i
What’s In Store for Stores?
Benchmark Report 2014
Paula Rosenblum and Steve Rowen, Managing Partners
June 2014
Sponsored...
i
Executive Summary
Key Findings
Even though most of retailers’ current growth is coming from digital channels, shoppers c...
ii
Table of Contents
Executive Summary.......................................................................................
iii
Figures
Figure 1: Improving Employee Knowledge Grows in Importance ......................................................
1
Research Overview
Even though stores remain the source of more than 85 percent of retail’s aggregate revenue,
they’ve un...
2
As we’ll see later, notwithstanding their hope for in-store technologies in general, retailers seem
to be underwhelmed b...
3
Figure 3: Winners Focus on the ‘How,’ Not the ‘What’
Source: RSR Research, June 2014
As we often find, laggards remain f...
4
compared them by retailer performance. As we can see, the better the retailer’s performance, the
more apt they are to pr...
5
• Products sold:
Fashion / Short Lifecycle 19%
Seasonal 12%
Basics/Replenished Items 22%
Durable Goods 16%
Consumer Elec...
6
Business Challenges
Pressures Come From Many Different Directions
While showrooming and omni-channel pressures dominate ...
7
chicken or the price-oriented advertising egg. Data from RSR’s Pricing Benchmark
1
tells
the same story. Retailers are e...
8
• To almost no one’s surprise, retailers selling Consumer Electronics are most concerned
about showrooming and increased...
9
We are reminded of Walmart’s stated objective to open more neighborhood markets. If we look at
Walmart through the lens ...
10
Opportunities
Two Completely Varied Visions
Retailers’ performance dramatically affects their perception of the opportu...
11
happenstance: there is a direct correlation between a purpose-focused store associate and
market success.
Figure 9: Tim...
12
Figure 10: Get ‘Em In and Keep ‘Em Smiling
Source: RSR Research, June 2014
Winners place far greater focus on the power...
13
Winners also have very high hopes for social networks’ abilities to engage consumers. Again,
these are still relatively...
14
Organizational Inhibitors
Mixed Messages And Conflicting Priorities
At the beginning of this report, we suggested that ...
15
What’s The Real Value?
We would expect that the perceived source of improvement would have easily quantifiable ROI,
yet...
16
Fewer than half of respondents this year cite “smaller projects with incremental ROI along the
way” as a tool to get pr...
17
Technology Enablers
Resistance Is Futile
Let there be no doubt, retailers know their stores are in a tough spot: in des...
18
Born Under A Bad Sign
Throughout this report, we’ve noted how retailers understand the store needs help, but are just
n...
19
Figure 16: Second Verse, Same as the First
Source: RSR Research, June 2014
Not only have retailers purchased a series o...
20
The POS Story
Lastly, no report on the state of technology in stores would be complete without an examination of
the el...
21
BOOTstrap Recommendations
We are in the midst of what RSR calls Retail’s “Reset Moment.” And that moment dictates some
...
22
Participation in Loyalty Programs
Most retailers have some form of loyalty program, but far fewer actually use their pr...
a
Appendix A: RSR’s BOOT MethodologySM
The BOOT Methodology
SM
is designed to reveal and prioritize the following:
• Busin...
b
Appendix B: About Our Sponsor
With more retailers focused on providing a seamless customer experience across channels,
m...
c
Appendix C: About RSR Research
Retail Systems Research (“RSR”) is the only research company run by retailers for the ret...
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What is in store for store? 2014

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Even though most of retailers’ current growth is coming from digital channels, shoppers continue to visit stores – and will for many years to come. Their demand for a more relevant store shopping experience, however, has retailers asking “How can we rejuvenate the in-store experience?” in order to return stores to their rightful place in the retail ecosystem.
This report seeks to examine this question in detail.

Some highlights of the report include the following:
• While showrooming and omni-channel pressures dominate media conversations, fundamental and traditional pressures rise to the top of store-based issues. Find out what retailers report as their top Business Challenges

• Retailers’ sales performance dramatically affects their perception of what will make their stores more interesting places to shop. Winners have already had more success
prioritizing their employee work schedules. Where else have they made gains?

• All retailers face similar Organizational Inhibitors, but the technology infrastructure problem appears to be winding down for the best performers. Instead, Retail Winners worry that - for one - putting technology in the hands of store personnel can be a distraction rather than a useful tool.

• Retailers know their stores are in a tough spot: in desperate need of systems overhauls for both customer and employee facing technologies. Find out which technologies hold the most value – and budget – to help them “get there” in the Technology Enablers section of this report.

Based on our data, we’ll also offer several in-depth and pragmatic suggestions on how retailers should proceed. These recommendations can be found in the Bootstrap
Recommendations portion of the report.

