Today's retailers face increased competition from physical stores as well as brands and companies selling direct to consumers. In the "maker" economy, there is also competition from private individuals designing and selling goods.
With these pressures, how can retailers improve performance? What steps can they take to be more competitive at the local level — and how can they increase returns to shareholders? This article explains some of the important challenges facing brands and retail — and how to tackle them.
What is the digital challenge for retail?
The new normal for retailers is an ongoing struggle to match the growing reach and power of consumer devices, especially mobile. Whereas previously companies had access to greater computing power than consumers, the situation is now reversed. Customers can check up on products, prices, and promotions online, view competing offers, check specs, download coupons, and even discuss with their friends before making a purchase — all while walking down the store aisle.
The way in which consumers transact is different now from just five years ago, when in 2010 the iPad opened up another path to convenient browsing allied to mobile. Since then, consumers have continued to flock by the millions to social media platforms. There they post information about products and experiences, and exchange opinions.
The sheer scope of social media platforms is staggering. Facebook now has more than 1.3 billion users, QQ and Qzone, both of Tencent, more than 600 million users each, Instagram 300 million users, and Twitter 280+ million users.
Shoppers can now transact on the go and influence the store from outside. The impact of on-the-go shopping through the use of smart devices is enormous. As an indication, Gartner predicts worldwide shipment of more than 2.2 billion smartphones and tablets for 2015 — nearly a third of the world's population.
How can retailers improve performance?
Brands have to catch up to these digitally savvy consumers while trying to avoid being outflanked by competitors. This entails using Big Data, analytics, people, partners, and programs to make smarter decisions and deliver better financial results.
As they experiment with different formats and ways of engaging customers, brands still must ensure that the business makes money; they must apply a financial lens to ensure profitable decisions.
These are the new talking points for management in corporate boardrooms as they focus on delivering greater shareholder value. They are necessary — but not sufficient — steps for success.
Technology companies are working feverishly to enable consumers to complete transactions with greater ease and security on mobile devices. Google's upcoming "Buy" button, for example, will be embedded in online search results; Apple Pay aims to let shoppers effortlessly execute a transaction with a wave of their phones, and various e-wallet products offer similar solutions. Alongside these advances, troublesome issues are emerging about the governance and security of personal data entrusted by consumers to companies.
Improving promotion effectiveness
The first step to improving results is to accurately measure current results. If you don't know what works and what doesn't, then how will management determine what to do more of, and what to cut back on?
Customers reveal their preferences through their actions. They show up in store when marketing messages engage them, and vote with their dollars by purchasing what they like.
By measuring with accuracy and applying the magic of Big Data and analytics, we can calculate the profitability of items, offers and channels. We can apply sophisticated algorithms to measure the incremental returns of each additional dollar spent, and attribute it to specific marketing activities, promotions, merchandise offers, and space allocations.
This should be done at both the company and store levels. Aligning marketing and merchandising with finance is necessary at the corporate level. It will help ensure that decisions and expenditures are based on a sound relationship to ROI and shareholder value.
Zero based budgeting
Companies will be able to sharpen financial performance with "zero based budgeting" just as 3G (the Brazilian private equity firm) and Warren Buffett did with the two global consumer brands they jointly acquired: Heinz at $28 billion, and Kraft at $46 billion.
In support of zero-based budgeting, Buffett said, "I don't know of any company that has a policy that says, 'we're going to have a lot more people than we need.'"
Zero-based budgeting can help you understand what worked and what did not. We at Saferock built a system around this and have explained how to improve the ROI of merchandising and marketing spend for retailers and companies including Hudson's Bay, PetSmart, Toys 'R' Us, Christie's, and others.
Bringing the financial team members into the center of business decisions is a sound move as they can help to fairly monitor winners and losers, and move the focus from sales to profits, which is a benefit to shareholders.
Improving brand and vendor performance
An open question for the future is whether retailers and brands will become more dependent on each other, or less so. Regardless of the answer, they will still have to work with each other to reach customers, and consequently must ensure a fair "handshake" between themselves in their business transactions.
The value of brand is important as it attracts loyal shoppers and establishes the price profile and image of the company. Retailers want to attract loyal customers who will trust the store without question.
Retailers make more money when they are able to sell more products at full price. By selling accompanying services, they can bolster the overall profitability of the enterprise. For this, they have to carry the right brands and offer a reasonable business partnership. Precise measurement of ROI is critical to successfully managing brand relationships.
Easier transactions and data security
While transactions are becoming frictionless with services such as Apple Pay and Google Wallet, this is counterbalanced by the need for greater data security and proper oversight of the sensitive personal and financial information provided by customers. This has to be managed securely and with care.
Improved promotion effectiveness, financial focus, and better partnering will strengthen overall brand building as well as localization strategy. If the retailer is truly able to measure sales and profit ROI with accuracy, as suggested here, then their actions can be more precise.
To create a competitive edge, retail companies need to link customer engagement to shareholder value, using proactive, measurable steps. As a result, the brand will be more successful, localization strategy more likely to succeed, and shareholders will reap the benefits.
Shah Karim is the CEO of Saferock. For more than 20 years, he has advised retailers on digital transformation, cost reduction, and turnarounds. He has developed systems and algorithms to precisely measure retailer ROI performance, Big Data analytics, personal learning, and enterprise content management. Karim began his pioneering research on index numbers at Yale University and continued this work in Geneva.