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[REPORT PREVIEW] Leading Trends in Retail Innovation


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[REPORT PREVIEW] Leading Trends in Retail Innovation

  1. 1. LEADING TRENDS IN RETAIL INNOVATION Insights from Some of the Most Progressive Retailers Changing the Game MAY, 2018 BY BRIAN SOLIS RESEARCH REPORT PREVIEW VERSION
  2. 2. 2 Table of Contents 3 Executive Summary 4 Retail in Crisis: “A Day of Reckoning Is Coming” 7 Changing Consumer Behavior: A Threat and an Opportunity 10 Why Retailers Struggle to Respond to Changing Consumer Behavior and Digital Disruptions 12 The Intertwined Fates of Malls and Retailers 14 How Innovative Retailers Stay Ahead 14 Innovative Retailers Map an Overarching Customer Journey to Create a Consistent Cross Channel Experience 19 Investing in Rich Customer Data Allows Leading Brands to Zero in on Where to Innovate 21 Successful Retailers Prioritize Connected Customers Over Traditional Ones 26 Leading Retailers Operate Innovation Labs to Explore Future Retail Strategies 32 Acquiring the Right Skillset Allows Successful Retailers to Appeal More Effectively to Evolving Consumers 34 Conclusion: The Future of Retail is Here and Evolving 35 Methodology 35 Ecosystem Input 36 About Brian Solis, Principal Analyst 36 About Altimeter, A Prophet company
  3. 3. 3 Executive Summary Judging by media headlines reporting the staggering number of store closures, the current state and future of the retail industry is bleak. The shopping habits and behaviors of consumers have changed significantly with the rise of e-commerce and mobile technologies, leading the retail market to undergo radical transformation in the relatively short span of 20 years. But burdened with mounting debt, retailers have struggled to compete in this new world. They lack digital expertise. They lack a deep understanding of the evolving customer. And they fail to make the investments necessary to innovate, while their competitors continuously churn out new innovations that change the game for everyone. To understand the state of retail innovation, we interviewed 12 top retail executives at some of the industry’s most- recognized brands. We set out to learn how leading retailers are responding to digital disruptions — and staying ahead of them. We also aimed to uncover the challenges they face and the strategies that are making an impact. Our interviews and third-party research showed that retailers engage in these five strategies: • Constantly map the customer journey to create smooth cross-channel customer experiences; • Engage in deep consumer research; • Prioritize innovations that target the connected consumer; • Invest in formal innovation programs; and • Cultivate the necessary digital skills across the organization. Retailers today understand that customers and disruptive technology have changed the game and continue to do so. While they know innovation is the answer, how to innovate, consistently execute, and evolve continue to elude many of them. The insights from some of the most- successful retailers can offer guidance on how to stave off disruption and keep pace with an evolving retail landscape.