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What is in store for store? 2014

  1. 1. i What’s In Store for Stores? Benchmark Report 2014 Paula Rosenblum and Steve Rowen, Managing Partners June 2014 Sponsored by:
  2. 2. i Executive Summary Key Findings Even though most of retailers’ current growth is coming from digital channels, shoppers continue to visit stores – and will for many years to come. Their demand for a more relevant store shopping experience, however, has retailers asking “How can we rejuvenate the in-store experience?” in order to return stores to their rightful place in the retail ecosystem. This report seeks to examine this question in detail. Some highlights of the report include the following: • While showrooming and omni-channel pressures dominate media conversations, fundamental and traditional pressures rise to the top of store-based issues. Find out what retailers report as their top Business Challenges on page 6. • Retailers’ sales performance dramatically affects their perception of what will make their stores more interesting places to shop. Winners have already had more success prioritizing their employee work schedules. Where else have they made gains? Find out in the Opportunities section of this report, beginning on page 10. • All retailers face similar Organizational Inhibitors (page 14), but the technology infrastructure problem appears to be winding down for the best performers. Instead, Retail Winners worry that - for one - putting technology in the hands of store personnel can be a distraction rather than a useful tool. • Retailers know their stores are in a tough spot: in desperate need of systems overhauls for both customer and employee facing technologies. Find out which technologies hold the most value – and budget – to help them “get there” in the Technology Enablers section of this report, beginning on page 17. Based on our data, we’ll also offer several in-depth and pragmatic suggestions on how retailers should proceed. These recommendations can be found in the Bootstrap Recommendations portion of the report, which begins on page 21. We certainly hope you enjoy it, Paula Rosenblum and Steve Rowen
  3. 3. ii Table of Contents Executive Summary...........................................................................................................................i Research Overview ......................................................................................................................... 1 The Good News: The Table Is [Getting] Set................................................................................ 2 Better Performers See Things Differently.................................................................................... 2 Methodology................................................................................................................................. 4 Survey Respondent Characteristics ............................................................................................ 4 Business Challenges ....................................................................................................................... 6 Pressures Come From Many Different Directions ....................................................................... 6 Laggards Cutting Back on Store Growth ..................................................................................... 8 Opportunities ................................................................................................................................. 10 Two Completely Varied Visions ................................................................................................. 10 Winning is No Happy Accident................................................................................................... 10 Organizational Inhibitors................................................................................................................ 14 Mixed Messages and Conflicting Priorities ................................................................................ 14 What’s The Real Value? ............................................................................................................ 15 Overcome Doubts via Proof of Concept, But Don’t Waste Time............................................... 15 U.K. Retailers Get By With A Little Help From Their Friends .................................................... 16 Technology Enablers..................................................................................................................... 17 Resistance is Futile.................................................................................................................... 17 Born Under a Bad Sign.............................................................................................................. 18 Moving Forward: Still not Complete........................................................................................... 18 The POS Story........................................................................................................................... 20 BOOTstrap Recommendations ..................................................................................................... 21 Labor Productivity Benchmarks ................................................................................................. 21 Shopper Satisfaction Surveys.................................................................................................... 21 Market Basket / Average Transaction Value Analysis............................................................... 21 Conversion Rates ...................................................................................................................... 21 Participation in Loyalty Programs .............................................................................................. 22 Appendix A: RSR’s BOOT Methodology SM ...................................................................................... a Appendix B: About Our Sponsor ..................................................................................................... b Appendix C: About RSR Research...................................................................................................c
  4. 4. iii Figures Figure 1: Improving Employee Knowledge Grows in Importance ................................................... 1 Figure 2: Moving Towards Near Real-time Responsiveness .......................................................... 2 Figure 3: Winners Focus on the ‘How,’ Not the ‘What’.................................................................... 3 Figure 4: Near Real-time Processing More Predominant Among Winners..................................... 3 Figure 5: Traditional Pressures Dominate....................................................................................... 6 Figure 6: Different Challenges by Vertical....................................................................................... 7 Figure 7: Laggards Cutting Back, Winners Plowing Ahead ............................................................ 8 Figure 8: A Matter of Perspective.................................................................................................. 10 Figure 9: Time Well Spent ............................................................................................................. 11 Figure 10: Get ‘Em In and Keep ‘Em Smiling................................................................................ 12 Figure 11: Lack of Clarity Dominate Internal Challenges.............................................................. 14 Figure 12: Proof of Concepts More Valuable Than Incremental Improvements........................... 15 Figure 13: Give Us Simpler Tools.................................................................................................. 16 Figure 14: A Fine Mess We’re In................................................................................................... 17 Figure 15: Buying What We Value? .............................................................................................. 18 Figure 16: Second Verse, Same as the First ................................................................................ 19 Figure 17: The POS Exit Strategy ................................................................................................. 20
