the i factor How consumer demand is driving retail innovation A report from the Economist Intelligence Unit S p o ns o re d by : The I Factor How consumer demand is driving retail innovation Contents Executive summary About this report Today’s shifting landscape Watching—and waiting—for the next big thing Getting personal is key to meeting changing customer demands 10 Pioneering change—in-store and online 12 Where now? 16 Conclusion 18 Appendix: Survey results 19 © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation Executive summary Retailers have every reason to feel that consumers are winning a technological arms race Armed with smartphones and wider broadband access and coverage, consumers boast unprecedented price transparency and can call on customer reviews with the swipe of a barcode or the tap of a touchscreen Increasingly, the shopping trip does not start on the high street, but rather during the lunch hour at work, at the bus stop or even in bed When customers hit the shops, more than ever they expect to know what is in stock and demand the ability to reserve it, pay for it and go This retail revolution is different from previous shifts because it is based on consumer-driven innovation Previous innovations—such as self-service supermarkets, direct e-commerce sales and using credit and debit cards—were all cases of retailers offering consumers something that most did not know they wanted The new omni-channel world of Customers are coming into stores with 21st-century kit, the cloud in a handheld device, and retailers are using till systems from the 1980s The arms race has really switched to the consumers now Ian Cheshire, chief executive of Kingfisher, owner of B&Q and Castorama consumers seamlessly researching and buying across mobile devices, computers and physical stores within the same shopping journey is one that consumers already inhabit Winning over this new, omnipotent customer is not a question of merely opening a store in the right location and filling it with the best stock Retailers recognise the rise of a new, empowered consumer and understand the need for action But there is a wide degree of variation in what it means for retailers of different stripes and in varying national markets In order to investigate how retailers are adapting, the Economist Intelligence Unit, on behalf of MasterCard, surveyed over 300 retailers from the UK, France, Germany, Italy and Russia Approximately one-half of the respondents are C-level executives and 42% come from companies with annual revenue of €500m or more The survey results were supplemented with eight in-depth interviews with senior executives from leading retailers This report takes a step towards mapping the shifting terrain and sketching out how retailers are navigating it Key findings include: Retailers are behind consumers in the technology arms race Only 3% of those surveyed are convinced that retailers are keeping pace with consumer demands for multi-channel retail But retailers are often grappling with legacy systems that are hamstringing efforts to evolve as rapidly as the market “Customers are coming into stores with 21st-century kit, the cloud in a handheld device, and retailers are using till © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation systems from the 1980s,” says Ian Cheshire, chief executive of Kingfisher, owner of B&Q and Castorama “The arms race has really switched to the consumers now.” Agility and speed give smaller companies the edge The first era of online expansion favoured the big players; now the smaller, more agile companies appear to have less difficulty responding to the rapidly evolving landscape Nearly one-half (49%) of larger retailers in effect admit that they are hostages to the next big innovation by stating that some unknown technology will be the most important driver behind consumer expectations However, just one-third of larger retailers are investing heavily in technology, compared to almost one-half (47%) of smaller retailers Although the big players are waiting for the next revolution, the smaller players are experimenting at the forefront Watching and waiting for the next game-changing technology After seeing the impact on the industry that different technologies have had in a very short period, retailers are betting that there is another game-changer that will shake things up by 2020 The biggest agent of change in customer relationships will be an innovation that is unimaginable today, according to 34% of respondents This lack of certainty can make it difficult for companies to decide where to invest But other seismic shifts can be predicted and prepared for: 36% expect the next big shake-up to be the burgeoning middle classes of emerging markets and 31% flag the impact of an ageing population in mature markets, while 43% expect mobile devices to be the most important channel for interacting with consumers in 2020 Physical stores take on a new role in the omni-channel landscape Brick-and-mortar stores are expected to be a less important channel through which companies interact with their customers by 2020 (dropping from 53% at present to 27% in 2020), compared with other channels such as mobile devices (rising from 32% to 43% in the period) However, just onequarter of respondents expect to be able to reduce their high-street presence and over one-half (55%) say that they are turning their retail outlets into “showrooms”, recognising that although most purchasing will be conducted online in the future, customers still want to touch and try out products before buying Getting personal is the key to meeting changing customer demands Technology has enabled the consumer to research the market at great speed, either in-store, at home or on the move Retailers must now try to keep pace, and so they are getting to know their customers better and using social media to meet changing customer needs Some 37% of those surveyed are conducting more research on customer expectations and 38% are increasing their use of customer segmentation, while 39% of retailers are delivering personalised shopping experiences and 32% say