity with brands in person. But it will need to increase its focus on frictionless and customer-centered omnichannel efforts by focusing on three key differentiating factors:

• Amazing online experience
• Amazing offline exprieince
• Connecting these experiences through customer data which can be gathered either online (e.g. mobile app) or offline (e.g. sales associates)

Furthermore, as traditional luxury brands such as Nordstrom build capabilities, they can develop partnerships with new digital native luxury brands and provide offline exposure to them.

During the COVID period, Nordstrom built small local showrooms for customers to window shop online and then find their desired products locally to try them out before making the final purchase.

A perspective for the luxury-goods industry during--and after--coronavirus

Photo by Korie Cull on Unsplash

Technology as enabler of success

To build better brands and communicate the true value of a product with customers, content development and management, digital marketing, and customer data analytics will be key to success.

To reduce costs, retailers will need to optimize business operations through process efficiencies, employ business intelligence and analytics, and utilize IoT automation.

To deliver frictionless experiences, retailers need to simplify processes in the backend of their businesses through human-centered design thinking, UX design, and AI.

And finally, to deliver an enhanced customer experience, retailers will need to optimize customers’ interactions at frontend touchpoints through detailed customer journey mapping, omnichannel personalization, smart voice/video/etc. customer assistance and service.

Kahn’s retail success matrix — Technology enablers of success

Photo by Artificial Photography on Unsplash

Post-COVID online/offline integration

While we know that shoppers will most likely make mundane and repeat grocery shopping online, the future of offline retail is integrated into delivering a differentiated shopping experience. This will require malls and traditional retailers to move towards customer-centered omnichannel retailing whereby they deliver an in-store experience that inspires trust with traditional and digital-native companies converging to be everywhere customers want them to be.

Amazon is going offline and Walmart has gone online

In the post-COVID era, some malls and department stores will never reopen as they will have gone bankrupt and those that do will need to pivot and reconfigure their value proposition. The buy online and pick-up at the store is here to stay triggering a new way of utilizing physical retail space. Today, it is standard to have a front space for shopping and a back office for distribution and fulfillment. If the pick-up culture scales, we may witness a business model change and retailers may repurpose their space and transform more into distribution centers.

Digital native vs. legacy retail players: bridging weaknesses

Kahn’s retail success matrix — Digital native vs. Legacy players

While digital natives are the leaders of the frictionless operational experience, and legacy retail brands experts in providing a differentiated experience, both players will be improving their disadvantages in the post-COVID era, as online and offline begin to merge.

The insights digital native players are gathering by opening offline stores is that not only is this move not cannibalizing online sales, but is increasing overall sales as it builds brand and acts as a supplement to the digital experience they are already offering.

Online Pioneer Warby Parker Bets Future on Adding Hundreds of Stores - BNN Bloomberg

In the case of an offline retailer going online and succeeding, Lululemon is one of the frontrunners. Lululemon created online classes to preserve its community feel and provided a curbside pick-up option during COVID. Lululemon acquired Mirror, a connected exercise program, to help its community of customers get an augmented omnichannel feel for group exercise.

Lululemon to Buy Mirror, a Fitness Start-Up, for $500 Million (Published 2020)

Photo by Annie Spratt on Unsplash

The case of China: a forefront in new retail

Why retailers everywhere should look to China

There are seven key market dynamics to consider about China:

• The culture in China is more of a collective society than individualistic, and they enjoy being part of a group, even when shopping. Therefore Chinese consumers rely heavily on product reviews and group discussions to make a purchase decision. In China, 75% of internet users post online feedback about purchases at least once a month while this is around 20% in the US (~1/3)
• Trust between consumers and retailers needs to start way before they go into the store. While in the US, the trust is provided upfront unless something goes wrong. Therefore it’s quite difficult to establish trust in China and this is where the Key Opinion Leaders or Social Influencers become important for retail. These influencers have shaped what is coined Social Commerce in China

China consumer report 2020: The many faces of the Chinese consumer

• Alibaba has shaped the online shopping culture of China which is quite different from Amazon. While Amazon’s focus is to reduce frictions and make purchase decisions easy for customers, Alibaba takes customers down a treasure hunt rabbit hole with the elements of surprise and impulse purchase. This is what is called Shoptainment (i.e. Shopping Entertainment) which many new marketplaces are picking up across the globe
• Chinese shoppers also share their purchase experiences with others on social media, for example showing their recent purchase of a luxury brand or innovative item to their communities. Which is very different from what one would see in the West
• China has experienced a retail technology leapfrog whereby 98% of retail purchases are made on mobile phones. And therefore, online channels are optimized for social purchases which through the ease of changing apps, sharing content on social platforms is very easy
• While the West has maybe too much retail space per capita, China lacks this infrastructure, especially in 3rd, 4th, and 5th tier cities. And therefore online and mobile retail has grown tremendously
• Payments in China is quite frictionless, with mobile tap and QR code scans, making checkouts and final impulse decision of customer seamless

China: top 10 retail chain operators based on retail sales 2020 | Statista

Online retailers go offline in China

Retailer’s strategies in China: Alibaba

Most Chinese retailers including Alibaba did very well during COVID as most of their business was online to start with. Alibaba is a treasure hunt platform that’s about product discovery and killing time or Shoptainment. It has two big platforms that it operates, Taobao and Tmall.

