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The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
The Relevant Store in the Digital Age
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The Relevant Store in the Digital Age

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  • 1. The Relevant Store in the Digital Age Benchmark  Report  2013   Nikki Baird & Steve Rowen, Managing Partners May 2013 Sponsored by:
  • 2. ii Executive Summary As stores try to find their way in a brand new digital world, we asked retailers to candidly share their experiences. The following is what we can derive from what they tell us: Key Findings • Retail Winners have a completely different view of the store’s future than those whose sales are hurting; • Winners see stores helping to compete with the online experience and are less likely to think future growth will only come from digital channels; • They expect they can reverse the erosion of the store - if they can better incorporate technology as part of the store experience; • Winners plan to open new stores in both new and existing geographies; laggards are closing existing stores, and the few who do plan new opens will do so with smaller-format stores; • Winners’ top challenge is more consistent store execution and employee productivity; laggards would improve customer service only if it doesn’t increase payroll costs; • Laggards remain inordinately focused on consumer price sensitivity; • SMB retailers look to bring more web-like functionality – the things consumers already like about shopping online - into their stores to help differentiate themselves; • Retailers continue to see increased value in communicating with consumers within the store walls, all while neglecting the wireless infrastructure to do so effectively; • All retailers are concerned that stores are spending too much time on the wrong things (including distracting store technologies and administrative tasks for corporate), while Winners worry they are not spending enough on cross-channel selling and fulfillment; • Retail Winners drive the most interest in investing to support loyal shoppers; • Retailers appear finally ready for WFM solutions, and that scheduling can no longer be done via spreadsheet; • Modern POS hardware and software top the list of high-value technologies that enable store employees; • Cross-channel concerns are driving retailers to reconsider their current POS systems; • Winners are increasingly turning to on-demand or software-as-a-service solutions, driven primarily by interest in leasing and to a lesser degree, managed service agreements. BOOTstrap Recommendations We see four major issues that almost all retailers need to address to help their ailing stores. And while it comes down to one simple theme (Get Over It), we offer detailed suggestions on how retailers can get over each of these core challenges at the end of this report. They include the need to recognize that there is no ROI for omni-channel in stores, the necessity of public WiFi, that incentives have nothing to do with P&L… and there is no time to waste.
  • 3. iii Table of Contents Executive Summary ........................................................................................................................ ii Research Overview .........................................................................................................................1 Defining Winners and Why They Win..........................................................................................2 Night and Day ..........................................................................................................................2 Methodology ................................................................................................................................3 Survey Respondent Characteristics ............................................................................................3 Business Challenges.......................................................................................................................5 The Overarching Theme..............................................................................................................5 From Here to There .....................................................................................................................6 Alpha and Omega........................................................................................................................7 The Pricing Conundrum Continues..............................................................................................8 Opportunities ...................................................................................................................................9 Make It Like Online......................................................................................................................9 A Story of Value.........................................................................................................................10 Intensifying with Time ................................................................................................................10 The Elephant in the Room .........................................................................................................11 Organizational Inhibitors................................................................................................................13 ROI, ROI, ROI............................................................................................................................13 Tech and People vs. Money ......................................................................................................13 Start Slow and Pay as You Go ..................................................................................................15 The People Factor .....................................................................................................................16 Incentives vs. Culture ................................................................................................................18 Technology Enablers.....................................................................................................................20 Customers Get the Tech Love...................................................................................................20 Management's Middle Road ......................................................................................................20 Helping Employees Help Themselves.......................................................................................21 Enabling the Customer ..............................................................................................................23 Why the Long Slow Road? ........................................................................................................23 BOOTstrap Recommendations .....................................................................................................25 Get Over It: There's No ROI For Omni-Channel in Stores ........................................................25 Get Over It: In-Store Public WiFi is a Necessity ........................................................................25 Get Over It: Incentives Have Nothing to Do with P&L ...............................................................26 There's No Time to Waste .........................................................................................................26 Appendix A: RSR’s Research Methodology....................................................................................a Appendix B: About Our Sponsor .....................................................................................................b Appendix C: About RSR Research ................................................................................................. c