that they are using social media to meet empowered consumers’ expectations The leading players will be building greater personalisation into how they operate, for example through loyalty schemes or the automatic customising of websites Emerging markets will not wait to follow in the footsteps of developed markets Middle-class consumers in emerging markets will not wait until their markets are deemed mature before they demand to transact by mobile phone, order at home for in-store collection or take to social networks The rise of the middle classes in emerging markets is the biggest factor expected to shape customer expectations by 2020 (36%), even beating the rising prevalence of shoppers armed with smartphones and tablet computers (30%) © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation About this report In June and July 2012 the Economist Intelligence Unit, on behalf of MasterCard, surveyed 306 European retailers to investigate their views on the challenges facing the retail industry in the years to 2020—what are the opportunities and growth areas, how they are adapting to sector changes and how are they using new technologies to deliver an improved customer experience l Federico Barbieri, senior vice-president of e-business at PPR Respondents were drawn from the UK, France, Germany, Italy and Russia Retailers were grouped by type—including independent retailers, department stores, supermarkets, specialty retailers and chains—as well as size (annual revenue of less than €500m and greater than €500m) l Andrea O’Donnell, commercial director at John Lewis In addition, in-depth interviews were conducted with eight experts from leading retailers Our thanks are due to the following for their time and insight (in alphabetical order): The report was written by Marcus Leroux and edited by Monica Woodley of the Economist Intelligence Unit l Ian Cheshire, chief executive at Kingfisher l Pilar Gonzalez, head of global payment strategies at Inditex l Jody Goodall, head of solutions architecture at Kiddicare and Morrisons.com l Mark Newton-Jones, chief executive at Shop Direct l Dr Christian Plenge, head of architecture and innovation at Metro Systems l Mike Shearwood, chief executive at Aurora Fashions © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation Today’s shifting landscape The secluded, fertile pastures of old are vanishing Merely having good stores in prime locations is no longer sufficient The three biggest drivers of changing customer expectations over the past five years, according to survey respondents, are the rise of consumer empowerment, the proliferation of self-service and increased competition between products Each is highlighted by one respondent in three Chart What have been the main drivers of change in customer expectations over the past five years? Looking at the % from each country that selected social media (% of respondents) Total respondents 25% Russia 11% UK 34% France 16% Germany 24% Italy 34% Source: Economist Intelligence Unit © The Economist Intelligence Unit Limited 2012 Combined, these factors make a potent cocktail: consumers have more choice and are better informed than ever “The reality is that you’re competing with Amazon, whose operating profits are between 1% and 3%,” says Andrea O’Donnell, commercial director of John Lewis “The competitive dynamics have moved significantly You have to be as good as Amazon online and offer the same amazing experience as you offline.” But not all countries are at the same point or have been affected in the same way: more than one-third of British and Italian retailers (34%) highlight social media as having an impact on customer expectations, compared with only 11% in Russia Differing levels of uptake by consumers inevitably shape the responses of retailers in those markets In a similar vein, companies of different sizes offer varying diagnoses of the factors behind changing consumer preferences Companies turning over more than €500m are more likely to look for global explanations: 36% name globalisation as a primary factor behind customers’ greater expectations, compared with only 22% of smaller firms Furthermore, 28% adduce the influence of the rise of high-net-worth and middle-class consumers in emerging markets, double the 14% of €10m-500m companies that so Correspondingly, smaller groups are more likely to see communications technology, such as the rising prominence of smartphones and live online chats, as a big factor in changing customer expectations Thus, although smaller companies The I Factor How consumer demand is driving retail innovation see technology as the driving force behind market change, larger firms look to the global economy The most significant manifestations of this will be explored later in this report Customers’ elevated expectations carry through to the final stage of the shopping experience— the payment transaction—and here retailers are slowly adding new options, with 38% of retailers stating that they already use contactless payment to improve the customer experience The UK is in the vanguard, with 52% having adopted the technology So too, perhaps unsurprisingly, are larger companies But the roll-out of contactless payment encapsulates the difficulties faced by multinational retailers when implementing new innovations (see case study below) Case study: Global landscape, uneven terrain The onus on retailers to adopt new technologies can be immense But external constraints can often be the true limiting factor Inditex, the world’s largest fashion retailer, knows this only too well It operates in 82 countries ranging from Kazakhstan to Uruguay via its native Spain The company has transactional websites in about one-third of its markets When the remaining two-thirds arrive will depend on the growth of online penetration in these local markets and awareness of Inditex’s roster of brands, which include Zara, Berskha and Pull & Bear It is also making early moves towards accepting contactless payment, with pilot schemes in Italy and Poland and the introduction of Google Wallet, a mobile-payment system, in its recently opened New York