Professional Documents
Culture Documents
John Hagel III (co-chairman, Deloitte Center for the Edge) has nearly 30 years of experience as a
management consultant, author, speaker, and entrepreneur. He has helped companies improve per-
formance by applying IT to reshape business strategies. In addition to holding significant positions
at leading consulting firms and companies throughout his career, Hagel is the author of bestselling
business books such as Net Gain, Net Worth, Out of the Box, The Only Sustainable Edge, and The
Power of Pull.
John Seely Brown (JSB) (independent co-chairman, Deloitte Center for the Edge) is a prolific
writer, speaker, and educator. In addition to his work with the Center for the Edge, JSB is Adviser
to the Provost and a visiting scholar at the University of Southern California. This position followed
a lengthy tenure at Xerox Corporation, where he was chief scientist and director of the Xerox Palo
Alto Research Center. JSB has published more than 100 papers in scientific journals and authored
or co-authored seven books, including The Social Life of Information, The Only Sustainable Edge, The
Power of Pull, and A New Culture of Learning.
Tamara Samoylova (head of research, Deloitte Center for the Edge) leads the Center’s research
agenda and manages rotating teams of Edge Fellows. Prior to joining the Center, Samoylova served
as a senior manager in Deloitte Consulting LLP’s Growth and Innovation practice, helping mature
companies find new areas of growth by better understanding unmet customer needs, industry
dynamics, and competitive moves.
Kasey M. Lobaugh (principal, Deloitte Consulting LLP, chief retail innovation officer) is focused on
disruptive technology, innovation, and the strategies required for the next generation of retail. He
has spent over 18 years consulting for the world’s largest retailers. He leads strategy and implemen-
tation teams focused on transforming large retail organizations’ people, processes, and technologies
to support growth and scale at the intersection of digital and physical required in today’s radically
changing retail environment. Lobaugh serves on the board of directors for Shop.org and is co-chair
of the Cross Channel Consortium.
Neha Goel (research fellow, Deloitte Center for the Edge) is passionate about financial services and
payments in particular. As a consultant in Deloitte Consulting LLP’s Strategy and Operations prac-
tice, she has worked with banks, credit card companies, and insurance exchanges to develop and
implement new strategies that reflect the fast-changing landscape of the industry. She is especially
interested in harnessing mobile technology to improve customers’ experiences and relationships
with financial institutions.
Contents
Executive summary | 2
Conclusion | 31
Endnotes | 32
Acknowledgements | 36
Contacts | 36
The retail transformation: Cultivating choice, experience, and trust
Executive summary
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A report in the Future of the Business Landscape series
“Looking for something? Make a request again disrupted in the 1970s and 80s, this time
and we’ll find it for you,” promises Operator, a by big-box retailers. Over the next quarter
new shopping app, on its website. The service, century, club stores, category killers, and value
developed by Uber cofounder Garrett Camp players joined big-box stores to drive more and
and former Zynga executive Robin Chan, more smaller merchants out of business. Then,
offers a personalized, on-demand shopping at the turn of the century, as Internet access
experience that blends the benefits of virtual became mainstream, e-commerce retailers
and physical retail. The Operator app responds shook up the sector yet again. The level of dis-
to customers’ natural-language-based ques- ruption has been significant: By 2000, seven of
tions and requests with pictures and descrip- the eight largest US retailers in 1980 had filed
tions of suggested products. The customer can for bankruptcy, been acquired, or lost their
buy desired products automatically using a places as major industry players.2
credit card on file. Operator is now in private That’s a lot of change for one century. But
beta stage, with more than 85,000 signup each of the transitions described above was
requests.1 A wealth of such innovative sales driven by larger technological and social
models are expected to emerge as the retail shifts, and each led to fundamental changes in
landscape evolves. how people shopped. And every one of them
Operator is just one manifestation of what increased consumer choice while reducing
is arguably retail’s most fundamental transfor- consumers’ total cost in terms of money, time,
mation in a century-long string of changes. In and opportunity.