  • 4. iv Figures Figure 1: An Incomplete Vision of the Future… ..............................................................................1 Figure 2: …Comes Into Focus ........................................................................................................2 Figure 3: The Big Picture.................................................................................................................5 Figure 4: It Ain’t Easy ......................................................................................................................6 Figure 5: A Tale of Two Cities .........................................................................................................7 Figure 6: Bringing the Store Online – And Back to the Store ..........................................................9 Figure 7: Value To the Door ..........................................................................................................10 Figure 8: Value Through the Door.................................................................................................11 Figure 9: Second Verse, Same as the First ..................................................................................12 Figure 10: Making Technology Pay...............................................................................................13 Figure 11: Infrastructure Like Molasses ........................................................................................14 Figure 12: Getting Investments to Fly ...........................................................................................15 Figure 13: Sell, Sell, Sell ...............................................................................................................16 Figure 14: The Cross-Channel Time Problem...............................................................................17 Figure 15: The Cross-Channel Incentive Problem ........................................................................18 Figure 16: Winners Don't Pay, But Don't Lose Either....................................................................19 Figure 17: Love Me and I'll Love You Back...................................................................................20 Figure 18: Mixing Up Labor ...........................................................................................................21 Figure 19: The Modern POS Family..............................................................................................22 Figure 20: Digital Killed the POS...................................................................................................22 Figure 21: Getting Personal ..........................................................................................................23 Figure 22: Because We've Always Done It That Way...................................................................24
  • 5. 1 Research Overview Retailing has never been easy, and stores have always had challenges. But with a good location, retailers once had a fairly straightforward means to compete: by offering unique products, the lowest cost, or superior customer service. Pick one or two of these core tenets, execute well upon them, and with a lot of hard work and a little luck, a happily-ever-after scenario was highly probable. And apart from the systems needed to keep their stores and inventory operating smoothly, one thing retailers really didn’t have to worry much about was technology in stores. How things have changed. There is more computing power in the average smartphone than all of NASA had at its disposal to put the first man on the moon. And not only does today’s consumer have nearly-limitless choices of how and where to shop thanks to online channels, she has nearly-limitless power as well, thanks to how dirt-cheap and effective these mobile devices have become. As a result, the store is struggling to find its identity. In an increasingly digital world, where do stores fit in? They can’t go away – that much we know. In addition to retailers’ massive (and lease-locked) investments, customers have spoken; they still want to visit stores. The problem is we no longer know why. What may drive one individual to leave their home and visit a store is almost guaranteed to vary – and drastically - from what drives the next individual through the door. No one store can be all things to all people, and as a result, confusion about what a store should be has set in. Recent months have seen headlines of old models falling on the sword of show- rooming (Best Buy) and very public failed re-imaginings (JCPenney). It therefore only makes sense that the first thing we wanted to know from our retail respondents was what they saw for the future of the store. As you can see from Figure 1, at first blush, retailers genuinely understand the need to bring more technologies into their store in order to remain relevant. Figure 1: An Incomplete Vision of the Future… Source: RSR Research, May 2013 11% 27% 38% 40% 29% 44% 42% 48% 31% 19% 16% 7% 28% 10% 4% 5% 1% 1% Future retail growth will come primarily from digital channels, not stores Our current store technology will not be capable of enabling our future store shopping experience Our store results will continue to erode unless we find a way to incorporate technology as part of the store experience In-store technology helps stores compete with the online experience Future Store Strategies Stongly Agree Agree Neutral Disagree Strongly Disagree
  • 6. 2 However, these opinions are heavily influenced by retailers’ current status in the market. It comes down to one simple question: are you a Winner or a laggard? Defining Winners and Why They Win RSR’s research always focuses on a category of retailers we call “Retail Winners”. Our definition of Retail Winners is straightforward. We judge retailers by year-over-year comparable store/channel sales improvements. Assuming industry average comparable store/channel sales growth of five 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.” It is consistent throughout much of RSR’s research findings that Winners don’t merely do the same things better, they tend to do different things. They think differently. They plan differently. They respond differently. Night and Day One of the prime examples of this difference is in how Winners regard the future of the store. As seen in Figure 2, Winners have an entirely different point of view from their peers: they are the ones driving the notion that stores will help to compete with the online experience (49% strongly agree to laggards 24%), and they are much less likely to think that future growth will only come from digital channels (6% to laggards’ 18%). They are much more realistic in their goals, and understand that they can reverse the erosion of the store only if they can better incorporate technology as part of the in-store experience. They are also more likely to believe that they are already on the correct path: believing that the current technology investments they are making will be the ones to help them get where they need to be. Figure 2: …Comes Into Focus Source: RSR Research, May 2013 In essence, Winners have a completely different view of the future, and keeping in mind this “lens” through which they look while reading this report will help explain the myriad different tacks they are taking to help return stores to their rightful place of relevance. 18% 24% 6% 24% 11% 37% 48% 41% 6% 16% 38% 49% Future retail growth will come primarily from digital channels, not stores Our current store technology will not be capable of enabling our future store shopping experience Our store results will continue to erode unless we find a way to incorporate technology as part of the store experience In-store technology helps stores compete with the online experience "Strongly Agree" Winners Average Laggards
  • 7. 3 Furthermore, this vastly different perspective shows they understand the problems stores currently face: while a happily-ever-after scenario may have previously been possible for retailers offering unique products or superior customer service, today, those functions absolutely require new technologies in the store. Customers demand them. In fact, they are an absolute necessity for anyone operating on anything other than a low-price model. And while we’ll discuss the importance of pricing several places throughout this report, history has already proven there are very few retailers who can compete on a low-price basis. This report is about how technology can help every other store-based retailer compete with rock-bottom-price competition – whether it’s coming from other stores OR the online channel. Methodology RSR uses its own model, called the “BOOT,” to analyze Retail Industry issues. We build this model with our survey instruments. Appendix A contains a full explanation of the methodology. 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 model 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 - April 2013 and received answers from 131 qualified retail respondents. Respondent demographics are as follows: • Job Title: Executive/Senior Management (CEO, CFO, COO, SVP) 35% Middle Management (VP/Director/Manager) 41% Individual Contributor 14% Other 11% • 2011 Revenue (US$ Equivalent) Less than $50 Million 33% $51 - $249 Million 14% $250 - $999 Million 13% $1 - $5 Billion 20% Over $5 Billion 20% • Products sold: Fashion / Short Lifecycle 31% Seasonal 12% Basic/Replenishment Goods 19% Durable Goods 12% Consumer Electronics 15% Perishable / Food 11% • Headquarters/Retail Presence: USA 49% 55% Canada 5% 24% Latin America 6% 20% UK 4% 14%
