When the internet bubble burst in late 2000, few retailers expected cyberspace to grow in relevance for them over the near term. In fact, just the opposite has occurred. E-commerce and multi-channel retailing have become ever-more important as top- and bottom-line retail drivers. Compound growth rates of e-commerce sales have been consistent at 25 percent to 35 percent, even though the channel's percentage of total retail sales remains relatively low--around 2.5 percent in 2005, according to the U.S. Department of Commerce. At the same time, the proliferation of in-home broadband connectivity, coupled with improved search engines like Google, has created an enormous jump in internet usage for product research and discovery. For all practical purposes, if a retailer doesn't have an internet presence, the retailer doesn't exist.
Best-in-class retailers typically operate in three channels: stores, the internet, and call centers/catalogs. While these retailers may operate in three channels, the internet and call centers support the stores rather than replace the in-store shopping experience. Stores remain the predominant delivery vehicle. Indeed, the below-average performers who responded to an Aberdeen survey in October and November 2005 tend to rely solely on stores or primarily on the internet as their primary selling channel.
Even those retailers who are achieving best-in-class sales performance have a long way to go in adopting the multi-channel best practices. While some may be successful "bruting" their way to multi-channel effectiveness on today's relatively small scales, as cross-channel buying and delivery increases as a percentage of total sales, more and more money and productivity will be squeezed from their enterprises. Worse, they could find themselves with dissatisfied, disappearing customers, and affecting their top-line sales growth as well.
The good news for today's sales laggards is that they clearly have the opportunity to leapfrog the competition by adopting best practices and technologies. The best-in-class are vulnerable. The field of multi-channel play is wide open. Today's best-in-class multi-channel leaders are particularly vulnerable to laggards who take aggressive steps to get their houses in order.
|The Aberdeen Competitive Framework defines enterprises as falling into one of the following three levels of sales performance:|
• Laggards (25 percent) - practices that are significantly behind the average of the industry
• Industry norm (37 percent) - practices that represent the average or norm
• Best in class (39 percent) - practices that are the best currently being employed and significantly superior to the industry norm
Wall Street and boards of directors alike have always measured retailers by a straightforward yardstick-they expect year-over-year comparable sales to increase beyond the rate of inflation. The better the sales increases, the greater the applause. Calculations used to be simple: For brick-and-mortar retailers, it was all about comparable store / sales increases, and catalog retailers were measured on sales for similar offerings or books. When the internet and e-commerce came along, metrics got a bit distorted. Wall Street and other investors viewed the internet phenomenon as a marketing land grab, and seemed to measure a company's value based on how many marketing dollars it could spend, rather than on how much revenue it could generate.
Times have changed, and in some ways, what was old is new again. Once again, retailers are measured on their year-over-year comparable sales. In all Aberdeen benchmark reports, retailers are held to a similar standard. Given that comparable sales increases average 3 percent per year, Aberdeen defines that as the norm. Enterprises whose sales increase more than 3 percent are deemed "best in class" while those whose sales results are lower are considered "laggards."
Yet, in other ways, an irrevocable change has come to retailing.
The internet boom has morphed into the multi-channel phenomenon, and that phenomenon has brought new challenges to global retailers.
Retailers have gotten part of the message. Selling through more than one channel is a fact of life for 86 percent of survey respondents. While this creates daunting challenges for today's retailers, it also creates new opportunities. The good news is that more than half of retailers find multi-channel buyers more profitable than their single-channel shopping counterparts. The bad news is 22 percent still don't know, or can't even tell, how profitable their multi-channel customers are. This number has come down only slightly from the 25 percent that reported lack of knowledge in Aberdeen's 2004 multi-channel benchmark study.
Whether or not they realize the opportunity associated with a consistent cross-channel message, retailers viscerally understand customer expectations for a seamless cross-channel experience. They cited this as the most critical factor driving them to integrate their retail operations. Unfortunately, most retailers don't seem to really understand the consequences of inconsistency. Customer intolerance of mistakes and miscues ranked at the very bottom of external forces driving multi-channel initiatives.
