DUP 955 - Future of Retail - vFINAL PDF

The retail transformation
Cultivating choice, experience, and trust

From the Deloitte Center for the Edge
A report in the Future of the Business
Landscape series
About the authors
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
Back to the future | 3
The Big Shift: Transforming the business landscape | 6
Selling amid the Big Shift: Redefining retail | 10
New entrants are increasing consumer options | 15
The new rules of the game: Choices for retailers | 19
Pragmatic pathways for transformation | 28
Conclusion | 31
Endnotes | 32
Acknowledgements | 36
Contacts | 36
The retail transformation: Cultivating choice, experience, and trust
Executive summary
T ODAY’S retail landscape is changing

rapidly and dramatically. Driven by the
Big Shift’s forces, consumers are becoming
should reimagine how they create and capture
value, thinking past omnichannel positioning
to examine, and find the best uses for, their
far more informed, and product choices are assets. Digital marketplaces with on-demand
proliferating rapidly. Technological advances fulfillment can be incredibly well suited to pro-
and public policy liberalization are contrib- viding low prices and extensive choice. Brick-
uting to new flows of information, knowl- and-mortar assets can serve as a stage for
edge, and resources. As a result, retailers face customized consumer experiences that go far
new pressures: beyond ambience to surprise and educate the
consumer. Done right, these experiences can
• Lowered barriers to market entry are bring- become so valuable that they inspire consum-
ing in many new small players and frag- ers to choose to pay for them in themselves.
menting the retail landscape. Another opportunity for many large
retailers is to become industry infrastructure
• Online marketplaces are transcending geo- providers. Because sourcing and procurement,
graphic proximity and expanding market inventory management, store operations, mar-
demand for highly specific offerings. Small keting, and fulfillment become more efficient
niche players can reach consumers regard- as they scale, established retailers can extend
less of physical location. these capabilities to support smaller, more
fragmented niche players.
• Technologies such as on-demand fulfill- Traditional retailers can also move to trans-
ment are changing how and where retailers form into consumer agents—new entities that
hold inventory. use deep understanding of consumers to help
them navigate product choices.
• New retail models are arising out of new Change is seldom easy, especially when the
technologies and new ways to connect future is uncertain. Big changes, especially,
with consumers. require commitment and can attract organi-
Amid all this change, the retail value chain zational antibodies. To effectively scale new
is unbundling, and even remapping. Design, business models, established retailers should
sales, and support are less strongly linked, with pursue “small moves, smartly made”—test-
small, niche entrants drawing from a range ing, scaling, and incorporating the most
of flexible options to execute these activities. successful ideas as foundations for their
To compete effectively, traditional retailers evolving businesses.
2
A report in the Future of the Business Landscape series
Back to the future
“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
3
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.
Figure 1. The journey through the report
4
5
The Big Shift: Transforming

the business landscape
B EFORE taking a deep dive into the retail

sector, let’s explore several large-scale
dynamics shaping the broader environment
and disruption that is shifting the balance of
power between individuals and businesses. At
the same time as the Big Shift puts pressure on
in which retailers operate. Two key forces businesses through increased competition, it
are coming together to shape today’s rapidly increases the power of consumers by enabling
changing retail environment: better-informed connectedness, knowledge sharing, and trans-
consumers and a proliferation of both products parency of choice.
and niches.
Proliferating products and niches
The informed consumer Technological improvements, combined
Today’s consumers have more access to with increased access to tools through plat-
more information, can instantly compare forms such as TechShop (the “gym for mak-
prices and offerings, and can easily switch ers”), can make it easier for new product
among brands and products. Moreover, producers, including small, nimble businesses
information is increasingly decoupled from and individual craftspeople and inventors,
inventory: To learn about products, consumers to enter the market. Technologies such as
no longer need to visit stores. In the Deloitte 3D printing enable on-demand, small-batch
Center for the Edge Consumer Power survey, production. And marketplaces such as Etsy,
approximately 67 percent of US consumers Storenvy, and eBay offer ways for these new
surveyed in 2012 either agreed or strongly entrants to reach targeted consumers. As figure
agreed that they have a lot more information 3 shows, the rising popularity of the maker
about brands than they once had. And 70 per- movement, along with the growing availability
cent of respondents agreed or strongly agreed of supporting infrastructures and platforms,
that they have many more product choices further increases product diversity and length-
than they had in the past.3 ens the tail of demand.
This trend is a result of the fundamental As many aspects of production have
macroeconomic transformation we call the become more accessible, near-universal
Big Shift (see sidebar). Exponential improve- Internet access has allowed shoppers in many
ments in the cost and performance of core categories to shift away from a mass-market
digital infrastructure, coupled with a general environment to one characterized by a pro-
trend toward public policy liberalization, are liferation of accessible niche markets. Chris
creating an environment of constant change Anderson’s 2004 Wired article “The long tail”
6
THE BIG SHIFT