  4. 4. 4 Retail in Crisis: “A Day of Reckoning Is Coming” Over the past few years, the term “Retail Armageddon” has been frequently invoked to describe the state and future of retail. The media coverage of bankruptcy and store- closing announcements, as well as the predictions from experts, have certainly fueled doomsday hysteria. In 2017, Glen Kacher of Light Street Capital Management hedge fund warned, “The retailing industry is going to be an apocalypse.” 1 And Charlie O’Shea, a retail analyst for Moody’s, shared a similar grim outlook for the future of retail in a Bloomberg report: “A day of reckoning is coming.” 2 To be fair, the number of store closures in the U.S. (and around the world) is staggering and gives credence to these apocalyptic predictions. In 2017, retailers closed approximately 9,000 brick-and-mortar stores.3 This was a significant increase from 2016, when only 2,056 stores closed down, and from 2015, when that number had soared to 5,077, according to a research report published by brokerage firm Credit Suisse. “Barely a quarter into 2017, year-to-date retail store closings [had] already surpassed those of 2008,”4 the report stated. In 2018, the number of store closures is expected to dramatically soar to more than 12,000, according to real estate firm Cushman & Wakefield.5 But there’s more to the retail-industry story than what these numbers might suggest. 1. 2. 3. 4. 5. Major Chain Store Closures 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 2 0 1 9 M A J O R C H A I N C L O S U R E S F O R E C A S T M A J O R C H A I N C L O S U R E S C U S H M A N & W A K E F I E L D
  5. 5. 5 After all, U.S. retailers (not including grocery stores and restaurants) also announced more than 3,000 store openings in the first three quarters of 2017.6 While the number of closed-versus-open store signs that will be hung this year represents a jaw-dropping four- to-one ratio, the number of store openings shows that physical stores still matter. Eighty-five percent of retail sales are still made in physical stores today. According to U.S. government data,7 for example, retail and food service sales totaled $4.78 trillion in the U.S. during the first three quarters of 2017. In September 2017, sales hit $484.4 billion, which represented a monthly record high. And during the first week of November 2017, Walmart and Home Depot shares also hit record highs, with Home Depot raising its full-year profit and sales forecasts. So long as consumers continue to visit physical stores, retailers continue to invest in them.’s opening of its Amazon Books physical bookstore and Amazon Go convenience stores — and its surprising $13.7 billion8 acquisition of Whole Foods in August 2017 — also point to the promise of brick-and- mortar retail. 6. Source: ICSC Research Team and PNC Real Estate Research, Image: Bloomberg, “America’s ‘Retail Apocalypse’ Is Really Just Beginning,” 7. 8. Annouced Store Openings and Closings Excluding Grocery Stores and Restaurants 20,000 15,000 10,000 5,000 0 S O U R C E : I C S C R E S E A R C H T E A M A N D P N C R E A L E S T A T E R E S E A R C H 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 C U M U L A T I V E C L O S I N G S C U M U L A T I V E O P E N I N G S
  6. 6. 6 While the next several years might bring what could be the largest number of retail bankruptcies and store and mall shutdowns on record, to call the state of the retail industry an apocalypse is largely a misnomer. The shuttering of stores is not the end of retail. It’s the end of retail as we used to know it. Digital technologies have disrupted how people behave and consume, creating, without a doubt, a crisis for retailers as they rush to keep pace with evolving online shopping trends. Michael Sapir, CEO of ProShare Advisors, forewarned, “A minority of brick and mortar (retailers) will be able to make the transition [to online retail], and it is going to be expensive and painful.” 9 Shifting consumer trends offer the same opportunities to every retailer. In our era of digital Darwinism, natural selection will favor bold retail innovators, like Amazon, Walmart, Target, and Sephora, that adapt more readily to these changes. 9. “A minority of brick and mortar (retailers) will be able to make the transition [to online retail], and it is going to be expensive and painful.”
  7. 7. 7 Changing Consumer Behavior: A Threat and an Opportunity Over the past two decades, the behaviors, preferences, and values of consumers have been changing as a result of their access to digital devices, social media, real-time connectivity, and new online shopping experiences. What consumers once considered the standard for how they shopped — dedicating time to visit their favorite stores and browsing for new products and trusted brands — has evolved, creating new norms in the process. “People get used to on-demand retail, Amazon conveniences, mobile phones, and so on,” Scott Emmons, Head of Innovation Lab (iLab) at Neiman Marcus, shared with us. As they get a taste of these new experiences, it’s hard for them to go back to shopping as usual. Consumers today are more informed, empowered, discerning, demanding, impatient, and elusive. With a simple online search, they have near-limitless access to product choices, information, and prices. They can instantly plug into the “wisdom of the crowds,” accessing online reviews and sharing experiences. With such a massive amount of information, they are more discriminating than ever about what brands they buy and how much they are willing to pay for products. They have also grown accustomed to the ease of online shopping, as well as the speed of delivery and on-demand access that the best e-commerce sites offer. They now insist on these conveniences — plenty of choices, competitive pricing, and rapid transactions — in all of their shopping experiences, including in-store ones. And as they focus their attention on their social networks and mobile apps, it’s harder than ever to reach them with traditional advertising and marketing. The rise of e-commerce has birthed a generation of digital-first consumers — consumers for whom the preferred and only channels to discover and buy products are digital. “ The reality is that the online channel has massively disrupted consumer patterns,” Julie Bornstein — a retail industry executive with experience at Stitch Fix, Nordstrom, Sephora, and others — concluded. “People aren’t spending as much time going into stores.” Now, the pervasiveness of mobile devices and commerce apps has further disrupted consumer behavior. As consumers set out to make decisions about their next purchase, more and more frequently they’re reaching for the device closest to them — usually their smartphone. This has given rise to a generation of mobile-first and mobile-only consumers who mainly interact with brands and commerce via their phone, further reshaping how, where, and why consumers shop.