A slightly higher percentage of best-in-class retailers (again, those whose comparable sales outperform those of their peers) have a better understanding of the risk of alienating their customers (18 percent).
Best-in-class enterprises typically respond to the pressures they face with visionary strategic actions, new day-to-day capabilities, and enabling technologies to support them in their goals. The multi-channel retailer has thus far demonstrated himself to be a bit different.
This retailer focuses on operational excellence, ensuring that, "by hook or by crook," the consumer will see the same information across all channels, orders will be fulfilled seamlessly, and pricing and messaging is consistent.
Even the best-in-class have a long way to go in gaining efficiencies in the multi-channel operations. These efficiencies might not drive immediate top-line increases, but they would most assuredly drive bottom-line improvements.
Although these best-in-class retailers operate in three channels, the internet and call centers support the stores rather than replace the store shopping experience. The internet has taken its place as a critical point of product discovery and price-comparison shopping while stores remain the predominant delivery vehicle. Indeed, the below-average performers tend to rely solely on stores or primarily the internet as their primary selling channel.
Best-in-class retailers understand the "brand" value of a multi-channel offering: consistency and efficiency across all the channels. Top performers wrap their brand identity around fulfilling customer expectations for seamless purchase and delivery options across channels. They ensure product information and pricing is up to date and consistent across channels. Their over-arching strategy is to create a single-brand identity across channels.
Whereas below-average performers tend to worry that order, inventory and customer data is not integrated or shared consistently across all channels, above-average multi-channel retailers resolve this concern through an integration strategy where product information is entered into one channel system of record and moved electronically into other channels.
|Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows:|
Pressures - external forces that impact an organization's market position, competitiveness, or business operations
Actions - the strategic approaches that an organization takes in response to industry pressures
Capabilities - the business process competencies required to execute corporate strategy
Enablers - the key functionality of technology solutions required to support the organization's enabling business practices
Best-in-class performers are more concerned about channel conflict than their competitors are, and take specific organizational steps aimed at ensuring conflicts do not occur, including a much stronger emphasis on changing the organizational structure to be brand- rather than channel-specific (compared to average and below-average performers).
However, this does not mean that leaders are complacent about information integration across all channels; more than half of best-in-class retailers plan to implement new cross-channel content management and product information management systems in the next year.
According to survey responses, most multi-channel retailers are primarily concerned with lack of data integration between channels and don't feel they can adequately address these issues due to spending constraints. Not surprisingly, these retailers fall back on internal prioritization of needs and ROI analysis in hopes of generating the executive support needed to address these issues.
Somewhat surprisingly, given multi-channel retailer recognition of the need to show a unified "face" to the customer, cultural issues continue to dominate internally as the dominant channel continues to fear cannibalization of sales. However, in this key area of concern, they do not see aligning of incentives as the best way to address these issues.
Rather, these retailers lean toward bringing in outside expertise to help the company overcome organizational and process barriers. Efforts to improve cross-channel collaboration will fail without aligning incentives to brand rather than channel success.
Best-in-class multi-channel retailers, on the other hand, respond in different ways to these perceived challenges. Changing the organizational structure to be brand-specific is second in importance only to developing a plan for prioritizing integrated multi-channel data management strategies, and outsourcing programming to improve system integration is more important that bringing in outside expertise to drive process change. Moreover, since organizational structures are aligned to be brand- and not channel-specific top performers don't place much importance on changing incentive structures. This suggests that behavior change needs to be addressed organizationally first, before incentives.
Over time, retailing winners differentiate themselves in five key areas: the business processes they adopt in their enterprises to support new ways of doing business; the organizations they put in place; their management of data and knowledge in support of their business strategies; the technologies they employ; and their frequency of measurement of the success of their initiatives. Certainly, none of these practices will replace the requirement to stock merchandise customers want, but they will help retailers become more effective at satisfying those customers with required customer service options. Very few retailers have such unique product mixes that they can afford to ignore the customer service imperative.
