Finding the Integrated Multi-Channel Retailer

Transcription

1 Finding the Integrated Multi- Channel Retailer Benchmark Study 2008 Written By: Brian Kilcourse, Managing Partner Edited by: Steve Rowen, Partner Sponsored by:

2 Table of Contents Executive Summary... 1 Business Challenge...1 Opportunities...1 Organizational Inhibitors... 1 Technology Enablers...2 Bootstrap Recommendations...2 SECTION I: Overview...3 Why the Study Was Conducted...3 Methodology...3 Defining Retail Winners and Why They Win...3 Survey Respondent Characteristics...5 SECTION II: Business Challenges...7 A Retail Paradox: How to Keep Up with Consumers Ever-evolving Multi- channel Expectations and Still Improve Profits?...7 How Multi-Channel Retailers have Turned the Profitability Trend Around...8 How are Efficiencies Achieved?...9 But are Retailers Ready for the Cross-channel Shopper?...11 SECTION III: Opportunities...13 It Takes an Integrated Multi-channel Retailer to Meet the Needs of a Cross-channel Customer...13 New Channels? Retailers are Hedging their Bets...14 Business Initiatives that Matter: Getting the Basics Right...15 You Have to Measure It to be Able to Change IT...16 SECTION IV: Organizational Inhibitors...18

3 Technology Takes Center Stage (Not in a Good Way)...18 Fear of Cannibalization Still Lurks...19 How Retailers Plan to Address the Technology Inhibitor...19 SECTION V: Technology Enablers...21 Increased Focus on Integrated Multi-Channel Technology Enablers...21 M-commerce: Not on the Radar Screen...22 Retailers are still Bruting Their Way to Integration...23 SECTION VI: BootStrap Recommendations...24 Top Line: Be There...24 Stop Working So Hard - Support Process Improvement with Enabling Technologies...24 One Version of the Truth...24 You Get what you Pay For...25 Keep an Eye Out for the Next Wave...25 Bottom Line: Stay Focused on Customers They are Leading the Way...25 APPENDIX A: The BOOT Methodology...a APPENDIX B: About Our Sponsors...b APPENDIX C: About RSR...c

4 Figures Figure 1: Winners Give Consumers More Options...4 Figure 2: Early Adoption Has Created a Clear Advantage...5 Figure 3: Winners Focus on the Customer Others Don t...7 Figure 4: Multi-Channel Retailing Is Good For Profits...8 Figure 5: The Web An Outlet for Old Inventory or an Extension of the Store?...9 Figure 6: The Buy-side of Multi-channel Retailer s Business is Coalescing...10 Figure 7: Shared Fulfillment Services Are Becoming the Norm...11 Figure 8: Larger, More Experienced Retailers Are Better At Enabling Cross-Channel Shopping...12 Figure 9: Retailers Multi-Channel Presence Helps Define Their Total Brand Value...13 Figure 10: Getting the Basics Right...15 Figure 11: Retailers Are Unclear About Which Measures to Use...17 Figure 12: Legacy Technologies Remain A Stubborn Inhibitor...18 Figure 13: Responding to Inhibitors: Customers Show the Way...20 Figure 14: Technology Enablers A Growing Sense of Urgency...22 Figure 15: Stove-Piped Systems Are Still Prevalent...23

5 EXECUTIVE SUMMARY The pace of e-commerce retailing continues to dramatically outpace growth in traditional channels. Although the National Retail Federation only projects sales growth in retail to be 3.5% in 2008, the U.S. Census Bureau estimates that e-commerce sales will rise over 17% in the same period, and over 70% in the next five years. While approximately 50% of U.S. adults currently have hi-speed internet connections at home, there is an even higher penetration in other parts of the globe, especially in Europe. As a result, today s consumers are not only bringing the store to their homes via electronic ordering and direct delivery, they also want to start transactions outside of the store to be completed in the store, and visa versa. This cross-channel behavior is being enabled by smart retailers who are using their systems capabilities to integrate their multi-channel capabilities into a seamless brand offering to consumers, and it ups the ante for all retailers. In this study, Finding the Integrated Multi-Channel Retailer: Benchmark Study 2008, RSR set out to reveal how retailers are addressing the challenges and opportunities that exist as a result of changing consumer shopping behaviors enabled by always-on high-speed access to the web via PC s and emerging mobile device capabilities. BUSINESS CHALLENGE In our research report on multi-channel retailing ( Searching for the True Multi-Channel Retailer, by Paula Rosenblum), we learned that as retailers sought to scale-up their e-channel operations to meet burgeoning consumer demand, the relatively high profitability of the e-channel had declined. Because of this shift, retailers had begun to focus on synchronizing internal processes to reduce or eliminate operational and systems redundancies that increase the overall cost of multi-channel operations. This year s survey results show that retailers have made progress towards stabilizing the gross margin of e-channel sales relative to store margins by finding efficiencies both in how they buy/source for the multi-channel operations and how they fulfill non-store orders. As the web continues to flourish as the fastest growing channel, most retailers continue to be concerned about redundant processes and systems that drive their costs up. But consumers are one step ahead, driving the multi-channel agenda by increasingly engaging in cross-channel purchasing, forcing retailers to not only optimize each of their channel operations, but to ensure that all channels work well together to deliver a seamless solution. Consumers aren t satisfied if all channels can t work together to deliver a total solution for their lifestyle needs. It is no longer enough to have separate channels, even if those channels are equal (equal assortment, equal price, etc.). Consumers really do expect all channels to work together to enable a seamless experience, and integration of the e-channel to the store is being emphasized more than ever as customers engage in cross-channel shopping. In this context, retailers clearly see alternate channels as a way to enhance the value of the dominant channel the store. At the same time, retailers cannot afford redundant business processes and systems for all the channels that they operate, and so there is tremendous pressure to address operational efficiencies as well as fulfill customer expectations of a seamless cross-channel experience. OPPORTUNITIES As retailers work to differentiate from their competition, creating a consistent brand identity across all channels is viewed as the best opportunity by the vast majority of retailers. Ensuring that product and customer information is consistent across the channels is a key component of the brand identity, as well as enabling cross-channel fulfillment. At the same time, most see opportunities to improve operational excellence through the effective rationalization of business processes across all the channels. ORGANIZATIONAL INHIBITORS Winning retailers are most worried that their legacy systems lack the flexibility to adapt to new demands. Virtually all retailers surveyed are concerned that inventory and order management systems are inconsistent across the 1

