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The State of Multi-Channel Retailing in the Apparel Market
Aberdeen surveyed more than 120 retail enterprises between December 2008 and January 2009 to determine the current state of multi-channel retailing, and the future implementation of digital and mobile channels.
Aberdeen data reveal that 58 percent of retailers surveyed have had a multi-channel initiative in place for at least one year. Best-in-Class companies are 1.5-times as likely as Industry Average and Laggard companies to have implemented these initiatives in that time (Figure 1).
Looking at the other side of the coin, only 9 percent of Best-in-Class companies have not completed or planned activity, compared with 14 percent of Industry Average and 18 percent of Laggard companies. Our data also indicate that there is a direct relationship between the degree of retail enterprise performance and implementation of multi-channel initiatives. For example, 53 percent of the top 20 percent of retailers launched multi-channel initiatives in the past two years, whereas a mere 28 percent of the bottom 30 percent of retailers launched multi-channel initiatives during the same period.
The Impact of Multi-Channel Growth
Despite the prevailing economic conditions and grim state of customer demand in the retail apparel category, the multi-channel retailing experience continues to grow as consumers' needs and wants change. A multi-channel report that Aberdeen conducted last year indicated that the top pressure facing retailers was the need to increase cross-channel shopping. This year, there has been a shift in pressures, with the No. 1 pressure being the need to address rapid changes in customer needs and preferences for sales channels. While this pressure is uniform across all three maturity classes, Best-in-Class retailers are feeling this pressure more so (Figure 2). The next three pressures felt most by retailers include the need for a faster, easier and more convenient shopping experience (28 percent), customer need for instant gratification through a channel of their choice (24 percent), and the need to establish a focus on new markets (23 percent).
As Aberdeen data show, the pressure has shifted away from a business driver such as growth in cross-channel shopping toward the rapidly changing world of shopping channel preferences. These pressures ensure that retailers keep their customers' media, product content, and digital lifestyle needs (home, work and social) as their top-of-mind focus, especially in turbulent economic times.
As more emphasis is placed on the retailer's ability to address convergence of lifestyle and media needs of the customer, the availability of multi-channel shopping to consumers will increase. This is one reason why digital and mobile retailing channels are expected to be a major retail customer trigger for years to come. However, even as retailers target continued growth in the digital environment, they must overcome internal challenges first. While 70 percent of multi-channel retailers are prepared to handle customer-facing processes and system upgrades such as the commerce infrastructure in the store environment, only 30 percent of multi-channel retailers demonstrate similar customer and systems readiness in the online channel or emerging sales channels such as mobile.
Irrespective of maturity class, retailers need to focus on integrated multi-channel operations. Best-in-Class companies, however, are leading the charge in the deployment of these initiatives. The top strategic action being undertaken by Best-in-Class retailers for multi-channel deployment is to create product offers and services for all channels of operations (52 percent). These companies are 50 percent more likely than Industry Average and Laggards to create these offers and services across all channels (Figure 3). This enables the multi-channel brand to acquire a unified look, feel and experience for customers.
A third of Best-in-Class retailers are also developing programs for new channels, such as the mobile channel, at a higher level than Industry Average and Laggard companies. Despite the fact that such programs have so far had greater success and scalability in some Asia-Pacific and European Union countries, the emergence of new retail channels such as mobile does improve the retailer's ability to serve an untapped customer base or buying affinity of existing customers. Mobile retailing has the potential to widen the scope of the customer shopping experience and loyalty in the current down-market scenario.
The other top actions of all retailers are to improve operational excellence across all channels (54 percent) and to create a single brand identity across all channels (48 percent). A single brand identity will go a long way toward promoting the future growth of the brand, integration and recognition across all channels, and improved customer loyalty. The push to improve cross-channel efficiency will help to usher in the new model of retailing utilizing the digital and mobile channel, and infusing converged services in the store environment.
