How To Understand The Biggest Problems Facing Retailers In 2017

The convergence of the digital and physical realms is wreaking havoc and destruction upon traditional retailers.

American Apparel filed for bankruptcy. Macy’s is closing 15% of its stores. Kmart is closing 78 stores and Sears another 26. Wet Seal is closing all 171 of its stores. The carnage will continue as companies attempt to adapt to a consumer climate that has suddenly changed its behavior and expectations of the shopping experience.

Malls, once the bastion of tragically unhip teenagers and the crux of local retail ecosystems, are becoming ghost towns. Especially in the middle of the country.

The popular line among retailers in 2017 is that the industry will see more innovation in the next five years than it has seen in the last 50. The seismic shift has come hard and fast and left the entire industry trying to figure out how to modernize internal systems and the front-end customer experience. All while keeping the doors open, the lights on and people employed.

“I had a CIO say to me, ‘we have to change the engine while we are still flying the plane,’” said Robin Copland, vice president retail, Americas, at ThoughtWorks, in an interview at the National Retail Federation’s 2017 “Big Show” in New York City.

When it comes to reinvention and progressive iteration—the hallmarks of real innovation—the retail industry is well behind the curve. Empirical evidence suggests that the wake up, come to technology, moment came only two years ago.

The Inside-Out Conundrum For Retailers

For many years the topic of technology for retailers was an internal one.

How can a retailer track inventory across channels? What kind of enterprise resource planning (ERP) tool to use? What are the goals and tools for cloud migration? What is the role of the customer relationship management (CRM) software in an omnichannel world?

“Retailers have spent the last 50 years building systems—legacy systems—based on ERPs,” said Copland. “Technology came into retail to help them scale. How do I make it faster, cheaper? How do I get it to my shelves faster? And that was the era of SAPs, Oracles, JDAs and all of those companies. And, for the most part, those are the core systems that run those companies today. Technology has been internal focused. The customer was always internal.”

This type of internal technology is what traditional IT departments historically focus on at large enterprises (retail or otherwise). Internal technology is often slow to update and does not handle different inventory channels well. In the enterprise, the need to innovate is the need to update, which means that large retailers are always behind the technological curve.

Two years ago, the mindset started to change. Terry Lundgren, the CEO of Macy’s, admitted on stage at NRF that the company had only started looking at data and analytics two years ago. Copland said that some of ThoughtWorks clients started looking at external, customer-focused systems two years ago.

Why, all of a sudden, did retailers wake up to new technology two years ago? By 2015, it was clear that the world and consumer behavior had already changed. What was the signal that finally got retailers to start changing how they deploy technology?

“I think a couple of years ago what we started seeing was an uptick in the proliferation of technologies and applications,” said Copland. “Which spawned a rapid change in consumer behavior, faster than retailers could absorb.”

Thus the comment about changing the engine while the plane is still in flight. Gone are the days where a retailer can buy a new internal tool and update it every once in a while or buy a new point-of-sale system and think that the work is done.

Copland explains:

Think about it, from a technology perspective, you bought a new point of sale and that got you five, 10 years. You don’t even think about it. You bought an ERP system and that got you five to 10 years depending on your business, you didn’t even think about it. Now it is like six months to a year. So that is a very different mentality across the board. Now all of a sudden you are talking about I have to have agile development teams, I need to do continuous delivery. I need to be constantly updating my infrastructure and my applications. That is a different financial model. It doesn’t have the same predictability when you are buying systems of record, so to speak.

The Failure Of Omnichannel

According to a recent study, most consumers think that they are “omnichannel” shoppers. That means they interact with retail brand through a variety of digital and physical channels such as email, apps, websites, in store and now bots and instant messaging platforms.

The notion of omnichannel was retailers’ reaction to changing consumer behavior. Go where the eyeballs are to maintain and increase brand mindshare.

The problem of omnichannel is that retailers have never really been able to successfully take advantage of it from the back end. Those old Oracle, SAP, JDA systems are not configured to cross the boundaries between wholesale, store front, ecommerce and other channels. Or, if they are, they are difficult to execute upon. The customer relationship is not unified in one system that creates holistic data points so that retailers can personalize products and service to the shopper in all channels.

“From a merchant perspective, omnichannel is a word that is overused,” said Linda Kirkpatrick, executive vice president of merchants and acceptance at Mastercard. “The way I like to look at it is, yes you have to be be multi-device and engage consumers on multiple levels, but you have to think about it in the context of being personal, social, digital and custom. Really appealing to the consumer in ways that transcend the typical retail experience.”

As Kirkpatrick said, omnichannel was supposed to be a way for brands to personalize the shopping experience. And yet, as Copland notes, the internal systems have not been able to get omnichannel to the heart of the matter: understanding consumer intent.

“The notion of product insight. We all want more data today because we can get more data. From a brand’s perspective, how do they romance the product and build a service around it?” said Copland. “You can create the right experience, understand your customer, pick up in store or use your phone to scan the tag to see if your size is available. At the end of the day, you can get it.”

The Convergence: Bringing Data To The In-Store Experience

One fundamental disconnect in retail strategy is the notion that ecommerce is the present and future. Ecommerce has taken a deep bite into the margins of retailers that have not figured out pure digital sales channels. And those are margins that those retailers could ill afford to lose. Hence we see retailers closing stores, cutting down on inventory and laying off employees.

The fact of the matter is that most shopping is still done in store. Depending on what metrics and forecasts you believe, between 85% and 90% of all shopping is done at a physical location. Is it a statistical coincidence that Macy’s is closing 15% of its stores?

Physical still has preeminence in the shopping equation. But digital has brought on a whole mountain of information for retailers that needs to be understood, sliced and diced down to the individual customer level.

“The foundation is data,” said Kirkpatrick. “You need to use the data in order to figure out the personalized messages, how to customize the preferences, how to appeal to them in a social way and how to digitize the shopping journey.”

The trick for retailers is to figure out how to use all the data they accumulate via digital channels and use it to create better in-store experiences and products.

“We have all heard the term data rich, information poor,” said Copland. “One client built a system where they thought they were targeting 25-year old females. It turns out 45-year old females were buying the product.”

Copland tells a hypothetical story about a retailer that sells fitted suits and menswear. One time, the retailer messed up the measurements of a suit that led to frustration by the customer. Right now, when that customer comes back, the store has no way of really knowing the previous interaction the brand had with that shopper. The opportunity for the sales representative to have a conversation with the customer has been lost.

“Understanding point-of-service over point-of-sale. It is different. Because then it is a conversation,” said Copland. “Very different than a guy coming in and saying, hey, we are running 30% off suits.”

Shoppers have many options these days. Big department stores are not necessarily the answer anymore. Retail has become more niche specific and product oriented. Retailers that survive will be the ones that have learned to retool the backend systems and integrate front-end digital data to create a unique in-store experience. An experience that differentiates the retailer from the mass of staid and boring shopping experiences they have had their entire lives.

“Retail needs to retool. Underpinning those things we think there are a few key tenets in terms of understanding that customer contextually,” said Copland. “So it is no longer just having all the analytics and seeing that Suzy, she is a mother of two … it is more than that. It is understanding what we call purpose over place. What is her intent? What is her implied intent you can intuit from her prior behavior?”