The Big Shift is a set of fundamental macroeconomic trends that are reshaping the global business
landscape and unleashing flows of information, people, and capital (figure 2). These trends give
consumers and talent more power through access to information and lower switching costs. At the same
time, competition—from both traditional and nontraditional sources—has increased. Many companies
configured to operate in the scale-based, efficiency-driven models of the 20th century are now struggling
to create value in the rapidly changing world of the Big Shift.
Figure 2. The Big Shift’s trends
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.
Overall trend of the Index of Economic Freedom, a compilation of 10 indicators

measured by the Heritage Foundation, has been increasing since 1995.
Nearly 70 percent of customers agree that they have increased information

Impact trends
and choice about brands.
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:
1. Technological advances. Exponential improvements in the cost/performance ratio of core digital

technologies have led to exponential advances and innovations in other technologies that employ the
digital infrastructure, blurring many traditional lines between industries and technologies.
2. Public policy liberalization. Over the past six decades, public policies have broadly trended toward
freeing the movement of people, capital, and other resources across geographic and political boundaries,
making it generally easier for individuals to start and scale businesses.4
The structures and regulations of specific industries have in some cases accelerated, and in others
delayed, the impact of the Big Shift; however, the effects are poised to spread across the economy, in part
as new businesses from other industries encroach on traditional industry territory.
7
Figure 3. Maker movement overview and drivers
Maker Faire attendence Etsy revenue

$1.9B
2014 130K
85K $1.3B
120K
2013 64K $895M
110K
2012 50K
$525M
97K
2011 27K
83K
2010 23K
74K
2009 Did not exist!
2011 2012 2013 2014
San Francisco Bay Area New York
Kickstarter project hits >1,100 hackerspaces worldwide

# of
Project Goal Funded backers
Pebble $100K $10.3M 69,000
Oculus rift $250K $2.4M 9,522
Goldieblox $150K $286K 5,519
Safecast $4K $104K 290
Find details at: http://hackerspaces.org/wiki/list_of_hacker_spaces
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
8
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.
9
Selling amid the Big Shift:

Redefining retail
Etsy sales alone. She says that her new business

T HE Big Shift has affected the retail sector
in four main ways:
has “saved her life.”9
She’s not the only one. As Gibran’s example
demonstrates, barriers to entry have fallen
1. Reduced barriers to market entry are bring-
drastically for both producers and sellers of
ing in more small players.
consumer goods, changing the table stakes
of retail and allowing in a flood of new com-
2. Increased access to market demand is tran-
petitors.10 Today, it’s possible to set up a retail
scending geographic proximity.
operation in just a few hours; individuals like
Gibran can become niche retail operations
3. On-demand fulfillment is reducing the
quickly and easily, adding a new dimension
need for retailers to hold inventory.
to competition.
This change is due largely to the elimination
4. New technologies and customer rela-
of the need to own infrastructure—a heavy
tionships are opening up new ways of
investment usually recouped through scale and
creating value.
thus difficult for most small players to afford.
Together, these changes are placing pres- Using pay-as-you-go services and free or inex-
sure on existing retailers while opening up new pensive infrastructure provisioning (such as
space in which nontraditional entrants can an Etsy “storefront” instead of a physical one,
operate. They are also increasing opportunities or on-demand physical pop-up space rented
across the retail landscape and reducing the through Storefront), small merchants can eas-
level of investment needed to pursue them. ily enter the market. Retailers need not own
or even prerent their infrastructure; instead,
Reduced barriers to they can incur costs only as assets are needed,
enabling efficiency at any size. As a result, the
market entry are bringing retail landscape is fragmenting. Deloitte analy-
in more small players sis shows that the top 25 established retailers
In 2008, Yokoo Gibran was a copy center today own 2 percent less total market share
employee with a passion for knitting. Early that than they did in 2009—a shift of $64 billion.11
year, she began selling her handmade knitwear Digital technology has made many aspects
on Etsy. Within a year, she was making enough of retail operations exponentially cheaper and
to quit her day job; by December 2009, she was easier. Nearly all areas of business are affected,
earning more than $140,000 a year from her from digital storefront costs to back-end
10
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.
11
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.
12
Figure 4. ROYGBIV Indiegogo campaign
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
13
New technologies and customer company 3D-prints customized earbuds—

