Commentary: Why retail must differentiate or die

This article was written by retail educator Dr. Chris Petersen, who will be leading a session at this year's Retail Customer Experience Executive Summit. You can get up-close access to Chris and all of our educators in this intense day-and-a-half event, August 13-14 in San Diego.

Today, we as consumers have unprecedented choice in where we shop, how we shop and when we shop. If you are mostly concerned about finding a good deal, you have the tremendous flexibility of being able to comparison shop across regular and virtual stores. In fact, you don't have to shop in a store at all. An app can search out the best deal and where to procure it. The days of "lazy merchandising" of merely putting products on shelves are gone.

So what's changed in retail?

A retail channel is typically defined as:

A group of similar, competing retailers, carrying similar assortments of products attempting to serve similar consumer segments or groups.

The US "consumer electronics" (CE) channel was historically composed of retailers like Circuit City and Best Buy. If you go even further back in history, Sears was one of the dominant retailers in the consumer electronics channel. Before Walmart, Sears sold a very high share of US home electrical products like TVs, stereos, small and large appliances.

So what changed? No one stays in their historical channel any more. DIY home improvement centers now sell a wide assortment of major appliances for the home and have captured a significant share. The largest mass merchant in the world, Walmart, now sells many of the same electronics as Best Buy. And, the Internet darling Amazon has crossed into everyone's channel, and now competes on everything from books, to shoes, to consumer electronics. These days it's very tough to be just an assortment specialist.

In the 90s, mass merchants and large format retailers absolutely dominated on a combination of two key differentiators: breadth of assortment, and price. Toys 'R Us became the category killer and shopping preference for moms looking for a place that had everything related to children's items. Best Buy became the destination for consumer electronics based on assortment and location. But Walmart created the ultimate "big box" differentiation by combining amazing breadth of assortment coupled with low prices in thousands of convenient locations.

The "long tail" assortment of Amazon offers consumers literally millions of products. E-commerce collectively offers the lowest prices anywhere. And, no store location can beat the convenience of home shopping and home delivery. While Walmart can still dominate bricks and mortar retailing on assortment and pricing at over 4,000 US locations, e-commerce essentially now dominates the differentiators of assortment, convenience and low price.

The "secret sauce" in retailing today is differentiation beyond products

If retailing is only about finding products at a best price, then it's game over. There are only two clear winners in assortment/price/location differentiators. Walmart's store base and infrastructure enable them to compete very effectively on product and price in an omni-channel world. Amazon has the proven ability to take market share based on assortment breadth, price, convenience and service. Traditional bricks and mortar retailers simply cannot win the "race to bottom" in competing on price or selection.

Apple has literally rewritten the book on retailing by focusing on the differentiators that holistically create value around consumer experience:

  • They build iconic open space store formats where consumers mingle.
  • They simplified (and even patented) a simple, clean merchandising design.
  • They hire staff with a different profile and then invest extensively in training them on how to interact and engage consumers (not training them in "how to sell").
  • They load their products in store with a wide variety of content and connect them to the Internet so that consumers can experience them the way they would use them.

Apple's success is twofold: 1) they have focused on differentiators that create experience consumers value and 2) they have focused on the intangibles that are hard to copy. The bad news for retailers looking to quickly fix the balance sheet is that the hard-to-copy stuff, like talent and training, are also the ones requiring a lot of work, time and investment. However, while it's quick and easy to reset store shelves and change prices, today's consumers are responding to other differentiators.

Small retailers can thrive if they differentiate value for today's consumer

Big retailers with big stores were better suited to compete on assortment and price before the consumer shift to online shopping. The race to the bottom to compete on price erodes margins. This is a dangerous recipe for big box stores which are very expensive to operate.

There is little doubt that e-commerce will continue to thrive based on differentiation through assortment, price and convenience. What is more exciting to watch are the retailers who are now beginning to thrive based on differentiating through staff, new services and creating levels of consumer experience. The smaller, more agile retailers may in fact be in the best position to use new technology and media to create new levels of differentiation:

  • Check-in technology enables retailers to literally find consumers in their area.
  • Instead of blasting low prices in circulars, retailers can offer targeted mobility offers.
  • Good retailers always have and will continue to differentiate through engaging consumers in experience and offering new levels of personalization.
  • CRM enables stores to follow up, personalize service and create repeat traffic.
  • And, traditional retailers like Best Buy and Staples have found that consumers will shop at stores with services that make their gadgets work (and by the way those services are in many cases more profitable than the margins on the products).

In retail, it's always the results that count. In the glory days of big box retailing, it was moving volume sales at low prices to attract consumers. E-commerce will definitely be able to do that profitably. Amazon and others will own those differentiators. If brick and mortar stores don't differentiate beyond products at a price they will most surely die one click at time.

(Photo by Brad Greenlee.)

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User Comments – Give us your opinion!
  • james cage
    24914049
    Interesting article. E-commerce has taken retail business to next level. Retailers need to analyze and adapt their marketing strategies to stay ahead in business. Read an interesting whitepaper on this very topic that readers will also find very useful “Thinking about tomorrow: Post recession strategies for retailers” @ http://bit.ly/10XoIQa
  • A E
    23661220
    How does the customer differentiate? Big box, Ecommerce .. The biggest differentiater is the customer service that is offered in any retail commerce and success will be to those who can leverage this in the dynamics of consumer preferences.
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