While more than a third of best-in-class and average performers are "getting by" in entering product and customer information into each channel separately, a majority of laggards (57 percent) are finding themselves falling further behind using this methodology. Similarly, a greater portion of laggards (21 percent) rely on outside service bureaus to "de-dupe" redundant customer information. A retailer must be in control of its own destiny and its own customer database.
The process used most commonly by best-in-class performers to synchronize product information is more effective than redundant data entry, but still inefficient. Forty-three percent of best-in-class retailers enter product information into one system and move it electronically to other channel systems, while only 19 percent of the best in class have one version of truth (a single database) for both product and customer information.
The most common organizational structure for the best in class is a single IT organization supporting separate user organizations. While this may be effective in today's world, the challenge of perceived channel cannibalization described earlier will not be overcome until these firms move to the best practice of creating a single user organization supporting a single brand.
Laggard performers clearly do not take advantage of customer information. All too frequently, they don't make it available at all. This is one very clear problem that must be addressed quickly.
While the best in class also must make improvements to make their customer information available across all channels, laggards are at a distinct disadvantage. Clearly they recognize this weakness, as 64 percent of respondents report plans to implement real-time updates of customer and product information, the foundational element required to take full advantage of available technologies.
In general, frequency of measuring the value of multi-channel initiatives was disappointing across the board, with very little difference between best-in-class and laggard performers.
More retailers opt to measure this performance on an ad-hoc basis (35 percent) than through any formal annual, quarterly, monthly, weekly, or real-time plan. We expect the percentage of formalized performance measurements to rise as the overall sales volume generated across multiple channels also rises.
On a positive note, while the frequency of measurements may be at issue, for the most part, the quality of the key performance indicators used to measure results is excellent. In this one area, retailers have moved beyond the metric of year-over-year comparable sales to looking at average transaction value and customer retention.
Somewhat disappointing, however, was the limited importance retailers give to on-time delivery, which was rated as important so rarely it literally fell off the chart. Only 3 percent of the retail respondents felt this was a top three performance indicator. This is yet another indicator of retailers' underestimation of customers' lack of tolerance for mistakes and miscues. Even more disheartening, this survey was conducted in the autumn, at the height of the holiday selling season.
Most firms generally experience similar external pressures. Winning enterprises are defined not by the pressures they experience, but by how they respond to those pressures.
In essence, retail performance is not just an accident, nor is it solely the result of a merchant with a hot hand. There is a clear relationship between performance and a retailer's responses to the pressures it experiences. Readers are encouraged to evaluate their own organizational priorities as a benchmark and to help create plans for actions going forward.
The industry-wide disconnect between recognizing the importance of a seamless cross-channel experience and the consequences of NOT providing that experience opens the field of play for new entrants. Today's best-in-class leaders are vulnerable to laggards who take aggressive steps to get their technology houses in order in anticipation of rapidly increasing customer demands. Multi-billion-dollar retailers are vulnerable to midmarket upstarts.
Retail respondents indicated they are ready to make these technology investments. Laggards expressed almost equal interest as the best in class in many technology areas, and actually outpaced them in plans for distributed order management systems, real-time inventory and customer updates, and cross-channel content management.
Of course, technology investments alone have never been a panacea for enterprise ailments. Cultural and business process changes are also required. With that in mind, the following actions are recommended to help spur necessary performance improvements:
Laggard Steps to Success
1. If you haven't put a multi-channel strategy in place, do it now. Multi-channel retailing is a necessary part of any retailer's portfolio. If the expense and effort of creating your own shopping site is daunting, vendors are available to provide hosted e-commerce solutions.
2. Make sure your organization is aligned by product, not by channel. In the survey, only 38 percent of laggards indicated this as a critical response to the challenges they face, versus 60 percent of best-in-class respondents. This change in mindset is as critical for multi-channel retailers as any technology initiative.