flagship First, there are legacy ePOS systems that hinder the introduction of contactless payment Even if a local market has an up-to-date integrated payment system, domestic limits on the amount that can be spent in a contactless transaction can reduce the benefits of introducing the new equipment Inditex’s major rivals are also taking steps Gap Inc, the world’s third-biggest fashion chain, has introduced Google Wallet to its Gap, Old Navy and Banana Republic stores in the US H&M, which is the global number two, ought to have an even bigger incentive as it is a single-brand operator and sells at lower prices than Inditex However, although the retailer has introduced a transactional online presence in some markets, it is yet to begin rolling out contactless payments Some retailers are actively engaged in driving standardisation across markets Metro, Germany’s largest retailer, has developed a uniform method of payment using near-field communications that it believes can be rolled out internationally Dr Christian Plenge, head of architecture and innovation at Metro Systems, the IT division of Metro Group, says: “We are keen to move away from stand-alone solutions and to work towards a standard that can be applied throughout the industry—regardless of the provider, the platform and the devices used.” This entails greater co-operation with bodies outside the sector, such as card providers and mobile phone operators © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation At the moment, the fast-follower, the small and the nimble, have got more flexibility than the big boys But the major retailers who are investing heavily in this are becoming more agile too Ian Cheshire, chief executive of Kingfisher Watching—and waiting—for the next big thing After seeing the impact on the industry that different technologies have had in a very short space of time, retailers are betting that there is another game-changer that will shake things up by 2020 Some as yet unknown technology is the second most popular choice for the main driver of changing customer expectations by 2020 (34%), behind only the inexorable and long-foretold rise of the middle classes in emerging markets (36%) The strength of the response masks an illuminating divergence The gap between smaller firms and larger companies here is a colossal 25 percentage points Similarly, it appears that the higher up the organisation you travel, the more fatalistic—or some would say realistic—the responses are C-level executives are more likely to say that some unknown and unforeseen technology will transform customer expectations between now and the beginning of the next decade However, although the big players are waiting Chart What you believe will be the main drivers of changing customer expectations by 2020? Some technology which cannot be predicted right now (% of respondents) 49% Companies with €500m or more 23% Companies with €10m to €500m 37% 34% C-suite Total respondents Source: Economist Intelligence Unit © The Economist Intelligence Unit Limited 2012 for the next revolution, the smaller ones are experimenting at the forefront Whereas the first wave of online expansion— broadly between the foundation of Amazon in 1994 and the onset of serious “click-and-collect” initiatives around 2007—favoured the first mover and those with sufficient scale to attract traffic and spread investment over a larger cost base, the second, multi-channel phase favours fleetfooted operators who, often by dint of being latecomers to new technology, can tailor a new system to their own specifications “At the moment, the fast-follower, the small and the nimble, have got more flexibility than the big boys But the major retailers who are investing heavily in this are becoming more agile too,” says Mr Cheshire of Kingfisher The established players are more likely to be locked into powerful but unwieldy IT systems The scale of what companies must manage in just one area of technology, payments, shows the threat to inflexible incumbents—and the potential cost of inaction The volume of global contactless card transactions will rise from 3.5bn in 2009 to 31.8bn in 2013, according to US-based market-research company, the Yankee Group, while the value of mobile payments, either through near-field technology or remote transactions, will rise to US$1.3trn by 2017, according to Juniper Research of the UK The case study on the following page contrasts how two retailers of differing sizes dealt with technological innovation The I Factor How consumer demand is driving retail innovation Case study: Experiments at the edges or innovation by command? Multi-channel retailing is the buzzword of the era But the differing paths retailers take to get there are illuminating, and offer a revealing glimpse into why attitudes differ between companies of varying sizes Aurora Fashions, the British owner of clothing brands including Coast, Warehouse and Oasis, is a mid-sized retailer that, in the words of its chief executive, Mike Shearwood, is prone to the odd “mutation” “One of the guys from Oasis came and asked for £2,000 to develop something in 2009,” he recalls The result, he says, was fashion retail’s first transactional iPhone app “Sales through mobile now are 10% of the digital channel.” Letting things happen and following the customer is the modus operandi “We have integrated our IT, e-commerce and retail teams They all talk to each other and don’t things in silos When they develop something, they it with another relevant part of the business The testing is much quicker than the old way of doing IT projects, and a lot more flexible.” If Aurora adopts technology through evolutionary mutation, then John Lewis, another British retailer with a turnover approximately ten times the size of Aurora’s, adopts technology through intelligent design The company’s commercial director, Ms O’Donnell, was in charge of transforming John Lewis into a multi-channel retailer—a project that spanned along the supply chain from a new automated distribution centre to rewriting the job description of its shop-floor staff and overhauling its website “Four