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Posted Date: 10/11/2012

People + Technology: Getting the Recipe Right

By Jordan Speer, Editor in Chief
In 1957, Disneyland opened the Monsanto House of the Future, which brought together technology from a consortium of companies ranging from plastic furniture to a "revolutionary" microwave oven and a "non-operational wall-mounted television screen."

The home was "incredible," says John Long, partner, Bain & Co., a futuristic marvel of what might be to come. But within 10 years the attraction was closed. After all, microwave ovens were introduced to the marketplace in 1967, and the wow factor likely was wearing thin. "It's indicative of the fact that the future is hard to predict," said Long, speaking at Apparel's Executive Forum last month.

That statement applies equally to the 1950s and the 2010s, with the difference being that today, the rate at which new concepts and technologies obsolesce is much, much faster.

Today, digital technology and the convergence of channels is requiring that retailers and brands adopt new technology at a rapid pace, while also remaining flexible enough to respond to rapid changes in its development, rapid changes in its use by consumers, and rapid changes in the ways that integration of digital, physical and people is changing the entire makeup of the shopping experience — all of which is "making retailers rethink" their business models. "Digital technology is the most powerful disruption to hit the retail industry in at least 50 years," says Long.

While digital technology is changing the role of the workers at an organization, it is having the surprising effect of making them not less, but more important to an enterprise. More than ever, companies view technology as a tool to complement the skills of their people vs. a tool to automate and replace staff, recognizing that the right mix of people and technology — combined with very compelling product — produces a recipe for success.

That was one of the primary messages delivered by speakers at this year's Apparel Executive Forum, who, in addition to Long, included keynote speakers Kathryn M. Henry, CIO, logistics and distribution, lululemon athletica, Dennis Hernreich, EVP, CFO and COO of Casual Male Retail Group and Leigh Rawdon, co-founder and CEO of Tea Collection.

Additionally, Kevin Burke of the American Apparel & Footwear Association (AAFA) offered up the view from Capitol Hill and Christian Buss of Credit Suisse gave a bird's eye view of the apparel industry from Wall Street.

Digital: we've only touched the tip of the iceberg
The array of technologies that are now available or soon will be is "mindboggling," says Long, who offered up a shopping of the (not-too-distant) future video that featured a woman trying on clothes in a "magic mirror" — different versions of which are starting to pop up in the beta stage — and another ordering clothing from the TV by talking to it directly.

Today, digital sales account for just about 9 percent to 10 percent of retail spending, says Long, but the advantages digital offers — more product info, input from friends and peers, personalized content and smart recommendations, real-time prices and basket comparisons, all of it anytime and anywhere — open the gates wide for that percentage to increase.

As the poster child for digital retail, Amazon, says Long, has redefined retail in three simple steps by: 1) offering the Earth's biggest selection of product (25 million individual SKUs), mostly through third-party sellers; 2) leveraging size and scale to reduce cost structure and cost of goods sold — and passing along the savings to customers through lower prices; and by 3) offering a great customer experience through the types of services it offers and suggests.

"These three steps are resulting in pretty amazing business: a $100 billion market cap with return on capital nearly three times what traditional brick-and-mortar [retailers] are returning. Over the last five years, on a revenue basis, Amazon has grown 32 percent per year; compared with traditional retailers at about 7 percent per year … Year over year, [the Amazon] customer is spending 10 percent more [than she did the previous year.]"

The result is that online retail sales are cannibalizing physical stores, and "what's remarkable," says Long, "is how slowly traditional retailers are adapting to this new reality." Products that lend themselves to a digital format, such as books and CDs are at greatest risk of losing out quickly to e-commerce, but digital is encroaching swiftly upon apparel and accessories.

Traditional retailers' physical stores are witnessing a loss of sales in the range of 9 percent to 10 percent and are caught in what Long calls a "doom loop," i.e., retailers respond to the decrease in sales by looking to reduce costs. Subsequently they reduce labor, which results in the deterioration of customer service, which subsequently drives customers online or to another retailer.

"There isn't an easy answer to that," says Long, adding that roughly half of all retail sales are already influenced by the web. "Digital is setting the standard by which traditional has to play."

"The new breed of consumer doesn't think of channels," says Long "Millennials don't even remember where they bought something, because they don't think of store vs. online vs. whatever. They have come to expect this seamlessness."

Despite the prevalence of digital, says Long, physical stores should not be regarded as a liability but an asset. "As we look at what digital does particularly well, we should think about what stores do particularly well," says Long. Stores offer a social aspect, an opportunity to feel and try on apparel, while the combination of stores and digital offers many opportunities to innovate, he says, citing Burberry and Topshop as leaders in this space. Both have, for example, given customers the ability to buy apparel digitally the minute it appears on the runway.

Ideas for blending digital reality with stores to enhance the customer experience might include allowing the consumer to customize product to her liking (such as Converse does, with a shoe that offers up 32 parts for customization); using hangers that incorporate mini screens that display counts of "likes" from Facebook fans, or arming sales associates with customer history and preferences the moment customers walk in the door (by identifying them via face-recognition technology), he says.