  5. 5. 1 Research Overview Even though stores remain the source of more than 85 percent of retail’s aggregate revenue, they’ve undergone an identity crisis over that past five years. Most retailer growth is coming from digital channels. The core question has been, and remains, “How can we rejuvenate the in-store experience?” It is, of course, an exquisite irony that the very tools and techniques retailers use to create a compelling online experience, all based on liberated self-service, have brought only marginal success in stores. The reason is simple: People don’t just shop in stores to touch and feel products – they also expect assistance from human beings. And retailers are recognizing that those human beings, their employees, are woefully ill-equipped to provide that assistance. Can technology help? Recently, in the superb blog, “The Business of Fashion (www.businessoffashion.com),” writer Suzanne Bearne pondered just that in her piece “In-Store Tech, Sales Driver of Hype?” Her observations were interesting. It seems that even high-end high-tech self-service solutions are marginal drivers of sales, while tools given to employees are far more widely used and deliver better results. Of course, most retailers don’t sell the high-end luxury products highlighted in BOF. Still, our broader benchmark study leads us to the same conclusion. While last year, retailers were fixated on the end goal, maintaining or improving the customer experience, this year, they most frequently cite making employees “smarter” and better informed as a top-three value in-store technologies bring to the table. Figure 1: Improving Employee Knowledge Grows in Importance Source: RSR Research, June 2014 28% 24% 28% 15% 35% 46% 69% 47% 20% 24% 30% 31% 33% 45% 48% 59% Create competitive advantage and new sources of revenue generation Put actionable information into the hands of managers Help the company win new customers and retain current customers React quickly to changes in the business environment Bring more of the digital experience into stores Increase revenue while holding down operational costs Maintain and/or improve the customer experience Make our employees “smarter” and better informed Opportunities for In StoreTechnologies 2014 2013
  6. 6. 2 As we’ll see later, notwithstanding their hope for in-store technologies in general, retailers seem to be underwhelmed by many of the tools they’ve deployed thus far. Over the course of this report, we’ll attempt to tease out whether this is the fault of the tools themselves, incorrect performance metrics, or over-amped general expectations. The Good News: The Table Is [Getting] Set Making employees smarter and better informed is certainly dependent on giving them accurate and up-to-date information. As we can see in Figure 2, real progress has been made in updating back-office systems to reflect store activities in near-real-time. Figure 2: Moving Towards Near Real-time Responsiveness Source: RSR Research, June 2014 Since enterprise transformation of core merchandising systems is a long and arduous process, we expect to see more retailers turning to high performance data warehouses to get these near real-time results before we see a larger turnover in systems of record that currently can only process in batch. Better Performers See Things Differently In our benchmark reports, RSR quite frequently cites differences between retailer over- performers in year-over-year comparable sales and their competitors. We find that consistent sales performance is an outcome of a differentiating set of thought processes, strategies and tactics.. We call sales over-performers “Retail Winners.” RSR’s definition of these Winners is straightforward. Assuming industry average comparable store/channel sales growth of three percent, we define those with sales above this hurdle as “Winners,” those at this sales growth rate as “average,” and those below this sales growth rate as “laggards” or “also-rans.” To illustrate these differences, we’ll take a look at the data already presented in aggregate through the lens of performance First, we’ll look at retailer perception of technology value (displayed in aggregate in Figure 1). 13% 37% 50% 15% 41% 44% Near real-time updates to data warehouse and other “flash” systems (batch updates to systems of record) Near real-time updates to customer, sales and loss prevention systems of record Batch updates to all back-office systems How DoesYour Enterprise Process Data Delivered from Store to Headquarters’ Systems? 2014 2013
  7. 7. 3 Figure 3: Winners Focus on the ‘How,’ Not the ‘What’ Source: RSR Research, June 2014 As we often find, laggards remain focused on the end result - “gaining and retaining customers,” while Winners focus on the “how:” in this case making their employees smarter, reducing reaction time, yet still managing costs. We see a slightly different twist when taking a look at the processing data from Figure 2. Figure 4: Near Real-time Processing More Predominant Among Winners Source: RSR Research, June 2014 We added together the two different ways retailers can get to near real-time information (near real-time updates to systems of record and near real-time updates to “flash” systems) and 59% 27% 23% 41% 18% 27% 55% 45% 15% 16% 25% 25% 38% 42% 53% 69% Help the company win new customers and retain current customers Create competitive advantage and new sources of revenue generation Put actionable information into the hands of managers Bring more of the digital experience into stores React quickly to changes in the business environment Increase revenue while holding down operational costs Maintain and/or improve the customer experience Make our employees “smarter” and better informed TopThree Opportunities for In-storeTechnologies Winners Laggards 63% 58% 41% Retail Winners Average Performers Laggards Near Real-time Processing of Enterprise Data at Headquarters
  8. 8. 4 compared them by retailer performance. As we can see, the better the retailer’s performance, the more apt they are to process data from stores to back office systems in near real-time. Methodology RSR uses its own model, called the “BOOT Methodology © ,” to analyze Retail Industry issues. We build this model with our survey instruments. See Appendix A for a full explanation. In our surveys, we continue to find differences in the thought processes, actions, and decisions made by retailers who outperform their competitors and the industry at large – Retail Winners. The BOOT helps us better understand the behavioral and technological differences that drive sustainable sales improvements and successful execution of brand vision. Survey Respondent Characteristics RSR conducted an online survey from March-May 2014 and received answers from 161 qualified retail respondents. Respondent demographics are as follows: • Job Title: Executive/Senior Management (C-level or VP) 21% Middle Management (VP/Director, Manager) 47% Individual Contributor and Other 32% • Functional Area of Responsibility: Executive Management 11% Customer Experience 14% eCommerce/Direct Operations 4% Finance, Legal, Human Resources 7% Information Technology 12% Marketing 5% Merchandising 3% Product Development 4% Real Estate/Construction 2% Store Operations 20% Supply Chain 5% Other 14% • 2013 Revenue (US$ Equivalent) Less than $50 Million 12% $50 - $250 Million 16% $250 - $500 Million 13% $500 - $999 Million 13% $1 - $5 Billion 23% Over $5 Billion 24%