years ago, we made a decision to be a multi-channel retailer because we recognised that added value to shopping,” she says The project included customer research, a dramatic expansion of the number of products stocked online and retraining its 27,000 partners in what customer service means “We spent a lot of time with partners talking about the changing nature of the shopping experience and how more shopping trips started online We turned them into brand advocates, changed their job description and their KPIs [key performance indicators] That was a key area.” That meant explaining to a traditional workforce who have been trained to “think that good service was selling physical products to a customer in a shop” that they were also responsible for online sales in their catchment For Ms O’Donnell, multi-channel represented a leap of faith: “It was a big gulp to swallow.” It was a bet, in the form of tens of millions of capital expenditure, placed on the basis of a long-term vision of consumer behavior—not a £2,000 punt on a smartphone app What is standing in retailers’ way from adapting to the new landscape? Inconsistency across different markets was by far the most common response, with 64% of respondents highlighting it as a problem Payment-on-delivery is more deeply rooted in some markets, such as Germany, which poses problems for online sales Similarly, there is no industry standard for contactless or near-field communication (NFC) payments Dr Plenge of Metro Systems says that contactless payment was a “great opportunity” for the world’s fourth-largest retail group and its customers, adding: “NFC payment using a smartphone is currently the most technically sophisticated solution—we think it has a very big potential to become a common payment method © The Economist Intelligence Unit Limited 2012 because the smartphone is already the ‘allpurpose device’ of our customers “But mobile payment has to be as easy for the customer as paying with a credit card, otherwise it won’t catch on Currently, different players on the market—banks, mobile carriers, smartphone producers, et cetera—are competing to establish their own NFC solution as the industry standard.” There are also routine internal challenges: although the cost of inaction is staggering, responding to the omni-channel challenge is not cheap either Over two-fifths (43%) of respondents think that the adoption of cumbersome IT platforms is preventing retailers from moving at the same pace as the consumer when it comes to offering multi-channel The I Factor How consumer demand is driving retail innovation In a lot of organisations there’s internal resistance to change We have tried to take a view that if it’s right for the customer it will be right for us eventually Mike Shearwood, chief executive at Aurora Fashions opportunities, and the cost of adoption has to be a major factor in this choice The expense, for larger companies especially, is considerable Kingfisher is in the midst of spending £70m (US$110m) on “rewiring its internal systems” to enable the company to become an omni-channel retailer Ms O’Donnell reckons that it requires between £40m and £50m for John Lewis to stay ahead of the game: “An incremental 30% to 50% onto your IT bill per annum is what it takes if you want to be a leading omni-channel retailer We believe this investment will create barriers to entry.” The decision to adopt a new technology is often painful, either because it requires investment or because it forces compromises in the way retailers operate Mcommerce is a case in point “More and more people are using their idle time, whether at the bus stop or in the car, to go online—on social networks, browsing the web or to shop It’s only natural that you would expect people to transact as well,” according to Mark Newton-Jones, chief executive of Shop Direct, whose brands include Littlewood and Very “That requires creative effort and systems integration— and also cash.” Few retailers relish the chance of trying to inspire customers with a selling space that is only a few inches wide, nor will they jump with joy at the expense involved in repurposing their websites and, in Shop Direct’s case, their internal systems But following the customer is no longer optional “In a lot of organisations there’s internal resistance to change,” says Mr Shearwood of Aurora Fashion “We have tried to take a view that if it’s right for the customer it will be right for us eventually.” More and more people are using their idle time, whether at the bus stop or in the car, to go online—on social networks, browsing the web or to shop It’s only natural that you would expect people to transact as well Mark Newton-Jones, chief executive of Shop Direct © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation Those most reluctant are specialty retailers— only 34% say that they are turning stores into showrooms It is specialists that have the most to fear from the freerider problem of online stores benefiting from the service and store network of their rivals The role of suppliers here could become crucial Since the advent of multiple stores in towns, people have walked around and checked prices Technology has made it more transparent, more immediate and now people are doing it in-store with mobiles Jody Goodall, head of solutions architecture at Kiddiecare and Morrisons.com The demands of multi-channel retailing also mean that there are fewer hiding places for dualpricing policies between the Internet and stores John Lewis took the decision to drag its Never Knowingly Undersold pledge online, albeit with a caveat excluding Internet-only retailers, and the big electrical retailers are moving towards pricing parity WM Morrison’s Kiddicare was a pioneer of the multi-channel showroom Bespoke onlineordering kiosks are available in its stores It is sanguine about the threat of customers test-driving its buggies before buying them from Amazon “We will give you free WiFi, PCs even, to help you make your purchasing decision, whatever that might be,” says Ms Goodall “Since the advent of multiple stores in towns, people have walked around and