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What retail technology can save brick & mortar?

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Moda Pacific - Jaime Syjuco - PhotoIn this post, Jaime Syjuco, Managing Partner of Moda Pacifica – licensee for Havaianas in Singapore – gives an overview of which retail technology can improve the performance of brick and mortar stores. This is re-posted with permission from LinkedIn.

Last post, I spoke about how brick & mortar retail is in peril, and my quest to save it by rapidly testing technologies over the next 2 years, sharing my results along the way.

To kick this off, the first topic to tackle is: WHICH technologies should I test?

To derive this list, I will speak about:

  1. What’s wrong with my old retail tech?
  2. The problems of NEW offline retail.
  3. Which retail technologies will fix my new retail problems?

What was wrong with my old retail technology?

Nothing.

Up until 2013, nothing was wrong with my old retail tech.

Those were great days.

Using my old retail tech, we became best-in-class offline retailers. Our volume and revenue per square foot exceeded all other brands in our category. This allowed us to negotiate prime locations, which continued the virtuous cycle of “better location = more customers = getting even better locations…”. In fact, our locations were so prime, that we were the only retailer of our brand in the world that could boast a location beside a main-floor Chanel store. And our technology was critical in achieving this.

Our technology back then included:

  • Backend: ERP, Stock Mgmt, Inventory visualization & allocation, Visual merchandising tools.
  • Frontend: CRM, POS, customer service surveys, store traffic counters, heat maps, dwell counters, beacons, data analytics, digital screens and projectors, in-store social networking apps.
  • Digital Marketing: email, eCommerce, click-and-collect, social networking, online presence and digital campaigns, coupons & promos.

It wasn’t simple to do, but in our 13 years of offline retail business, we had the luxury of undisrupted time to optimise our business.

Today we are still a perfectly optimised offline retailer. We know this because we constantly benchmark against other industry leaders. Our store visitors, conversion, revenue, customer service, repeat customers and customer satisfaction are all at or above industry standard. Cost performance is optimised, exhibiting at or above industry metrics for sellthrough, GMROI, occupancy rate, staff performance and marketing returns.

If Nigel Tufnel of Spinal Tap would have said it, we are performing “up to 11” against our peers.

Until the future arrived in 2013.

The Problems of NEW offline retail

NEW offline retail is completely different than the old.

And the problem is, our old technology only allows us to optimise against the “old retail equation”.

Simplified and rounded up, the industry-average old-retail equation looks like this:

  • Revenue = 100%
  • Cost of Goods 50% + Overstock clearance 5% = 55% total cost of goods
  • Rent = 20%
  • Labour = 10%
  • Marketing & promotions = 5%
  • Investment Amortisation = 5%
  • Store net profit = 5%

(note: the above cost of goods numbers are for retail licensees, who purchase stock from the Brand Principal. If you are a Brand Principal and are vertically integrated, your cost of goods is lower, but you’ll have to run your own offline retail.)

In the old world, with this working equation of a steady and replicable single-digit net profit, a retailer can expand a store network (we now have 60+) to saturation, build the operating, support and marketing systems, and make a steady return from store investments.

However, in this new world today:

  • Number of mall-goers are sliding (numbers today indicate >-30% in some markets and still dropping).
  • Shoppers no longer consume print communications (hence we no longer do print).
  • Shoppers no longer read marketing emails (used to be 2%, now much less).
  • Shoppers consume more user-generated shopping content than they do company direct-generated content.
  • Shoppers don’t come back if they don’t find it first time at your store.
  • Finding discounts is easier online from parallel importers.
  • Shopper use of mobile has surpassed all other forms of communication, and soon transactions.
  • eCommerce + A.I. can generate and communicate recommendations at a relevancy, rapidity, scale and scope far beyond what offline can.

The scary realisation I’m having is this: Even if I’ve fully-optimised the old-retail equation (like we have at Nigel’s “11”), and have optimised all the necessary old technologies (like we have), the elephant in the room is the NEW equation. The new equation is now “at 20”, and incrementally improving my retail store performance from “11” to “12” wont work. No amount of incrementally better customer service, better pricing, better merchandising, better marketing, better customer experience nor better locations is going to get me to “20”.

By now, offline retailers have reached their full old-retailer potential. Incrementally improving what we’ve already been doing for decades can’t save old retail.

Which retail technologies will fix my new retail problems?

 Short Answer: Whichever ones will allow us to again optimize “to 20”.

Sticking to the retail store investment equation, this means a MAGNITUDE OF 2X is needed to evolve our retail stores and make them viable investments again.

Why 2X?

Going back to the retail store investment equation, if we assume:

  • Mall-goer traffic to drop further to 50% (by both lower attendance or retailers moving stores to cheaper-rent-lower-traffic locations)
  • Improvements to Cost of goods, labour and marketing effectivity to only increase between 5% to 10%.
  • Store build-out costs and Rents relative to revenue will stay where they are.

Then the maths indicate in the medium term we need to generate up to 2X more revenue from 50% less store visitors to maintain brand-positive locations AND make stores financially viable.

Therefore, my approach will be to focus technology testing on specific Variables of the NEW equation:

  • Revenue = Traffic x Conversion x Units x Price
  • Cost of Goods = sellable stock + missed sales + overstock
  • Rent = (Passerbys x Capture) + Destination Shoppers
  • Labour = recommendations x conversion
  • Marketing = audience x capture
  • Investment Amortisation = Store fitout + stock + technology

The result is my list of 17 variable-targeted technologies to test over the next 2 years:

  • Revenue = A.I. smart recommendation displays, Mobile ecommerce, demographic cameras.
  • Cost of Goods = Integrated inventory management, A.I. smart ordering, merchandising and allocation.
  • Rent = Smart A.I. windows, Drive-to-store mobile apps.
  • Labour = A.I. enabled staff recommendations, Mobile training & staff gamification.
  • Marketing = Integrated CRM & Gamification, POS data capture, Mobile Apps, Data Analytics, Business Intelligence, Offline-2-Online, Online-2-Offline
  • Investment Amortisation = Integrated Open sourced Cloud platforms

Dear reader, my apologies for the maximum verbosity setting, but it’s important we tie the upcoming tests to specific variables, allowing me to report their success / failure and subsequent pivot / persevere next steps.

Whichever variables we can affect 2X can save offline retail. The rest will just be incremental…but we will also learn from them.

My next post will answer the question:

  • How do we plan to implement these projects rapidly, cheaply and with minimal impact on our organization and wallet?

Until then, in the spirit of dinosaurs and evolution, I leave you with a quote:

“Increasingly, the mathematics will demand the courage to face its implications.” Michael Crichton, Jurassic Park

Syjuco is set to join more than 200 other e-commerce, retail and payments professionals speaking at Seamless Asia. For more information, download our brochure here, or go right ahead and register here.

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