What Digital Transformation Actually Means For Retail
In this great article from Forbes, Nikki Baird looks at What Digital Transformation Actually Means For Retail.
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.
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.
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