checked prices Technology has made it more transparent, more immediate and now people are doing it in-store with mobiles.” Similarly, Sportscheck, the German sports retailer, introduced online browsing tables and in-store iPads to its stores two years ago This circumnavigates the classic problem faced by sports stores: how to display low-margin, awkward-to-stock sports equipment Customers can also benefit from in-store service instead of being left to sink or swim online The train of thought here is that, since there is no hiding place, one may as well be as transparent as possible and earn the goodwill of parents at a time when they are in need of advice And, of course, price match if one has to 14 © The Economist Intelligence Unit Limited 2012 The social media challenge Despite the buzz over social commerce, the results betray a lack of certainty regarding how social networks will affect the industry The UK and Germany are further ahead than their counterparts British retailers are more likely to say that social media has driven change in customer expectations in the past five years, but less likely to say that it will so between now and 2020 Accordingly, British and German retailers appear to be thinking more actively about how they use social media For example, 51% of British retailers say that more empowered consumers will necessitate a new social media policy, compared with 35% overall Federico Barbieri, senior vice-president of e-business at PPR, social networks provide a quandary for the luxury industry as a whole “[Social media] builds networks of people based on relationships, common interests or occasions Historically luxury brands built their awareness through word of mouth among those few who could afford them - it was still exclusive and discrete, so in line with luxury values,” he says “[But] times have changed and now social media is doing that job, mixing people who would never be a customer with core customers For luxury brands, it is key to understand how to play in that complex field rather than just it [social media] because its happening.” Luxury brands are beginning to grapple with how to engage on a forum as democratic and open as social media in a manner that is appropriate for a sector that thrives on exclusivity and scarcity The case study on the next page shows how retailers can use social networks to create communities for their customers The I Factor How consumer demand is driving retail innovation Case study: Building a community of customers Castorama, a French home-improvement chain owned by Kingfisher, has devised an innovative way of allowing its customers to benefit from each other’s expertise Les Trocs’heures is a free website that allows customers to swap their DIY expertise (troc is French for barter or swap) “Say you’re a gardener but you don’t have a clue how to lay a floor You can swap with somebody who’s good at flooring but not much cop in the garden,” explains Ian Cheshire, group chief executive of Kingfisher “It’s doing surprisingly well on a slow burn.” Users upload a profile including their location, availability and areas of competence The website already has 3,500 members and has facilitated more than 1,000 swaps It is one of a series of peer-to-peer schemes that Kingfisher has set up In the UK, it has launched a pilot scheme called Street Club, which aims to introduce group-buying for tools “Think of it as a local social network with 15 © The Economist Intelligence Unit Limited 2012 elements of Groupon and collective buying.” “We bought a web platform which we have adapted to help streets to get together to share, borrow from each other or buy equipment as a street,” he explains “That’s been on trial this year and we’re hoping to scale up to a national roll-out.” Thus, instead of paying £50 for a powertool that will be used once and stowed away in the shed, members will be able to pay a fraction to borrow one from an assigned neighbour whose contact details would be available on the website “We’re trying to think differently about the retail relationship with our customers.” He adds: “All of this relies on technology that just wouldn’t have been possible ten years ago.” Screwfix, Kingfisher’s trade business, hosts online forums where tradesmen share tips and upload home-made instruction videos of projects they have worked on The electricians’ area of the site alone has nearly 40,000 discussions The I Factor How consumer demand is driving retail innovation Where now? Ten steps in pursuit of the omnipotent consumer for 2020 Mobile devices will become the first port of call for engaging with customers Whether it is through the use of near-field communication technology or using geographical positioning capabilities to offer targeted discounts, or simply ensuring that mobile-optimised websites carry the hand-writing of a brand, mobile will be the shop front of tomorrow Today, mobile devices are being used by just 32% of retailers to communicate with customers, but when asked about their expectations for 2020 it is the most common channel of communication, with 43% suggesting that it is set to overtake stores, call centres and direct mail The high street will make a comeback The omnipotent consumer is more demanding than their traditional high street or online-only cousins—retailers must assure the “omnishopper” that they have what they want, when and where they want it, and will therefore win their trade Online-only players are already seeking physical presences Amazon is experimenting with lockers and recently signed up a partnership with Collect+ to use its network of 5,000 cornerstores for deliveries and returns Even retailers with significant store presence are taking similar steps: John Lewis will deliver to its Waitrose sister chain, a model that it will soon extend to third parties Only one-quarter of respondents hope that by meeting customers’ new demands they will be able to reduce their 16 © The Economist Intelligence Unit Limited 2012 high-street presence, leaving it well down in the list of objectives Stores will embrace their new status as showrooms There is a temptation to