in-ear headphones—based on photos taken
relationships are opening up through its iPhone® mobile app. This model
new ways of creating value has three benefits. First, the very act of manu-
The Big Shift’s technological advances, facturing to order adds value for consumers
besides shaking up the traditional retail in terms of personalization. Second, Normal
industry, have also spawned a flood of sellers need not invest in products that may not sell;
with new and different business models—for by creating to order, it keeps manufacturing
example, digitizing sample sales, selling niche costs to a minimum and maintains the fungi-
Japanese barware, offering affordable per- bility of its raw materials. Third, the use of 3D
sonalized goods, or mail-ordering stylish yet printing reduces the company’s supply chain
affordable eyeglasses. While these models vary costs. Several competitors require professional
in execution, each was started by a small team ear molds made by audiologists; the prices of
that connected directly with consumers to Normal’s closest competitor start at $400 com-
provide an individualized experience. pared with Normal’s $199.27
Take online retailer Gilt Groupe, a mar- Eyewear retailer Warby Parker represents
ket entrant whose rise was enabled by digital the fourth observed impact of the Big Shift:
technology. Cofounder Kevin Ryan sought to lower costs for both consumers and retailers.
digitize sample sales (which are traditionally While traditional eyeglass retailers often sell
used to sell excess inventory), democratizing frames for hundreds of dollars, Warby Parker
and centralizing access to designer/luxury offers lower-cost, equally fashionable options
goods at low prices while retaining the sales’ primarily online, with both samples and
sense of urgency and exclusivity.25 Though the finished products shipped directly to consum-
idea at first seemed alien to the designers to ers. The company recently opened a handful of
whom Ryan pitched the idea, the site quickly brick-and-mortar locations linked to its online
took off. presence. These stores distinguish themselves
Oakland-based Umami Mart, an inde- from traditional eyeglass retailers with their
pendent retailer of Japanese kitchen goods library-inspired design and open access to
and barware, illustrates the potential of niche the store’s entire line of glasses. Customers are
retailers fueled by digital technology. Umami encouraged to browse and try on as many pairs
Mart started as a collaborative blog created by as they want—an added value that comple-
chefs and other food industry professionals. ments the online and at-home experiences.
As the blog gained a following, its participants Locations also offer eye exams onsite for a
and readers began to think about importing low flat fee.28 The company states that most
the Japanese kitchen goods they discussed. The customers who purchase glasses in a store go
retail component of Umami Mart was born, on to buy a second pair online.29 Warby Parker
spurred by online aggregation of demand.26 has raised $115 million from 16 investors over
New York–based start-up Normal exem- five rounds, indicating the effectiveness of
plifies the role of on-demand fulfillment. The its model.30
14
New entrants are increasing

consumer options
A S discussed previously, more small,

fragmented merchants targeting niche
demands are emerging. They are enabled by
Small, fragmented retailers can have the
operations they do—flexible, highly scal-
able, with even international reach—precisely
concentrated players (such as digital market- because of their small size and structure. For
places) that offer enabling capabilities (such example, an eBay clothing merchant, despite
as store operation) as a service, and they often having an infinitely smaller total revenue than
operate in fragmented markets that were a large, established retailer, may actually sell
previously unsustainable without aggregated across more countries; its small size enables
demand. The digital technologies that enable the merchant to enter markets with little brand
products to reach consumers not only tend advertising or infrastructure requirements.
to lengthen the tail of demand—they also Most of these fragmented players are
make its head more shallow and less profit- launching without brick-and-mortar assets;
able over time, reducing the size of the “mass they often fulfill orders on demand, enabled
market” (see the sidebar “Factors affecting by technological advances and the emergence
fragmentation”). of new marketplaces and platforms. Acquiring
Consider retail music sales. Thanks to digi- access to brick-and-mortar retail assets
tization (mp3s replacing CDs) and the shift of remains challenging for independent niche
the music market to online platforms such as retailers due to high, often up-front, costs.
the iTunes® program and YouTube, demand for Some, however, find a way, with many using
“niche” music has significantly increased. As pop-up retail services such as Storefront.
more people become interested in previously
lesser-known genres and musicians, these Value chain impact:
niches loom larger in the public consciousness.
The resulting diversification of what is “popu-
Fragmentation of design,
lar” has split sales across more albums—a sales, and support
trend borne out by the fact that most of the top As the retail landscape fragments, with
50 albums of all time were created in the 1970s more and more smaller retailers serving niche
and ’80s, with none made after 2000.31 Instead, markets, so too do many components of the
the last decade has seen a fragmentation of retail value chain. Of these, product design,
preferences, with more people listening to sales, and support activities are especially vul-
more genres. This makes smaller players sus- nerable to fragmentation.
tainable in a way not possible without aggre-
gated demand enabled by digital technology.
15
FACTORS AFFECTING FRAGMENTATION:

DIFFERENT SPEEDS, SAME DESTINATION
Design, sales, and support activities will fragment faster in some sectors than others. The level of regulation,
the availability of online marketplaces, and the value of a unique story are some of the factors affecting a
sector’s rate of fragmentation (figure 5). But this doesn’t mean that highly regulated mass-market goods
without online marketplaces are safe. As technology continues to advance, and public policy continues its
trend toward liberalization, more sectors are likely to be affected by fragmentation.
Figure 5. Factors affecting fragmentation
1. Regulatory freedom: Less regulated

markets will fragment more quickly. For
new entrants, regulations can serve as
barriers to entry or commercialization. Low Regulatory freedom High
2. Online marketplaces: Online market-

places serve as platforms for new
entrants, helping them access customers
and enabling operations.
Absent Online marketplaces Present
3. Unique story: The more consumers

value a unique connection to a product
and/or merchant, the more they will seek
out niche offerings—and the more they Not Unique “story” Important
enable fragmentation. important
Design retro-styled iPad® device cover, at TechShop