the early 1900s, retail was dominated by local Today, we are on the cusp of yet another
mom-and-pop stores, each providing its com- transformation. Technology improvements
munity with a highly personalized shopping coupled with shifts in consumer mind-set are
experience. Choices were limited by both shelf again changing the nature of retail. Consumers
space and the amount that shoppers could have more options, and both switching costs
carry home. The invention of the automobile and brand loyalty are low. To survive, many
increased the volume of items shoppers could retailers are finding ways to serve individual
carry on any one trip, contributing to the rise consumers in ways tailored to their needs
of larger general stores and department stores. and desires—transforming both their value
The postwar population boom and increasing propositions and their business models. The
suburban sprawl, supported by TV advertis- retailers most likely to survive the current
ing, prompted retail locations to consolidate shift are those that can provide a tremendous
further into indoor and open-air malls, strip variety of offerings while maintaining, or
malls, and mass retailers. The status quo was
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The retail transformation: Cultivating choice, experience, and trust
reviving, the personal touch of a mom-and- options for established retailers in light of these
pop corner store. changes, then describe small, smart steps these
This report explores emerging trends retailers can take to help position themselves
affecting both businesses and consumers, and well for the future landscape. Figure 1 provides
considers the ways these trends are manifest- a high-level view of the journey on which this
ing in the retail space. We will discuss possible report will take you.
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A report in the Future of the Business Landscape series
5
The retail transformation: Cultivating choice, experience, and trust
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A report in the Future of the Business Landscape series
The cost of computing power has decreased from $222 per million transistors
in 1992 to $0.06 per million transistors in 2012.
Foundational trends
The cost of data storage has decreased from $569 per gigabyte of storage in
1992 to $0.03 per gigabyte in 2012.
The cost of Internet bandwidth has decreased from $1,245 per 1,000 Mbps
in 1999 to $23 per 1,000 Mbps in 2012.
The compensation gap between the creative class and the rest of the
workforce has steadily widened over the past 10 years.
The economy wide return on assets (ROA) has declined over the last 47 years,
to a quarter of its 1965 level in 2012.
Source: John Hagel, John Seely Brown, Tamara Samoylova, and Matt Frost, 2013 Shift Index metrics: The burdens of the past,
Deloitte University Press, November 11, 2013, pp. 9-27, http://dupress.com/articles/the-burdens-of-the-past/.
Graphic: Deloitte University Press | DUPress.com
The Big Shift is measured and described through the 25-metric Shift Index, but it can be understood in
terms of two fundamental drivers:
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The retail transformation: Cultivating choice, experience, and trust
Sources: Top left: Maker Faire, “Maker Faire overview,” Makezine, http://cdn.makezine.com/make/sales/Maker-Faire-Overview.pdf, accessed
May 18, 2015; Kurt Wagner, “Part Disneyland, part Burning
rning Man: Maker Faire turns 10 years old,” Re/code, March 17, 2015, https://re-
code.net/2015/05/17/part-disneyland-part-burning-man-maker-faire-turns-10-years-old-qa/,
n-maker-faire-turns-10-years-old-qa/, accessed May 18, 2015. Top right: Matthew
Flamm, “Handmade goes big: Etsy nears $1B in sales,” Crain’s New York Business, January 18, 2013, http:www.crainsnewyork.com/arti-
cle/20120128/TECHNOLOGY/1301129904, accessed May 18, 2015; Michael Brush, “The hidden problems lurking in Etsy’s ‘feel good’ IPO,”
Fiscal Times, April 16, 2015, http://www.thefiscaltimes.com/2015/04/16/Hidden-Problems-Lurking-Etsy-s-Feel-Good-IPO,
.com/2015/04/16/Hidden-Problems-Lurking-Etsy-s-Feel-Good-IPO, accessed May 18,
2015. Bottom left: Kickstarter, “Pressroom,” http://www.kickstarter.com/press?ref=footer,
w.kickstarter.com/press?ref=footer, accessed January 14, 2014. Bottom right:
Hackerspace wiki, “List of hacker spaces,” https://wiki.hackerspaces.org/List_of_Hacker_Spaces,
h k /Li t f H k S accessed
d May
M 18,18 2015.
2015
illustrated, and in many ways foresaw, this fashion trends, from Dior’s New Look to the
explosion of options: “Now, with online dis- 1980s’ massive shoulder pads.
tribution and retail, we are entering a world of
abundance.”5 Potential implications
Such market fragmentation is affecting
common notions of trends and taste, says
for retailers
former New York Times fashion critic Cathy The rise of better-informed consumers,
Horyn. In a recent Atlantic article, Horyn along with product and niche proliferation,
admitted that she no longer knew what was is putting pressure on traditional retail roles.
