Wednesday, March 15, 2006

shift: the future face of retail - discussion

This may go over like a lead balloon, but on my flight to San Jose this morning, I had a brief moment of clarity that I thought I'd run by ya'll. Is this something worth exploring in more detail? (ed. apparently yes - see comments)

Pretend you're a big-box retailer. Now look at the following five "value propositions" and rank them in terms of most important to least important:

1. Convenience
2. Community (your ability to participate in / be associated with local events and local identity)
3. Customer service
4. Cost
5. Customization (your ability to serve local and niche markets)

You would immediately pick out #1 and #4 as your top two value props. You'd flirt with #3, but it wouldn't be one of your core competencies. If you're Target, you'd add #5, just because you're trying to be the "hip" big-box store, and your branding naturally aims you at the "hip" demographic.

Now pretend you're a local community retailer and do the same exercise. You'd naturally gravitate to #2, #3 and #5, knowing that you can't compete on #4. You'd flirt with #1, but only if you delivered a specific named service, such as dry cleaner, drug store, coffee shop, or if you were a specialty retailer serving a unique local need (e.g. comic book store in a college town).

Gross economics have driven the success of the big-box retailers; simply put, more SKUs in greater volumes translate into greater convenience at lower costs for consumers. But when asked, most consumers readily admit that they would prefer to give their custom to a local retailer, but they don't - because the smaller, local retailer can't match the convenience of greater selection with the lure of lower prices.

Let's take it as read that in 2006, the retail merchant trade demands that anyone who cares to play in it successfully needs to be in tune with trends, knows how to merchandize, has a passion for the product, etc. But how can you compete when price is positioned as the differentiator?

The answer is you don't - you break open your Value Innovation toolbox and you find a way to compete in a way that delivers value in a new, exciting and compelling way. For retailers, it requires a shift in how local business is done, and one key catalyst for that shift will be technology.

I would argue that the availability of and aggressive use of three specific technologies is going to change the face of retail, giving local community vendors the ability to compete against the big-box retailers if they modify their business practices in a coordinated way to adopt them.

These three technologies play together - shared affinity programs + shared marketbasket data analytics + shared feedback systems. Done well, and done in real-time, this would arm local retailers with the same sort of visibilty the big box stores have into buyer behavior.

"But how does an individual vendor compete on cost?" you ask.

"By making the four other value propositions so much more compelling, picking select loss-leaders, and leveraging on-line vendors to complement your own stock. Local retailers need to think of themselves as a team - and act like a team."

To that I'd add the extra spice of "scarcity marketing", but that's just me.


(photo borrowed from an Engadget post, and included here in a moment of whimsy)


Anonymous said...

On one hand, there are some obvious problems with your suggestion that local retailers participate in some collective affinity/ marketbasket analysis/ feedback program. The first is simply practical -- if this isn't like herding cats, I don't know what would be. But the second is more important: local retailers have made the choice to run independent businesses for a reason, and part of that reason is that they don't want constraints imposed on the way they do their business. No matter how you slice it, sharing purchasing pattern analyses or feedback channels is going to require some kind of process standardization, which they might not want to be bothered with.

On the other hand, community retailers might be even better suited to things like affinity programs than larger ones. I don't know about you, but I'm a little creeped when my supermarket receipt addresses me by name. However, if you walk into a local store and the proprietor says "Hey Bob, I put aside a bottle of that Chardonnay you like" .... well, doesn't that just make you feel all warm and fuzzy? And let's face it, you're buying that damn bottle of wine.

bob said...

Just to clarify, this entire post is about "community retailers", the downtown merchant class vs the "just off the highway big box full of x".

Chris, think about that feeling you get from a local retailer - now create programs to keep local buyers "stuck" with local retailers. That's the goal of affinity programs - they can be as simple as coupons, but it requires some tracking and reporting so that all of the local merchants can participate equally.

I acknowledge that there is an independent streak in the merchant class, but there's an even more dominant pragmatic streak. If local retailers don't work together to draw and retain traffic, then they'll get marginalized by the low-price big-box stores every time.

There's a business here, by the way, in creating, selling and maintaining local affinity programs that improve the viability of local community retail.