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Over $30 billion in retail bankruptcies and 250,000 store closings. Iconic, category leaders like Blockbuster, Zales and Borders are contemplating bankruptcy or fire sales. Top private equity firms lead retail portfolio companies into bankruptcy. These headlines over the past two years illustrate the seismic shift shaking the world of retail. The bad economy, inept management and Wal-Mart are insufficient explanations for their misery. The real reason is both scary and exciting; but has more to do with the world their customers live in, and the inability of these retailers to adapt to it.
For most of the 20th Century, retailers flourished by focusing on product, price and brand. Today, that’s no longer enough. Purveyors of everything from apparel to groceries to consumer electronics and general merchandise are battling four macro trends: Price pressure from larger-scale retailers; market share competition from innovative, low-cost rivals; product commoditization; and brand glut from an excess of specialty and private label operators.
Retailers — even those hawking goods in the earliest bazaars — have always profited by exploiting their superior knowledge of merchandise, prices and availability. The Internet, however, is rapidly shrinking this information gap; in fact, in many cases shoppers are more sophisticated than their retail counterparts in using online tools. To make money today, retailers must offer personalized solutions by bundling unique products and services, for which well-informed shoppers are willing to pay a premium.
To succeed, retailers have to come to grips with the new reality that they operate in a multi-channel, customer-centric (mc3) world. Over 80% of retail transactions today involve customer interactions across multiple channels for research, purchase or service.
Americans have dramatically changed the way they shop, consume media, communicate and access information but most merchandisers have barely altered the way they acquire, communicate, inform, sell to and serve customers. U.S. consumers now devote almost 30 minutes, on average, each day to browsing the Internet—more time than they spend with the ads in any other shopping medium. Yet retailers earmark less than 5% of their advertising and customer acquisition budgets for online purposes; and continue to fork over billions for newspaper advertising. Retailers can increase sales while reducing marketing expense 30-50% by shifting to new Internet based platforms — where customers are.
We are at the cusp of a millennial shift in the way things are bought and sold – from a product focus to one based on deep customer relationships, from transactional to emotional. Sellers now have access to two things they did not before. For one thing, when buying or browsing online, customers reveal exponentially more information about themselves. For another, new media (Internet, kiosks, cell phones) allow sellers to personalize each interaction with each buyer. The key to a seller’s success in the next millennium, one may surmise, will be his ability to capture as much customer information as he can and then use it for the benefit of the customer. Sellers who build deep, powerful, and trusted relationships with buyers will be the winners and may end up selling the same buyers a diverse set of products and services. Sellers will likely be classified not by the category of products and services they sell but rather by whom they sell it to. The question retailers need to answer is: How well do I know my customer?
Retailers with outmoded business models like Borders and Blockbuster will shortly be extinct if they don’t change. By putting the names and addresses of millions of their customers interested in books, movies and games to better use, they can still build new, innovative billion-dollar businesses with superior operating economics.
This new world of retailing can either be an ominous threat or an exhilarating opportunity. The good news is that most leading retailers still have the financial resources to adapt if they choose to. If not — well, we all know what happened to the dinosaurs.
Love Goel is the Chairman and CEO of GVG Capital Group, a private equity firm focused exclusively on building market leaders in the multi-channel retail and consumer sector.