6 channels, and worry that there may be budgetary constraints that would enable them to address these issues. One interesting caveat: winners are not nearly as concerned about this issue. TECHNOLOGY ENABLERS The top technology enabler, according to the total respondent group, is the ability to perform real-time inventory and customer updates and make that information available across all channels. Cross-channel content management and product information management are key enablers, and the top choice of retail winners. Retail winners also place a great deal of importance on having a central customer-facing order management system across channels. Disappointingly, retailers are definitely not focused on the technology enablers for the emerging m-commerce channel. BOOTSTRAP RECOMMENDATIONS First and foremost, those retailers that are not yet engaged in multi-channel retailing need to get engaged. The cost of entry into the multi-channel retailing world is manageable, even for the smallest retail operations. Retailers large and small need to invest in integrated solutions that enable them to speed up and scale up their multi-channel operations at a lower cost of operations. A key component of that is to move towards technologies that have a single point of control ( one version of the truth ) for product and customer information. Retailers also can t neglect the lingering cultural issues associated with the fear of cannibalization of the #1 channel (typically the stores) by new channels. This requires embedding customer-oriented performance metrics into business processes and building incentives around those metrics. As investments are being made to modernize the technologies that enable efficient and scalable multi-channel operations, retailers need to pay attention to a new emerging channel, the mobile channel, or m-commerce. Finally, retail winners understand the importance of closely following consumer buying trends, and place importance on gaining a better understanding of customers cross-channel behavior as a way to prioritize their opportunities. 2

7 SECTION I: OVERVIEW WHY THE STUDY WAS CONDUCTED As we enter the second decade of B2C e-commerce as a practical shopping alternative for consumers, multi-channel retailing is an undeniable reality. Retailers and consumers started that journey in the 1990 s with little notion of how pervasive and ubiquitous the commercial web would become. However, what started as a technical curiosity has matured to become a baseline expectation for consumers. Multichannel retailing is now ubiquitous across all retail verticals, and consumers expect a seamless experience whether they choose to shop in the store, on the Internet or via mobile devices, from a catalog - or across all channels. At the same time, retailers remain challenged to improve customer service and satisfaction - the retail world is more competitive than ever. The Finding the Integrated Multi-Channel Retailer: Benchmark Study 2008 was designed to measure how retailers are addressing cross-channel consumer product research and shopping patterns, the extent to which they have achieved unified processes that bring product and customer information into all channel systems, and how well they are establishing cross-channel content and product information management systems, to ensure brand identity is consistent across all channels. We also wanted to learn the extent to which retailers are preparing for a new channel that is quickly emerging the mobile channel. METHODOLOGY RSR uses its own model, called the BOOT, to analyze Retail Industry issues. This model is built with our survey instruments. An explanation of the methodology can be found in Appendix A. Winning is not an accident in the world of Retail. Customers vote with their wallets. Sustainable sales improvement and successful execution of brand vision are direct results of an enterprise s recognition of external and internal business issues, its ability to take advantage of opportunities for improvement, and its use of technology enablers to simplify and rationalize business processes. Data that emerges from the BOOT model helps us understand the behavioral and technological differences between winners and their peers. DEFINING RETAIL WINNERS AND WHY THEY WIN Our definition of Retail Winners is straightforward. We choose to follow Wall Street. Wall Street judges retailers by year-over-year comparable store sales improvements, and we do the same. Assuming industry average comparable store sales growth of three percent, we define retailers with sales above this hurdle as winners, those at this sales growth rate as average, and those below this sales growth rate as laggards or also-rans. It is consistent throughout much or RSR s research findings that Winners don t merely do the same things better, they tend to do different things. For example, in Figure 1, we can see that Retail Winners put more emphasis on having multiple selling channels than other respondents. In fact, according to our survey respondents, only 9% of winners reported that they currently only operate stores compared to 21% of all other respondents. Winners clearly see a robust multi-channel offering to consumers is an important factor to winning. 3

8 Figure 1: Winners Give Consumers More Options Most Retailers Operate in More than One Channel E-channel only Call Centers only E-channel and Call Centers only Stores, E-channel, and Call Centers Sell in stores and via the E-channel (Internet and/or mobile) Stores only 2% 2% 0% 0% 4% 4% 9% 24% 21% 33% 40% 60% 0% 10% 20% 30% 40% 50% 60% 70% All Others Winners Source: RSR Research, March 2008 This begs the question: Does implementing technology itself create differences in performance, or are there other germane business issues driving business success? Of course, the answer is yes, there is more to it than just the technology. The ubiquity of the web no longer restricts B2C e-commerce to large retailers. However, it is clear that large retailers and winners have offered the e-channel longer than all others (Figure 2), and early adoption of web-based B2C technologies has created a competitive advantage for those retailers. 4

9 Figure 2: Early Adoption Has Created a Clear Advantage Winners & Large Retailers Have Been At It Longer We operate in only one channel with no plans to open additional channels More than 10 years Between 5-10 years Between 2-5 years Less than 2 years We are preparing to launch at least 1 additional channel within the next year 0% 2% 5% 16% 13% 0% 9% 19% 0% 9% 14% 12% 9% 11% 29% 38% 59% 56% Large Retailers Winners All Respondents 0% 10% 20% 30% 40% 50% 60% 70% Source: RSR Research, March 2008 SURVEY RESPONDENT CHARACTERISTICS RSR conducted an online survey in February 2008 and received answers from 103 respondents. Respondent demographics are as follows: Job Title: Senior Management (CEO, CFO, COO) 16% CIO/IT Leader 13% (Senior) Vice President 8% Director 20% Manager 32% Other Staff 10% 2007 Revenue ($ Equivalent): $50 Million or less 28% $51 - $249 Million 8% $250 Million - $499 Million 9% $500 Million - $999 Million 10% $1 Billion - $5 Billion 27% Over $5 Billion 18% 5