Enabled by the emergence of platforms and in 2010. Buckley sold $4 million worth of
on-demand infrastructures, fragmented play- cases in his first year in business;33 today,
ers can design their own goods. Individuals or his 1,000-square-foot San Francisco factory
small teams can design and prototype goods at employs 25 people.34 The DODOcase is sold
open workshops such as TechShop, a “mak- online by Buckley’s team and carried in J. Crew
erspace” community affiliated with the maker stores.35 President Obama is often photo-
movement. For a monthly membership fee graphed with his.36
comparable to that of a gym, individuals and Designers can also use crowdsourcing plat-
small businesses can use TechShop’s equip- forms to presell items before they are built. For
ment, which ranges from milling machines example, the GE FirstBuild online community
and lathes to welding equipment, 3D printers, solicits participants and equips them to iden-
and industrial sewing machines.32 For example, tify market needs for appliances, work together
Patrick Buckley prototyped his DODOcase, a for product development, and even produce
16
prototypes at a dedicated microfactory. GE engagement around offering advice, sharing

has launched this community with the idea of experiences, and collaborating on additional
harnessing the huge amount of creativity that it product usage. These ecosystems can help
acknowledges resides outside its organization.37 retailers sense shifts in consumer attitude and
mind-sets, enabling sellers to continuously
Sales adapt their portfolio of offerings.
Using online marketplaces such as Etsy, SAP, while not a traditional retailer, has
eBay, and Storenvy, individuals and small embraced the idea of creating a robust support
businesses can now sell goods without exten- community. In 2003, the multinational soft-
sive, expensive store infrastructure. They can ware company launched the SAP Developer
also access on-demand payment infrastruc- Network, rebranded in 2007 as the SAP
tures such as mobile point of sale (mPOS) Community Network (SCN). This online
devices for physical payment and embed- platform attracts more than 2 million unique
dable application program interfaces (APIs) monthly visitors, the vast majority of whom
for online payment. mPOS devices such as are not SAP employees. They come to address
those from Square and PayPal enable anyone both technical and nontechnical issues, to give
to accept credit card payments in person. and get help, and to interact through approxi-
These devices, or “dongles,” plug into smart- mately 3,000 discussion forum posts and 25
phones and tablets, allowing sellers to accept blog posts each day. The resulting communally
credit card payments without the expense of created knowledge base relies on crowdsourced
a full POS terminal or the need for a complex content from hundreds of contributors, includ-
POS system. ing participants dubbed “SAP mentors.” The
Similarly, fragmented players can accept typical time to receive a response on SCN is 17
payments online using digital payment provid- minutes, and more than 85 percent of pre-
ers such as PayPal and Stripe that offer embed- sented issues are resolved.39 SAP uses informa-
dable Web-based APIs. These providers also tion derived from the community in product
help decrease retailers’ liability by removing development, sales, and customer support.40
them from payment processing, eliminating In the retail space, an IKEA “hacker
the need to store credit card information. In community” has emerged to innovate and
2014, PayPal alone enabled merchants world- experiment with the company’s furniture.
wide to accept $125 billion in purchases.38 Participants share ideas for product modifica-
tions, customizations, and enhancements. Such
Support ecosystems serve not only as sources for new
Support activities, which offer a way to product ideas but also as creators and reinforc-
further engage consumers around the prod- ers of customer loyalty—and, for retailers, as
uct experience and create relationships across windows into how their products meet or don’t
the ecosystem, are poised to become more meet customer needs.
important as the retail landscape changes. When retailers build, support, and partici-
Traditionally, retail support has been largely pate in such physical and digital platforms,
confined to onsite customer service desks and they can cultivate something of increasing
toll-free call centers. While these services are value in a transforming economy: ecosystems
important in addressing immediate customer where like-minded fragmented entities, includ-
questions, there is also an often-untapped ing consumers and third-party players, can
opportunity for further meaningful consumer come together to learn from each other and
engagement after (and even before) purchase. help address each other’s questions and chal-
Retailers that build support ecosystems for lenges. The resulting experience helps form a
their customers—and even those of other bedrock of engagement and loyalty.
vendors—can derive real value from the
17
Niche players’ unique stories Retailer Mackenzi Farquer, based in