push back against online prices and product comparison in an attempt to preserve margins This will recede as retailers become more adept at using their multi-channel flexibility to make sure that, once customers cross the threshold, they are offered a range of product and delivery options This will mean building incentives for online sales into store staff’s pay structure It also means that price matching will become the norm, not the exception E-commerce will develop a human touch Online retail will become an experience in itself, not just a means to an end Pureplays are grappling with how to deliver service in real time, while brick-and-mortar retailers are desperate to express ethos and translate their “handwriting” online This means more live chats Only 2% are using instant messaging to communicate with customers—but 21% say that they will so by 2020 This is a technique pioneered among e-retailers, 13% of whom are already using it Websites will also become increasingly dynamic, automatically tailoring search results and architecture to a customer’s history Contactless mobile payments will reach critical mass after standardisation Competing systems and inconsistent regulations are a barrier to adoption by retailers The rivalry between different consortium-backed systems, and Google Wallet, means that an industry The I Factor How consumer demand is driving retail innovation standard has yet to emerge Dr Plenge of Metro Systems notes: “Mobile payment has to be as easy for the customer as paying with a credit card, otherwise it won’t catch on.” Mobile payment has to be as easy for the customer as paying with a credit card, otherwise it won’t catch on Dr Christian Plenge, head of architecture and innovation at Metro Systems Bespoke technology will be a source of advantage Being locked into unwieldy IT platforms can restrict moves towards multichannel or international development There will be more deals such as Morrisons’ acquisition of Kiddicare, PPR’s tie-up with Yoox (an onlineonly fashion retailer) and supermarket groups buying digital media retailers in order to acquire successful technology Similarly, there has been a succession of large retailers, such as Mothercare and Marks & Spencer, announcing that they will stop using the Amazon platform Price will be neutralised as a weapon The omnipotent consumer has as good a view of competitor pricing as the retailer has In the absence of differentiated pricing, low prices will be the ticket to entry, not a guarantee of winning the prize Convenience, service and exclusivity will be the key drivers—retailers clearly feel compelled to act in response to customer demands, rather than in the hope of cutting costs The etiquette of the omnipotent landscape is still being written Retailers must mind their step Is it overbearing to phone a shopper who has abandoned an online transaction to offer assistance? Will consumers accept 17 © The Economist Intelligence Unit Limited 2012 technologically enabled price discrimination as long as it is packaged as a “reward” for a lucky few? When is it appropriate to enter a conversation on social media? The code of conduct offline has been built up over millennia The unwary retailers will find out about the new code of conduct the hard way The global population of omnipotent consumers will explode There is widespread recognition that first-generation consumers in emerging markets will reshape the industry—only 19% of respondents see it as a factor behind changing expectations in the past five years, but 36% believe that it will be a driving force over the remainder of the decade 10 The concept of “retail” needs to be flexible Even by conservative estimates, more than one high street shop in ten is empty in the UK In France, the most successful e-commerce model is the “drive” concept, used by hypermarkets so that customers can click-and-collect orders without leaving their cars Meanwhile, initiatives like Amazon’s collection lockers and third-party drop-off points are taking off How long will it be before retailers with excess store space or landlords of empty shops become repositories for other people’s goods? Smart retailers will embrace the opportunities brought about by this flexibility while considering how changes might affect consumers’ perceptions of their brand The I Factor How consumer demand is driving retail innovation Conclusion The test presented by omnipotent consumers is daunting They know what the market is offering, at what price and at a speed unimaginable a decade ago Retailers are responding but some are reverting to the comfortable, for example abandoning “troubled” low-margin markets where online presentation is highest—a move sometimes born of necessity, but as often out of ludditism Solutions are not one-size-fits-all, as demonstrated by the range of innovations highlighted in this report But successful retailers will accept the challenge laid down by “omni-shoppers” and use the new environment as an opportunity to refigure their businesses 18 © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation Appendix: Survey results What have been the main drivers of change in customer expectations over the past five years? Select up to three (% respondents) Increased competition between product/service providers 37 Proliferation of self-service (ie, booking a holiday online rather than through a travel agent, self-service check-outs at grocery stores, etc) 33 Customer empowerment 32 Increased amount of available information to consumers 30 Globalisation 28 Social media 25 Communications technology (smart phones, web chat, etc) 21 The rise of middle-class and HNW consumers in emerging markets 20 The need to compete on brand in a crowded marketplace 19 Changing demographics 12 Increased information available to companies on customers through analytics Decreased customer loyalty Other (please specify) 19 © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation What you believe will be the main drivers of changing customer expectations by 2020? Select up to three (% respondents) Growing middle class of consumers in emerging markets/increased