  • 8. 4 Europe 17% 28% Middle East 1% 14% Africa 3% 6% Asia/Pacific 15% 31% • Year-Over-Year Sales Growth Rates (assume average growth of 5%): Better than average (Retail Winners) 38% Average 46% Worse than average (Laggards) 16%
  • 9. 5 Business Challenges The Overarching Theme We’ve already seen that Winners have a different take on what the future holds for stores: Figure 3 shows just how different that vision is. Figure 3: The Big Picture Source: RSR Research, May 2013 The contrast couldn’t be any clearer: Winners plan to open new stores – not only in the geographies where they’ve already had success, buy also in new markets around the globe. They view stores as a vital component to their overall brand offering. Yes, consumers may be using any number of physical and digital channels in their paths to purchase, but stores still play a vital role in that equation, and their plans reflect this fact. By way of comparison, laggards seem to have given up on the store entirely. Perhaps they already have too many stores. Perhaps they need the money; but no matter the reason, one in two struggling retailers is planning to close stores in the near future (compared to 10% of Winners), and another 21% say they just plan to stop opening stores altogether. Whatever plans they do have for expansion are for smaller-format stores than what they currently operate. While it is important to recall that Winners are looking through an optimistic lens at the future of the store (and laggards a dire one, from Figure 1), Figure 3 sets the stage for the overall retail environment right now: Those who are “in the know” recognize their stores need technological revitalization, and are addressing that need post-haste. Laggards, on the other hand, just don’t “get it”: they have labeled the store as irrelevant, when in fact it is their lack of attention to those stores that has made their locations undesirable to consumers in the first place. Quite simply, why 7% 50% 21% 43% 29% 36% 17% 20% 14% 26% 40% 63% 10% 10% 14% 24% 66% 76% We plan to open larger stores in the future 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 new stores in new geographies We plan to continue to open new stores in our existing geographies Store Growth Plans Winners Average Laggards
  • 10. 6 would a consumer want to visit an antiquated, poorly arranged store whose personnel can’t answer even the simplest of product questions? It becomes a self-fulfilling and downward spiral. From Here to There When it comes to operational challenges, getting exciting new store-based technologies up and running – and playing well with both new and existing cross-channel tools – takes top honors. But the most interesting data points in Figure 4 are the 48% of retailers who acknowledge that implementing cross-channel process in stores is a top challenge, and that keeping employees focused on selling and service is, as well (Figure 4). Figure 4: It Ain’t Easy Source: RSR Research, May 2013 This makes perfect sense; for the best retailers, the store must evolve, and that means it’s going to be a significant challenge to ensure new store-based technologies do not operate in a vacuum. Consumers don’t care about “channels”, and new store systems will only be of value if they interoperate with all the other “channels” retailers operate. For the worst performers, this challenge may prove difficult enough to phase them out completely. Laggards’ problems are only further compounded by how little importance they place on an educated, helpful staff in stores: only 13% (compared to Winners’ 38%) identify hiring good people as a top priority. 17% 27% 30% 37% 41% 44% 48% 51% Keeping employees informed about marketing and promotional activities Helping store managers stay focused on driving store results Maintaining store processes/training in a high employee turnover environment Hiring good people Helping employees respond to informed, smartphone-enabled shoppers Keeping employees focused on selling and service Implementing cross-channel processes in stores Getting new technologies rolled out to stores Top 3 Operational Challenges
  • 11. 7 Alpha and Omega As always, Winners’ take on the external challenges they face offers a different perspective. Same problems: different reaction (Figure 5). Figure 5: A Tale of Two Cities Source: RSR Research, May 2013 Winners know their store employees are a key component to giving consumers more reason to visit their stores; 66% say their top challenge is more consistent store execution and employee productivity. Customers demand a more relevant store associate than most retailers currently provide, and technology holds much of the key to fixing this problem. Laggards, on the other hand, look to the bottom line before they consider the impact; 80% say they’d like to improve customer service, but only if it doesn’t cost them anything more in payroll. As the saying goes, this may be penny-wise, but in the end: pound foolish. Recall that laggards already report hurting sales. They have few plans to open any new stores and plan to close existing stores in the near future. Is this a coincidence? Hardly. Winners know that a hallmark of winning behavior is to put the customer at the epicenter of each business decision. If a store environment has little value to offer beyond the ability to touch and feel a product, those stores will continue to falter. 13% 27% 40% 7% 67% 20% 20% 80% 27% 8% 24% 51% 8% 41% 41% 19% 54% 51% 7% 14% 28% 28% 31% 31% 38% 59% 66% Need to reduce shrink In-store "showrooming" and increased competitive price transparency Difficulty differentiating ourselves from our competitors Store managers lack information they need on the selling floor – too much time spent in the back Consumer price sensitivity Customer dissatisfaction caused by lack of integration between the store and other selling Lost sales due to store out of stocks Need to improve customer service while holding the line on payroll costs Need for more consistent store execution/ employee productivity Top 3 Business Challenges Winners Average Laggards
  • 12. 8 The Pricing Conundrum Continues To further compound matters, laggards are inordinately focused on consumer price sensitivity. This has become a recurring theme in much of our recent research, despite a lack of evidence to support that consumers are actually becoming more price sensitive. It is a dangerous (and baseless) assumption to make, as addressed in our most recent pricing study: Those who over-perform on year-over-year comparable sales are far more likely to stay the course in their pricing strategy than their competitors. Their competitors continue to up the promotions ante, yet they don’t get the sales or margin kick that they crave… Winners are far more concerned about protecting their brands’ pricing image, whether they think of themselves as the ‘low-price’ or ‘premium product’ leader. Laggards, on the other hand, worry about competitor pricing aggressiveness and new competitors emerging in unexpected places. In fact, the pricing survey goes on to address many of the challenges retailers face in this very study right now, and even provides suggestions on how to get past them: All of this change - showrooming, price transparency, more targeted promotions across more digital channels - occurred in an economic downturn. This has led to consumer price sensitivity that retailers cannot seem to leave behind. At a time when retailers should be transforming their pricing strategies and practices for the omni-channel age, they are caught in a downward spiral of deeper and deeper discounts. We recognize that we are unlikely to stop the seemingly endless barrage of promotional activity retailers engage in, but we strongly recommend improving measurement tools, both before and after the fact.