trendy: “There is no single trend that demands Historically, retailers have served three main
our attention, much less our allegiance, as functions: inspiration, information, and sup-
so many options are available to us at once.”6 ply. However, where once consumers may not
Contrast this, say, to the ubiquity of earlier have had a precise idea of what they wanted
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until they saw specific items in stores, many of down. Retailers with high fixed-cost structures
today’s consumers (especially younger buy- (due to significant brick-and-mortar assets and
ers) get inspiration and information largely inventory costs), which compete using only
online—and are more likely to limit their inventory at hand, are increasingly losing out
interaction with retailers to obtaining already- to competitors with lower fixed-cost structures
selected items. A 2013 Ipsos survey ranked the and extensive product assortments. Rather
Internet as the primary source of new product than stockpiling inventory, many such retail-
and brand discovery for the Millennial con- ers fulfill demand only as orders are received.
sumer (ages 18–34), followed by discovery Business models tend to be rooted in few or
through friends and family.7 no brick-and-mortar assets, combined with
On Instagram, for example, younger con- on-demand fulfillment strategies that help
sumers share “outfits of the day,” collecting increase consumer value while decreasing total
“likes,” inspiring each other, and often creating costs (in terms of both price and time). For
demand. Product review sites such as CNET, example, Amazon operates at an approximately
Cars.com, and Amazon can equip shoppers 15 percent price markup, compared with an
with information long before they enter a retail average markup of 65 to 80 percent for appeal-
location or place an online order. centric retailers.8
The connected consumers who use these In this complex and evolving environ-
resources and communities are actively ment, retailers should fundamentally reas-
engaged. Through reviews, research, and sess both their roles and the way they create
cocreation, they are actively shaping the brand value for consumers. The retailers that will
messages of the products they consume. be most effective in today’s marketplace will
At the same time, the supply role of retailers likely be those that fundamentally rethink
is changing. Without effective product scar- the retail experience, developing business
city, and with shoppers less limited to options models that blend physical, virtual, and
in local stores, traditional retail models break community experiences.
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The retail transformation: Cultivating choice, experience, and trust
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inventory, order management, and supply not being captured in turn by direct competi-
chain infrastructures. As shown in figure 2, tors—indicating that a significant number of
the cost/performance ratio of core digital new players are entering the landscape.16 This
infrastructure (computing, data storage, and phenomenon is notable not just for the change
Internet bandwidth) has improved exponen- in the identity of the top 10 but for the ques-
tially since the early 1990s, making these tech- tions it raises about which types of retailers
nologies increasingly affordable and accessible. and retail models are most effective in this
Even the smallest retailers now have access new landscape.
to powerful infrastructure tools that once Reduced barriers to entry also make it
required large capital investment, making it easier for manufacturers and makers to sell
easier than ever for many individuals and small their products directly to consumers, bypass-
entities to form retail businesses and reach ing traditional resellers entirely. For example,
markets. Today, to start selling, all a merchant in 2014, 52 percent of US online shoppers
needs is a credit card.12 visited brand and manufacturer websites with
Cloud services are particularly crucial here, the intent to buy.17 Direct consumer contact
as they enable retailers to manage back-end eliminates intermediate steps in the value
office operations without investing heavily in chain, boosting profitability. Manufacturers
either servers or software. Instead, cloud-based that engage directly with consumers can also
programs are run and managed by a third get rich and timely feedback. As more manu-
party and accessed online, making it simple facturers enter the retail landscape in this way,
for businesses to scale their software use as fragmentation increases.
needed. Demand for retail cloud services has
grown rapidly and is on track to more than Increased access to market
triple from $4.2 billion in 2011 to $15.1 billion
in 2015.13
demand is transcending
In addition to being less costly, technology geographic proximity
infrastructure also tends to be easier to man- Digital technology helps to aggregate
age. Requiring no intensive training or dedi- demand beyond geographic areas. Tools such
cated IT department, many cloud platforms are as digital platforms and social media can con-
fairly simple for nontechnical users to access nect buyers and sellers across regional and
and manage. For example, individuals with no even national boundaries. E-commerce enables
coding knowledge can create and manage their retailers to connect with consumers from all
own websites using platforms such as Wix. over the world, reducing geographic con-
Six years after its founding, Wix has amassed straints. Online, a seller’s addressable market is
42 million users from 190 countries, netting effectively the world.
revenues of $80.5 million in 2013 and $130 Stores that would not be sustainable in the
million in 2014.14 physical world due to a limited number of
Lower barriers to entry have allowed a nearby customers can thrive online by reach-
large number of new retailers to enter the ing niche customers worldwide. Conversely,
space, eager to address fragmenting consumer customers once satisfied with “mainstream”
niches. The result is increased competition and options may now enjoy alternatives that they
volatility across the sector. For example, 6 of hadn’t known about before. For example, in
the 10 top retailers by annual revenue in 1990 1998, the out-of-print mountaineering mem-
were no longer in the top 10 as of 2012.15 In oir Touching the Void was recommended by
fact, Deloitte analysis reveals that the volatil- Amazon to customers purchasing or viewing
ity of retail market share has been increasing the bestseller Into Thin Air, which had kicked
rapidly since 2009. Moreover, the share lost is off a mountaineering-related reading wave.