Aberdeen data reveal that digital retailing is gaining in prominence through rapid growth in the online channel, consolidation in store-level multi-channel efforts, and gradual development of the mobile channel. Strategies that retailers intend to use in the digital and mobile channel include:
* 65 percent of retailers plan to use mobile marketing applications within the next 24 months to cater to a so far untapped consumer affinity;
* 63 percent of retailers plan to use online analytics in the next 12 months to improve sales and service performance;
* 45 percent of retailers plan to use online customer rating and feedback solutions within the next 12 months for improving customer product selection and comparison shopping.
The emergence of the digital and mobile channels has changed the retail landscape. Consumers can not only facilitate the entire shopping experience through the online channel (online shopping, online order with in-store pickup, setting up returns through the online channel, etc.) but can also use the mobile channels to receive coupons, product information, and complete digital transactions. Both these digital retailing formats will define the future of 21st century retailing. As apparel companies continue to expand their multi-channel capabilities, and look towards the emergence of new channels, they will be better equipped to react to their customer's changing needs, and in turn, will be better aligned with their customer's values.
Aberdeen's analysis of the Best-in-Class demonstrates that these companies are either upgrading or evolving toward connecting their retail channels with the needs of the digital consumer to ensure competitiveness. These companies are also simultaneously indentifying ways for integrating data, inventory, and customer strategies between channels due to uncertain demand and prevailing economic conditions. For a large portion of the Best-in-Class, depending on business pressures, IT resources, and skill sets, the mandate for such a transition is immediate. Figure 4 outlines the foremost process, organization, knowledge, and performance capabilities where Best-in-Class retail companies are outperforming the Industry Average and Laggard retailers. This Best-in-Class superiority shows the precise reason for improved multi-channel profitability and customer-centricity.
The ability to execute unified marketing plans between channels and adequate inventory visibility across all channels has emerged as the top Best-in-Class process. Our results show that unlike last year, leading retailers are two-times more likely than Laggards to focus on the execution of these processes, perhaps more so due to current global recessionary conditions. The reason is that both processes lend efficiencies to the complex retail value chain.
Our results show that the integrated marketing plans of multi-channel retailers ensure that companies are creating a unified marketing plan per account and category across all channels. These plans respond to the need for price and quantity promotions, a unified customer view of the brand, and customer pull strategies. In effect, integrated multi-channel marketing does help the retailer to understand the contribution of sales, margin, order values, ad and fulfillment costs per account towards Return on Net Assets (RONA) or EBITDA.
Best-in-Class retailers are also creating enterprise-wide inventory visibility through virtualization. This ensures that retailers have near-real-time or real-time visibility into how a product is moving from the supply chain to its channels and further into the sales and returns processes. Inventory visibility is not only beneficial from a channel in-stock, replenishment, and fulfillment standpoint, but also aids in lean inventory planning and balancing the working capital needs of retailers.
Our results indicate that, on average, Best-in-Class companies are 96 percent more likely than their peers to possess an executive mandate to develop new channels. This capability enables Best-in-Class retailers to improve competitiveness by expanding their customer product and service offers, diversified revenue and margin stream, and hedging business risks. The need to identify and establish new sales channels can turn into a strategic advantage as the current economic conditions have caused a shift in channel buying patterns and customer demographics. For example, in the past few months, leading retailers such as Aeropostale, Buckle, Macy's, JC Penney, among scores of others, revised their channel selection, marketing, product positioning, sourcing, and location-based product assortments to accommodate the teen (or generation Y) demographic segments. This business approach has facilitated somewhat of a sales and margin turnaround as teens have unleashed their buying power in the digital channels and pulled the baby boomers with them to the websites and stores. This was particularly true during the recently concluded holiday season.