  • 13. 9 Opportunities Make It Like Online When it comes to the opportunities that lie on the other side of business challenges, little has changed in recent years. In fact, focusing on a more convenient customer experience has been retailers’ top opportunity for the past three years running (Figure 6). Figure 6: Bringing the Store Online – And Back to the Store Source: RSR Research, May 2013 One thing that has changed, however, is that retailers want to bring more of a digital/online experience into stores. This is the first year we’ve included that option, and 48% of retailers immediately seized it as a top-three chance to improve their current stores. This is fascinating for a couple of reasons. First, it wasn’t that long ago that retailers were trying to replicate the in-store experience on their eCommerce websites; again, how quickly things have changed. But far more important is who is driving this notion: for Retail Winners, it is their top identified opportunity in 2013. And mid-sized retailers ($50-$999 million in annual sales) have a disproportionate appetite to bring more of this online functionality into stores than any other revenue group (67% vs. mega retailers’ 40% and small retailers’ 26%). It is one of the key ways they plan to differentiate their stores from competitors. Mom-and-pops are less likely to have the online firepower or inventory to draw upon, while behemoth retailers will (for some time to come, at least), view stores as still representing 11% 15% 29% 33% 34% 35% 35% 48% 60% Improve performance reporting to store management It’s all about our product mix. If we build it, they will come. Find ways to make our employees more productive More personalized attention from our employees Provide ability to locate and sell merchandise from anywhere in the company Add self-service customer-facing technologies Educate and empower our in-store employees using technology Bring more of a digital/online experience to stores Focus on a more convenient customer experience Top 3 Opportunities
  • 14. 10 90% of their overall income - they prefer to wait to see what in-store technologies play best with consumers. In a lot of ways this makes sense: with increased scale comes increased cost, and few mega-retailers can afford a misstep in an enterprise-wide store tech rollout. However, while this represents a tremendous opportunity for mid-sized retailers to gain some market share by modernizing stores with crowd-pleasing technologies that leverage some of the things consumers already like about the online experience, larger retailers should take note: now is not the time for sitting on hands. The customer is already well ahead in the race, and it is well advised to be aggressively pursuing pilot programs that bring more of the digital experience into at minimum, a few test stores. If large retailers wait to see what plays well in the mid-market, the damage may already be done; loyalties may already be sworn to more adventurous, “cool” factor- embracing competitors. A Story of Value 2010 was the first time we asked about consumer smart technologies’ value in driving customers into stores (and their value once within those stores). However, it wasn’t until 2011’s store study that retailers saw much value in either. What happened in those 12 months, of course, was significant; smart mobile phones exploded onto the consumer market, and retailers instantly started seeing them in the hands of every consumer in their stores. Since then, the value only intensifies each year. For example, in 2013, 87% of retailers see value in smartphones’ ability to drive consumers into their stores (Figure 7). Figure 7: Value To the Door Source: RSR Research, May 2013 And it doesn’t stop there - emails, mobile apps, branded eCommerce sites and presence on social networks - retailers are banking heavily on the ability of each to drive customers through their stores’ front doors. And much of this will happen via mobile device. But what then? Intensifying with Time Based on your experience, it may or may not be surprising that retailers perceive increasingly large-scale value in each of these touchpoints’ ability to drive sales – even within the store walls. 33% 44% 46% 50% 58% 51% 47% 42% 37% 38% 16% 9% 12% 13% 4% Presence on social networks Email communications Retailer Mobile App or web Consumer Smartphones eCommerce site Value in DrivingTrafficTO Stores Lot ofValue SomeValue Little to NoValue
  • 15. 11 Figure 8: Value Through the Door Source: RSR Research, May 2013 All of these numbers are up significantly from last year, and those were all up significantly from the year before. Some additional data points: • Winners have the largest appetite to make use of retailer-branded aps and mobile sites to communicate with consumers in stores (44% vs. laggard’s 29%); we intentionally did not specify a difference between app/mobile site, as that is not the goal of this report. However, it does show that Winners disproportionately recognize the consumer’s constant scanning of digital domains even when physically shopping - and see the advantage in communicating with consumers within their (or a competitor’s) store walls. • Those selling perishables and basics believe that their eCommerce site is being used in stores more so than any other segment (42% vs. Fashion’s 26%). This makes sense and demonstrates an understanding of their core audience; their products may not garner the type of consumer passion to warrant branded app or Facebook interest, but consumers do still use their phones to price compare against online offers and promotions while in store. But there’s a problem. The Elephant in the Room And here we (re)discover this ongoing problem. In order for any of these customer-facing technologies to work, retailers need in-store wireless networks. While each year the value for all types of in-store technologies grows (including both customer AND employee-facing, many of which would make the store AND its staff more relevant), retailers remain steadfastly unwilling to implement the wireless networks required to optimize their use (Figure 9). It has become one of the primary reasons retailers have been kept on the sidelines in transforming the retail store into a more exciting, vital, and helpful destination for so long. 13% 17% 25% 33% 35% 38% 37% 43% 42% 35% 49% 46% 32% 25% 29% Email communications Presence on social networks eCommerce site Consumer Smartphones Retailer Mobile App or web Value in Driving Sales WITHIN Stores Lot ofValue SomeValue Little to NoValue
  • 16. 12 Figure 9: Second Verse, Same as the First Source: RSR Research, May 2013 There is cost. There is risk. But without risk there can be no reward. If stores are to become relevant once more, it’s going to take more than the current penetration of wireless networks to get there. Employees need access to better information, and customers need more dynamic and excitement through own devices. If an attempt to prevent “showrooming” is the primary cause for any retailer to avoid implementing wireless in-store, the harsh reality is that it is already taking place. If you believe in your products, your prices and your service, a wireless infrastructure will not hurt: it can only help. Now let’s find out what else stands in retailers’ way. 20% 25% 27% 28% Wireless available for customers Wireless available throughout the store for performance management, POS and product related tasks No wireless network available in store Wireless available only for receiving and other inventory control related tasks WiFi in Stores
