SHOPPING FOR A NEW RETAIL OPERATING MODEL

ACHIEVE COMPETITIVE AGILITY

2 | Shopping for a New Retail Operating Model

There is a reason it is called the retail apocalypse. Retailers experienced a 37 percent increase in disruption between 2011 and 2018, the second highest jump among all industries in the Accenture Disruptability Index.1

Brooks KitchelManaging Director – Accenture Strategy, Retail

Brooks is the global Retail lead for Accenture Strategy. He works with top global retailers to address the critical issues facing their businesses. With more than 23 years of consulting experience to the Retail and Consumer Products industries, he has overseen major change initiatives for some of the world’s leading retailers and brands. Brooks is based in Washington D.C.

Al SambarManaging Director – Accenture Strategy, Retail

AI provides digital and innovation strategy services for executives in the Retail industry. With more than two decades of experience, he specializes in omni-channel and interactive retailing, business and digital transformation, and supply chain and IT strategy development. In 2016, he was named Consulting Magazine’s Consultant of the Year. Al is based in San Francisco

Richard WolffManaging Director – Accenture Strategy, Retail

Richard leads Retail for Accenture Strategy in Europe. He is also the CEO of Javelin Group and head of the Javelin Group Strategy practice. He has more than 25 years of experience in the Retail industry, and specializes in helping leading retailers and consumer brands with their enterprise digital and omni-channel retail strategies including organization, customer experience, international expansion and business transformation. Richard is based in London.

Margaret HuckebaSenior Manager – Accenture Strategy, Retail

Maggie helps leading global Retail and Consumer Product executives apply innovative digital, artificial intelligence and machine learning solutions to transform their strategy, operations and customer experiences. Maggie specializes in operating-model strategy, merchandising, digital and omni-channel marketing, customer service and product life-cycle management. Maggie is based in San Francisco.

2 | Shopping for a New Retail Operating Model

3 | Shopping for a New Retail Operating Model

The shift to digital and new business models is a killer. (See sidebar.) Fast-growing retail disrupters are breaking new ground and finding considerable success with business models that require completely new operating models. Meanwhile, the traditional retail operating model hasn’t changed significantly in 50 years. No surprise that many traditional companies are struggling to adapt and others are closing up shop altogether.

Surviving in today’s retail economy requires a leaner, more agile and customer- oriented operating model to support radically new ways of doing business. Building it means acting now—rejecting the status quo by revamping C-suite roles, managing P&L differently, and injecting digital and analytics into ways of working. Without a new model for a new era, many retailers will follow once iconic brands into obsolescence.

— Buckminster Fuller

You never change things by fighting against the existing reality. To change something, build a new model that makes the old model obsolete.

“

The dominance of digitalDigital is a mega force shaping basic human behavior today—consumers spend twelve hours a day interacting with digital media and devices.2 It is at the front of the line as a disruptive force in retail. This is why the new retail operating model must accommodate top digital trends like these that are changing all the rules.

Marketplaces are the dominant digital channel. The GMV growth rate of marketplaces has about doubled the growth rate of brand-direct digital commerce. Retailers have a choice. Either own their own reseller marketplace or be a high performer across many others’ marketplaces.

Retailers are driving growth with a house of brands. Even in this world of marketplaces, 25 percent of SKUs that US retailers sell are either private label or store brands.4 Clearly, a retailer’s ability to be a great brand acquirer and a brand innovator is essential to future competitiveness.

Retail-as-a-service is like a hot, new product line. Alibaba pioneered retail-as-a-service, offering services for sellers to use their platform to grow their businesses. This model is gaining momentum as US retailers like Kohl’s and Kroger position their assets as contractable services.

Advertising has become an income stream. The Amazon Advertising Platform is projected to bring the company more revenue than Amazon Web Services by 2021.3 In response, multiple retailers are making acquisitions and investments to scale their own ad services platforms.