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The retail transformation: Cultivating choice, experience, and trust
As a result of these automated recommenda- guarantees demand but also enables vendors
tions, Touching the Void started to outsell Into and retailers to build a deeper understand-
Thin Air two to one.18 By revealing little-known ing of their consumers. San Francisco–based
options to customers, e-commerce has helped custom clothing company JAKE, for example,
reshape individuals’ preferences. Over half of has completed two crowdfunding campaigns
Amazon’s book sales now come from books in its three years of public operations, most
outside its top 130,000 titles.19 recently for its capsule collection ROYGBIV.
Backers could preorder five essential clothing
On-demand fulfillment pieces for men and for women from the collec-
tion (figure 4). Once the campaign closed, the
is reducing the need company began production, reaching out to
to hold inventory each consumer to gather size information and
The third identified impact of the Big Shift color preferences plus additional demographic
is that supply and demand have been sepa- and psychographic data.
rated, with on-demand fulfillment reducing or Another on-demand retail start-up is
even eliminating the need to invest in inven- Massdrop, where groups of enthusiasts can
tory before selling. In fact, many small retailers purchase products in batches, sometimes
need not invest in inventory without guarantee at more than 50 percent off the usual retail
of purchase. price. Unlike JAKE, Massdrop is a third-
With drop-shipping, for example, retail- party reseller that does not manufacture its
ers buy inventory only as it is sold. Retailers own merchandise. Once consumers sign up
purchase goods from drop-shippers as con- for Massdrop, they can browse communities
sumers order them; drop-shippers then fulfill focused on information and advice on retail
orders with white-label delivery service. Drop- areas of interest. Community members can
shipping is a huge business: An estimated 93 also participate in group purchases at specified
percent of Facebook’s $8 billion ad market, prices, which are activated if and when enough
made up of over a million advertisers, is com- buyers sign up. When a group has enough buy-
posed of retailers selling by drop-shipping.20 ers, Massdrop approaches the manufacturer to
Retailers can also not only buy as they go obtain the items. Purchase categories include
but even stockpile orders prior to production. high-end electronics, crafting materials and
Crowdfunding-based presales, for example, do-it-yourself tools, watches, accessories, bags,
guarantee demand before production starts. and clothing, as well as tea, collectibles such
On the crowdfunding platform Kickstarter, as board games and trading cards, fine pens,
while many projects have been prototyped and more. Consumers can also vote to request
and may even have small lots in production, items they would like to see in future drops.21
an online campaign can provide the infusion The Big Shift has also made it easier for
of capital needed to scale production to meet product designers and retailers to manufacture
demand or reach a bigger market while guar- to order—for example, using 3D printing tech-
anteeing an initial batch of orders. nology. Indeed, while 3D printing still requires
Crowdfunding also enables consumers to the purchase of raw materials, home use of 3D
offer feedback, in the form of dollars, on prod- printers has created a market for 3D designs
uct ideas. Such “voting with their wallets” helps themselves. Early-stage start-up Pinshape, for
retailers and even manufacturers float more example, has based its market platform on 3D
ideas, pursuing only those that resonate with printing; the company curates a selection of
consumers. The crowdfunding process not only 3D printing designs that contributors can sell,
or offer for free, through the Pinshape site.
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Customers can purchase the design files or and tailoring options. The company, which
order the resulting 3D prints.22 has raised $60 million in funding, reported
On-demand fulfillment is affecting luxury approximately $50 million in revenue in 2014
retail as well as mass-market retailers. New and an average order value of almost $2,000.23
York–based Moda Operandi enables consum- Tinker Tailor, meanwhile, takes on-demand
ers to order merchandise directly from the fulfillment to the next level. The online luxury
runway—entirely bypassing the traditional retailer works with fashion houses, allowing
high-fashion retail flow, in which a season’s consumers to customize high-end fashion
designs are showcased on the runway and then items. Customers use 3D design and visualiza-
selected by retail buyers, who decide which tion tools to modify designs from more than
stores will sell which pieces. Moda Operandi 80 designers, including Vivienne Westwood,
gives consumers direct access to runway fash- Marchesa, Rodarte, and Giambattista Valli—
ion through a digital storefront. Its customers shortening a skirt, modifying a neckline, or
can preorder an item as soon as it appears even changing fabric options to create a unique
on the runway, paying half up front and the interpretation of a designer’s vision. Customers
remainder on receipt of the product (which can also create unique items starting with
can take a few months, as runway items are Tinker Tailor’s branded designs and fabrics.