Our results show that leading retailers are 28 percent more likely than their peers to possess the capability to track cross-channel performance analytics that leads to a much improved focus on multi-channel profitability, RONA and EBITDA. Cross-channel analytics provide the retailer with the ability to impact the diversified wallet share of their customers through improved precision merchandising, product offers, up-selling, and cross-selling. It also enables the retailer to be cautious of the margin contribution analysis when compared with the costs across product categories and channels. Some common metrics used by retailers to measure cross-channel performance are number of orders, average order value, fulfillment costs and returns. However, Best-in-Class retailers are measuring and tracking more incisive metrics such as customer conversion, overhead and profit per category, customer acquisition costs, and customer basket size per 100 or 1,000 orders generated. These incisive metrics are the true indicators of multi-channel performance as they break down the impact on customer, costs and profitability. It is noteworthy that multi-channel performance measurement and tracking is still evolving as both retailers and their solutions providers figure out a common set of metrics and standards.
With bourgeoning growth in the online channel over the course of the past three years, Best-in-Class retailers are utilizing online buying affinity to map store sales and margin attainment goals. As customers possess cross-channel buying affinity and preferences, Best-in-Class retailers are measuring online analytics such as type of orders, order value, response rates, etc. to improve in-store sales and merchandising performance. During the current economic times, this strategy assumes significance as several retailers are experiencing double-digit decreases in store comparative sales growth, whereas the online and direct channels are experiencing double-digit increases in comparative sales. Best-in-Class companies are 72 percent more likely than their peers to be using online user analysis for driving store and overall multi-channel performance, which results in lower lost sales opportunity and better margin attainment.
Our data show that continued evolution in customer content consumption habits and channel affinity is dictating new digital and multi-channel retail initiatives (Figure 4). The high-touch and high-involvement shopping environments such as apparel are ideal entrants in this shift toward "a digital customer." In 2008, Best-in-Class retailers were 1.5-times more likely than Laggards to adopt company-hosted blogs with reviews, rich-media product presentations, social-media monitoring, social-networking tools, customer feedback and user-generated content.
While loyalty initiatives, affinity-based merchandise assortments, and social marketing programs have been a part of Best-in-Class multi-channel strategy in varying degrees over the course of the past two years, a customer-ready multi-channel environment that includes digital retailing must move beyond just merchandise search, comparison shopping, order management and fulfillment. Our qualitative data showsthat projects are already underway and, within six to 12 months, several name-brand retailers will move toward rich and immersive customer-centric digital retailing strategies. Examples include:
* Websites with personalized loyalty and service offerings
* Drag-and-drop comparison shopping tools
* Mobile shopping carts
* Cross-channel access to wish-lists
* Easier web-store-mobile-catalog promotion, shipping, payment options using 2-D bar codes, QR bar codes, and associated fulfillment processes
* Customer rating/feedback solutions
* Campaign management solutions
* Content and knowledge management solutions
These website, store, and mobile feature and function improvements are likely to shape the next wave of customer centricity in the multi-channel retail environment. Scores of apparel retailers are currently revamping their digital strategies to unveil the next generation of customer experience. These are all indicators that leading retailers are trying to capture the converged mindset of today's customer. The converged retail strategies that the Best-in-Class are taking today will likely trickle down towards broad-based adoption, similar to traditional targeted strategies such as e-mail and database marketing.
Whether a company is trying to move its performance in retail multi-channel solutions from Laggard to Industry Average, or Industry Average to Best-in-Class, the following actions will help spur the necessary performance improvements:
Laggard Steps to Success
* Create avenues for new channel introduction.
* Develop a phased multi-channel strategy.
* Build a multi-channel performance roadmap.
Industry Average Steps to Success
* Increase agility and collaboration between channels.
* Review upgrades and advancements to the existing multi-channel technology infrastructure.
* Develop processes to track digital and multi-channel customer relationships.
Best-in-Class Steps to Success
* Continue pursuing a leadership strategy for customer and employee-facing channel improvements.
* Improve alignment between multi-channel performance and enterprise-wide financial performance.
Sahir Anand is research director, retail, and Chris Cunnane is research associate, retail and hospitality, of Aberdeen Group.
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