• Taobao — has a product assortment scale and was created to connect customers to customers (C2C), similar to eBay, where small merchants sell products to customers
• Tmall — is about developing and delivering brands to Chinese consumers with many Chinese and international brands wanting to connect to the lucrative Chinese consumer

How Alibaba Makes It Easier For Global Startups To Enter China, And For Multinationals To Innovate

What’s different about Alibaba compared to Amazon is that it shares data with the merchants. Amazon protects its data to provide a frictionless experience to end customers while Alibaba serves merchants to develop brands while creating a treasure hunt experience for shoppers. These two retail giants have very different strategies.

Consumers are attracted to Alibaba’s platforms because there is so much fun experience with many different brands to engage with. Alibaba employs AI and machine learning to personalize and customize a shopper's online experience and is very sophisticated in delivering this experience.

Alibaba Isn't Amazon: The Upgrade To Tmall 2.0

Alibaba has also started opening small physical stores built in neighborhoods, which is known as new retail, that serves as delivery points — buy online and pick up in the store as localized fulfillment centers. The back part of these stores caters to distribution and fulfillment and the front part for great customer experience. This integration of online and offline serves to create a truly customer-centered omnichannel experience.

Everything Alibaba Does Differently - and Better

Kahn’s retail success matrix — Alibaba’s retail strategy — Alibaba has a diversified portfolio approach through Taobao and Tmal and hence there are more combinations of positioning in its retail strategy matrix

Retailer’s strategies in China: JD.com

JD is smaller than Alibaba and is about efficient shopping with 50% of the assortment owned by the platform and within its control, and the other 50% as a marketplace where merchants sell on their platform. JD is very similar to Amazon where it offers peace of mind to the customer that they are not buying counterfeits as the platform controls the assortment.

Kahn’s retail success matrix — JD.com’s retail strategy

Retailer’s strategies in China: PinDuoDuo

PDD started in 2015 as a low-price marketplace very similar to a dollar store similar to Dollarama with commodity products. But gradually PDD took the low-price strategy and combined it with a fun customer experience through group buying.

What is Pinduoduo? | KrASIA

PDD grew tremendously in 2020 and 2021 to become the #1 retailer in China by the number of active users and it owes this growth to its low pricing, fun customers experience that matches China’s inherent shopping culture, and frictionless integration with social platforms and payment services such as WeChat.

Kahn’s retail success matrix — PinDuoDuo’s retail strategy which makes it a market leader on three strategic fronts, propelling to fast growth and profits — a unique market position to be in

Photo by Alexey Mak on Unsplash

Brand strategy and retail

Formally, a brand is a proprietary trademark for a specific product or service. Conceptually a brand is a contract between a company and its customers that promises specific benefits, quality, and value and aims to deliver a mutually beneficial relationship. In reality, a brand is no longer what the business tells the consumer was it is, but rather what the consumers tell each other about it.

Strong brands signal consistently promised high quality and common identity that is built upon four pillars:

• The target segment
• The point of differentiation relative to the competition
• The frame of reference or the context from which consumers view it
• The reasons to believe the promise

Brands as a force for ‘good’

Brand Citizenship — from ME to WE —the ‘ Me-to-we ‘continuum to help businesses gain lasting credit for sustainability and social responsibility initiatives

Many of the top-performing brands have moved to positions around values, aspirations, and desired identities. Today brands have the power to change the way people think and act and consumers want businesses to step in and fix things as they have lost faith in governments.

Business as a Force For Good — Sarah Wleklinski — Director of Retail Strategy, WE, Nike

Today, brands need to have an ethos about why they are in business — in other words, a business philosophy. They need to be transformational and not transactional. They need to form communities and authentically deliver long-term sustainable value not just to shareholders but to all stakeholders. They need to deliver social impact. Today brands are held to high standards, and COVID has only accelerated this demand.

Examples of this branding strategy can be found in Nike’s ad campaigns across recent years with the Colin Kaepernick’s movement as a recent branding tactic:

How Nike Turns Controversy Into Dollars | CNBC

In most of these cases, brands emerge as having a core purpose and values that align with their base of customers.

Brands Have Nothing Real to Say About Racism

Dick's Sporting Goods says it won't sell assault weapons anymore. It said the same thing in 2012.

CVS Lost $2 Billion With 1 Decision-Here's Why They Were Right

Photo by Sangga Rima Roman Selia on Unsplash

In summary, COVID did not bring new trends but accelerated the ones already out there such as digital migration, working from home, use of technology, and supply chain rebalance, and as long as retailers are focused on their customers, adapting to changing circumstances should be easy. What we can say for sure is that customer-centered omnichannel retailing strategies and relationships built on trust through core value offerings and brand building are here to stay.