10 Geographic Reach: Segments: USA 60% Canada 4% Latin America 1% EMEA 32% Asia/Pacific 3% Supermarket 4% Convenience Store 2% Department Store 15% Hardware/Do-it-Yourself 1% Furniture 3% Mass Merchant 10% Big Box Specialty Store (>10,000 Sq. Ft.) 13% Small Box specialty Store 29% Other 23% Year-Over-Year Comparable Store Sales Growth Rates: o Better than Average: 46% o Average: 39% o Worse than average: 14% 6

11 SECTION II: BUSINESS CHALLENGES A RETAIL PARADOX: HOW TO KEEP UP WITH CONSUMERS EVER-EVOLVING MULTI- CHANNEL EXPECTATIONS AND STILL IMPROVE PROFITS? When we asked our 2008 survey respondents to identify the top business challenges that they seek to address with their multi-channel strategy, their responses begin to show the differences between Retail Winners and others. While improving operational efficiencies remains a high priority for all retailers (as in the survey), this year s results show that average and under-performing retailers are concerned about stopping the bleeding to their bottom lines from store operations with the e-channel, whereas winners are more focused than ever on winning customer loyalty by delivering a seamless customer experience for both ordering and fulfillment across all the channels (Figure 3). Figure 3: Winners Focus on the Customer Others Don t Top Challenges: Winners are Focused More on the Customer Slowing growth in our primary channel needs to be offset by other channels 18% 38% A good customer experience in a single channel is not enough to maintain customer loyalty Need to improve our operational efficiencies Customer expectation of seamless purchase and delivery options across channels Increased cross-channel consumer research and shopping patterns 37% 34% 44% 43% 40% 35% 36% 59% Others Winners 0% 10% 20% 30% 40% 50% 60% 70% Source: RSR Research, March 2008 In our study on multi-channel retailing, we stated: Even as the number of multi-channel shoppers continues to grow, relative profitability of this shopping segment has decreased several forces have combined to reduce this profitability. As multi-channel shopping has grown in popularity, measurements of true profitability have become more precise. Certainly, today s multi-channel customer has more price sensitivity. But more important as their multi-channel businesses have grown, the primitive ways retailers drive cross-channel consistency have come home to haunt them. The 7

12 time has come for retailers to bring the same efficiencies to their multi-channel operations as they have brought to their bricks and mortar operations. 1 Even as shoppers have become more savvy about using multiple channels to research comparative products, prices, and services, retailers have improved the cost structure that supports multi-channel operations and have turned those efficiencies into delivering more profitable customers, as is evidenced by responses to our 2008 survey compared to 2005 and 2006 survey results (Figure 4). Retail winners report far better results, with 62% reporting that their multi-channel customers are either significantly more profitable than single-channel customers or slightly more profitable. Figure 4: Multi-Channel Retailing Is Good For Profits Multi-Channel Customer Profitability - Trends 70% 60% 50% 40% 53% 41% 50% 62% 30% 28% 20% 10% 0% More profitable than single channel customers 17% 13% 9% Equally profitable 8% 3% 3% 0% Less profitable than single channel customers 2005 Respondents 2006 Respondents 2008 Respondents 2008 Winners Source: RSR Research, March 2008 It is also worth noting that a startling 33% of survey respondents answered don t know/can t say to our question about the relative profitability of their customers. This is a telling indicator of the need for customer-oriented performance metrics in a multi-channel operation. HOW MULTI-CHANNEL RETAILERS HAVE TURNED THE PROFITABILITY TREND AROUND According to our 2008 survey respondents, the web is the fastest growing channel, compared with the stores, by a 2-to-1 margin. Winners reported an even bigger gap between growth of the web and the 1 Searching For The True Multi-Channel Retailer Benchmark Report , by Paula Rosenblum, pp

13 stores. As every retailer knows, growth for growth s sake is not necessarily good for the business, so the question arises, how is that growth being managed from a profitability perspective? The data indicate that profitability is not being achieved on the backs of the consumer, i.e. via higher prices, but by operating the e-channel more efficiently. Figure 5 shows that from a gross margin percent perspective (revenue minus cost-of-goods), the top performing channel remains the store, suggesting that retailers are being more aggressive in offering deals rather than in offering items at a premium via the web. This makes sense in that the e-channel is an excellent vehicle for offering overstocks and out-of-season merchandise. Figure 5: The Web An Outlet for Old Inventory or an Extension of the Store? Top Channels - Gross Margin % 70% 60% 50% 40% 62% 50% 30% 20% 31% 35% 10% 0% 14% 13% 5% 0% Catalog Stores the Web Mobile All Respondents Large Retailers (> $5B) Source: RSR Research, March 2008 Large retailers (those generating the equivalent of $5B or more in annual revenue) differ from all others in that they the manage gross margin percent closer to equivalency between channels, suggesting that they view the e-channel more as an extension of their store operations, than as an outlet for excess or different merchandise. The inference is clear: larger retailers (who not coincidentally have operated multichannel offerings longer than other retailers) are more focused on using alternate channels as lead generation engines for their total offering, whereas under-performers think of the e-channel as a virtual Bargain Alley. HOW ARE EFFICIENCIES ACHIEVED? So, how are efficiencies achieved? Retailers can attack the cost of their operations both on the buy- side and on the sell-side of their businesses. In the context of multi-channel retailing, companies have made strides in overcoming the early-stage costs associated with running redundant operations for each of their channels, as was the practice in the early days of e-retailing. According to our survey respondents, 61% of all retailers indicate that buying and sourcing processes work for all the channels, rather than having separate processes for each channel (Figure 6). This split is consistent across all performance groups, with winners reporting an only slightly higher level of convergence, at 62%. EMEA (Europe, Middle East, and Africa) retailers in particular have made even greater strides at coalescing their buy-side processes, with 81% reporting that they have unified processes that support all channels. From an industry vertical 9

14 perspective, Department Stores outperform other segments in this regard, with 80% reporting that they have unified buying and sourcing processes for all channels. Figure 6: The Buy-side of Multi-channel Retailer s Business is Coalescing Buying/Sourcing - Together or Separately? 12% 27% 61% All channels Each Channel separately Don't Know/Can't Say Source: RSR Research, March 2008 When it comes to how retailers are organized to support the sell-side of the business, and specifically non-store fulfillment, our survey respondents indicate that establishing some level of shared services is the favored approach according to 48% of survey respondents, although 37% indicate that they continue to support channel-specific fulfillment operations (Figure 7). Winners are more aggressive in establishing shared services, with 57% indicating that their companies have established corporate-wide shared services or shared services for direct-to-customer channels. 10