  9. 9. 5 • Products sold: Fashion / Short Lifecycle 19% Seasonal 12% Basics/Replenished Items 22% Durable Goods 16% Consumer Electronics 13% Perishable Goods 18% • Headquarters/Retail Presence: USA 45% 73% Canada 2% 34% Latin America 1% 18% UK 35% 32% Europe 10% 26% Middle East 1% 10% Africa 1% 8% Asia/Pacific 4% 73% • Year-Over-Year Sales Growth Rates (assume average growth of 3%): Better than average (Retail Winners) 36% Average 47% Worse than average (Laggards) 17%
  10. 10. 6 Business Challenges Pressures Come From Many Different Directions While showrooming and omni-channel pressures dominate media conversations, fundamental and traditional pressures rise to the top of store-based issues (Figure 5), Figure 5: Traditional Pressures Dominate Source: RSR Research, June 2014 When asked to choose their top three business challenges, retailers return to the basics: • Stores must operate within a pretty fixed budget. Somehow customer service must improve without driving costs through the roof; • Whether a retailer has five or five thousand stores, those stores must meet customer expectations consistently. Employees must be productive, and floor sets must have similar, with a somewhat localized look and feel; • Consumer price sensitivity continues to rise. It’s easy to call this a “showrooming problem” but in fact, the shopper has been trained by retailers to look for low prices in virtually every medium, from mass market advertisements and FSIs to personalized emails and notes on social networks. For better or worse, this training has been successful, at least from the retailers’ perspective. So even though regional supermarkets like Publix continue to outperform Walmart in the face of brutal price-focused TV ads, retailers continue their drumbeats, and consumers respond. Only history will tell which came first, the price sensitivity 15% 33% 21% 41% 42% 52% 61% 19% 27% 33% 34% 51% 59% 64% Store managers lack information they need on the selling floor Customer dissatisfaction caused by lack of integration between selling channels In-store "showrooming" and increased competitive price transparency Difficulty differentiating ourselves from our competitors Consumer price sensitivity Need for more consistent store execution/employee productivity Need to improve customer service while holding the line on payroll costs TopThree (3) Business Challenges Faced In Stores 2014 2013
  11. 11. 7 chicken or the price-oriented advertising egg. Data from RSR’s Pricing Benchmark 1 tells the same story. Retailers are engaged in a race to the bottom. There are some differences worth noting between retail verticals (Figure 6). Figure 6: Different Challenges by Vertical Source: RSR Research, June 2014 • Retailers selling basics and perishables are most concerned about consumer price sensitivity. In our view, this is a function of the relentless everyday advertising we mentioned above. 1 The Pricing Paradox: Maximizing Margin in a Promotion-Driven Environment, RSR Research, April 2014 42% 47% 63% 55% 35% 64% Fashion/Short Lifecycle Seasonal Basics/Replenished Items Durable goods Consumer electronics Perishable goods Consumer Price Sensitivity 73% 47% 50% 55% 70% 72% Fashion/Short Lifecycle Seasonal Basics/Replenished Items Durable goods Consumer electronics Perishable goods Customer Service vs. Payroll Costs 31% 37% 22% 40% 60% 16% Fashion/Short Lifecycle Seasonal Basics/Replenished Items Durable goods Consumer electronics Perishable goods "Showrooming" and PriceTransparency
  12. 12. 8 • To almost no one’s surprise, retailers selling Consumer Electronics are most concerned about showrooming and increased price transparency. Data from a variety of sources validates this concern. In fact, consumers have done price comparisons for big ticket purchases since retailing began. The only difference today is they can do those comparisons in real-time. We suspect this just leads to a faster purchase decision, not a different one. • Somewhat surprisingly, the retail verticals most concerned about improving service while holding the line on costs are Fashion retailers, Consumer Electronics (CE), and those selling Perishables. We can understand the pressure on CE. Margins are tight to start with. But Fashion and Perishables generally have healthy initial gross margins. We would expect that pressure to be less than it has turned out to be. Laggards Cutting Back On Store Growth We thought the largest retailers would start cutting back on store growth. At the end of the day, there is no such thing as an infinite market, and one would expect to see some retailers acknowledging they are fully built out. In fact, this was not a particularly strong indicator for additional growth. Instead, performance was the driving force behind new store decisions (Figure 7 – note: retailers were asked to select all that apply so numbers do not equal 100%). Figure 7: Laggards Cutting Back, Winners Plowing Ahead Source: RSR Research, June 2014 The most striking data point in Figure 7 is not so much that half of both laggards and winners are continuing to open stores in existing geographies, and it isn’t that almost half of laggards are planning to close underperforming stores and pull back on new ones. It’s that a third of laggards are planning to open smaller stores while a third of Winners are planning to open larger ones. 41% 36% 32% 9% 36% 55% 4% 13% 18% 36% 42% 56% We plan to close stores in the near future We do not plan to open new stores in the near future We plan to open smaller stores in the future We plan to open larger stores in the future We plan to open new stores in new geographies We plan to continue to open new stores in our existing geographies Future Plans Regarding Store Growth Winners Laggards
  13. 13. 9 We are reminded of Walmart’s stated objective to open more neighborhood markets. If we look at Walmart through the lens of performance, the company has been a definitive laggard for a long time. Comparable sales have lagged inflation as of this writing for eleven straight quarters. With community objections in almost every new urban market the company tries to enter, it dabbles with the neighborhood market as a way to gain a toe-hold in these areas where real estate is expensive and big box retail stores really won’t physically fit. More successful retailers are more likely to open new flagship stores in existing and new markets. Nordstrom, for one, is opening both full-price and off-price “Rack” stores at a good clip and is planning a new flagship on 57 th Street in Manhattan. This flagship will anchor one of the tallest buildings in the world. H&M is also moving forward with a Manhattan flagship. Clearly this indicates that for Retail Winners, at least, stores still represent interesting growth potential and opportunities. Next we’ll take a look at the “how.” What are the opportunities retailers see to improve the in-store experience? How will they justify store survival and growth?