essentially samples). Moda Operandi’s per- The buyer signs off on a 3D image of the final
sonal stylists advise customers on styles, sizes, product before it goes into production.24
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The retail transformation: Cultivating choice, experience, and trust
two businesses have distinct cultures and even experience, the nature of which will evolve
separate profit and loss statements; they might over time. Creating individualized experiences
also compete for internal resources. But with traditionally involves investments in fixed
more consumers expecting a consistent shop- assets and infrastructure, so existing physical
ping experience no matter how they choose to assets can provide an advantage in this strategy.
buy, such an approach is becoming less sus- For example, some vertically integrated retail-
tainable. To attract shoppers, retailers should ers such as Apple Inc. and Victoria’s Secret
move beyond the dualism of digital and physi- command higher prices (and thus margins) by
cal channels and instead approach the entire offering exclusive in-store experiences.
business holistically, with digital and physical Can retailers that are not now vertically
assets efficiently reinforcing one another to integrated pursue an experience-based strategy
execute the company’s chosen business model. that captures the value of experience in their
What should that business model look like? margins? Doing so may involve a fundamental
In part, retailers may want to base that decision shift in a company’s business model. Instead
on the extent of their physical asset base—in of attempting to fold the value of experience
other words, how heavily they have invested in into a product’s sale price, retailers pursuing
building and maintaining physical stores. This an experience-based strategy should focus on
is because, for all the ease of going from online creating an experience so valuable that the
storefront to physical shop and back again, the consumer will want to pay for it in itself. It’s
economics of operating online are very differ- critical to be as helpful as possible to custom-
ent from those of operating brick-and-mortar ers, both in terms of increasing their ability to
locations. Digital storefronts with unlimited make the right purchase given individual con-
“shelf space” and the ability to leverage on- texts and needs, as well as in enhancing their
demand fulfillment can operate at relatively ability to get the most value from products
low cost while offering consumers more after purchase—and to create truly memorable
product choice than even the largest brick- and engaging experiences along the way. This
and-mortar store could provide. With their kind of model does not entail inventory turns
low fixed-cost structure, and as consumers to capture value. In fact, customers may even
continue to use technology to compare prices, be encouraged to purchase items elsewhere—
online operations are well suited to making perhaps from a smaller, more nimble retailer
money from product-based transactions— or a large digital marketplace. The product, in
which are, of course, the retailer’s traditional this scenario, is not the source of profit. When
source of profit. Brick-and-mortar retailers done effectively, experience-based selling can
that try to compete on the same grounds help boost loyalty, increase the consumer’s
(price, speed, ease) in physical stores—for lifetime value, and even be a source of new and
example, big-box electronics stores that try to innovative ideas as consumers and ecosystem
match prices consumers find online—often partners interact and collaborate.
find that such an approach simply accelerates
their decline, as they cannot compete effec- “Experience bazaars” that
tively on those grounds.
On the other hand, physical spaces can
surprise and delight consumers
become catalysts for engaging consumers The idea of creating unique store experi-
and even ecosystems around products and ences using aesthetics and ambience—or
with each other—a very different business branded lifestyle products to communicate
model from one based solely on product sales. image—is hardly new. But historically, such
Retailers with a large physical presence may experiences are essentially “push” market-
therefore want to migrate toward a focus on ing—the consumer has little to no direct say in
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shaping his or her experience. The experiences opening physical storefronts. Google recently
therefore risk becoming quickly outdated, opened its first-ever brick-and-mortar store in
as one season’s cutting-edge brand is often London, with Android phones, Chromebook
next year’s passing fad. Take clothing retailer laptops, and other products on display.44 And
Abercrombie & Fitch, whose wares went from Amazon has debuted pop-up spaces in San
hot look to passé in the space of a few years. Francisco, Sacramento, and New York, where
The culprits: affordable, stylish “fast fashion” consumers can experience the company’s
and a larger cultural/aesthetic shift toward per- Kindle e-reader, Fire phone and tablets, and
sonalization and unique self-expression.43 Fire TV.45 Such spaces create a place where
Today, however, retailers have an opportu- consumers can experience products in person,
nity to create a completely new experience for while online retailers can engage with consum-
the consumer—one that can surprise, educate, ers and get direct feedback. The vast majority
and delight consumers by inviting them to of these companies’ sales are still online—but
select and cocreate their own experiences. This the physical environment creates a meaningful
may mean shifting business models, creating consumer touch point.