  8. 8. 8 With the swipe of an app or scan of a product barcode, mobile consumers have instant access to product and pricing information at their fingertips. Erich Joachimsthaler, Ph.D., founder and CEO of Vivaldi Partners Group, has written that mobile consumers behave “… ever more spontaneously, with short attention spans and short bursts of action. ... They shop in their spare moments; they search while on the go; they buy on a break by interacting primarily with their mobile phone.” 10 The ubiquity of online and mobile tools for product discovery, comparison, and purchase means consumers no longer view the brick-and-mortar store as a primary shopping destination but as one of many distribution points for all the brand options available. “Retailers are rushing to find the secret sauce of why consumers would be compelled to get into their cars and drive into a store,” Emmons noted. “There are too many good alternatives to the physical store as a ‘distribution center.’” This shift, in turn, has changed the dynamics of consumer loyalty. Charlie Cole, Chief Digital Officer and Vice President at Tumi, explained: “There might still be brand loyalty, but not at the point of distribution loyalty.” In the past, local retailers marketed and competed on the basis of “proximity”: The limited number of brands they made available, the physical convenience to shoppers, their hours of operation, and the design of their stores. These were the critical differentiators that earned a retailer consumer loyalty. As customers became familiar and comfortable with a retailer’s offerings, store layouts, and accessibility, they went back over and over again. But for connected consumers who can access a seemingly infinite number of brand choices at any time of the day without leaving their homes, competing on “proximity” may no longer be enough. Instead, today consumers extend their loyalty to brands that offer experiences, personalization, and services.11 This does not mean that consumers have given in-store shopping up. According to Marissa Tarleton, CMO of RetailMeNot and a self-described in-store shopper, “The retail-to-e-commerce ratio is not a signal of people’s interest in physical retail space.” The problem is that retailers have been slow to adapt to this new ratio. Emmons, agrees: “In-store shopping experiences have not evolved as quickly as what’s happening on the digital side of the world.” As much as changing consumer behavior threatens traditional retailers, it presents them with an opportunity to modernize their aging business models and invest in fresh, value-added experiences that are inherently appealing to connected consumers. 10. Erich Joachimsthaler, “The Flight of the Bumble Bee: Marketing in the Age of Micro-Moments,” LinkedIn, July 27, 2015 https://www. 11.
  9. 9. 9 SAMSUNG: Experience- First Retail “It’s not a store, but a new kind of place filled with ideas, experiences, and Samsung’s cutting-edge devices.” That’s how Samsung describes its innovative “837” concept location, situated in New York City’s Meatpacking District. Less of a store, more of a playground, “837” doesn’t actively try to sell visitors anything. Rather, it encourages them to explore, learn, and have fun. Visitors can try out the latest VR experiences and smart-home devices; take a photography class; drop-in on a lecture by high-profile thought leaders (like Arianna Huffington); or attend concerts with big-name lineups (like Gwen Stefani). Much like Apple envisions its stores as the “town halls” of tomorrow, “837” offers an interesting example of an “experience-first” retail future.