15 Figure 7: Shared Fulfillment Services Are Becoming the Norm How Non-Store Fulfillment is Serviced An outsourced function, 10% Other, 5% Channel specific, 37% A shared service for our direct-tocustomer channels only, 14% A corporate-wide shared service, 34% Source: RSR Research, March 2008 BUT ARE RETAILERS READY FOR THE CROSS-CHANNEL SHOPPER? As we have seen, this year s survey responses indicate that retailers have been hard at work optimizing their channel operations and finding synergies between their traditional operations and alternate channel operations, particularly as it relates to buying and sourcing. But is that enough to keep up with consumers continuous demands for solutions to their lifestyle needs? As the novelty of B2C e-commerce has worn off, it has been replaced by an expectation that retailers service offerings work together. Not only is having the same products at the same price important, but so is being able to buy on the web or from a catalog to be picked up in the store. Customers also demand the ability to order products in the store, on the web, or via catalog and have them delivered directly to their doorstep. Quite simply, consumers want it all. In examining these questions with our survey respondents, we found once again that experience with multi-channel retailing is a key to being ready for the next phase. As noted earlier, large retailers (those companies delivering the equivalent of $5B or more in annual revenue) tend to have more experience than mid and small retailers in multi-channel retailing. So it isn t surprising that larger retailers have gone much farther than others in enabling cross channel shopping (Figure 8), offering the ability to order instore for subsequent fulfillment via other channels (59% compared to 42% for all respondents), or to buy online and via catalog for subsequent in-store pickup (59% compared to only 35% for the total response group). Most significantly, large retailers have shown a much greater willingness than all other retailers to partner with suppliers to enable direct shipments from the supplier to the customer. This creates many efficiencies not possible in a more traditional buy-then-sell business model, since inventory doesn t have to be transferred first to the retailer in order to fulfill customer orders; However, such an approach requires more inter-corporate process integration than mid-tiered and SMB retailers may have attempted to-date. 11

16 Figure 8: Larger, More Experienced Retailers Are Better At Enabling Cross-Channel Shopping Cross-Channel Activities Drop ship direct from supplier to customer 49% 56% 82% Buy in-store to fulfill through other channels 44% 42% 59% Buy online or from catalog to pick up in-store, 38% 35% 59% In-store visibility into online inventory availability, 36% 35% 33% Online visibility into in-store inventory availability, 36% 44% 47% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% All Respondents Large Retailers (> $5B) Winners Source: RSR Research, March 2008 Still, most retailers continue to struggle to make in-store inventory visible to the online channels and visa versa, with large retailers performing only slightly better than others. This speaks to the issue that the underlying technologies supporting multi-channel retailing remain stove piped along channel boundaries. This continues in spite of fact that the business processes are more integrated, as we will discuss later in this report. 12

17 SECTION III: OPPORTUNITIES IT TAKES AN INTEGRATED MULTI-CHANNEL RETAILER TO MEET THE NEEDS OF A CROSS- CHANNEL CUSTOMER The definition of brand has evolved over the past several decades, away from simply being a name or symbol uniquely identifying products or services. Instead, it has become something far more complex. Retailers have moved from simply providing outlets for manufacturer branded merchandise, to offering their own private label merchandise. Category managers think of brand as the sum-total of the messages that the product categories they manage convey to consumers. Retailers have learned that the key to winning customer loyalty is by offering unique services wrapped around what are often undifferentiated products and prices in order to create a compelling value. Thus, retailers have come to define their brand value as how well their product and service offerings work together to solve their customers lifestyle needs. Multi-channel retailing has become inextricably intertwined with consumers sense of what a retailer s brand value is relative to their lifestyle needs. Our 2008 survey respondents clearly understand this (Figure 9). Although the need to improve operational execution across all channels is a least somewhat important to 97% of the respondents in our survey, the need to create a single brand identity across all channels received the greatest number of responses (99%). Respondents also indicated that a consistent and clear explanation of product features and benefits regardless of channel is important (94%). Figure 9: Retailers Multi-Channel Presence Helps Define Their Total Brand Value Opportunities to Improve Customer Satisfaction Across All Channels Create single brand identity across all channels 87% 12% Allow customer to purchase, take delivery, or return a product through the channels of their choice 65% 23% 12% Allow inventory allocated for one channel to be used for another channel s fulfillment 47% 36% 16% Improve operational execution across all channels 71% 26% Offer customized and unique product offering 35% 51% 14% Explore new channels (mobile phones, etc) for product discovery, information and pricing 26% 40% 34% Consistent and clear explanation of product features and benefits regardless of channel 61% 33% 6% Improve our promotional effectiveness 53% 38% 9% Very important Somewhat important Not very important Source: RSR Research, March