value through engagement, and cultivating Leading retailers are also “renting out”
an ecosystem of consumers and partners. For space in their brick-and-mortar stores, afford-
example, instead of selling cookware (with ing independent retailers appealing to the
peripheral experiential offerings such as classes same consumer group spaces where they can
and chef-cooked dinners), a retailer might showcase products and engage with consum-
focus on creating a community of consumers ers. Nordstrom, for example, has hosted Etsy
who are passionate about cooking, offering designers and retailers in its bridal pop-ups
a forum where members can come together and is collaborating with Shoes of Prey, a cus-
and share passions and advice. Ideally, such an tom women’s shoe manufacturer. Such oppor-
experience—an “experience bazaar”—could tunities give smaller, more fragmented sellers
become so valuable that the retailer could a chance to showcase products and engage
charge for the experience itself, rather than directly with the consumer, creating tailored
the associated products. With the community and engaging experiences.
in place, the retailer could suggest tools and Like restaurant dining and movie theaters,
products—either its own or competitors’—that physical retail will not go away. But it’s likely
may be purchased elsewhere. It could also to transform greatly in both its look and the
partner with data aggregation platforms and role it serves. Many consumers will continue
personalization solutions to provide a person- to enjoy the social aspect of shopping and the
alized experience before, during, and after the experience of discovering new products and
interaction, with a focus on helping consum- items. To thrive, retailers should develop new
ers get the most value from the products they business models that embrace this enjoyment,
have purchased. All aspects of the interaction creating spaces for consumers to explore, learn,
would be rooted in deep engagement with and and come together around common interests.
understanding of the consumer.
Early signs of this transition are emerging. Incumbent retailers as
Many physical spaces are hosting demonstra-
tions of online merchandise that consumers
infrastructure providers
want to interact with before purchase. The As some retailers shift the focus of their
value of these demonstrations is rooted less physical space toward creating individual expe-
in transactions in physical space and more in rience platforms designed to facilitate dis-
consumer interactions and engagement. For covery, learning, and interaction, others may
example, Warby Parker started as an online- choose to move toward creating value in the
only eyewear retailer and then expanded into
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The retail transformation: Cultivating choice, experience, and trust
Inventory
Sourcing & Store
Design management Marketing Sales Fulfillment Support
procurement operation
& distribution
Product Purchasing or Managing and Managing the Promotion of Execution of Delivering Helping
prototyping building distribution of point of sale goods for sale the purchase products to consumer
Description
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The retail transformation: Cultivating choice, experience, and trust
F C C C C F C F
Inventory
Sourcing & Store
Design management Marketing Sales Fulfillment Support
procurement operation
& distribution
Product Purchasing or Managing and Managing the Promotion of Execution of Delivering Helping consumer
Description
prototyping building distribution of point of sale goods for sale the purchase products to maximize the
inventory products to be and/or the transaction consumer value of products
sold retailer’s brand
GE Firstbuild Drop-shippers Stitch Labs Etsy Facebook mPOS UPS, Deliv, SAP Community
Example
Instacart Network
F Fragmenting C Consolidating
apparel retailer Nasty Gal got its start on the domestic US shipping market.55) A rising force
early social media platform Myspace. Founder in this area is same-day delivery services, such
Sophia Amoruso fostered a cult following, as those from Google, Deliv, and Instacart,
using the site to direct interested custom- that partner with retailers to fulfill remote
ers to buy from her eBay page; as Facebook orders. San Francisco–based Cole Hardware,
superseded Myspace, she transitioned to that for example, uses Google Shopping Express.56
platform. Nasty Gal took no external financ- Retailers can also rent out their brick-and-
ing until 2012, when it accepted a $50 million mortar facilities as fulfillment centers for other
investment from Index Ventures and posted players, thus becoming distribution hubs.
sales totals of nearly $130 million.54 These examples, several of which are shown
in figure 7, illustrate how players looking for
Fulfillment growth can position themselves in specific
Infrastructure providers can also carry out roles in different parts of the value chain,
fulfillment, the act of providing the customer as well as ways that the current market can
with his or her purchase. For brick-and-mortar reward scale and scope. By providing infra-
purchases, the term is usually synonymous structure, aggregating demand, and con-
with sales; in e-commerce, however, it becomes necting retailers with consumers through
a distinct step. Fulfillment appears to be con- marketplaces and platforms, scale-and-scope
solidating in the form of platforms or services players can benefit from the retail landscape’s
that send goods to customers on retailers’ changes—including increased fragmentation
behalf. This can take the form of drop-shipping and volatility, new ways to aggregate demand,
or mailing via a national service such as USPS, the decoupling of demand from supply, and
FedEx, or UPS. (UPS alone holds half of the the emergence of new retail models.