4 | Shopping for a New Retail Operating Model

Purpose is the new productIn the new economy, retailers need a reason to exist beyond commodity transactions. According to our research, it is now purpose, not products, that turns shoppers into buyers. Put simply, making money in retail starts with a clear sense of purpose that resonates with consumers.

A well-defined brand purpose is not enough. Retailers deliver on their promise with an operating model grounded in purpose. The new operating model enables a shift in the retail value proposition from purely selling products to wrapping products in services and experiences. It must also be flexible enough to support new business models that enable retailers to more fully deliver on the brand purpose such as subscription, marketplaces, rental, resale, and retail as a service.

Purpose-led retail drove US consumer electronics giant Best Buy’s impressive turnaround. Flash back to 2012. Beyond price matching major online retailers6 to slow down showrooming, the CEO’s strategy to differentiate against Amazon embraced the purpose of “enriching lives through technology.”7 Instead of focusing on one-time product sales, Best Buy doubled down on services and experiences through initiatives

31% MORE

Consumers who score retailers higher on purpose spend

than those who do not.5

like its in-home advisor program and Geek Squad. The commitment to retail with purpose even extends to the company’s choice to have Geek Squad members use the eco-friendly Prius for house calls.8

To oversee its in-home strategy across all channels, Best Buy has created a new executive role with an emphasis on building deeper relationships by helping customers learn about and enjoy their technology.9 Such a significant redefinition of the customer value proposition upends traditional retail performance measures, which must be accounted for in the operating model. Customer value is no longer a one-time “buy and be gone” transaction measured by product margin. Focusing on customer lifetime value instead allows retailers to form an evergreen relationship with the customer over time.

5 | Shopping for a New Retail Operating Model

In Best Buy’s case, this meant taking approaches that upset the status quo, such as carrying low-margin products to leverage the store square footage and gain overall customer value over time. Other retailers have made similar disruptive moves. When luxury retailer Neiman Marcus partnered with Rent the Runway, it essentially invited a competitor into the store. This counterintuitive strategy attracted younger customers, and created opportunities to build relationships with a new generation of shoppers.10

Retailers need a dedicated C-suite leader to shepherd the critical intersection between what they sell and their purpose. For Best Buy, it was the CEO, later supported by the new president of home and services. In the new retail operating model, it is the Chief Product Officer (CPO). The CPO creates and sources physical products and connected services and experiences. And as needed, the role orchestrates an ecosystem of trusted partners to deliver them, simultaneously fulfilling the brand purpose and creating new revenue streams.

6 | Shopping for a New Retail Operating Model

Markets are the new channels

As “what” retailers sell changes, “how” they sell must change too. Take the revered role of the Chief Merchant. This executive has often set trends, “telling” consumers what they should buy, not “listening” for what they want to buy. This disconnect is compounded by a strict sales-by-channel mindset that prevents merchandising based on integrated, data-driven views of consumers.

This sales-by-channel mindset is inherently complex. Multiple merchants—each typically focused on a specific channel or category—focus on the same customer. Not only is this inefficient, it can create inconsistent customer experiences and fuel damaging internal competition. And as more retailers sell products on non-owned channels—and their products are available across thousands of sites—it is impossible to cost-effectively scale this approach.

What retailers need is a seamless, channel-less approach that creates a suite of products, services and experiences that are fine-tuned for each market.

This market-focused retail operating model is by nature extremely customer-focused and scalable. It can enable retailers to build a tribe of loyal customers market by market. At the same time, it reduces the redundancy and complexity that occur across channels to help remove costs and improve execution.

Focusing on markets is also about optimizing traditional retailers’ greatest asset—physical stores. But looking at a market goes beyond stores. Retailers need a unified vision and voice for a community, orchestrating engagement through stores, influencers, partners, pop-ups and more. Localization is key. After all, consumers in Kansas City, Missouri have different needs than those in Paris, France.