per capita incomes 36 Some technology which cannot be predicted right now 34 Increasing global competition 33 Changing demographics (ie, ageing population in many developed markets) 31 Increasing use of smartphones, tablets and other portable web-enabled devices 30 Personalisation technology 30 Increasing outsourcing of service jobs to emerging markets 27 Increasing customer empowerment 21 Social media 14 Decreasing customer loyalty Other (please specify) Don’t know What are the implications of more empowered consumers for your company? Select all that apply (% respondents) New customer service strategies 42 New marketing strategies 41 New payment solutions 40 New social media strategies 35 New ways to increase customer loyalty 35 New ways to increase customer trust in our brand 34 Expanding into new markets 26 New pricing strategies 18 Partnering with other companies to strengthen our brand Partnering with technology companies to help us manage the transition to multi-channel retail No implications Not applicable, I don’t believe consumers actually are more empowered than in the past 20 © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation How is your company currently adapting in order to prepare for changes in consumers' needs and expectations? Select all that apply (% respondents) Delivering personalised shopping experiences across multiple channels 39 Increasing use of customer segmentation 38 Increasing research into consumer expectations 37 Increasing use of customer analytics to personalise service 34 Increasing use of social media 32 Increasing use/upgrading of CRM systems 32 Integrating our online and offline shopping experiences 30 Focussing on brand building 20 Increasing use of customer analytics to assess customer behaviour 19 Integrating multi-channel payments Using payment information to build consumer intelligence Other (please specify) What you believe those adaptations will deliver for your company? Select all that apply (% respondents) Increased customer loyalty 42 Stronger brand 42 Cost efficiencies through targeted marketing 33 Reduced customer support costs 29 Better customer intelligence 29 More efficient payment systems 28 Reduced high street presence 25 Increasingly globalised customer base 15 Broader product/service range 13 More personalised product/service offerings Other (please specify) 21 © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation What is preventing retailers from moving at the same pace as the consumer when it comes to offering the multi-channel opportunities consumers want? (% respondents) Inconsistency of experience across different territories (eg, some markets adopting new technology faster than others globally) 64 Adaptation of cumbersome IT platforms to meet new consumer demand 42 Lack of audience intelligence to stack up the case for investment 42 Lack of internal co-ordination and alignment 22 Supply chains which are not designed to serve multi-channel businesses 11 Not applicable, I think retailers are keeping pace with consumer expectations Do you agree or disagree with the following statements? (% respondents) Agree Disagree We are turning our retail outlets into “showrooms” as most purchasing will be online in the future 18 28 55 Creating a seamless customer experience via online and offline channels is key to my company’s success 20 37 43 We are investing heavily in technology to support our ability to deliver an effective multi-channel experience 30 29 41 Loyalty schemes are opening up new ways for my company to market and sell our products 11 54 36 Loyalty schemes are now expected by consumers but have little effect on my company’s sales 42 51 Which of the following technologies you currently use to deliver an improved customer experience? Select all that apply (% respondents) Data collection (eg, based on previous purchase history) 40 Contactless payment technology 38 Social media tools 36 Technologies to enhance e- and m-commerce 35 Self-service kiosks 32 Employees in-store with mobile-POS 29 'Swipe and go' 28 Location-based technologies 23 Quick response codes 'Next generation' loyalty engines Other (please specify) 22 © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation Which of the following technologies you plan to use to deliver an improved customer experience in the next year? Select all that apply (% respondents) Contactless payment technology 44 Data collection (eg, based on previous purchase history) 41 'Swipe and go' 38 Technologies to enhance e- and m-commerce 35 Social media tools 27 Location-based technologies 27 Self-service kiosks 26 Employees in-store with mobile-POS 26 Quick response codes 16 'Next generation' loyalty engines Other (please specify) Which of the following technologies you plan to use to deliver an improved customer experience by 2020? Select all that apply (% respondents) Employees in-store with mobile-POS 41 Location-based technologies 35 Self-service kiosks 33 Social media tools 33 Quick response codes 32 Data collection (eg, based on previous purchase history) 31 'Swipe and go' 28 Contactless payment technology 26 'Next generation' loyalty engines 18 Technologies to enhance e- and m-commerce 14 Other (please specify) 23 © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation Which of the following are the most important channels your company uses to interact with customers now? Select your top three (% respondents) Stores/outlets 53 Email 44 Telephone/ call centre 43 Website 38 Social media 37 In person/sales force 36 Mobile devices 32 Mail 13 Instant messaging services Other (please specify) Which of the following will be the most important channels your company uses to interact with customers in 2020? Select your top three (% respondents) Mobile devices 42 Website 38 Telephone/ call centre 38 Social media 37 Mail 37 Email 32 Stores/outlets 27 In person/sales force 21 Instant messaging services 21 Other (please specify) 24 © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation In which country are you personally located? (% respondents) UK 23 France 22 Germany 22 Italy 21 Russia 12 What type of retailer