Retailers might offer customers ways to try on items and share with friends (a version of this is already in play by Diesel and Levi), or set up virtual stores on posters or walls in unexpected places such as bus stops or subway stations, where customers can shop via mobile device by clicking on QR codes. Digital displays in stores that change to reflect new trends, specific weather, or the types of people passing by offer another way to effectively blend in-store and digital experiences.

Crucial to all of this, especially given the rapid turnover of technology, is fundamentally understanding what your customer wants, and figuring out the best way to deliver the integrated experience they're looking for, says Long.

Lululemon: "If we didn't sell clothes, we'd be a leadership company."
Finding the best way to deliver the integrated experience customers are looking for — or to create the experience they didn't even know they craved — is a major goal at lululemon athletica, the yoga-wear business that has made a big splash with its functional yet stylish apparel and localized stores whose strong following has led to astounding sales of $2,004 per square foot.

Henry, who was previously at Gap and Levi's before arriving at lululemon in 2010, and who addressed the Forum audience in lululemon apparel, says the brand strives for transformability in its clothing — so it can go from yoga to work to the market. "If you're going to make something functional, why not make it beautiful too?" asks Henry.

To bring that beauty and transferability into its business, lululemon focuses on people: employees and customers alike. "We hire folks that are doing big things in their lives; our designers are cyclists, runners, yoga instructors … who test our products as we come out with them … the folks who design are athletes designing for athletes."

The company, which got its start after founder Chip Wilson saw women in yoga classes wearing their husband's oversized t-shirts, has "spawned a pretty significant market opportunity" with stores and product that resonate with customers by embedding in the communities where they do business.

A careful expansion strategy — lululemon is growing by about 35 stores per year — that involves going into each community before it opens a store to "see if it is ready for us" defines the company's approach to each market. Among the things it researches are the number of yoga classes and studios in the city. In explaining the individual approach to each market, Henry says: "We don't open 35 stores each year; we open one store, 35 times." The type of connection it builds with its customer base has allowed the company to eschew advertising in favor of community-based and grass-roots marketing.

Significantly, lululemon lives the message it's selling, placing strong emphasis on creating work-life balance (you'll find yoga classes at corporate headquarters, too), pursuing activities outside of your comfort zone and getting deeply involved in the community to build real relationships with colleagues and customers. Lululemon once shut down half of NYC's Madison Avenue for a spin class with more than 100 people, for example, and also organized Salutation Nation; an event that took place across more than 20 locations and involved more than 2,000 people doing yoga at the same time.

It may sound like fun and games, but the company also has a "hard-core culture of accountability," says Henry. "Trying to build 36 percent growth year over year takes a lot of talent.

"We are people led. We have a culture of accountability. We hire locals. We develop leaders. We hire ahead of the curve," she says. "If we weren't selling clothes, we'd be a leadership company."

People are truly the foundation of the business, says Henry. "We are pretty serious about who we are being, as we do what we do." Fifty percent of employee ratings are based on culture — how people treat each other and relate to others "You can deliver great results, but if you're climbing over people's backs, you're not going to last very long at lululemon. We don't have much of that," she adds. "We are a team sport kind of company."

This type of culture is crucial for the team-building the company does as it prepares to enter new markets. Recently, lululemon has set up teams in cities including Hong Kong and London as it begins to build a presence in those locations.

In addition to international expansion, lululemon is seeking more growth out of its existing stores in North America and intends to add locations here as well, says Henry.

Lululemon is also working to perfect a localized guest experience across channels, bringing together retail stores and e-commerce with mobile capabilities and integrated online and store inventory and sales. It also has plans to extend its e-commerce platform to Europe and Asia and to enhance its mobile- and web-commerce apps, which it is bringing in-house to develop.

Its focus on leadership extends outside its four walls; lululemon strives to establish truly collaborative partnerships with its vendors, encouraging transparency to promote continual improvement in product design and development. "Leadership is also how we work with our vendors in the supply chain," says Henry. For example, lululemon brings its factory partners to headquarters for leadership training — and yoga. This sort of relationship has opened the door to conversations that are "much more about how can we collaborate to create a future that doesn't exist yet," she says.

The company is also working to align its IT to best match its needs, outsourcing where it doesn't want to be involved in custom development, but building collaborative relationships with its partners and not simply "handing off" the responsibility to them. Some recent projects have been building out business intelligence (with provider Quantisense/Netezza), building data centers for redundancy and security, adding infrastructure and looking closely at its distribution network — one of the next big projects on the horizon, says Henry.

As always, the company is working to expand its lines. It is growing its men's business, and looking at other areas of possibility. Recently, lululemon dropped capsules on swim and outerwear to test them in the market. One challenge? "The footprint of our store. You can only fit so much in our store, and our intention is not to grow [the size of] stores."

Jordan K. Speer is editor in chief of Apparel. She can be reached at jspeer@apparelmag.com.

Editor's Note: Look out for more from speakers at the Apparel Executive Forum in next week's Editorial Alert


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