Unlocking Retail's Disruptive Opportunities

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Background

While the headlines chronicle brick-and-mortar retail’s demise, we believe there has never been a bigger underlying opportunity. With a social media account, Shopify, and a mobile phone, scrappy solopreneurs are disrupting the retail playbook with nimble product positioning, outsourced logistics and operations, and 24/7 engagement and customer support. They are placing their products “within arm’s reach of desire,” meeting customers in bed, during their commute, or in a meeting, without the inconvenience of long lines and pushy salespeople.

By contrast, retail executives are relying on a decades-old playbook of reducing inventory, cutting staff, and closing underperforming stores to stave off erosion of their brick-and-mortar business. However, cost-cutting is a survival mechanism, not a strategic play for success. By decreasing store inventory, retailers threaten their remaining advantage over online shopping: “try before you buy.” According to Adyen, a payments processing firm, cutting staff reduces sales through declines in customer service and longer  checkout times.

Budget-consumers will continue to embrace Walmart’s “everyday low price” strategy and high-end consumers will value the personalized experience of shopping at Neiman Marcus; however, mass-market disruption is at hand. Failure to face and address these trends, while struggling to maintain existing retail locations, will radically reshape an entire generation of retailers. Toys R Us is Exhibit A and close behind are JC Penney, Macy’s, Bon-Ton, Sears, and KMart each closing 100+ stores since early 2017.

Introduction

For established retailers to craft a response, we introduce our COE-creation model, which finds inspiration from Unbundling the Corporation by John Hagel III and Marc Singer. Their paper defines three types of businesses, of which an organization can only master one: infrastructure management, customer relationship management, or product innovation. Leveraging this framework, we categorize an organization’s improvement efforts as core (economies of scale), organic (economies of scope), and exponential (innovation). The COE-creation framework visualizes the company’s current improvement efforts, recognizes their staff’s limited capabilities versus the operational demands of the traditional “9 to 5,” and lays bare the need for a dedicated innovation effort.

 The Berkeley Innovation Group's COE-Creation Model (Core, Organic, Exponential)

The Berkeley Innovation Group's COE-Creation Model (Core, Organic, Exponential)

Core Improvements

According to Adyen’s research in Evolving Retail, sixty-percent of in-store consumers shop “to see, touch, and try on items.” Buoyed by this fact, retail executives continue to pursue economies of scale by maximizing same-store sales and expanding their geographic footprint. In support of these goals, they improve internal processes to increase efficiency, favor modifications to successful lines over embracing new brands and adapt existing back-end systems to allow “innovations” such as online ordering of items for in-store pick-up. Unfortunately, core improvements alone will not rescue brick-and-mortar retail. Instead, as Matt Powell of NPD is quoted in RetailDive as saying,

“To adjust to the new landscape, retailers must rationalize their physical footprints not just by shuttering stores, but also by taking care that the remaining locations offer personalized, elevated experiences. Retailers must develop their own 'muse,' or an iconic customer that represents the core of their business.”

Organic Growth

The goodwill generated by a service-oriented history will no longer carry the day; instead, when a customer visits a store, they want a unique experience with the least amount of effort. Hagel and Singer’s framework tells us an infrastructure management business cannot achieve the same success in a customer relationship business. So how does a brick-and-mortar retailer use their brand to expand their reach?

For example, Nordstrom is separating its core procurement and distribution operations from its intimate, one-on-one customer service to launch Nordstrom Local. As an investor in Bonobos, Nordstrom had a front row seat into a model that provides in-person style advice but fulfills all orders online. With the courage to reimagine their brick-and-mortar retail stores as regional warehouses, Nordstrom can get hyper-local through smaller footprint stores that provide more convenient pick-up and return options, while offering value-add services like manicures and tailoring. As I view the redevelopment of Broadway Plaza in Walnut Creek, California, REITs are taking notice. Macerich is redesigning a flagship property to de-emphasize anchor tenants and maximize smaller, more flexible in-line space.

“The ‘9 to 5’ Line”

At this point, most organizations reach the “9 to 5 barrier,” which is the limit of an organization’s human capital and is short of real exponential innovation. Instead, dedicated individuals spread across the company undertake innovation efforts in their free time. The downside for executives is a lack of visibility into the organization’s innovation portfolio that leads to duplication of efforts and siphons off operational budgets to fund side projects. In response, we advocate for a separate innovation-focused organization structure to design new products and services outside of the operational constraints of the core business.

Exponential Innovation

Through dedicated innovation organization structures, guided by design thinking principles, traditional retailers can realize the same opportunities fueling more nimble start-ups and solopreneurs. However, large organizations fall victim to the orthodoxies of “the way we’ve always done things,” and eschew calculated risks based on iterated learnings. For decades, brick-and-mortar retail was the only channel to fill the customer’s immediate need for a good. This explains the begrudging integration of e-commerce into their business models in the late 1990s and early 2000s. Today, customers expect an omnichannel experience: buying a good on their phone after reading a blog post and expecting Prime delivery tomorrow.

In order to survive this shift in behaviors and expectations, today’s retailers will benefit from continued evolution and embracing autonomous commerce. Similar to our work with Recology, where we reimaged the waste stream as a data stream, how might we guide retailers beyond purveyors of physical goods and into custodians of customer data?

Conclusion

Successful retailers are getting in their customers’ face, literally, via their mobile phones. The ability to purchase your product must be “within arm’s reach of desire,” and delivery must be seamless, meeting the customer at their convenience. These are core improvements for all retailers to remain a going concern. Organic growth will come from repurposing brick-and-mortar stores from large distribution centers housing everything under one roof to smaller customer relationship management outlets offering customized style advice, effortless tailoring, and convenient returns. However, neither initiative will differentiate a brand or build customer loyalty. To achieve exponential growth, retailers must reframe their business model as the trusted custodian of a customer’s most valuable and intimate data, their measurements under the outfit.

The goal of our “Designed Disruption” workshop is to train operationally-focused leaders in the tools of design thinking to re-imagine the future. This is not to compare the future to “the good old days,” but to uncover the “ah-ha” moments that iterate on your existing business model or create the prototype of a new venture.

Jeff Eyet