In 2011, retail will continue to undergo some of the most dramatic changes the industry has seen in half a century due to underlying drivers that have permeated society and shopping behavior. The most powerful, of course, is digital. Less immediate but also highly significant are demographic, economic and cultural value changes that are having an impact at both the local and global level.
Consumers’ digital domination
Nielsen predicts one in two U.S. consumers will own smartphones by the end of 2011. And yet, despite the rapid adoption of digital technology, the majority of retailers have been slow to respond to the opportunity. The coming year will be one of catching up. The lion’s share of capital budgets will be allocated to the online channel and its optimization for mobile use, while marketing departments will try and crack the code for connecting with customers through social media. To truly connect with shoppers who are adept at controlling the interaction, retail brands will continue to discover innovative ways to be invited into consumers’ closed loop.
At the same time, consumers are increasingly more willing to allow access to their private information. Amazon.com now allows users to link their Amazon account to their Facebook account, so that the subjects in their social posts can be integrated into their Amazon recommendations. Keep in mind that in exchange for access, customers will expect to receive more value.
As retailers rush to take advantage of digital’s new channels for customer insight, interaction and engagement, they will also be faced with data overload — more information on customers, transactions and operations than they know what to do with. They will seek to find ways to separate the wheat from the chaff in terms of metrics, by way of refined research into the shopper’s path to purchase.
The art of the deal
While technology has allowed consumers to become increasingly savvy, skilled and sophisticated shoppers who gleefully drive deals, it also makes them susceptible to impulse purchases. The group bartering trend has been formalized through programs such as Groupon, where stores grant deep discounts if enough people sign up for them. Members only clubs for apparel like Gilt Groupe, are being adopted by other categories. Flash sales, or time-limited offers via text or Twitter, will continue to trigger impulse buying and give shoppers the smart feeling of having scored a great deal. Traditional retailers like J. Crew are already learning to use the flash sale: It recently opened an online factory store only on the weekends for deal-happy shoppers.
Brick and mortar transcends itself
Despite the fact that the point of purchase is now highly mobile, retailers are going to find that the physical store still needs significant investment. Shoppers expect it to be the epitome of the brand experience and the embodiment of all that is unique about the way a merchant does business. Otherwise, why go to the store? Stores will incorporate new services and experiences into their concepts to remain relevant and provide emotional engagement. This will be key to the increased importance of word-of-mouth as great service and experience will be actively compiled, commented upon and shared by wider audiences.
In the past, the 80/20 retail rule of thumb said that 20 percent of a store’s SKUs equaled 80 percent of sales. That rule will be turned on its head. In a digital world with almost infinite choice, shoppers will be drawn to stores with a personalized focus. Physical store concepts will become smaller, better executed and highly tailored. Assortments will become relevant and finely curated as they evolve toward true demand. As shoppers buy less of what’s mainstream and more of what suits them individually, 80 percent of units will earn 80 percent of profits. Additionally, private labels, localized sourcing and cultural influences will be further differentiators, as shoppers demand simplicity, convenience and closeness.
Urbanization, empathy and emerging markets
Two big demographic trends have arrived that will affect the retail industry’s long-term planning outlook. The first is a striking population shift. Today, half the world’s population lives in urban areas. Nearly 180,000 people move into cities daily, which will impact the retail landscape dramatically. Retailers will concentrate less on traditional malls in favor of heading back into the city. Real estate will become more of a challenge, as city lots require clever adaptations of core concepts. We are already seeing arguably more creativity from retail brands as they incorporate existing and sometimes historical architecture into the shopping experience, discovering new aspects of their brand personality in the process. The dense living and working environment will also spawn new retail business models, such as pay-to-share for large expensive items, like Zipcar and B-cycle car and bike sharing. As consumers, city dwellers tend to be more open to new concepts, so expect merchants to react accordingly.
Corporate philanthropy and good citizenship will also be a growing expectation. Brands will learn to strengthen customer loyalty through generosity and acts of kindness, such as Dutch KLM’s campaign of spreading happiness by surprising passengers with unexpected gifts at the airport.
Expect retail expansion into China and India to continue. Retail spending in China has risen by double digits the last two years and is expected to maintain that pace. Merchants, seeing manufacturers’ succeed by launching new products and brands that are culturally right for emerging markets, such as Levi’s dENIZEN jeans and Hermès’ Shang Xia, will adopt a similar strategy and create store concepts inspired by native culture. Barriers to global trade will continue to come down, which will encourage retailers to think and work towards a global customer base, sources, talent and reach.
Look out for more sector predictions on Monday.