  • 17. 13 Organizational Inhibitors ROI, ROI, ROI The top three organizational inhibitors reported by survey takers circle around the subject of ROI: difficulty quantifying a return on investment, dealing with old infrastructure (much of which has been optimized and depreciated to death), and overall capital requirements necessary to fund store investments (Figure 10). Figure 10: Making Technology Pay Source: RSR Research, May 2013 However, even among these top three, there is a certain level of ambivalence. None of the options garnered a majority of responses, and after the top two, the response rate drops significantly. It seems that it comes down to one simple inhibitor: transforming stores is hard - very hard. Tech and People vs. Money By performance, survey respondents report that different types of organizational inhibitors get in the way. For Retail Winners, it's all about the existing technology infrastructure and challenges getting the store operations group to move. For laggards, it's all about the money (Figure 11). 21% 31% 33% 33% 35% 38% 47% 48% The TCO of in-store technologies makes it hard to justify many of the newer technologies We’re conflicted as to whether new technologies will be tools or distractions Stores already have too much going on - they don't have the capacity to add more projects Store operations poses a cultural barrier to change We are trying to simplify our in-store technology, not make it more complex Overall Capital Requirements – we never even get to the subject of ROI The existing technology/infrastructure is preventing us from moving forward with new solutions Hard to quantify technology return on investment Top 3 Organizational Inhibitors
  • 18. 14 Figure 11: Infrastructure Like Molasses Source: RSR Research, May 2013 Retail Winners see two cultural challenges, much more so than for laggards: first, that stores are resistant to change. While this particular challenge sits around the middle of the list, it appears to be growing in influence. As the role of stores changes, the roles of the people within the store are going to have to change too. If stores aren't committed to an omni-channel transformation, the retailer's efforts risk a case of too little, too late. The second cultural challenge comes from a perception that stores already have too much going on. Retail Winners are more worried about this than their peers as an organizational inhibitor, but as we'll see in the sections that follow, almost every retailer in our survey is concerned that stores are at least spending too much time on the wrong things. On the technology side, Retail Winners are more concerned than peers about "Bright Shiny Object Syndrome", where new technologies may prove to be a distraction for stores. On one level, this was a surprising finding from the survey. One could argue that Winners tend to be better at implementing new technologies, and so should already have the tools in place to mitigate this kind of risk. However, lagging retailers are often enamored by silver-bullet technologies, so it's not surprising that they would downplay the risk. It is exactly this challenge of 29% 50% 43% 14% 21% 29% 57% 43% 22% 33% 39% 36% 36% 31% 50% 39% 15% 30% 33% 33% 33% 37% 41% 59% The TCO of in-store technologies makes it hard to justify many of the newer technologies We are trying to simplify our in-store technology, not make it more complex Overall Capital Requirements – we never even get to the subject of ROI We’re conflicted as to whether new technologies will be tools or distractions Store operations poses a cultural barrier to change Stores already have too much going on - they don't have the capacity to add more projects Hard to quantify technology return on investment The existing technology/infrastructure is preventing us from moving forward with new solutions Top 3 Organizational Inhibitors Winners Average Laggards
  • 19. 15 tool vs. distraction that can lead to projects that don't end up best serving store employees as they engage with customers. Some additional differences: • The largest ($5B+) and mid-tier ($50-$999M) retailers are most concerned about their existing technology infrastructure and difficulty quantifying a return on investments. While their concerns appear the same, the reasons underlying these concerns come from very different sources. For the largest retailers, making infrastructure changes are very expensive, thanks to the scale of their operations. For mid-sized retailers, investment decisions must often be a trade-off between technology infrastructure investments and growth - whether through opening new stores or new geographies. • Second tier retailers ($1B-$5B) are the ones most concerned about cultural issues. They are also more likely to say they are trying to simplify their store infrastructure, not make it more complex. This, despite the fact that these retailers are far less concerned than their mid-sized peers about stores being asked to do too much already. Start Slow and Pay as You Go In order to address their internal challenges, retailers strongly intend to move slowly, leveraging pilot programs and smaller projects, and to ease the financial burden of store transformation by structuring projects to pay for themselves as they go (Figure 12). Figure 12: Getting Investments to Fly Source: RSR Research, May 2013 Such an approach allows for retailers to address some of the cultural change issues in stores, but for most retailers, stores already move too slowly compared with the digital side of the business. This perhaps explains why managed services to help speed implementation seem to have 32% 34% 34% 30% 58% 9% 26% 30% 15% 64% 77% 21% 27% 29% 52% 73% 78% Gain sharing programs with vendors Merchandising vendor funding for in-store projects Asking vendors to provide success stories and references Managed services to speed technology implementation Start with smaller projects, buying basic system functions, and using ROI to drive additional functions and features Pilot programs in specific stores or regions Top 3 Ways to Overcome Inhibitors 2013 2012 2011
  • 20. 16 become more interesting to retailers overall. Anecdotally, retailers report that their interest in using a managed services approach comes from the need to reduce focus on supporting the existing systems that will eventually be replaced. Additional differences: • Retail Winners report a stronger interest in smaller projects to pay the way (78% vs. 64% of laggards), while laggards are much more interested in managed services (64% vs. 48% of Winners). • Mid-sized retailers (both $50M-$999M and $1B-$5B) expressed the most interest in pilot programs (85% and 94%, respectively, vs. 78% overall). The People Factor Retailers are extremely contradictory when it comes to store employees. In some research we find retailers proclaiming store employees one of their most valuable assets. In other surveys they report that store employees are the most untrustworthy members of the retail ecosystem, usually ranking well above even organized retail crime as a source of theft. This contradictory behavior extends into store operations as well. Retailers expect store employees' roles to change, but they appear to be doing little to incent the behavior they expect. Omni-channel is the largest example by far. When asked how store employees are spending their time across various activities, a very clear majority of respondents reported that their store employees are not spending enough time on cross-channel selling and fulfillment, and another majority felt the same about selling and customer service, theoretically what store employees are hired for in the first place (Figure 13). Figure 13: Sell, Sell, Sell Source: RSR Research, May 2013 Where are they spending their time instead? On administrative tasks for corporate, followed by inventory management, with facilities maintenance and technology maintenance also garnering too much of employees' time, though at a much lower rate than administrative tasks. Given how 62% 27% 23% 33% 3% 8% 25% 49% 48% 39% 44% 8% 9% 11% 13% 25% 53% 70% 4% 13% 16% 3% 0% 14% Administrative tasks (corporate paperwork & processes) Facilities support & maintenance Technology support & maintenance Inventory management Selling & customer service Cross-channel selling & fulfillment Store Employee Activities Too much time The right amount of time Not enough time Not applicable
