Retail Renaissance

This post is the first in a series on transformational retail IT.

Retailers have historically been luddites and cheapskates when it comes to technology and capital expenditures.  Recently, however, there is a renaissance of retail IT happening, empowering retailers and brands for the first time in history to utilize digital data and connectivity to bridge a direct relationship between consumers, marketing, point of sale, inventory and related systems.

Target (Photo credit: kevin dooley)

What if the sleeping giants of retail awoke to this flicker and drove information technology at unprecedented levels directly in front of a $5 trillion dollar juggernaut of high volume annual consumer spending? Many players in traditional retail are now embracing the best practices of digital commerce and are in the nascent stages of integrating them. Under CEO Gregg Steinhafel, Target TGT -1.31% has been among the top retailers funneling significant SG&A and cap-ex investment into its in-store omni-channel strategies. Having spent an annual $130-$160 million on in-store IT initiatives in recent years, the company is now turning to its monetization phase, including the recent launch of its Cartwheel app. By harnessing and leveraging proprietary digital data, traditional retail has the potential to transform itself into a new type of entity.

The traditional retail industry has in fact been far less disrupted by technology than other industries to date. The array of arguments for e-commerce’s threat to physical retail still include: vulnerability to even small decreases in revenue due to the high cost of real estate, in-store inventory management, and customer acquisition and retention, whereas e-commerce companies with low overhead, broad inventory, and massive warehouses are better equipped to grow revenue and to stave off small fluctuations over time. This approach was central to Mark Andreessen’s overhyped death knell for retail in a PandoDaily interview earlier this year. Further, “showrooming” has become a media darling bogeyman.

According to the US Census Bureau, e-commerce sales for the second quarter of 2013, adjusted for seasonal variation, were $64.8 billion, a 18.4% increase from the prior-year quarter, while total retail sales for Q2 2013, adjusted according to the same criteria, increased by 4.7% over the same period to $1.2 Trillion. Is the accelerating proportion of e-commerce’s market share in fact a threat to physical retail?

I believe there is a more nuanced discussion of retail and technology that views technology as a positive disruptive force in physical retail. While the market for e-commerce continues to grow at a faster rate than that for the retail industry as a whole, it still represents only a small fraction of the larger retail pie. Brick and mortar stores continue to hold the lion’s share of retail, while estimates of e-commerce market share vary between 5% and 8%. Additionally, a significant portion of e-commerce is captured by traditional retail brands’ online storefronts as part of this number. So what is the “threat level” of native ecommerce against traditional brands? Perhaps well below 5% of all retail spending.

In the retail industry, the transformative potential of technology will not displace physical retail, but rather, will transform and augment the traditional experience and displace legacy systems. Probably the biggest single enhancement to traditional retail is the ability know who the customer is in the store – except for old school local store clienteling, the only time a retail establishment knew who someone was when entering the premises was probably when Jesse James walked into a bank. Now retailers have the ability to engage on a one-to-one basis with a broad base of population creating door swings.

Omni-channel retail and data-driven in-store experiences are providing retailers unprecedented opportunity to meet customer desires, drive sales, and increase in-store conversion rates. As retailers seek to tap into the consumer engagement, lower-cost loyalty programs and brand awareness that new technologies facilitate, digital omni-channel solutions will continue to grow and proliferate within physical retail outlets. Geofencing and beacon technology will increasingly be used to send highly-targeted coupons and promotions to consumers at the point of purchase. All must be done with care and respect for the individual and their privacy.

The power of omni-channel retail is that it reveals not just what shoppers buy, but how they arrive at purchasing decisions. Bastions of the retail industry are taking note. Earlier this summer Saks Fifth Avenue announced an ambitious, $100M plan to create an omni-channel retail enterprise, having noted that 41% of Saks’ customers use smartphones in-store for looking up product information or to comparison shop.

I believe that new retail technologies will become seamlessly critical to in-person purchasing as consumers demand high-touch, tailored experiences and access to deals and product specifications, and as retailers learn to tap into the potential of omni-channel in-store marketing technologies. This is ushering in a golden age of retailing, one where brands that embrace this sea change will be richly rewarded with market share over those that don’t understand or believe in it.

Co-Authored by Rachel Shannon-Solomon