  14. 14. 10 Opportunities Two Completely Varied Visions Retailers’ performance dramatically affects their perception of the opportunities that will make their stores more interesting places to shop (Figure 8). Figure 8: A Matter of Perspective Source: RSR Research, June 2014 Once more, in classic, albeit unfortunate fashion, lagging retailers tend to focus on the end result (a more convenient customer experience), while Winners focus more on more productive, educated and empowered employees, as the way to achieve that. And while both performance groups are responding to the first part of the top business challenge (“Need to improve customer service…”), Winners are focused more on improved productivity through education and empowerment as the way to respond to the second part of the top challenge (“… while holding the line on payroll costs.”). In light of the fact that consumers today are more demanding than ever, retailers know they must respond with better service than may have been offered in the past. But Winners want to do that without blowing up the budget. Winning Is No Happy Accident In continuation of this theme, Winners have already had more success prioritizing their employee work schedules, reporting that the time they spend with customers is far more in line with corporate objectives than that of those whose sales are already hurting (Figure 9). This is not 23% 27% 23% 41% 64% 32% 45% 36% 20% 24% 36% 36% 40% 40% 42% 51% Provide ability to locate and sell merchandise from anywhere in the company It’s all about our product mix. If we build it, they will come. Add self-service customer-facing technologies Bring more of a digital/online experience to stores Focus on a more convenient customer experience Educate and empower our in-store employees using technology More personalized attention from our employees Find ways to make our employees more productive TopThree (3) Opportunities for Improving the In-store Experience Winners Laggards
  15. 15. 11 happenstance: there is a direct correlation between a purpose-focused store associate and market success. Figure 9: Time Well Spent Source: RSR Research, June 2014 This does beg the question, however, if lagging retailers’ employees are not spending enough time on the things they - and their customers - think they should to be doing, where then, are they spending their time? • Laggards are much more likely to report that employees spend too much time on administrative tasks such as corporate paperwork and processes than Winning retailers (50% to 36%, respectively). This is one of the primary means by which Winners continue to push their culture – and their year-over-year sales – forward. They ensure that the revenue generating services are given the time needed for success. • If we extend this trend one point further, a store environment where the store manager is also freed of administrative tasks, we find a formula whereby not only are employees acting as true brand ambassadors to the shopper, but the store manager is fulfilling a much more effective role as well. He can oversee consumer/associate engagement, fully informed of what’s taking place on the sales floor. We will examine which technologies facilitate this “unshackling” of both store associate and store manager in the Technology Enablers section of this report. As it relates to the technologies consumers use, however, which provide the best chance to get shoppers through the front door and make the time they spend in-store more valuable? Figure 10 shows how differently Winners and Laggards view these questions. 5% 64% 29% 2%0% 32% 68% 0% Too much time Right amount of time Not enough time Not applicable Selling and Customer Service: Time Spent Winners Laggards
  16. 16. 12 Figure 10: Get ‘Em In and Keep ‘Em Smiling Source: RSR Research, June 2014 Winners place far greater focus on the power of the consumer’s smartphone. It is no secret that the average shopper is in love with her personal device – she carries it everywhere she goes and uses it for nearly every daily task at this point. And for Winners, that relationship is entirely leverageable. Have we yet to see great examples of phone-based communication (whether through SMS, email, app or direct call) to get consumers into a store? Apart from excessive price and promotions efforts that are mainly delivered via email, the answer is “not yet”. But based on the fact that the most successful retailers see such tremendous opportunity to leverage these customer-owned tools in the future, we expect to see not only interesting ways to entice shoppers off the street, but even more creative ways to liven up the in-store shopping experience. She’s already got her phone out: what can you do to get her talking to you on it? 14% 36% 27% 45% 64% 51% 53% 53% 58% 64% Presence on social networks Consumer Smartphones Retailer Mobile App or web Email communications eCommerce site A Lot ofValue DrivingTraffic to Store Winners Laggards 5% 18% 32% 27% 27% 27% 31% 38% 42% 51% Presence on social networks Email communications eCommerce site Consumer Smartphones Retailer Mobile App or web A Lot ofValue Once Customer Is In the Store Winners Laggards
  17. 17. 13 Winners also have very high hopes for social networks’ abilities to engage consumers. Again, these are still relatively early days. Apart from the “get a friend’s advice” demos that are part and parcel to any socially-enabled solution demo, currently, few have cracked the nut beyond price and promotions as to how Facebook, Pinterest, or LinkedIn could be leveraged to create great value either in-or-out of the store’s four walls. But the important thing is this: the better a retailer’s performance, the more likely they are to see the potential. Now let’s see what stands in retailers’ way to realizing more of these opportunities.