18 Looking at how each performance group responded to the opportunities for improving customer satisfaction across all channels, we see again just how winners win in multi-channel retailing. As we see in most of our research, winners win by maintaining a relentless focus on the customer, while others focus primarily on shaking efficiencies out of operations. In this survey, retail winners rate the need to create a single brand identity across all channels as very important 91% of the time, whereas laggards only rate it 71%. Laggards put more weight on improving operational effectiveness, rating that choice as very important 79%, while winners place less emphasis (67%). While winners continue to address internal process inhibitors, they remain focused on the consumer, and it is this focus that drives their success. EMEA retailers demonstrate the greatest awareness of the need for a single brand identity across all channels, with 94% of those respondents ranking this opportunity as very important. NEW CHANNELS? RETAILERS ARE HEDGING THEIR BETS One area of opportunity that retailers aren t willing to take the lead on is with emerging new channels such as mobile e-commerce, or m-commerce. Only 26% of this year s respondents indicated that exploring new channels is very important, and 34% declared this to be not very important. Retail winners only rated this opportunity slightly higher, with 31% identifying it as very important. As to large retailers, only 6% of respondents from that group rated this opportunity as very important, and a startling 41% rated the opportunity not very important. However, it appears that most respondents are hedging their bets when it comes to new channels. While 41% of the overall response indicates that this opportunity might be somewhat important, 53% of large retailers think so, as do 44% of winners. Emerging capabilities in mobile technologies promise to empower consumers to search for products, to price-compare, to communicate with other shoppers and retailers, to pick up coupons, and to pay for goods. Companies such as Google are working to create the technical capabilities that link search and maps in such a way that will drive customers to stores, and thus create a powerful tool to drive traffic to retailers primary revenue generating channel. These geo-location services promise to enable such activities as: o o o o The ability for consumers to find the goods they want while shopping (search in the physical world); The ability for consumers to find deals while out of the house. For example, Where can I find the cheapest 32 plasma TV? ; The ability for consumers to negotiate with in-store sales personnel. For example, they will be able to show the in-house sales person via their smart device that the same product is $10 cheaper somewhere else; and, The ability for retailers to target advertisements to people based on their physical location. Although retailers are apparently wary of missing an opportunity in the m-commerce space, they are clearly not willing to take the lead in adopting the new technologies either. This caution could result from a raft of reasons, among them that many practitioners still remember the wild over-exuberance of e- commerce s early days, and don t want to make the same mistakes again. However, our survey responses also show that those who adopted multi-channel retailing earliest tend to have the most highly effective multi-channel practices now. So why the caution now? As we will see later in this analysis, retail winners and large retailers may be concerned about the limitations of their systems to support new and expanded multi-channel capabilities. 14

19 BUSINESS INITIATIVES THAT MATTER: GETTING THE BASICS RIGHT When it comes to what matters most to retailers in multi-channel execution, our 2008 survey respondents show that pragmatism, not experimentation, is the focus. As we saw earlier, retailers are being very cautious about new emerging channels such as m-commerce. They also are not focused on customized or unique product offerings (see Figure 9). Only 35% of the total respondent group indicated that this opportunity is very important, and large retailers placed even less importance on it, rating the option as very important in only 29% of responses. So what initiatives matter to retailers? Figure 10 indicates a clear overall desire to get the basics right. Both winners and the overall response group indicate that the time is now to address fundamental capabilities such as getting product information and pricing consistent across all the channels and enabling cross channel fulfillment. The total response group rated ensuring product information and pricing is up to date and consistent across channels as today s most important initiative. Non-winners place the most emphasis on that initiative, with 63% identifying it as the top priority. Although that s also important to winners, those retailers place greatest emphasis on cross-channel fulfillment (64%) as do large retailers (65%), compared to 53% for average performers and laggards. EMEA retailers take a different tack, indicating that their top priority now is cross-selling and personalized promotions, according to 58% of those respondents, compared to just 37% of the overall response group. This is an important distinction between U.S. retailers and their European counterparts, since cross-selling and personalized promotions is still considered a future project by many U.S. respondents. Figure 10: Getting the Basics Right Initiatives That Have Impact (and Could have Impact!) Ensuring product information and pricing is up to date and consistent across channels Enabling cross-channel fulfillment Cross selling and personalized promotions Same day shipping & simple, consistent returns Synchronizing customer and inventory information across channels Enabling real time views of cross-channel inventory Information sharing with merchandise vendors on product features and availability 32% 45% 34% 39% 32% 43% 39% 48% 24% 46% 20% 29% 46% 16% 27% 14% 61% 63% 64% 53% 58% 0% 10% 20% 30% 40% 50% 60% 70% Future Potential(all) Others Winners Source: RSR Research, March

20 As to future initiatives that could have impact, retailers expect to be able to de-emphasize ensuring product information and pricing is up to date and consistent across channels, indicating that for our survey respondents the initiative has either been completed or soon will be. Instead, our respondent group puts a great deal of emphasis on cross selling and personalized promotions as the next step in multi-channel retailing, with 58% indicating that it is a top priority. Although as noted earlier, EMEA retailers are already focused on cross selling and personalized promotions, they expect to maintain that focus in the future, with 56% indicating that it will continue to be their most important initiative going forward. Large retailers have a very different view of the future, putting much less emphasis on the importance of cross selling and personalized promotions, with only 41% viewing this as a top priority. Instead, large retailers plan to continue to focus on cross channel fulfillment (65%). This finding echoes large retailers relative lack of interest in m-commerce; Clearly these retailers are intent on making sure that the multichannel is an extension of the store offering, and aren t tempted with allusions to one-to-one retailing. YOU HAVE TO MEASURE IT TO BE ABLE TO CHANGE IT In Section II of this report, we mentioned that 33% of survey respondents answered don t know/can t say to our question about the relative profitability of their customers. When we asked our survey respondents to specifically identify the most important measures of cross-channel synergy, the #1 choice is customer satisfaction with 43% indicating this as a top choice (Figure 11). Other choices lag behind, and no choice was a clear winner by garnering at least 50% of responses. Retailers tend to fall back on traditional measures such as gross margin (36%) and the percent change in comparable sales (28%). Multi-channel customer profitability lags behind, with only 25% indicating that measure. Once again, large retailers (who have offered multi-channel options for the longest time) lead the way, indicating that they are beginning to use measures such as multi-channel customer profitability (31%). EMEA alone maintains a focus on sales conversion rates as a significant measure (in fact, those retailers top measure), with 45% indicating that it is important. There is a clear opportunity for better measures than currently are being utilized. Wall Street focuses on same store sales and merchants focus on same category sales, but the opportunity exists for new metrics that focus on same customer sales. However that opportunity has not been realized to any great degree across all retail segments as of yet. 16

21 Figure 11: Retailers Are Unclear About Which Measures to Use Top Measures Customer satisfaction 43% Gross Margin 36% % change in comparable channel sales Multichannel customer profitability Average transaction value Sales conversion rates 28% 25% 26% 25% Customer retention 17% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% All Respondents Source: RSR Research, March