3. Establish performance metrics by brand, rather than by channel. This corollary to the previous step was another clear differentiator between best-in-class and laggard retailers. The day-to-day capability to measure overall brand performance without fear of cannibalization is critical to move up the ladder of multi-channel success.
Industry Norm Steps to Success
1. Consider outsourcing programming to improve system integration. The number of retailers who contemplate using outsourcing to solve their technology integration woes was significantly lower for retailers at the norm than for either laggards or best in class, despite their acknowledgment of the pain associated with the costs. Outsourced programming is a viable alternative for budget-strapped retailers.
2. Prioritize initiatives to improve cross-selling and promotional capabilities. Surprisingly, retailers at the norm, with average comparable sales improvements, assigned a very low priority to initiatives in this area. Half of best-in-class respondents rated this as a key strategic initiative, versus 19 percent of average performers.
3. Escalate timing of initiatives to implement distributed order management systems. Retailers at the norm expressed interest in implementing distributed order management within two years, while both the best-in-class and laggards were more bullish, indicating investment within 12 months. Postponing these initiatives will require higher inventory investments to fulfill customer orders as multi-channel activity continues to rise.
Best-in-Class Next Steps
1. Prepare for continued growth. As multi-channel retailing becomes a larger percentage of a retailer's portfolio, more automation will be required. With the right organization in place, the best in class are well-poised to achieve economies of scale through automation.
2. Look behind you-laggards are making changes. Our data clearly indicates the tenuousness of the current best in class. In addition to increased customer retention and higher incidence of first-call resolution, taking the above steps can directly impact a company's overall costs, revenues, and profitability.
|Between October and November 2005, Aberdeen Group and Retail Systems Alert Group examined the multi-channel practices, technologies, procedures, experiences, and planned initiatives of more than 60 retailers. Executives completed an online survey that included questions designed to determine the following:|
• Number of retail channels in use and profitability of each;
• Current and planned use of various applications to support cross-channel brand, customer, order, and delivery management; and
• Business challenges and pressures these retailers face that drive or impede adoption of new initiatives.
The intention was to determine whether and how each of the above created competitive advantage for retailers that use them and a disadvantage for those who do not. From there, emerging best practices were identified and a framework was provided by which readers could assess their own capabilities and ways to improve effectiveness.
Responding enterprises included the following:
• Job titles/functions: The research sample included respondents with the following job titles: senior management, including CEOs, CFOs and COOs (10 percent), vice presidents (7 percent); CIOs and other IT leaders (17 percent); directors (27 percent), managers (25 percent), and internal consultants and staff (14 percent). Functional areas represented included marketing, merchandise management, logistics/supply chain, finance, store or field management, and procurement.
• Retail segments: The research sample included respondents from across the retail spectrum. The majority of respondents (57 percent) were specialty retailers, including 46 percent from small-box specialty retailers (each store in the chain having a footprint of less than 10,000 square feet) and 10 percent from large-box specialty retailers (each store footprint generally more than 10,000 square feet). Fast-moving consumer goods companies represented 16 percent of the respondent base, including supermarket, convenience stores, chain drug and warehouse stores. Department stores and mass merchants represented 17 percent of the respondent base. The remaining 10 percent came from hardware and do-it-yourself, furniture, and hospitality.
• Company size: About 41 percent of respondents were from large enterprises (annual revenues above $1bn); 35 percent were from mid-sized enterprises (annual revenues between $50m and $1bn); and 24 percent from small businesses ($50m or less).
Figure 1: Relative Profitability from Multi-Channel and Single Channel Customers (PDF)
Figure 2: Top Three Pressures Driving Retailers to Integrate Multi-Channel Initiatives (PDF)
Figure 3: Planned Multi-Channel Technology Investments Over the Next 12 Months (PDF)
Paula Rosenblum is director of the Retail Research practice at Aberdeen Group, Boston, Mass., www.aberdeen.com.
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