  18. 18. 14 Organizational Inhibitors Mixed Messages And Conflicting Priorities At the beginning of this report, we suggested that while retailers believe that technology in general will help reinvigorate the in-store experience, once we get to the details, a different picture emerges. That different picture is apparent in the organizational inhibitors retailers report they face (Figure 11). Figure 11: Lack of Clarity Dominate Internal Challenges Source: RSR Research, June 2014 To call out differences in perspectives, we looked at overall responses, Winners and laggards. First, the technology infrastructure problem appears to be winding down for Retail Winners. In last year’s study, 47 percent of all respondents cited this as a top-three inhibitor, while this year only 31 percent of Winners identified it as such. We believe they’ve found ways to work around otherwise intractable aged systems to get new functions install. 27% 27% 32% 27% 41% 32% 55% 32% 19% 22% 26% 28% 31% 43% 48% 48% 26% 24% 24% 35% 39% 41% 53% 36% Store operations poses a cultural barrier to change The TCO of in-store technologies makes it hard to justify many of the newer technologies Overall Capital Requirements – we never even get to the subject of ROI Stores already have too much going on - they don't have the capacity to add more projects The existing technology infrastructure is preventing us from moving forward with new solutions We are trying to simplify our in-store technology, not make it more complex Hard to quantify technology return on investment We’re conflicted as to whether new technologies will be tools or distractions TopThree (3) Organizational Inhibitors Overall Winners Laggards
  19. 19. 15 What’s The Real Value? We would expect that the perceived source of improvement would have easily quantifiable ROI, yet we can see that for more than half of all respondents, including almost half of Retail Winners, that ROI is actually quite elusive. We’ll see later in the Technology Enablers section of this report that the more specific questions get, the more ambivalent retailers become. Retail Winners, in particular worry that putting technology in the hands of store personnel can be a distraction rather than a useful tool. They worry distraction could come from tools that actually add complexity into the store, after spending years trying to make life simpler for a transient workforce. Surprisingly, only one quarter of respondents are worried about Total Cost of Ownership and far fewer than last year are concerned about overall capital requirements (38 percent cited this as a top-three inhibitor in last year’s study). It appears as though budget is being freed up for in-store technologies, even as it has been pulled back from eCommerce initiatives 2 . Overcome Doubts Via Proof Of Concept, But Don’t Waste Time Until this year, retailers have consistently cited incremental technology investment as a way to overcome capital requirement (CapEx) hurdles. But having seen a significant drop in CapEX concerns, we’ve seen an even more dramatic drop in the desire for incremental improvements (Figure 12). Figure 12: Proof of Concepts More Valuable Than Incremental Improvements Source: RSR Research, June 2014 2 The Great Leveler: eCommerce’s Next Move, RSR Research, November 2013 73% 29% 21% 27% 52% 78% 36% 37% 38% 42% 58% 67% Start with smaller projects, buying basic system functions, and using ROI to drive additional functions and features Asking vendors to provide success stories and references Gain sharing programs with vendors Merchandising vendor funding for in-store projects Managed services to speed technology implementation Pilot programs in specific stores or regions Overcoming Inhibitors: TopThree Ways 2014 2013
  20. 20. 16 Fewer than half of respondents this year cite “smaller projects with incremental ROI along the way” as a tool to get projects going than they did last year. While 41% of laggards still like this approach, the sentiment is consistent: “There’s no more time to waste, let’s get moving.” Within that context, it’s not surprising that pilot programs continue to stand as the most frequently cited way to overcome doubts, and Managed Services are used to make the transitions as smooth and distraction-free as possible. U.K. Retailers Get By With A Little Help From Their Friends It’s worthy to note that our large base of U.K.-based retailers skewed some of our results this year. These retailers are far more apt to look to their merchandise and technology vendors to help share the cost of technology implementations (Figure 13). Figure 13: Give Us Simpler Tools Source: RSR Research, June 2014 Merchandise vendor funding in the United States is typically reserved for cooperative advertising, or to support technologies like digital signage that directly advertise the vendors’ products in store, Gain-sharing is considered a niche solution mostly used for operational audits, not technology implementations. There are some good and not-so good reasons for this. Given the KPI’s used to measure the value of new technologies (typically sales increases) it can be very difficult to isolate any one cause of improved top-line results. This once again begs the question “How do we measure success?” Can we measure it based on reduced losses to other channels? Increased conversion rates? It is our view that until these KPI’s can be determined and baked into contracts, gain-sharing will not become ubiquitous. But more importantly, until the retail industry improves the KPIs associated with in-store technology, ambivalence and doubt will continue to reign. 39% 29% 46% 48% Merchandising vendor funding for in- store projects Gain sharing programs with vendors UK Retailers LookTo Share Costs...Anywhere UK All Other
  21. 21. 17 Technology Enablers Resistance Is Futile Let there be no doubt, retailers know their stores are in a tough spot: in desperate need of systems overhauls for both customer and employee facing technologies (Figure 14). Figure 14: A Fine Mess We’re In Source: RSR Research, June 2014 Where this knowledge starts to crumble is in the way these problems get resolved. Are in-store technologies really so differentiating that the very mention of outsourcing them is forbidden? Recall that many of retailers’ antiquated systems involved some measure of roll-your-own methodology – often times the result of a dangerous cocktail: the immediate need to meet customer demand combined with retailers’ insistence that their business model (and needs) are entirely too personal to be trusted in the hands of others. After all, it wasn’t long ago that retailers were in a similar spot with their eCommerce sites due to burgeoning online sales. And many are still paying the price for the self-concocted solutions they brought to bear fifteen years ago to meet online demand. Rushing to self-design in-store solutions that may/may not meet impending customer demand is hardly an ideal solution in 2014, particularly when off-the-shelf solutions have improved so drastically in recent years. The key, as ever, is to make sure the business need of whatever problem you’re trying to solve is addressed in the early stages, then test and measure the program’s effectiveness relentlessly. However, retailers’ technology problems don’t stop there. 37% 38% 39% 47% We need to outsource support of our legacy store systems so that we can focus on innovation and new capabilities We need to centralize our store systems to make them easier to support and update In-store technologies are critical and we won't ever consider outsourcing them We need to modernize our store systems to make them more flexible What is your company's perspective on technology service levels for store technologies?