22 SECTION IV: ORGANIZATIONAL INHIBITORS TECHNOLOGY TAKES CENTER STAGE (NOT IN A GOOD WAY) Retailers have learned that Information Technology isn t a silver bullet to address their operational challenges. Business decision makers know that technology is best positioned as an enabler to help business processes operate faster and more efficiently, and to scale up as the business grows. As we have seen, multi-channel retailers have made important strides in improving process efficiencies, particularly in product buying/sourcing and non-store fulfillment processes. It would be no great leap of faith to assume that the technologies that support those process integration efforts have kept pace but the data suggests otherwise. Retailers concerns about the ability to integrate their systems across all channels have actually increased rather than decreased since the study. In our survey report, 44% of survey respondents identified the #1 inhibitor to be that inventory and order management systems are not integrated across all channels, while 40% indicated that customer data is not integrated or shared across all channels, and 40% said that their inflexible technology infrastructure is difficult to change and adapt. Over one year later, we asked retailers to respond to the same question, What are the top organizational inhibitors that currently present a barrier to your company becoming an efficient multi-channel retailer? Their responses make it clear that their legacy technologies remain a stubborn inhibitor to progress (Figure 12). As before, the fact that inventory and order management systems are not integrated across all channels remains the primary concern for our respondents. Figure 12: Legacy Technologies Remain A Stubborn Inhibitor Top Organizational Inhibitors- Winners Worry About Tech Flexibility, Others Worry About Cost There are budgetary constraints to creating integrated processes 29% 46% Customer data is not integrated or shared across all channels 37% 38% Inflexible technology infrastructure is difficult to change and adapt Inventory and order management systems are not integrated across all channels 29% 53% 56% 51% The dominant channel fears sales cannibalization 25% 38% Channel-specific, instead of brand-specific, merchandising organization 33% 33% 0% 10% 20% 30% 40% 50% 60% Winners Others Source: RSR Research, March

23 Looking inside the numbers, differences start to emerge. For example, Tier 1 retailers (those producing annual revenues of $1B or more) and large retailers (those generating $5B or more) are much more concerned about the lack of integration of inventory and order management systems across all channels, responding 65% and 71% respectively, and therefore state that this is a top inhibitor (compared to 53% for the overall response group). EMEA retailers, on the other hand, express less concern about the level of integration of their inventory and order management systems across all channels, only citing it as a top inhibitor 44% of the time. Retail winners and EMEA respondents are much more concerned about an inflexible technology infrastructure (53% and 50%, respectively) than laggards, who only indicated it as an important inhibitor 21% of the time. Laggards worry about budgetary constraints as the #1 inhibitor (with a 50% response compared to 29% of winners and only 12% of larger retailers) and also skepticism from key decision makers (21% response, compared to 15% for the overall survey group, and only 6% for large retailers). What do the differences in responses mean? Under-performers, who as we have seen are much less confident in the profitability of their multi-channel operations, are concerned that there will be insufficient funding to address technology-related inhibitors to an integrated multi-channel offering. Winners are not nearly as concerned about where the money will come from to address problems with the technology. Instead, they are concerned that their legacy applications portfolios are so inflexible that changes required to enable cross-channel data visibility and functionality will come too slowly to meet increasing consumer demands for a consistent experience across all the channels. But as we have also discussed, most retailers aren t proactively considering the improved integration of systems capabilities as necessary prerequisites for future channels such as m-commerce. Instead, most retailers are reacting to consumer expectations and the need to optimize multi-channel operations. FEAR OF CANNIBALIZATION STILL LURKS It is worth noting a nagging process (rather than technology) concern coming out of the survey results. There continue to be lingering fears about cannibalization by the dominant (store) channel throughout the total response group, the concern ranked #3 for retail winners, who rated it as a top inhibitor 38% of the time, compared to 25% for all other respondents. In a related concern, winners are also worried that channel conflicts/lack of channel flexibility and/or mismatched metrics and incentives is a top inhibitor (33% compared to 23% for all others). One way to overcome these concerns is by changing compensation incentives to be brand, rather than channel, specific. In the study, 28% of respondents rated this as an important response to overcome fear of cannibalization. In this year s study, retail winners only rated it as an important response 16% of the time, well behind other choices. This can only be interpreted to mean that although winners see the problem, they re not going to do much about it in the near term, focusing instead on the more pressing technical issues that prevent them from moving forward on the multi-channel agenda. HOW RETAILERS PLAN TO ADDRESS THE TECHNOLOGY INHIBITOR Given that legacy technologies are such an overarching concern, the question that decision makers have to ask is where to start. Since technology, rather than other concerns (such as market acceptance or fear of change from internal organizations) is the organizational inhibitor that retailers are most concerned about, decision makers have to develop a plan of attack. As in most retail businesses, ROI is the typical driver of technology decisions, as most of our studies have shown. But in the case of multi-channel retailing, we see that consumer concerns often override other considerations in determining where to start (Figure 13). Winners place top importance on gaining a better understanding of customers cross- 19

24 channel behavior to help prioritize opportunities (60%). As we have seen in other responses throughout this study, winners focus externally - on what the customer wants. Figure 13: Responding to Inhibitors: Customers Show the Way Top Ways to Overcome Inhibitors A better understanding of customers cross-channel behavior to help prioritize opportunities Tying multi-channel systems efforts to strategic business objectives Improved integration tools Internally prioritizing integrated multi-channel data management strategies Creating an ROI-based business case to gain more resources to integrate business processes 48% 37% 42% 40% 38% 46% 53% 35% 33% 60% 0% 10% 20% 30% 40% 50% 60% 70% Winners Others Source: RSR Research, March