Retail innovator, IKEA, continually reinvents how it brings relevant products, services and experiences to customers. To cater to an urban clientele that increasingly does not own cars to make the trek to its suburban superstores, IKEA opened a mini store/ design studio in the heart of London that specializes in kitchens and bedrooms. It offers an immersive in-store

experience so busy city shoppers can browse, interact and get one-on-one advice and inspiration for their renovation projects.11

To support this market-by-market focus, online and offline merchandising and marketing teams need to be combined into one organization, led by the Chief Commercial Officer (CCO). Data insights help the CCO understand what makes customers tick and what makes each market unique. This market-by-market view informs how the CCO sources products and services. And in a profound change, P&L is restructured away from products to markets to more accurately track customer lifetime value. This results in aligning metrics and voice to the consumer one-to-one.

7 | Shopping for a New Retail Operating Model

Data is the new foundationData and digital capabilities are the foundation of purpose-led and market-focused retail. Yet many traditional retailers struggle here.

And in a world where e-commerce now makes up 15 percent of all retail sales and continues to show double digit growth12, just 16 percent of retailers view their company as a digital business.13

Retailers have oceans of data. Yet they lag in optimizing it for several reasons that, not surprisingly, stem from legacy business and operating models.

From a financial perspective, many retailers focus on return on invested capital from the physical store footprint, and customer data is not central to generating revenue from a real estate portfolio. From a technology perspective, legacy systems create multiple points of truth so access to reliable data is problematic. Culture is a significant barrier as well. Retailers have long rewarded the art of merchandising over the science of data analytics.

To thrive in disruption, retailers must reinvent their relationship with data. Because data, not margins or products, is the new cornerstone of retail. It is the unequivocal path to future revenue and is the heart and soul of the new retail operating model. By shifting to a model where data is the shared foundation, retailers can improve decisions around serving customers and running the business. It is also critical to invest in digital technologies that unlock cost savings that can be reinvested to grow the top line. Systems must be flexible, modern, digitally-decoupled and API-enabled so retailers can integrate seamlessly into ecosystem partnerships.

ONLY 25%of retailers think their company is data-driven—the lowest among all industries.

In the new retail operating model, the Chief Digital Officer (CDO) oversees investments in data platforms, artificial intelligence (AI) and machine learning capabilities to empower people, eliminate repetitive tasks, and boost efficiencies. The work of the CDO makes it possible for the CPO and CCO to quickly adjust to changing customer and market demands.

Consider the revolution in data-driven retail led by China’s e-commerce giant Alibaba. The company’s fresh food grocery—Hema—uses data to inform both in-store and online customer experiences. For example, online purchases are delivered in just 30 minutes to customers living close by thanks to AI technology that combines insights from customer, product, staff utilization, traffic and weather data.14 This digital retail experience is so compelling to consumers that the company reports an increase in housing prices in neighborhoods within the 3-kilometer delivery radius.15

8 | Shopping for a New Retail Operating Model

Buying into changeRetailers cannot face down disruption by bolting layers onto an obsolete operating model. Building a new retail operating model is a profound, and profoundly important, change. It will help deliver unbeatable customer experiences at a competitive cost—an elusive balance amid so much disruption. Driving change starts with the new C-suite focusing on these fundamentals:

Display whole-brain leadership Retailers over-index on right-brain thinking—that traditional merchant’s gut feel and intuition. Tomorrow’s new retail C-suite must embrace whole-brain leadership. This blends right-brain creative skills with left-brain skills like data analysis. It is balanced leadership grounded in the art and science of retail, the numbers and the nuance.

Unlock funds to drive growth A zero-based mindset (ZBx) reallocates resources to fuel retail transformation. It is a C-suite initiative that takes a bottoms-up view of all expenses to identify non-working money, optimize SG&A, lower op-ex costs with intelligent automation, and reinvest for top-line growth. This effort should reduce old-model assets that limit agility and trap cash.

Shop for new revenue streams Once retailers optimize SG&A and release new funds for investment with ZBx, they can invest in business models to drive them into the future. The focus is on developing a new value proposition based on a deep understanding of target customers and markets to secure the strongest path to sustainable revenue and growth.