  • 21. 17 much retailers worry that technology solutions in stores may become a distraction, it appears that those fears do not actually translate into time ill-spent on the selling floor. By performance, some critical differences emerge - and some topics appear universal. Every performance group worries that store employees are not spending enough time on cross-channel selling and fulfillment (Figure 14) - we'll come back to that notion in a moment. Figure 14: The Cross-Channel Time Problem Source: RSR Research, May 2013 Laggards are the ones driving the concern about not enough time spent on selling & customer service. Their Winning peers are far less concerned on that score. On the flip side (not pictured), 80% of laggards are concerned that their store employees spend too much time on corporate administrative tasks, while only 61% of Winners share that concern. The cross-channel figures above, while distressing given the strategic importance of these processes, is not that surprising. Cross-channel processes are still very immature, so retailers have not yet fully incorporated them into store operations. However, that state of things will never change unless retailers align their incentives to match their expectations, and it is here where retailers fall woefully short (Figure 15). 68% 46% 25% 19% 18% 11% 71% 50% 26% 9% 9% 9% 73% 73% 21% 0% 13% 7% Cross-channel selling & fulfillment Selling & customer service Inventory management Facilities support & maintenance Technology support & maintenance Administrative tasks (corporate paperwork & processes) Store Employee Activities "Not EnoughTime" Winners Average Laggards
  • 22. 18 Figure 15: The Cross-Channel Incentive Problem Source: RSR Research, May 2013 Only 38% of respondents give stores financial credit for items shipped from store, while another 29% give partial credit. If the store actually does the selling, the numbers are even worse. Only 16% of retailers report giving sales credit for an item sold in store but fulfilled in another channel. It appears that retailers are trying to match the revenue with the inventory, rather than the effort to sell the inventory. The store gets credit for an online sale if the inventory comes out of the store - where the store played no role in actually convincing a shopper to buy the item. And yet, when the store does all the work of convincing a shopper to buy, they get no credit because the inventory is fulfilled elsewhere. Small wonder stores are not spending enough time on cross- channel selling. Incentives vs. Culture Ironically, looking at these responses by performance group yields counter-intuitive results (Figure 16). It's not the highest-performing retailers that have the most well-aligned incentives when it comes to cross-channel selling. Rather, average performers have done the most to help gain stores' support for cross-channel initiatives. However, Winning retailers were not any more or less likely to report that store associates focus on cross-channel activities. And they were far more likely than peers to say that their store employees are focused on selling. 14% 16% 28% 36% 38% 32% 27% 38% 32% 29% Sold in store, fulfilled by another store Sold in store, fulfilled online Buy online/fulfilled in store Buy online/pick up in store Ship from Store Do stores take financial ownership for the following types of cross-channel sales? Yes Partial
  • 23. 19 Figure 16: Winners Don't Pay, But Don't Lose Either Source: RSR Research, May 2013 This is why Winners worry about culture and change. While incentives help align activities and objectives, a strong culture oriented toward helping the customer can also achieve similar results. However, when the activities required are new - for example, store activities in support of cross- channel - it may take more than a can-do attitude to get stores to where they need to be. 31% 23% 19% 15% 8% 43% 46% 39% 14% 19% 36% 36% 14% 21% 14% Ship from Store Buy online/pick up in store Buy online/fulfilled in store Sold in store, fulfilled online Sold in store, fulfilled by another store Do stores take financial ownership for the following types of cross-channel sales? "Yes" Winners Average Laggards
  • 24. 20 Technology Enablers Customers Get the Tech Love When it comes to where retailers would prefer to direct their technology investments, it's customers that get all the attention--particularly loyal customers (Figure 17). Figure 17: Love Me and I'll Love You Back Source: RSR Research, May 2013 Retailers are twice as likely to report a high priority for loyal shoppers as they are for district managers, apparently the big losers when it comes to future investments. However, as we'll find below, while retailers report a strong interest in supporting store managers alongside store employees, that interest doesn't necessarily translate into specific technologies. Retail Winners drive the most interest in investing to support loyal shoppers (82% vs. 75% of laggards). They are also more focused on store employees - 71% report those constituents a high priority, vs. 63% of laggards. On the revenue side, mid-sized retailers ($50-$999M) drive the interest in shoppers - any shoppers - with 96% reporting shoppers as a high priority (vs. 74% overall) and 88% reporting loyal customers as a high priority (vs. 79% overall). And, perhaps in response to mobile-enabled shoppers already in their stores, retailers selling consumer electronics and durables report the most interest in investing to enable store managers and employees (75% and 78%, respectively, vs. 64% and 63% overall). Management's Middle Road While store and district managers may not be the highest priority for new technology investments, the reasons for this relative lack of priority come from two perspectives: one, store and district managers have benefited from the last round of investments (typically the first to receive store- provided mobile hardware, for example), and two, in the grand scheme of things, retail is still mostly about helping customers. As a result, most technology tools that are mostly for management's benefit occupy a middle tier of value, a ho-hum investment plan, but still a significant backlog of wishlist (Figure 18). 38% 64% 63% 74% 79% 40% 28% 27% 17% 12% 22% 8% 10% 9% 9% District managers Store managers Store employees Shoppers Loyal Customers Investment Priorities for Store Constituents High Priority Low Priority No Plans