Astoria, NY, says, “My customers shop Target,
Fragmented niche retailers most often
IKEA, Crate and Barrel, and other big-box
compete on specialization or personalization,
merchants. I offer items they can’t find in those
offering unique or customized goods suited to
stores. Plus, I’m not afraid to have the conver-
small groups of consumers. These merchants’
sation with my customers on what they may
value propositions or personalized experiences
have in their homes from these stores, and how
offer a way to connect with consumers. Such
the items my store carries can complement
merchants tend to focus not only on closing
them.”42
the sale but also on engaging deeply with their
Similarly, Oakland-based independent
customers—a relationship that can evolve with
retailer Umami Mart, the purveyor of Japanese
consumers’ changing tastes, preferences, and
kitchen goods and barware, connects with
needs. Explains independent floral retailer
its customers through its blog, hosted by the
Joanne Leiman, who owns FlowersFlowers in
owners with guest posts from food industry
Evanston, IL, “As a small independent business
professionals. In-store events help the busi-
owner, I don’t try to ‘compete’ with big-box
ness further connect with customers around
stores. Instead, I offer individualized customer
merchandise and blog themes.
service and unmatched quality that simply
can’t be found in a big-box chain.”41
18
The new rules of the game:

Choices for retailers
agents—new entities that use deep under-

T O remain relevant, traditional retailers
should define their roles in the new land-
scape being driven by the Big Shift. To recap
standing of consumers to help them navigate
product choices.
the situation: New entrants to the retail space
are fragmenting the marketplace, offering more Beyond the online/offline divide
highly targeted niche products. These players Today, many consumers care less about
help create value by using their understand- whether they’re shopping online or at a physi-
ing of consumers to provide high-touch, often cal store than about getting the best deal—no
personalized or customized, services that fre- matter what tools they use to reach that goal.
quently require deep expertise and knowledge. From the viewpoint of a typical consumer,
They are enabled by digital marketplaces and a retailer should offer a seamless shopping
supported by sophisticated virtual platforms experience across online and offline channels,
that enable plug-and-play online operations integrating its virtual and physical operations
without the limits associated with physical so that, for instance, a shopper can return an
shelf space. item bought online at a store, or go to a store’s
In this rapidly changing environ- website to find out if an item is in stock at the
ment, where can traditional retailers find a closest physical store location. Indeed, the
place? Constrained by factors such as shelf distinction between online and offline shop-
space limits and fixed-cost physical assets, ping is becoming increasingly blurred, if not
how can such businesses offer consumers entirely irrelevant. For example, an Apple®
distinguishing value? retail store customer can pick up a product
It’s not an easy fix. To rise to the challenges and pay for it with his or her Apple ID via an
of this rapidly evolving landscape, large retail- iPhone mobile device, leaving without ever
ers should revisit the ways they approach both talking with a salesperson. Is this an offline or
their online and brick-and-mortar businesses. online transaction?
They should then transform their physical The need to integrate virtual and physical
stores, focusing not on completing transactions operations to present a single face to the con-
but on redefining experiences. Alternatively, sumer may pose a challenge for many retailers.
they can look for opportunities to extend their Historically, most retailers have managed their
operational and infrastructure capabilities as online and brick-and-mortar businesses as
services—essentially becoming service provid- separate entities—sometimes going so far as
ers to smaller niche players. Finally, traditional to locate them in different regions and stock-
retailers can move to transform into consumer ing them with different inventory. Often, the
19
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
20
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
21
Figure 6. The traditional retail value chain
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
inventory products to be and/or the transaction consumer maximize the

sold retailer’s brand value of
products
business-to-business (B2B) space by providing concentrators—“scale-and-scope” operators

infrastructure capabilities to other retailers. able to provide sourcing, inventory manage-
Figure 6 shows the traditional retail value ment, store operations, marketing, and fulfill-
chain—the general sequence of functions ment capabilities to smaller retailers.
needed to move a product from concept to sale
and beyond. While retailers have traditionally Sourcing and procurement
performed many, if not most, of these func- Today, emerging retailers can contract for
tions, technological changes are beginning fully managed sourcing and procurement pro-
to break up and recombine the value chain’s cesses once too complex for many small busi-
elements, making it newly possible for an nesses to handle. A number of infrastructures
organization to perform only a single function, and platforms, including purchasing coopera-
or even to reorder the traditional sequence tives and organizations offering e-procurement
of activities. tools, provide sourcing and procurement
Even as the product design and sales steps services to small retailers.
fragment, the value chain’s central functions— Historically, purchasing cooperatives made
from sourcing and procurement through procurement easier and helped reduce costs by
fulfillment—are, as we describe below, con- buying in bulk, then splitting the goods among
centrating, increasing efficiency by leveraging multiple parties. For example, Bay Area chain
economies of scale and scope. Because these Cole Hardware, an independently owned local
functions can benefit from such economies, business, purchases the majority of its inven-
they are likely to continue to concentrate, tory through the Ace Cooperative for hardware
offering opportunities for growth to those stores.46 Today, technology enables an even
players able to dominate the space. greater variety of sourcing and procurement
Concentration refers to the emergence options, including drop-shipping and crowd-
of a small number of large-scale players to funding. Drop-shippers handle all sourcing
handle an industry’s infrastructure needs, each and procurement for fragmented retail-
focused on a single business activity or func- ers, while crowdfunding facilitates presales,
tion. These large-scale infrastructure providers enabling extremely accurate demand predic-
are enabled by economies of scale and scope, tion. These entities rely on the economics of
as well as by the potential for network effects. scope and scale: The more transactions and
As the retail industry undergoes concentration, participants they support, the more cost-effec-
especially in B2B interaction, established retail- tive each transaction is.
ers may have the opportunity to become B2B
22
Inventory management the majority of commercial retail real estate.