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recommend services, offerings, or products from within the products from across the
products that are in the best organization’s portfolio whole marketplace
interest of the individual—which
may extend to recommending Low High
options even beyond an
organization’s own portfolio
Defined as the ability to actively services and functions individual needs based on a deep
(not passively) recommend not personalized to understanding of the individual
services/products to consumers the individual’s needs
based on a deep understanding Low High
of the individual
Democratization
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The retail transformation: Cultivating choice, experience, and trust
system uses a number of simple elements, such Similarly, Stitch Fix, founded in 2011, is
as items a user has purchased in the past, items a personal shopping club that sends users
in his or her virtual shopping cart, items liked customized boxes of clothing, on demand or
or rated, and items that other customers with by subscription. Customers are asked to fill
similar purchases have viewed and purchased. out detailed profiles and even share Pinterest
The algorithms customize the consumer expe- boards so that the company can assess their
rience—and Amazon’s metrics demonstrate style preferences. Stitch Fix uses a combina-
that they work. The most recent iteration of the tion of proprietary algorithms and personal
company’s recommendation engine contrib- stylists to curate a personalized five-piece
uted to a $3 billion, or 29 percent, quarter- assortment of clothing and accessories, which
over-quarter sales increase.58 is shipped to the customer along with styling
26
A report in the Future of the Business Landscape series
recommendations (figure 9). The customer can Mobilizing the retail landscape
keep all or none of the items in her package,
As the retail industry evolves into a land-
paying a “styling fee” of $20 only if she pur-
scape of niche players connected by “experi-
chases nothing from that box. If all the items in
ence bazaars” and marketplaces, and enabled
a box are purchased, the customer receives a 25
by infrastructure providers, opportunities
percent discount. Stitch Fix, which uses very
will arise for organizations to act as mobiliz-
limited traditional marketing, relying instead
ers—entities that bring together elements of
on word of mouth and social media tastemak-
a rapidly shifting ecosystem to pursue shared
ers for promotion, is projected to bring in
interests and enable learning, helping to orient
more than $200 million in revenue in 2015.59
the industry around common goals.
Amazon and Stitch Fix have developed
Mobilizers are not a new concept. Retail
consumer agent capabilities by leveraging
associations such as the National Retail
technology to understand consumer needs,
Federation provide resources that enable
then recommending options that address those
participating retailers to adjust and enhance
needs. For this model to be effective, con-
performance, supporting the industry as a
sumers must trust agents deeply—a difficult
whole through trade shows, conferences,
achievement when the agent recommends only
workshops, seminars, thoughtware, legisla-
its own products. Knowing this, some agent
tive lobbying, and more. However, in times of
businesses will suspend reliance on inventory
change, new movements and organizations
at hand and instead find items that best meet
are likely to emerge to address fragmenting
consumers’ needs—whatever their source. As
consumer interests. For example, the maker
such, they will likely have limited, if any, brick-
movement encourages hands-on manufactur-
and-mortar assets, instead investing heavily
ing and tinkering, while “glocalism” encour-
in analytics capabilities and relationships with
ages consumers to purchase goods that, if not
ecosystem partners. Perhaps the most sustain-
local, contribute to specific microeconomies
able business model for an agent business is to
(for example, purchasing items from trade
receive payments from customers for services
co-ops in East Africa). Entities within these
rendered, rather than from advertising revenue
movements can take on the role of mobilizers.
or markups on products sold, which tend to
City governments promoting the purchase of
undermine trust.
locally made goods to revive their cities’ manu-
While change can be challenging, the good
facturing industries are acting as mobilizers,
news, as we’ve noted, is that agent businesses
as are publications that educate individuals on
are likely to be driven by powerful economies
movements and offer ways to get involved. To
of scope and network effects. The more an
connect more deeply with their communities
agent knows about any individual customer,
and understand underlying shifts in consumer
the more helpful it can be to that customer.
behavior, retailers should pay attention to
Just as important, the more customers an
mobilizing forces in their environments.
agent interacts with, the more it can iden-
tify emerging unmet needs across custom-
ers—and the more helpful it can be to any
individual customer.