25 SECTION V: TECHNOLOGY ENABLERS INCREASED FOCUS ON INTEGRATED MULTI-CHANNEL TECHNOLOGY ENABLERS In the study, we stated: Having understood the primary business challenge is to create a more efficient and effective multi-channel enterprise, and recognizing that this is also retailers self-identified best opportunity to improve customer satisfaction, it is not surprising to find real-time inventory and customer updates and single operational data stores rising to the top of the list of technology enablers. 2 If anything, retailers sense of the importance of these capabilities has increased (Figure 14). This year s survey respondents identify the ability to perform real-time inventory and customer updates as the top technology enabler (71%). The general response group rated cross-channel content management and product information management as very important according to 66% of this year s respondents, a big jump from the prior survey, when respondents indicated that this capability had a much lower importance (43%). Again, winners rated this very highly at 79% (in their view the most important technology enabler) while only 43% of laggards view this as very important. Winners understand that consumers have gone beyond virtual self serve and are now engaged in searching and comparing before they buy. In this context, the e-channel is potentially a powerful lead generation engine for retailers, and meaningful information made available on the web to consumers drives traffic both online and even more importantly, to the store. Companies such as Home Depot and Wal-Mart now offer advanced search and compare capabilities that go so far as to tell customers if a particular store has inventory for the product the customer chooses. While laggards fret over budgetary constraints to enable these capabilities, winners continue to forge ahead and widen the gap between those that can and those that won t. Retail winners also place a great deal of importance on a central, customer-facing order management system across channels, with 79% of those survey respondents identifying it as a key technology enabler (compared to 61% for the total group). This capability is closely tied to a modern e-commerce platform, and 71% of winners think that this is very important (compared to 64% of the total response group). For EMEA survey respondents, a modern e-commerce platform is the #1 technology enabler, with 84% identifying is as very important. As e-commerce is now in its 2 nd decade, it is understandable that retailers would look at their legacy platforms as inhibitors (as we have seen in this year s survey results). Retailers want e-commerce platforms that integrate well with their merchandising, inventory, business intelligence, supply chain, and in-store operations systems. 2 Searching For The True Multi-Channel Retailer Benchmark Report , by Paula Rosenblum, p

26 Figure 14: Technology Enablers A Growing Sense of Urgency Important Technology Enablers (% "Very Important") Partnering with cellular/mobile portals such as AT&T, O2, or Sprint 7% Partnering with commercial portals such as Yahoo and Google Using mobile phones as an information, sales and marketing channel Advanced web and in-store analytics available in real time Improved search tools on the web 16% 15% 14% 40% 39% 51% 51% A modern ecommerce platform Transportation management systems, returns management systems Single operational data stores and data warehouses across all channels A central, customer-facing order management system across channels 32% 32% 39% 43% 55% 64% 61% Real-time inventory and customer updates 60% 71% Cross-channel content management and product information management 42% 66% 0% 10% 20% 30% 40% 50% 60% 70% 80% all Respondents all Source: RSR Research, March 2008 M-COMMERCE: NOT ON THE RADAR SCREEN It is clear from this year s results that retailers are busy optimizing business processes and reviewing their enabling technology platforms to determine how best to support multi-channel retailing as it exists now. Retailers have very little bandwidth to address a new and even more complex channel. As we saw earlier in this report (see Figure 5 & Figure 9), the m-commerce space is just a blip on retailers radar screens. Survey responses regarding technology enablers bear this out. Although the idea of using mobile technology as an information, sales, and marketing tool has a toehold of interest that hasn t diminished since the report, it has not increased in interest either. EMEA companies show the greatest interest, with 58% identifying this technology enabler as somewhat important, compared to 39% from the total response group. EMEA markets have seen early adoption of SMS ( Short Message Service ) messages for direct-to-consumer marketing via mobile phones, but this concept has not yet landed on U.S. shores in any material way. However, technology companies that provide e-commerce solutions to retailers report that there is early interest from some U.S. retailers in pursuing the idea of search capabilities using mobile phones, and so we can expect that future multi-channel retailing studies will focus increasingly on how well retailers are prepared for the new channel. 22

27 RETAILERS ARE STILL BRUTING THEIR WAY TO INTEGRATION In a 2005 study on multi-channel retailing, RSR partner Paula Rosenblum stated: Retailers achieving best-in-class performance are mostly bruting their way to higher sales. As the volume of cross and multi-channel sales increases, these retailers will find themselves at a customer service disadvantage. 3 In spite of the growing acceptance of multi-channel retailing in society and the rising tide of cross-channel shopping on the part of consumers, survey responses indicate that retailers are still manually synchronizing systems across channels (Figure 15). Despite our respondents views that integrated systems that service all the channels are key enablers going forward in the multi-channel world, today s reality is not so rosy. Large retailers, who have offered multi-channel options to their consumers the longest, indicate that product and customer information is entered separately into each channel s systems, according to 47%, and 41% of the time that information is entered into one system and then moved electronically into other channels. Interestingly, laggards indicate that one process gets product and customer information into all channels systems of record, according to 21% of those respondents, ahead of other retailers (winners identified this as their method for managing multi-channel data 18%, and larger retailers only 12%). From our responses, this is the sole benefit to having been so late in the multi-channel retailing game, i.e. laggards systems may not be so old. Figure 15: Stove-Piped Systems Are Still Prevalent How Multi-Channel Data is Managed One process gets product and customer information into all channels systems of record 12% 18% Product and customer information entered into separate order systems; duplicates are deleted later 0% 10% Product and customer information entered into one channel system of record and moved electronically into other channels 27% 41% Product and customer information entered separately into web, brick & mortar, and catalog systems 45% 47% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% All Respondents Large Retailers ( >$5B) Source: RSR Research, March The Multichannel Retail Benchmark Report - Where Is the True Multichannel Retailer?, 12/2005, 2005 Aberdeen Group & Retail systems Alert Group LLC, by Paula Rosenblum, p.8 23