and distribution San Francisco Bay Area retailers Umami
Rather than having to create or own inven- Mart and Frankie & Myrrh both enjoy spe-
tory management and distribution systems, cial deals—Umami Mart with the City of
many retailers can now outsource these Oakland,50 and Frankie & Myrrh with the
functions entirely or in part, hiring infra- online marketplace Storenvy (which itself
structure providers to handle procured and received a discounted rate from the owner of
produced goods and send them to stores. For its physical storefront)51—that enable them
example, Stitch Labs is a cloud service that to lease brick-and-mortar locations. Beyond
can track and manage inventory and sales such deals, the growing popularity of “pop-up
across multiple online storefronts. Similarly, retail” enables small retailers to affordably lease
drop-shippers fully handle inventory man- space from consolidated players—space that
agement, often eliminating the need for store might otherwise be vacant. Established retail-
distribution altogether. ers can take the store operation function to the
next level by creating the “experience bazaars”
Store operation discussed above.
Retailers can also hire third-party infra- Beyond provision of physical and digital
structure providers to provide storefront space space, other store operation functions include
and even manage back-end store operations. traffic analytics and other back-end technical
Store operation is the point at which retail- and data resources designed to enhance the
ers open up merchandise to the public; the customer experience. These too can be pro-
term encompasses both online and physical vided by scale-and-scope operators, freeing
stores. In the past, the need for high capital small retailers from the need to own them.
investment in physical space made retailing a And they too are consolidating. For example,
generally expensive, risky proposition. Online Google Analytics held an 85 percent share of
selling supported by virtual storefront provid- the cloud-based analytics market as of 2012,52
ers has removed much of the expense. while Amazon Web Services held a 35 percent
Meanwhile, many digital marketplaces are share of the infrastructure-as-a-service market
rapidly consolidating. A few key platforms, in 2013, with no other competitor holding
including Etsy, eBay, and Amazon, now more than 7 percent.53
dominate the online storefront industry. This
concentration creates a virtuous cycle. The Marketing
more storefronts a marketplace enables, the Aggregation platforms such as social media
more likely users are to gravitate to its site, networks can become a means for marketing.
attracted by its variety; the more users come to Fragmented players can use scale-and-scope
an online marketplace, the more likely sellers operators such as Facebook to advertise to
are to use its digital storefront services. Today, both broad and targeted audiences. While the
Etsy is the biggest player in the handmade retailers may create the ads, the aggregation
marketplace industry, with 78 percent of the platforms do the work of posting them and tar-
worldwide market in 2012.47 Etsy features more geting them to the appropriate audiences—in
than 25 million sellers,48 two-thirds of whom short, the bulk of the mechanics of advertising.
view their selling on that platform as full- Social media platforms are particularly
fledged businesses.49 strong examples of scale-and-scope provid-
Physical real estate remains prohibitively ers, as any individual platform’s value grows
expensive for many retailers, so most rent with the size of its user base. Used as market-
rather than own physical store space, usu- ing platforms, they can drive highly effec-
ally from one of the major players controlling tive retail campaigns. For example, women’s
23
Figure 7. The traditional retail value chain—consolidation and fragmentation
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
Fragmenting, as Consolidating, Consolidating, Consolidating, Consolidating, Fragmenting, Consolidating, Poised to fragment,

more and more via via cloud via via social media as more via shipping as peer-to-peer
individuals have e-procurement services and marketplaces and online individuals are services and platforms emerge
Status
access to and drop- platforms marketing able to drop-shipping to facilitate

design tools shipping platforms establish retail ecosystems around
operations products
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.
24
Established retailers agent serves, the more likely it is to recognize

