Retail Innovation: How To Disruption-Proof Your Business
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By Pam Danziger
Traditional, long-established retailers feel much like sitting ducks today. While the National Retail Federation tries to encourage the industry with Vice President Pence playing cheerleader recently at the NRF Retail Advocacy Summit
in Washington, D.C. saying “The best days for American retailers are ahead,” most of those in the audience must have agreed, simply because retail seems so bad now.
In just the first half of this year, retailers are falling in record numbers: 8,640 will close shop, according to a recent Credit Suisse
report, which is 40% higher than at its 2008 peak when 6,200 were shuttered. Further, it predicts that 275 malls, 25% of the nation’s 1,200 total, will close within the next five short years.
NRF president Matthew Shay can “push back on the apocalyptic narrative,” but if he got down off the stage and out into the stores and the malls, he couldn’t ignore the obvious: retailers have been slow, way too slow, in responding to the shifting patterns and preferences of American shoppers.
Amazon continues unabated to siphon dollars out of the malls and stores. It’s become so bad that “being Amazoned” has now entered the business lexicon.
While prospects look so poor for retail, there is still plenty of capital ready to invest in the right opportunity. Robin Lewis, founder and CEO of The Robin Report
, Forbes contributor and co-author of the book, The New Rules of Retail, says, “Some $2 trillion of corporate capital remains sidelined because businesses don’t see enough of an increase in consumer demand to justify investing that capital in growth.” But nobody is going to throw good money after bad to prop up failing traditional retail strategies.
Recent mergers and acquisitions, notably Walmart’s acquisition
of digitally-native Jet.com, ModCloth and Bonobos, point to a way for traditional retailers to pull themselves out of the abyss. They must apply new-age thinking to solve 21st-century retailing challenges and that requires bold and aggressive moves, not reworking of stale, outmoded strategies.
Retail innovation is desperately needed now. Fortunately, Dave Knox, Managing Director of WPP Ventures and Chief Marketing Officer of Rockfish, a WPP agency, has written the guide book for that in Predicting the Turn: The High Stakes Game of Business Between Startups and Blue Chips
. It is not too late for traditional retailers to get out ahead of the consumers and respond to their needs.
Knox sees the way forward for traditional retailers is to redefine the business they are in and invest accordingly. It’s not just “selling more stuff to more people more often,” as marketing strategist Sergio Zyman said, but anticipating consumer needs and being able to deliver proactively in the fastest, easiest, most efficient ways possible. That means breaking out of old habits of basing strategies on past performance and backward-looking indicators and replacing them with proactive, anticipatory thinking that looks ahead to the next turn.
Retailers need to invest not just in acquiring new brands and new tools, but more importantly in human capital that has this new way of predictive thinking programmed into its DNA. For such retail investment, Knox notes, “There is a lot of value besides just the financial returns.”
Knox knows what he is talking about, being groomed in traditional CPG strategies through a seven-year stint with Procter & Gamble, all the while working on the side with innovative startups. “The inspiration for Predicting the Turn is that in my professional career I wear two hats,” Knox explains. “During the day I was a classically-trained brand manager working for a lot of Blue Chips, but then on the nights and weekends, I was spending time in the world of venture capital, advising venture funds and startups and an investor myself.”
A lot has been written about the disruptive change in business, but Knox’s book takes you behind the scenes to give businesses tools to deal proactively with it. “I saw this need for these two worlds to understand each other and also to wake up the big companies in particular, that the game of business has really changed. They needed to understand that the competition that was going to change their business wasn’t necessarily going to be that which is directly in front of them,” he says.
For so many inbred, deeply ingrained reasons, the disruptive change that causes the turn most often doesn’t come from the boardrooms of the Blue Chips, but from innovation taking place among the startups. They can see problems invisible to Blue Chips and find opportunities in the Blue Chip’s corporate blindness.
Knox sees the big innovation opportunity for retail Blue Chips, like Walmart, Target, Macy’s, Kroger and others, is to invest in startups, since organically-grown innovation is frequently discouraged by Wall Street and the investment community with its focus on quarterly returns.
“Historically companies look at the individual competitor, but often times miss the societal shift that is the indicator coming out of it,” Knox explains. “They need to think about these players not just as a brand to acquire, but how they can bring a business model and a way of doing business that they fundamentally don’t have.”
In retail, the best and brightest startups have been born and bred on the internet and Marvin Traub Associates has done the research for such investing. TRAUB has prepared the pick list of retail startups
where traditional retailers can find new ideas and new blood.
TRAUB calls these companies the “New Davids,” some 200 digitally-native companies that individually often don’t get on the radar of Blue Chips, but are bringing the next disruptive turn to their established businesses, whether they realize it or not.
On the New Davids, Knox says, “I view all of the Davids as the canary in the coal mine. They are the indicator of change.” To explain, he points to Dollar Shave Club and its subscription-commerce model as a big turn in the traditional CPG world, which is optimized around shipping truckloads full of merchandise out to retailers’ distribution warehouses, but customers clearly want delivery of individual packages to the home in anticipation of their needs. In a prescient move, Blue Chip Unilever acquired Dollar Shave Club in 2016 and bought not just the brand, but the subscription-model expertise along with it.
“A lot of big companies looked at who was doing subscription commerce in their space and made the assessment of whether that company was a threat or not. They ignored the fact that there was $300 million invested in subscription commerce across the board. That was an indicator of a business model change. They should have been looking at the business model change, not the individual companies as a competitor,” Knox says.
Traditional retailers need transformational innovation
Knox explains that corporate innovation arises in three ways:
- Core innovation which is focused on increasing market share in the business you are already in
- Adjacent innovation which is 1 degree of separation into adjacencies, like Starbucks going into packaged coffee for the home
- Transformation innovation which is a complete reworking of the business model and into a new category. Knox points to Amazon and its cloud computing Amazon Web Services, which, he says, “shares synergies with its core business but is something totally new.”
It is the later transformational innovation that retailers need now because that is where the big opportunities lie. “In terms of Blue Chip investment, it typically breaks down to 70% in core, 20% in adjacencies, and 10% in transformation.” Knox says. “But the returns are flipped, 70% through transformation, 20% through adjacencies and only 10% in core.”
To their detriment, too many retailers have been investing only on adjacency and core innovation, trying to fix problems in small incremental steps, not in transformational innovation that is needed. “Over the past 10-15 years, people have been intimidated to do transform innovation. They have been forced to focus on their core business and not get distracted,” Knox says.
Blue Chip retailers can modestly invest in transformational startups, like Walmart did with Bonobos, in order to get huge returns. “You are placing a lot of bets, but the one that works is going to work big,” Knox advises.
But even more importantly, those transformational investments can mean the retail business is positioned for the next turn. And by acquiring new talent that has mastered the new business models, traditional retailers have a totally new perspective to predict what’s next and get ahead of it, not be swallowed by it.
More about Pam Danziger: Pamela N. Danziger is an internationally recognized expert specializing in consumer insights for marketers targeting the affluent consumer segment. She is president of Unity Marketing, a boutique marketing consulting firm she founded in 1992.
As founder of Unity Marketing, Pam leads with research to provide brands with actionable insights into the minds of their most profitable customers. She is the author of five books including a recent mini-book, What Do HENRY’s Want?, explores the changing face of America’s consumer marketplace. Pam is frequently called on to share new insights with audiences and business leaders all over the world. Contact her at firstname.lastname@example.org.
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