  22. 22. 18 Born Under A Bad Sign Throughout this report, we’ve noted how retailers understand the store needs help, but are just not sure how to “get there.” Figure 15 shows just how big this disconnect really is: retailers continue to purchase store technologies without even ascribing high value to those very solutions. The most valued technologies that available to them today are in-store fulfillment tools – and just barely more than half of our retail respondents see value in those. Few charts have been more telling of the current breakdown between knowledge and action in our industry today. Figure 15: Buying What We Value? Source: RSR Research, June 2014 Moving Forward: Still Not Complete Their lack of confidence in specific solution value is not keeping retailers from moving forward. Figure 16 shows retailer plans in the coming months and years. 27% 33% 40% 39% 41% 43% 45% 50% 48% 43% 50% 50% 60% 57% 27% 33% 38% 39% 41% 44% 45% 46% 48% 48% 50% 53% 53% 57% Store-provided mobile hardware for customers Self checkout KPI’s and alerts to store managers on mobile devices and tablets Store-provided mobile hardware for employees Digital displays and interactive kiosks to enhance the shopping experience Software to assign actions for specific stores/departments in response to store performance Clienteling/CRM solutions for store employees In-store personalized rewards and/or coupons Modern POS hardware & software Mobile solutions enabled by customer smartphones Endless Aisle selling capabilities Software that schedules the right mix of labor so employees can complete all activities – selling, restocking, receiving,… In-store Wifi for store functions In-store fulfillment Technologies In Stores Right Now A Lot of Value Implemented
  23. 23. 19 Figure 16: Second Verse, Same as the First Source: RSR Research, June 2014 Not only have retailers purchased a series of technologies that they don’t find particularly valuable, but they plan to keep on doing so. This begs the question: If retailers are unsure of solution value, yet continue to purchase those solutions, how will they know if they actually add value? The fault lies not in the selection or the solution. It lies in lack of meaningful Key Performance Indicators to determine success. RSR’s previous studies have shown that every technology’s effectiveness is gauged based on its impact on sales and margin. Longtime retailers know these numbers are volatile, and can be affected by everything from the weather, to payroll tax increases. Pilot programs will help, but long-term metrics for success are necessary to evaluate success. 23% 31% 29% 32% 31% 31% 31% 34% 29% 29% 23% 30% 37% 39% 41% 44% 45% 46% 48% 48% 50% 53% 53% 57% In-store public Wifi Store-provided mobile hardware for employees Digital displays and interactive kiosks to enhance the shopping experience Software to assign actions for specific stores/departments in response to store performance Clienteling/CRM solutions for store employees In-store personalized rewards and/or coupons Modern POS hardware & software Mobile solutions enabled by customer smartphones Endless Aisle selling capabilities Software that schedules the right mix of labor so employees can complete all activities – selling, restocking, receiving, and corporate-driven tasks In-store Wifi for store functions In-store fulfillment Technologies Coming to Stores Soon? A Lot of Value Planned/Budgeted
  24. 24. 20 The POS Story Lastly, no report on the state of technology in stores would be complete without an examination of the elephant in the room: the single largest technology investment in most retail stores and sadly, the one most often in need of dire update – the Point of Sale. In an apparent turning of the tide, retailers have come to terms with the fact that the current generation of POS technologies won’t survive – no matter how much ancillary mobile technology is put into employees’ hands. Figure 17: The POS Exit Strategy Source: RSR Research, June 2014 Certainly mass merchants and supermarket retailers have fewer challenges with their POS: after all, people just want to get done and out of the store by the time they reach the checkout stand. But all other retailers have a real problem. For fashion retailers, the cash wrap will remain a critical component of any legacy, modern, single channel, cross-channel or hybrid in-store POS system. The question becomes not how – but when – will a single platform that can extend from the store (meeting all of its specific requirements) out to every digital channel (and all of its specific requirements) ultimately emerge? And if that day is still a ways off, what can you be doing to ensure that all of those varied requirements are being met, even if disparate (and likely non-harmonious) systems are required in the meantime? It’s not a rhetorical question: the customer is already demanding that you do. 33% 37% 29% 58% 24% 39% 43% 50% Our goal is to replace our POS with a single customer interaction platform that serves both store and digital channels We're looking to supplement our existing POS with separate mobile solutions Our goal is to isolate and eventually replace our existing POS Our existing point of sale is not designed to support a rich digital or cross-channel shopping experience What is your company's perspective on your current point of sale solution? 2014 2013