patterns and thus improve the quality of its
as trusted agents advice. Large established retailers, with their
The consumer agent is not a new concept; access to extensive purchase-activity data for a
personal shoppers and personal wealth advi- large number of customers, have an advantage
sors have existed for decades. However, these in this arena.
services have historically been accessible only In today’s retail environment, such retailers
to a few wealthy individuals, mainly because may take on new roles as consumer agents—
personalized advice is often costly and not entities that use their deep knowledge of indi-
easily scalable.57 But recent advances in core vidual consumers to proactively recommend
digital technology have now made it possible the best options for each (figure 8). Effective
to develop cost-effective personalized services agent business serve consumers first, focus-
that draw on data platforms, big data analytics, ing more on meeting consumer needs than on
and machine learning. As products and niches product sales, and tapping a broad network of
continue to proliferate, consumers will increas- curators and partners to help connect consum-
ingly look for trusted sources that can help ers to preferred niche options.
them navigate multiple options and choose Trusted consumer agent businesses are
those that fit their needs. This role requires already beginning to emerge. For example,
scale to be effective: The more consumers an Amazon’s algorithm-based recommendation
Figure 8. Characteristics of agent businesses
The agent business
Defined as the ability to Recommends services/ Recommends services/

Agnosticism
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
Passively provides Proactively anticipates

Anticipation
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
Accessible only to a limited Easily accessible to a large

number of individuals (high number of individuals (low
Defined as the accessibility of cost or limited availability) cost and wide availability)
agents to individuals with respect
to price and availability Low High
25
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
Figure 9. Sample Stitch Fix customer styling card
26
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
Pragmatic pathways
for transformation
T HE landscape we describe in this report

challenges established retailers to dra-
matically alter both their mind-sets and their
business’s new core. Such an approach can
help make it possible for retailers to reinvent
themselves while minimizing potential risks
business models. But such change can be both and maximizing impact.
difficult and risky. How can retailers choose An edge is a growth opportunity that has
the right path when the future is uncertain? the potential to scale—so much so that it can
Historically, most companies have catalyze change, eventually becoming effective
approached major transformation as a large- enough to replace the core of the business. A
scale, big-bet investment—one often driven true edge should align with larger trends dis-
from the top of the organization, where a large rupting the industry. Edges involve fundamen-
investment signals commitment. However, tally different business models and practices
less than a third of such big-bet approaches from those of the core. For established retail-
to organizational change are effective.60 This ers, potential “edges” could include becoming
is not surprising when one considers human an “experience bazaar” for consumers, a B2B
psychology: Changing an entire organization infrastructure for fragmented niche retailers,
is difficult—and it can be intensely politi- or a trusted consumer agent.
cal. When bets are high and the environment
uncertain, organizational antibodies can How can retailers scale an edge?
emerge to attack the initiative, which competes
Once a retailer identifies its edge—what
for resources and may be perceived as highly
business it wants to be in 5–10 years from
risky. It can take a long time to meet ambitious
now—it should then make small, smart moves
goals, and even supporters can grow impatient.
that test and grow that edge. First, the retailer
As a result, many such initiatives fail to achieve
should design quick prototypes—for example,
their initial objectives.
pop-up events or informal collaboration agree-
ments—and test them rapidly to get feed-
Scaling edges for transformation back. The retailer should also find individuals
However, there is another approach to who are passionate about the opportunity
transformation—one that can be less risky, to lead these edge projects. Here, passion is
yet still retains the potential to transform an more important than experience; passionate
entire organization. This approach, which people tend to find ways to learn new skills
we call “scaling edges,” is based on identify- and capabilities.
ing a promising “edge” for the organization, To avoid competition for resources, edge
then growing that edge until it becomes the projects should not rely on resources and IT
28
STEPS TO SCALING EDGES

Identify an edge to explore: Determine what business the company wants to be in 5–10 years from
now—one that has a fundamentally different business model from that of the company’s core.
Execute and test the edge: Establish a group to carry out the edge business model on a small scale,
focusing on rapid prototyping and feedback.
Starve the edge: Fund the edge project on a shoestring, encouraging it to find creative ways to meet
resource and infrastructure needs other than getting them from the business’s core.
Staff for passion: Select individuals for the edge team based on interest in and affinity for the work rather
than solely on experience. Passionate people tend to find ways to learn new skills and capabilities.
Define success in relative, rather than absolute, terms: Aim for the edge initiative to deliver
continuously improving returns—not necessarily large returns in an absolute sense.
Scale up: Once the edge initiative gains traction, do not attempt to integrate it into the core of the
company. Instead, allow the core to be pulled to the edge (figure 10).
Figure 10. Design principles: How to scale the edge?
Start Organize Amplify Perform

How do you mobilize How do you use How do you measure
How do you start? the right resources disruptive technologies success to drive
and participants? to grow? improvement?
Focus on edges, not Staff for passion Break dependency on Embrace double
Maximize upside
the core before skills core IT standards

potential
Focus
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
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
Conclusion
T ODAY’S retail landscape is in the midst

of what is arguably its most fundamental
transformation in a century-long string of
When the future is uncertain, transforma-
tion can be difficult—and can be met with
internal resistance. At the same time, periods
changes. Multiple large-scale dynamics are of uncertainty can offer tremendous possibility
shaping the broader environment in which for those able to choose a direction and shape
retailers operate, putting pressure on tradi- the opportunity. By driving change at a busi-
tional business models. To survive and thrive ness’s “edges,” retailers can prototype and test
in this environment, established retailers new business models, gather meaningful feed-
should reassess how they create value, adjust- back, and learn and reflect with less internal
ing their asset mix to focus on the roles they tension and resistance. Small moves, smartly
chose to play. made, can set big things in motion.
31
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35
Acknowledgements
This paper would not have been possible without the support of our colleagues. The authors would
like to thank:
Kayoko Akabori Jodi Gray Sarah Qian