Stock the right skills and capabilities Whether it is enabling technology, data science know-how or adjacent services that complement the brand purpose, retailers will need to look outside themselves to fill capability gaps. This means making smart “build, buy, borrow” decisions around investments, acquisitions and ecosystem partnerships.

8 | Shopping for a New Retail Operating Model

9 | Shopping for a New Retail Operating Model

The future of retail is a fast-moving target. By trading in a 50-year-old operating model for one that is more agile and adaptable, traditional retailers will be ready to thrive during the next 50 years of retail change.

9 | Shopping for a New Retail Operating Model

Reach out to our authors to see how shopping for a new retail operating model can drive innovation and growth.

10 | Shopping for a New Retail Operating Model

References1 Accenture Strategy, Accenture Disruptability Index 2.0, 2019

2 Quentin Fottrell, “People Spend Most of Their Waking Hours Staring at Screens,” August 4, 2018 at https://www.marketwatch.com/story/people-are-spending-most-of-their-waking-hours-staring-at-screens-2018-08-01

3 Ginny Marvin, “Analysts Say Amazon’s Advertising Business will Surpass AWS by 2021,” August 15, 2018 at https://searchengineland.com/analysts-say-amazons-advertising-business-will-surpass-aws-by-2021-303840

4 Louis Biscotti, “Private Label Brands Roar at Retail,” May 2, 2019 at https://www.forbes.com/sites/louisbiscotti/2019/05/02/private-label-brands-roar-at-retail/#479459048990

5 2018 Accenture Love Index Research

6 Best Buy Price Match Guarantee, https://www.bestbuy.com/site/help-topics/best-buy-price-match-guarantee/pcmcat297300050000.c?id=pcmcat297300050000

7 Lauren Hirsch, “People Thought Hubert Joly was ‘Crazy or Suicidal’ for Taking the Job as Best Buy CEO. Then He Ushered in a Turnaround,” June 19, 2019 at https://www.cnbc.com/video/2019/06/20/best-buy-chairman-and-fmr-ceo-hubert-joly-with-courtney-reagan-at-cnbc-evolve-summit.html?&qsearchterm=hubert%20joly

8 Suzanne Hilker, “A Year of Hybrid Happiness With the Eco-Geekmobile,” April 12, 2017 at https://corporate.bestbuy.com/year-hybrid-happiness-eco-geekmobile/

9 Best Buy Blog, https://corporate.bestbuy.com/about-best-buy/trish-walker/

10 Walter Loeb, “Neiman Marcus Partners with Rent the Runway to Attract Much Needed Millennial Customers,” November 22, 2016 at https://www.forbes.com/sites/walterloeb/2016/11/22/neiman-marcus-partners-with-rent-the-runway-to-attract-much-needed-millennial-consumers/

11 Zoe Wood, “Mini Ikea Spin-Off Store Opens in Central London,” October 11, 2018 at https://www.theguardian.com/business/2018/oct/11/mini-ikea-planning-studio-spin-off-store-opens-central-london

12 Digital Commerce 360, “Global Ecommerce Sales Grow 18% in 2018”, January 21, 2019 at https://www.digitalcommerce360.com/article/global-ecommerce-sales/

13 Accenture Strategy, “Ecosystems: Cornerstone of Future Growth,” 2018 at https://www.accenture.com/us-en/insights/strategy/cornerstone-future-growth-ecosystems

14 Xinhua, “Alibaba’s AI-Powered Hema Stores to Drive the Digitization o f the Retail Industry,” January 16, 2019 at http://www.chinadaily.com.cn/a/201901/16/WS5c3ede65a3106c65c34e4d72.html

15 Asha Barbaschow, “Alibaba’s Hema Stores Changing the Supermarket Experience,” November 20, 2018 at https://www.zdnet.com/article/alibabas-hema-stores-changing-the-supermarket-experience/

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