27
The retail transformation: Cultivating choice, experience, and trust
Pragmatic pathways
for transformation
28
A report in the Future of the Business Landscape series
Focus on edges, not Staff for passion Break dependency on Embrace double
Maximize upside
Edge initiative: __________ Who within the firm would What new technologies What metrics can we use
be most passionate about can we leverage to amplify to measure progress
the edge initiative? our abilities? toward core goals and
edge goals?
Look externally, not Starve the edge Mobilize the passion- Measure progress of
internally ate outside the firm the ecosystem
Leverage
instrument
Levers
Minimize
required
What external resources, What are the minimum How do we connect with What specific metrics can
ecosystems, and partners resources required to get passionate talent outside we use to measure the
can we leverage? started? our organization? health of the edge
ecosystem?
Learn faster to move Reflect more to move Move from dating to Focus on trajectory,
faster faster relationships not position
Acclerate
lead times
Compress
How can we iterate What can we do to better What platforms and tools How can we assess the
quickly to test the edge incorporate learnings along can we use to create rate of learning and
initiative? the way? trusted relationships with performance improvement
ecosystem partners? within the ecosystem?
29
The retail transformation: Cultivating choice, experience, and trust
systems from the business’s current core.61 and regional banking. But market shifts were
Along with testing a fundamentally new putting increasing pressure on traditional
business model, retailers should tap into banking operations while increasing demand
new sources of infrastructure and resources. for scale-intensive back-office processing, a
Edge initiatives should also be “starved” with function increasingly challenging for many
respect to investment from the core: They are small banks. Noting this, the company built
essentially start-ups within a company, and, out its back-office capabilities, outsourcing
in general, successful start-ups are not over- them to other financial institutions. It also
funded early on.62 To help maximize learn- pushed aggressively into the high-tech process-
ing and leverage resources, company leaders ing of transactions related to asset manage-
should encourage edge teams to build deep, ment, global custody, 401(k)s, and trusteeship
trust-based relationships with ecosystem play- of debt securities based on securitized assets.63
ers. And they should measure results without These initiatives grew so rapidly that State
worrying too much about absolute metrics, Street ultimately decided to shut down its com-
focusing instead on trajectory. mercial bank operations and focus exclusively
It can be instructive to look at compa- on infrastructure outsourcing. Pursuing this
nies in other industries that have reinvented edge has paid off for the company, which as of
themselves by pursuing promising business the first quarter of 2015 had $28.5 trillion in
edges. For example, financial services provider assets under custody and administration and
State Street shifted from consumer banking $2.4 trillion under management.64
to become a B2B infrastructure provider for Retail today is at a crossroads. Incremental
other financial institutions. Founded in 1792, improvement is not enough—to be effective,
State Street Bank started as a commercial most retailers will need to make a fundamental
lender. By the mid-1970s, it had developed shift in both mind-set and identity. The good
lines of business in commercial banking, news: There is a path forward, but it is one that
financial services, investment management, requires both conviction and courage.
30
A report in the Future of the Business Landscape series
Conclusion
31
The retail transformation: Cultivating choice, experience, and trust
Endnotes
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A report in the Future of the Business Landscape series
33
The retail transformation: Cultivating choice, experience, and trust
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35
The retail transformation: Cultivating choice, experience, and trust
Acknowledgements
This paper would not have been possible without the support of our colleagues. The authors would
like to thank:
Contacts
For more information about this report or about the Center for the Edge, please contact:
Wassili Bertoen
Managing director, Center for the Edge Europe
Deloitte Netherlands
+31 6 21272293
wbertoen@deloitte.nl
Deloitte is a leading presence in the retail and distribution industry, providing audit, consulting, risk
management, financial advisory, and tax services to more than 75 percent of Fortune 500 retailers. With
more than 2,400 professionals, Deloitte’s retail and distribution practice provides insights, services, and
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drug, wholesale and distribution, and online. For more information about Deloitte’s retail and distribution
sector, please visit www.deloitte.com/us/retail-distribution.
36
A report in the Future of the Business Landscape series
Below the surface of current events, buried amid the latest headlines and competitive moves,
executives are beginning to see the outlines of a new business landscape. Performance pressures are
mounting. The old ways of doing things are generating diminishing returns. Companies are having
a harder time making money—and increasingly, their very survival is challenged. Executives must
learn ways not only to do their jobs differently, but also to do them better. That, in part, requires
understanding broader changes to the operating environment:
Decoding the deep structure of this economic shift will allow executives to thrive in the face of
intensifying competition and growing economic pressure. The good news is that the actions needed
to address short-term economic conditions are also the best long-term measures to take advantage
of the opportunities that these challenges create.
For more information about the Center’s unique perspective on these challenges,
visit www.deloitte.com/centerforedge.
37
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