Nick Alexander Adam Hendle Rachel Smeak
Jeanne Allen Julian Ivann Lisa Gluskin Stonestreet
Troy Bishop Nathan Johnson Jake Wall
Andrew Blau Junko Kaji Kevin Weier
Ed Chen Duleesha Kulasooriya Maggie Wooll
Austin Dressen Matt Lennert Whitney Young
Robert Falcey Alison Paul
Contacts
For more information about this report or about the Center for the Edge, please contact:
Blythe Aronowitz Peter Williams

Chief of staff, Center for the Edge Chief edge officer, Centre for the Edge Australia
Deloitte Services LP +61 3 9671 7629
+1 408 704 2483 pewilliams@deloitte.com.au
baronowitz@deloitte.com
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
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sector, please visit www.deloitte.com/us/retail-distribution.
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About the Deloitte

Center for the Edge
The Deloitte Center for the Edge conducts original research and develops substantive points of
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Australia, helps senior executives make sense of and profit from emerging opportunities on the edge
of business and technology. Center leaders believe that what is created on the edge of the competi-
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opportunities related to big shifts that are not yet on the senior management agenda, but ought
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focused on implications for near-term action, the day-to-day environment of executives.
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
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• What needs to be done today to change course?
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For more information about the Center’s unique perspective on these challenges,
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The retail transformation

Cultivating choice, experience, and trust

Back to the future | 3

The Big Shift: Transforming the business landscape | 6

Selling amid the Big Shift: Redefining retail | 10

New entrants are increasing consumer options | 15

The new rules of the game: Choices for retailers | 19

Pragmatic pathways for transformation | 28

T ODAY’S retail landscape is changing

Back to the future

Figure 1. The journey through the report

The Big Shift: Transforming

B EFORE taking a deep dive into the retail

THE BIG SHIFT

Figure 2. The Big Shift’s trends

Overall trend of the Index of Economic Freedom, a compilation of 10 indicators

Nearly 70 percent of customers agree that they have increased information

and choice about brands.

1. Technological advances. Exponential improvements in the cost/performance ratio of core digital

Figure 3. Maker movement overview and drivers

Maker Faire attendence Etsy revenue

Kickstarter project hits >1,100 hackerspaces worldwide

Pebble $100K $10.3M 69,000

Oculus rift $250K $2.4M 9,522

Goldieblox $150K $286K 5,519

Safecast $4K $104K 290

Find details at: http://hackerspaces.org/wiki/list_of_hacker_spaces

Graphic: Deloitte University Press | DUPress.com

Selling amid the Big Shift:

Etsy sales alone. She says that her new business

Figure 4. ROYGBIV Indiegogo campaign

New technologies and customer company 3D-prints customized earbuds—

New entrants are increasing

A S discussed previously, more small,

FACTORS AFFECTING FRAGMENTATION:

Figure 5. Factors affecting fragmentation

1. Regulatory freedom: Less regulated

2. Online marketplaces: Online market-

3. Unique story: The more consumers

Graphic: Deloitte University Press | DUPress.com

Design retro-styled iPad® device cover, at TechShop

prototypes at a dedicated microfactory. GE engagement around offering advice, sharing

Niche players’ unique stories Retailer Mackenzi Farquer, based in

The new rules of the game:

agents—new entities that use deep under-

Figure 6. The traditional retail value chain

inventory products to be and/or the transaction consumer maximize the

Graphic: Deloitte University Press | DUPress.com

business-to-business (B2B) space by providing concentrators—“scale-and-scope” operators

Inventory management the majority of commercial retail real estate.

Figure 7. The traditional retail value chain—consolidation and fragmentation

Fragmenting, as Consolidating, Consolidating, Consolidating, Consolidating, Fragmenting, Consolidating, Poised to fragment,

access to and drop- platforms marketing able to drop-shipping to facilitate

Graphic: Deloitte University Press | DUPress.com

Established retailers agent serves, the more likely it is to recognize

Figure 8. Characteristics of agent businesses

The agent business

Defined as the ability to Recommends services/ Recommends services/

Passively provides Proactively anticipates

Accessible only to a limited Easily accessible to a large

Graphic: Deloitte University Press | DUPress.com

Figure 9. Sample Stitch Fix customer styling card

T HE landscape we describe in this report