28 SECTION VI: BOOTSTRAP RECOMMENDATIONS TOP LINE: BE THERE A multi-channel selling environment has become a baseline consumer expectation. Yet according to our survey respondents, 17% of retailers operate store only businesses, including 21% of non-winners. Winners see things differently, and very few (9%) do not offer consumers an alternative to the store. Although large retailers (those delivering the equivalent of $5B in annual revenue) have been at the multichannel game the longest and presumably bore the comparatively high costs associated with early adoption, multi-channel retailing is no longer exclusive to big and rich companies. Responses to the 2008 survey indicate that 26% of retailers with revenue less than $250M run store-only environments, and even 11% of retailers with annual revenues between $250M and $1B have store-only environments. In fact, the technological barriers to entry have been significantly lowered, and today there are many commercial options that are available to small and mid-tiered retailers. STOP WORKING SO HARD - SUPPORT PROCESS IMPROVEMENT WITH ENABLING TECHNOLOGIES Retailers continue to brute their way to the appearance of multi-channel systems integration, but this way of doing business adds costs that impact the profitability of the e-channel, is error prone, and won t scale up as the percent of business flowing through the e-channel increases. It doesn t have to be so hard, but in order to improve, retailers need to take advantage of new solutions, and that in turn means that they need to invest. Winners know this, while laggards worry about the price tag. The real question is not whether to begin, but where to begin? To some extent, the path is clear. It is a baseline expectation that product and price information is timely and accurate across all channels. Retailers need to take steps to ensure that their store-level perpetual inventory information is updated in real time, is accurate, and is available to all the channels; customer data is should be available to all channels as well. Many of these requirements are satisfied by modern commercially-available solutions, and so there is little need now for retailers to roll their own code. But RSR recommends that retailers continue to pressure solutions vendors to bear much of the cost of integrating new e-commerce platforms. This pressure will compel solutions vendors to continue to simply the integration points to their packages, and lower implementation and maintenance costs for all customers. As we recommended in our report, insist on a clear roadmap from potential solutions vendors. ONE VERSION OF THE TRUTH Retail Winners place much more emphasis on cross-channel systems and real-time data updates, particularly for inventory and customer information. Seventy-nine percent of those respondents believe that a central, customer-facing order management system across all channels is a key technology enabler. That being said, 45% of all survey respondents manage their data by entering it separately into each of their channel-specific systems. Retailers need to move to one process that gets product and customer information into all channels systems from a single point of control. So far, only 18% of the total respondent group manages its data in this way. 24

29 YOU GET WHAT YOU PAY FOR Although our survey respondents show that retailers focus is increasingly on the need to modernize technologies that support the multi-channel agenda, cultural issues linger that must be addressed, specifically, fear of cannibalization. With a multi-channel agenda, retailers move irrevocably towards a brand orientation and away from a product/location orientation, since the objective is to solve consumers lifestyle problems and not merely to push lots of product through a channel. The brand is the retailer s value to the consumer. Many retailers continue to provide incentives to the merchants based on product-oriented or store-oriented metrics: For example, how a category did compared to last year, or how a store performed compared to plan. Customer-oriented metrics are still relatively new in retail, but these metrics need to be designed and embedded into business processes along with incentives, to refocus merchants on brand rather than products & locations. Only in this way will retailers begin to move away from the tyranny of same store sales. KEEP AN EYE OUT FOR THE NEXT WAVE While retailers continue to focus on getting processes that support all their selling channels and the systems that enable those processes into sync, they may be missing the next disruptive technology wave mobile technology with geo-location search capabilities. Already in other parts of the world, retailers and their partners are using SMS (Short Message Service) to send incentives directly to consumers. Technologies are available that allow a consumer to photograph a bar code, send it off to an online retailer, and get an alternative price for the product in front of them. Already, in many parts of the world, smart phones are used as secure payment devices. Digital channels such as the web and mobile phones are not only opportunities for selling products and services. Even more importantly, they are great lead-generation engines for the stores. Retailers who don t pay attention to the emerging power of consumer mobile technologies to drive traffic to the stores will miss out on the next wave of multi-channel retailing. BOTTOM LINE: STAY FOCUSED ON CUSTOMERS THEY ARE LEADING THE WAY Just as consumers led the way in using the web as a research tool for their purchases (and retailers responded by making product information available to consumers via their websites), they also point the way forward with cross-channel buying behaviors. This ups the ante for all retailers who operate in the multi-channel space, because cross-channel consumer buying demands a level of integration between the channels which retailers have (so far) struggled to maintain. Retail Winners understand the importance of closely following consumer buying trends, and place importance on gaining a better understanding of customers cross channel behavior as a way to prioritize their opportunities. 25

30 APPENDIX A: THE BOOT METHODOLOGY The BOOT methodology is designed to reveal and prioritize the following: Business Challenges Retailers of all shapes and sizes face significant external challenges. These issues provide a business context for the subject being discussed and drive decisionmaking across the enterprise. Opportunities Every challenge brings with it a set of opportunities, or ways to change and overcome that challenge. The ways retailers turn business challenges into opportunities often define the difference between winners and also-rans. Within the BOOT, we can also identify opportunities missed and describe leading edge models we believe drive success. Organizational Inhibitors Even as enterprises find opportunities to overcome their external challenges, they may find internal organizational inhibitors that keep them from executing on their vision. Opportunities can be found to overcome these inhibitors as well. Winning retailers understand their organizational inhibitors and find creative, effective ways to overcome them. Technology Enablers If a company can overcome its organizational inhibitors it can use technology as an enabler to take advantage of the opportunities it identifies. Retail Winners are most adept at judiciously and effectively using these enablers, often far earlier than their peers. A graphical depiction of the BOOT follows: a

31 APPENDIX B: ABOUT OUR SPONSORS IBM has the industry experience, business consulting capabilities and technology to help retailers apply innovation and differentiate themselves to meet the needs of the increasingly demanding consumer. IBM helps retailers deliver superior customer experiences, create demand-driven merchandising systems and supply chains, and drive operational excellence. To learn more about IBM in retail, please visit IBM at About SAP for Retail SAP is the leading provider of application solutions for the retail industry. SAP helps retailers of all sizes to understand the shopper, anticipate the need and inspire the experience. The SAP for Retail solution portfolio provides specific solutions for retail companies in the food, fashion and hardlines businesses. The solution portfolio consists of building blocks that cover the areas of merchandise lifecycle (including lifecycle pricing and optimization); shopper experience (including a portfolio of POS and multi-channel solutions); supply chain (including inventory and replenishment), corporate operations (including finance and human resources) and a business process platform. SAP allows companies to implement solutions in a step-by-step approach, and provides an easy, cost-effective means to connect information across the business. (Additional information at b

32 APPENDIX C: ABOUT RSR Retail Systems Research ( RSR ) is the only research company run by retailers for the retail industry. RSR provides insight into business and technology challenges facing the extended retail industry, providing thought leadership and advice on navigating these challenges for specific companies and the industry at large. We do this by: Identifying information that helps retailers and their trading partners to build more efficient and profitable businesses; Identifying industry issues that solutions providers must address to be relevant in the extended retail industry; Providing insight and analysis about a broad spectrum of issues and trends in the Extended Retail Industry. Copyright 2008 by Retail Systems Research LLC All rights reserved. No part of the contents of this document may be reproduced or transmitted in any form or by any means without the permission of the publisher. Contact [email protected] for more information. c