  25. 25. 21 BOOTstrap Recommendations We are in the midst of what RSR calls Retail’s “Reset Moment.” And that moment dictates some significant changes in the way retailers engage with consumers in stores. While it’s facile to say “you need more technology in your stores,” that begs the question: “Which technologies are most needed and why are they needed?” Until now, the industry in general has been challenged to answer that question. Comparable sales improvements over time remain the litmus test for success in the world of retail, but that is an outcome…not a specific result. Within that context and thinking of the challenges and opportunities retailers have identified, we suggest the following new Key Performance Indicators (KPIs). Labor Productivity Benchmarks Since retailers clearly want to improve customer service while holding the line on payroll costs, it’s important to determine the “as is” situation by documenting the types and number of tasks that can be completed by in-store employees. Any new technology should be benchmarked against that baseline to see if productivity has actually improved. Of course, one way to improve labor productivity is to find ways to outsource or reduce non- revenue generating functions. The largest retailers often hire Merchandise Services Organizations (MSOs) to re-stock various departments in the store. Similarly, many retailers outsource Point of Sale maintenance and repair to avoid asking in-store personnel to attempt fixes to in-store technology touch points. As the number of digital touch points in stores continue to rise, this becomes a continually more viable solution. Shopper Satisfaction Surveys Again, a pre-implementation baseline is important, but once that’s done, it’s important to get a sense of what shoppers like or don’t like about the in-store experience. The best way to accomplish this is with some kind of exit interviews from selected stores. We believe an in-person is likely more effective than an emailed survey…as time tends to smooth the edges of a poor experience. Market Basket / Average Transaction Value Analysis Does a new technology result in a larger market basket, or a higher average transaction value? These answers can be determined after the fact, and today’s high performance computing platforms can spit out responses far more quickly than those of days gone by. Today’s analytics can give you a sense of where sales lift has been achieved. Conversion Rates This metric is hard to determine unless some kind of traffic counter is in place. It’s not an easy journey, but it is well worth the price. Plus, people counting software can assist in other ways – determining if lines at the register are too long, or if anticipated strong promotions are actually drawing a crowd. Dwell time analysis will help determine if an in-store display is truly interesting or just worth a passing glance.
  26. 26. 22 Participation in Loyalty Programs Most retailers have some form of loyalty program, but far fewer actually use their programs to determine the effectiveness of changes they’ve made. These are the customers retailers should know most about. Does implementation of a new technology increase their purchase frequency? Does it increase sheer numbers of participants in the program? Your most loyal customers are also your best source of directional information on their in-store experience. In this case, email surveys can serve the retailer well. On-line marketplaces are notable for their post-purchase follow-up. There is every reason in the world to extend this into store visits as well. A surprisingly small percentage of retailers actually do it today. We all know that the store is going to exist for a long time to come. The challenge for retailers in this Reset Moment is to determine how they’re going to create, maintain, and enhance the next generation in-store experience.
  27. 27. a Appendix A: RSR’s BOOT MethodologySM The BOOT Methodology SM is designed to reveal and prioritize the following: • Business Challenges – Retailers of all shapes and sizes face significant external challenges. These issues provide a business context for the subject being discussed and drive decision-making across the enterprise. • Opportunities – Every challenge brings with it a set of opportunities, or ways to change and overcome that challenge. The ways retailers turn business challenges into opportunities often define the difference between Winners and “also-rans.” Within the BOOT, we can also identify opportunities missed – and describe leading edge models we believe drive success. • Organizational Inhibitors – Even as enterprises find opportunities to overcome their external challenges, they may find internal organizational inhibitors that keep them from executing on their vision. Opportunities can be found to overcome these inhibitors as well. Winning Retailers understand their organizational inhibitors and find creative, effective ways to overcome them. • Technology Enablers – If a company can overcome its organizational inhibitors it can use technology as an enabler to take advantage of the opportunities it identifies. Retail Winners are most adept at judiciously and effectively using these enablers, often far earlier than their peers. A graphical depiction of the BOOT Methodology SM follows:
  28. 28. b Appendix B: About Our Sponsor With more retailers focused on providing a seamless customer experience across channels, managing the resulting influx of new technology becomes challenging. At Xerox, we’re dedicated to helping retailers achieve success in this new world order, leveraging our assets along with our years of experience working with the world’s most recognized retailers. We’re a global leader in enterprise infrastructure management, store support, process management and contact center solutions, touching more than 48,000 global store fronts and a level of internal technology expertise that’s difficult to match. Our mission is to help retailers improve performance, grow revenues and gain a competitive advantage through technology without taking their focus away from their customers. Visit us at http://services.xerox.com/ to learn more.
  29. 29. c Appendix C: About RSR Research Retail Systems Research (“RSR”) is the only research company run by retailers for the retail industry. RSR provides insight into business and technology challenges facing the extended retail industry, providing thought leadership and advice on navigating these challenges for specific companies and the industry at large. We do this by: • Identifying information that helps retailers and their trading partners to build more efficient and profitable businesses; • Identifying industry issues that solutions providers must address to be relevant in the extended retail industry; • Providing insight and analysis about a broad spectrum of issues and trends in the Extended Retail Industry. Copyright© 2014 by Retail Systems Research LLC • All rights reserved. No part of the contents of this document may be reproduced or transmitted in any form or by any means without the permission of the publisher. Contact research@rsrresearch.com for more information.

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