is your organisation? Select all that apply (% respondents) Independent 36 Department store 23 Chain 19 Speciality retailer 18 Supermarket 17 Franchise 15 Warehouse retailer 11 E-tailer Convenience retailer Discount retailer What is your job title? (% respondents) Board member CEO/President/Managing director 23 CFO/Treasurer/Comptroller CIO/Technology director Other C-level executive 14 SVP/VP/Director 17 Head of Business Unit 15 Head of Department 19 Manager Other 0 25 © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation What type of goods does your organisation sell? Select all that apply (% respondents) Food 40 Durable goods 37 Soft goods or consumables 33 Intangible goods/services What is your organisation’s global annual revenue in euros? (% respondents) Less than €10m €10m to €500m 58 €500m to €1bn 25 €1bn to €5bn 16 €5bn to €10bn €10bn or more Where does your company operate? (% respondents) Globally Europe only 40 My country only 45 My city/region only 26 © The Economist Intelligence Unit Limited 2012 While every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in this white paper Cover image - © RichVintage/istockphoto LONDON 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8500 E-mail: london@eiu.com NEW YORK 750 Third Avenue 5th Floor New York, NY 10017 United States Tel: (1.212) 554 0600 Fax: (1.212) 586 1181/2 E-mail: newyork@eiu.com HONG KONG 6001, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: hongkong@eiu.com GENEVA Boulevard des Tranchées 16 1206 Geneva Switzerland Tel: (41) 22 566 2470 Fax: (41) 22 346 93 47 E-mail: geneva@eiu.com [...]... has In the absence of differentiated pricing, low prices will be the ticket to entry, not a guarantee of winning the prize Convenience, service and exclusivity will be the key drivers—retailers clearly feel compelled to act in response to customer demands, rather than in the hope of cutting costs 8 The etiquette of the omnipotent landscape is still being written Retailers must mind their step Is it... innovations highlighted in this report But successful retailers will accept the challenge laid down by “omni-shoppers” and use the new environment as an opportunity to refigure their businesses 18 © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation Appendix: Survey results What have been the main drivers of change in customer expectations over the. .. retailers, and the big electrical retailers are moving towards pricing parity WM Morrison’s Kiddicare was a pioneer of the multi-channel showroom Bespoke onlineordering kiosks are available in its stores It is sanguine about the threat of customers test-driving its buggies before buying them from Amazon “We will give you free WiFi, PCs even, to help you make your purchasing decision, whatever that might... which comprise the keenest group of retailers that are using personalisation and customer segmentation This is despite their reputation as being the most insulated corners of the high street from the technological revolution in how customers shop For example, what would personalisation look like in the convenience sector? The I Factor How consumer demand is driving retail innovation J Sainsbury’s “coupon... Ten steps in pursuit of the omnipotent consumer for 2020 1 Mobile devices will become the first port of call for engaging with customers Whether it is through the use of near-field communication technology or using geographical positioning capabilities to offer targeted discounts, or simply ensuring that mobile-optimised websites carry the hand-writing of a brand, mobile will be the shop front of tomorrow... linked to the south-west This could open the door to price discrimination: charging customers different prices for the same product on the basis of information, for example, on their user history However, many retailers will be reluctant to risk the ire of consumers But the personalisation of websites based on order history is already in use by Ocado, an online grocer Using the Internet as a window to... similar steps: John Lewis will deliver to its Waitrose sister chain, a model that it will soon extend to third parties Only one-quarter of respondents hope that by meeting customers’ new demands they will be able to reduce their 16 © The Economist Intelligence Unit Limited 2012 high-street presence, leaving it well down in the list of objectives 3 Stores will embrace their new status as showrooms There... more immediate and now people are doing it in-store with mobiles Jody Goodall, head of solutions architecture at Kiddiecare and Morrisons.com The demands of multi-channel retailing also mean that there are fewer hiding places for dualpricing policies between the Internet and stores John Lewis took the decision to drag its Never Knowingly Undersold pledge online, albeit with a caveat excluding Internet-only... retailers will find out about the new code of conduct the hard way 9 The global population of omnipotent consumers will explode There is widespread recognition that first-generation consumers in emerging markets will reshape the industry—only 19% of respondents see it as a factor behind changing expectations in the past five years, but 36% believe that it will be a driving force over the remainder of the. .. Increasing use/upgrading of CRM systems 32% Integrating our online and offline shopping experiences 30% Focussing on brand building 20% Increasing use of customer analytics to assess customer behaviour Integrating multichannel payments Using payment information to build consumer intelligence 19% 5% 2% Source: Economist Intelligence Unit 10 © The Economist Intelligence Unit Limited 2012 Analysing and ... use the new environment as an opportunity to refigure their businesses 18 © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation Appendix:... offerings Other (please specify) 21 © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation What is preventing retailers from moving at the. .. generation' loyalty engines Other (please specify) 22 © The Economist Intelligence Unit Limited 2012 The I Factor How consumer demand is driving retail innovation Which of the following technologies