  • 25. 21 Figure 18: Mixing Up Labor Source: RSR Research, May 2013 Workforce management software wins in terms of existing implementations - retailers appear to finally understand that scheduling can no longer be done via standard shifts and spreadsheets, particularly as store employees get more mobile in their personal lives. However, laggards drive the primary interest in scheduling, reflecting a more recent realization of its importance than peers, who have already made investments here. KPIs and alerts win on the budget and wishlist front. While store technology needs to enable the customer experience first, those investments don't do any good if retailers don't help store management understand how best to support those experiences. Helping Employees Help Themselves Modern POS hardware and software top the list of high-value technologies that enable store employees (Figure 19). While we didn't specify that such hardware and software be mobile, it's clear that retailers are thinking more about how to help employees "transact" more so than "sell". Modern POS is also near the top of the list in terms of budgeted projects, both among employee-facing technologies and across all of the technologies that we asked about. In terms of wishlist opportunities - those projects that are planned but currently have no budget set to them - endless aisle capabilities scored the highest, a challenge to implement, given that most retailers don't currently give store associates credit for selling items fulfilled by other locations. 18% 32% 22% 13% 20% 19% 31% 23% 34% 43% 49% 51% Software to assign actions for specific stores/ departments in response to store performance KPI’s and alerts to store managers on mobile devices and tablets Software that schedules the right mix of labor Store Management-FacingTechnologies HighValue Implemented Budgeted Planned, No Budget
  • 26. 22 Figure 19: The Modern POS Family Source: RSR Research, May 2013 What's so wrong with current POS systems? Retailers report that it is primarily cross-channel concerns driving them to reconsider their most critical in-store technology asset (Figure 20). Figure 20: Digital Killed the POS Source: RSR Research, May 2013 Retail Winners are the most adamant about replacement - 42% report that they intend to use a "surround" strategy of new mobile devices that eventually replace existing POS, and another 35% plan to totally replace POS with a single customer interaction platform. 17% 24% 16% 19% 18% 13% 14% 13% 13% 22% 14% 30% 38% 32% 50% 46% 55% 43% 41% 46% 49% 62% 63% 65% Store-provided mobile hardware for employees Endless Aisle selling capabilities Clienteling/CRM solutions for store employees In-store fulfillment In-store Wifi for store functions Modern POS hardware & software Employee-FacingTechnologies HighValue Implemented Budgeted Planned, No Budget 43% 14% 29% 50% 39% 39% 18% 55% 31% 35% 42% 65% We're looking to supplement our existing POS with separate mobile solutions Our goal is to replace our POS with a single customer interaction platform that serves both store and digital channels 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 Perspectives on Current POS (Select all that apply) Winners Average Laggards
  • 27. 23 Enabling the Customer Retailers have made a lot of investment in the past year around consumer-facing mobile. So it's not surprising in this survey to find that retailers now report an interest in personalized offers - a capability that is significantly helped when a retailer already has an avenue for personal, in-store communications, like mobile apps (Figure 21). Figure 21: Getting Personal Source: RSR Research, May 2013 However, while the top three customer-facing technologies above were rated fairly high on the list of valuable technologies, retailers are not that interested in making significant investments in any of these areas - yet. In fact, most distressing on this list is the relative lack of importance - and budget - ascribed to in-store public WiFi. As retailers lean more heavily on consumer-provided mobile devices (as store-provided mobile hardware appears to be something of a non-starter outside of grocery), they are risking a poor customer experience if the cellular signal required to enable that experience is too weak to be of any use. One gratifying bright spot - while in the past retailers have on occasion placed a lot of value on customer self-service technologies like self checkout, retailers' interest in the current investment cycle appears to focus more on the experience than on the "self service" - whether that experience is primarily supported by employees or by technology. Why the Long Slow Road? In the Organizational Inhibitors, we found that retailers appear to place a lot of value on an approach that enables them to take on store investments in an incremental fashion - an approach that focuses on pilots and small projects that pay for themselves. Despite the need to move fast to address cross-channel changes, retailers prefer to move slow. The chart below (Figure 22) provides another perspective on this conservative retailer point of view. 17% 14% 24% 31% 31% 29% 14% 6% 8% 13% 13% 18% 17% 28% 33% 41% 35% 31% 21% 25% 37% 48% 50% 51% Store-provided mobile hardware for customers Self checkout In-store public Wifi Digital displays and interactive kiosks to enhance the shopping experience Mobile solutions enabled by customer smartphones In-store personalized rewards and/or coupons Customer-FacingTechnologies HighValue Implemented Budgeted Planned, No Budget
  • 28. 24 Figure 22: Because We've Always Done It That Way Source: RSR Research, May 2013 Overall, retailers tend to favor investing to own and depreciate over time. However, that view is clearly not shared by Winning retailers. While their peers continue to feel the need to muster all of the capital required to make store technology investments, Winners are increasingly turning to on demand, or software-as-a-service solutions, driven primarily by interest in leasing and to a lesser degree, managed service agreements (laggards edged Winners out on that response). We leave you with this perspective, because financing is so often the constraining factor when it comes to making store investments, particularly for larger retailers hit hard by the "store multiplier" effect. Winners appear to be getting over that point of view. Does that mean they will be able to implement new store technologies faster than their peers? The future of the store may depend on it. 18% 27% 0% 55% 9% 12% 24% 56% 13% 25% 29% 33% Total "as-a-service" agreements that include hardware as well as software are ideal It's better to lease/expense whatever you can On demand or software-as-a-service agreements are best It's best to own it and depreciate over time Financing StoreTech Investments Winners Average Laggards
  • 29. 25 BOOTstrap Recommendations The store is in trouble. We have said it before, but it bears repeating. And if "knowing is half the battle" then Winning retailers are well ahead of their peers: they already acknowledge that their stores have a future, provided they move now to make the investments necessary to keep stores relevant. However, even Winners have some blind spots when it comes to the future of stores. We see four major issues that almost all retailers need to address. It comes down to one simple theme: Get Over It. Get Over It: There's No ROI For Omni-Channel in Stores Stores are a monopoly business that has just been forced into a wild-west free market - where stores once were the only places you could go to shop, consumers and the technology they carry with them have completely disrupted that model. It's change or die. The economic model of stores was never designed to share revenue with the online channel. It was never designed to support an environment where all of the selling happened (and the cost of those sales) but not the transaction itself. And through RSR's other research, we've found that retailers expect the store model may completely collapse under its own weight when online & digital channel sales (i.e. via mobile and social channels) reaches 25-30% of the business. That's not to say that some store pieces of the omni-channel puzzle won't individually have a return on investment. Just ask any fashion retailer considering exposing store inventory online in concert with ship from store - they won't tell you any numbers, but the twinkle in their eyes and the smug grin on their faces will tell you plenty. And that doesn't mean that stores' omni-channel transformation has to break the bank - there are a lot of things that retailers can do to help manage those costs, including looking at managed services for existing store infrastructure, leaving the retailer the capacity to drive innovation. Including a more eCommerce-like development cycle that focuses more on usability in order to minimize the need for lengthy training and rollout. But if your executive team is waiting for the pretty, bound report that neatly sums up how store investment is going to return more than, say, investing in online or a mobile app, they're going to be waiting until the day the company goes under. Omni-channel as it is expressed in stores isn't about creating more value than the dozens of other projects retailers could do, it's about preserving value - preserving the future of the business. Get Over It: In-Store Public WiFi is a Necessity Retailers' lack of interest in investing in in-store public WiFi continues to astound us. What is the value of all of a retailer's investments in mobile and digital channel solutions aimed at enhancing the store experience if the store is a patchy or, worse, dead cell zone? We don't want to minimize the very real security issues and bandwidth challenges that come along with public WiFi. And, back to point one above, it may well be impossible to build a business case to support such a major investment - at least, if you haven't already made the investment and seen how consumers (and employees, by the way) end up using that public WiFi to enhance their shopping experience. Sure, consumers will use it to showroom. Sure, employees
  • 30. 26 will use it to post inappropriate things to Facebook. Sure, a hacker will try to use this very public access point to attack the rest of your network. But there are plenty of solution providers out there who know how to address these issues. And once up, store employees may also use public WiFi to help consumers answer questions and make purchase decisions. And consumers may use it to learn you have a far greater assortment than what is on the shelf in front of them, or locate and reserve an out of stock item that happens to be in stock online or at another store in your chain. The reality is that consumers will bring digital into your store one way or another. Are you going to be a part of that experience or an obstacle? Which do you think will drive greater customer loyalty? Get Over It: Incentives Have Nothing to Do with P&L Why does it matter where an item is fulfilled from to meet customer demand? And, most distressing, why should the fulfilling location, which bore none of the costs of selling the item, get the revenue credit? And most importantly, if you are an employee asked to operate in this environment, where your pay is driven in large part by the revenue you generate, why would you ever try to sell an item that you didn't already have in your possession? Retail Winners told us that they have instilled a culture of "help the customer at any cost" in stores, such that they can overcome these barriers without a major re-alignment of incentives, but even they worry that such altruistic behavior won't last. Incentives are compensation based on specific objectives - a carrot to inspire a desired behavior. A carrot whose size (budget) bears absolutely no relation to revenue, other than perhaps a heuristic used to determine the overall size of the incentive pool. And while many incentives are defined based on financial measures - revenue, margin, profit - there is no requirement for this to be the case. And nowhere should that be more obvious than in stores, where manufacturer spiffs and corporate-sanctioned competitions are frequent. Sell five of these pans and get a free one for you. If we sell $1000 in sweaters by noon, the department will pay for lunch. Why is it so hard to add "Save ten sales today with online orders and get a bonus" to that list? Why must stores only be rewarded for cross-channel sales if they are the location that happens to have the inventory? There's only one real reason, and it's the wrong one: because the financial system demands matching revenue to the inventory. Okay, fine. But then why do stores need to be rewarded based on that number? If you want stores to spend more time on cross-channel sales, then reward them for that behavior. Match the revenue to the effort required to capture the revenue - at least when it comes to awarding incentives. There's No Time to Waste Perhaps the alternative title for this recommendation should be "Get Over It: Stores Can No Longer Move At Their Historical Leisurely Pace". The plain truth is that stores take a long time to change - if you are used to retail-hardened requirements and arduous rollouts involving store provisioning and exhaustive employee training. All of this needs to change - now. When the website needs to change, the change is made, sometimes literally within hours of making a decision. It might be A/B tested, it might not. It's pushed live to the site with no consumer training. Only in very big changes ("Look! Our new site is so much better than the old one!") does the retailer offer any explicit communication that any change is coming at all.
  • 31. 27 Whether customer-facing, employee-facing, or manager-facing, stores need to move at this speed - the speed of online. They have no choice in the matter. Consumer technology and shopping sophistication has already outpaced the store experience. If it takes retailers ten years to respond and get stores to catch up, they'll only find that instead of ten years behind, they'll now be twenty years behind - consumers aren't going to wait around for stores to figure it out. Stores don't have ten years. They don't even have five, really. Does that mean that our cities will become littered with empty malls and "lifestyle centers" that are devoid of life before the end of this decade? No. Stores will always be there, and there will always be shoppers who buy from them. Always. But there will be the stores that have survived - hung on by the skin of their teeth in an eroding business model - and stores that thrived, those that transformed themselves to become something more than just a place to go to buy. That monopoly is over.
  • 32. a Appendix A: RSR’s Research Methodology The “BOOT” methodology 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 follows:
  • 33. b Appendix B: About Our Sponsor Xerox Corporation’s vast array of services eases the store and back office burden for the world’s leading retail organizations. Through our sourced simplicity approach we help our clients tap into hidden intelligence that yields greater business return. With the expertise of our 140,000 people, global brand strength and innovative technology, we bring our client’s data and services that result in better and faster decision making for improved efficiency and performance. Our clients tell us we’re responsive to business needs, we’re flexible to changing priorities, we’re reliable for delivering results and we act with integrity at all times. For more information, visit Xerox at www.xerox.com  or at ito-communications@xerox.com.  
  • 34. 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© 2013 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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