Polarization in Retail

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\"\"Success in today’s increasingly competitive retail landscape requires delivering superior customer experiences centered on one thing: convenience. But how can retailers capitalize on consumers’ thirst for convenience while maintaining or growing margins?

The ability to properly segment, identify, and understand individual customers and their desires for convenience and differentiated experiences leads to a polarization of the market. This provides retailers with the opportunity to offer different service models to consumers while mitigating some of the traditional industry challenges in delivering on that brand promise.

Within the consumables and food categories, the polarization approach is largely centered on replenishment. That enables retailers to gain greater predictability over their businesses, address competitive price shopping, increase customer loyalty, and streamline labor efficiencies.

Consumers, meanwhile, benefit from the convenience of obtaining basic consumables and focusing their time and money on impromptu or occasional fashion, experiential or indulgent products and services that can be harder for competitors to duplicate.

Driving incremental spending with subscription and rental “as-a-service” models

Seeking ways to cash in on market trends, many consumer-focused companies, like Dollar Shave Club, are embarking on the “Uberization” of retail. This means they’re adding subscription or rental models to provide products and experiences as services.

The idea is that products are available at consumers’ fingertips, at home, with subscription models proactively refilling the pantry. That saves customers the cost and time of visiting a store and waiting at checkout. Such tactics also drive incremental sales by preventing buyers from running low on consumables and having to stretch usage.

An average consumer may try to lengthen the amount of time he uses his razor blade to shave, for example. While that may translate to just an additional 3 to 5 percent total consumption, given a typical eight-pack of razor blades, it’s common for a customer to use more when a product is readily available at home.

Each subscription sold means incremental—and more predictable—revenue for the business, and as a result, an opportunity to reduce SG&A expenses and increase margins. Given the $600 billion-plus size of the U.S. grocery market, even a small shift in market share can be large.

Smart devices are smart business

Smart devices, empowered by the Internet of Things, are another way retailers can proactively drive sales and encourage in-the-moment purchase decisions.

Examples of the allure of connected devices are all around us. Smart refrigerators begin to leverage SKU-level RFID tags to recognize their contents and expiration dates. Keurig machines detect when water filters need to be replaced and estimate when coffee pods are running low. Nest thermostats, meanwhile, recognize when cold weather is setting in.

With machine learning, retailers can analyze this data and turn it into valuable insight. Consumers can benefit from this by receiving new water filters and coffee pods or hearing suggestions on seasonal orders of peppermint hot chocolate as winter nears. Smart devices can even recommend adding a can of whipped cream to a customer’s grocery order. After all, the system can recognize that the cannister in the fridge expired a half year ago.

The opportunity for the consumer to receive these products together when they need them cements loyalty while providing a larger individual purchase for the retailer at a lower cost to fulfill.

The time/convenience/money tradeoff for consumers

Consumers continue to provide numerous examples of their willingness to pay more for convenience.

Business Insider recently reported a 400 percent increase for Amazon Dash Button-initiated orders. These Wi-Fi-enabled buttons allow consumers to order products from more than 200 brands, including Charmin, Gatorade, and Huggies, without even seeing the price prior to purchase.

Customers truly are paying for convenience, applying the hotel minibar concept to everyday consumables, though not at the exorbitant markups that everyone expects from the hotel fridge.
Similarly, voice-enabled technologies, such as Amazon’s Alexa, Google Assistant, and Apple’s Siri, let consumers purchase in the moment just by speaking.

How does this apply to the rest of the retail world?

Retailers can transform the way they interact with consumers by providing them with their weekly or monthly consumables as a subscription, simultaneously providing customers with time savings, reducing the risk of price sensitivity, and lowering the cost to serve.

By leveraging customer insights collected from loyalty data, retailers can:

  • Determine which products consumers purchase on a regular basis,
  • Calculate the typical frequency of usage for each individual consumer, and
  • Understand when customers typically shop in their stores.

With this insight, retailers can gather customers’ most frequently purchased (i.e., replenishable) items and have them ready to pick up at the store at an hour chosen by the customer. With each scheduled pick-up, retailers can provide micro-targeted offers for deals on prepared meals or other promotional specials, representing a step up from the brands they typically purchase. This can convince consumers to splurge on goods they normally don’t buy.

Customers will gladly spend less time walking aisles for those replenishable items—avoiding price comparisons, by the way—and instead focus on the impromptu or unique purchases they have been considering, be it a special bottle of wine, an expensive filet or a date night video with the spouse.

Providing convenience and lowering labor costs

With proper analytics and forecasting capabilities, there is real potential for in-store labor and cost savings.

Subscription adoption can help retailers reduce labor costs by placing fewer units on shelves. Subscription boxes can be packed efficiently during slow times of the day, either in back of the store or in distribution centers that ship the pre-packaged boxes directly to the store.

Under “as-a-service” models, businesses will be wise to charge for the bundled products together as an auto-billed weekly or monthly subscription fee, with e-mail or credit-card notification, rather than ringing up each item at the point of sale, potentially changing perceptions about in-store prices and reducing the likelihood of price-comparison shopping.

Not just for grocery

Subscription and “as-a-service” concepts extend beyond grocery. Retailers can partner with school districts, for instance, to create bundled SKUs that allow parents to click virtual “buy” buttons online and purchase pre-assembled school supply boxes with all the required consumables needed for the school year. By doing this, companies can capture a bigger share of the $27.3 billion K–12 back-to-school market, according to NRF’s 2016 estimates.

This option may not have the buzz or novelty factor that placing a physical button in a customer’s home may have. But even an online “buy” button delivers that one thing that all customers so desperately crave: convenience.

What’s the imperative now?

Many leading retailers today are already using these types of services to their advantage.

But implementing them effectively while delighting consumers requires a shift in mindset and organizational change. Namely, it requires real-time technology
to accurately forecast consumer supply and demand, allowing companies to adjust their operating and labor models.

Executed properly, this transformation will help companies fight the frictionless economy by reducing price sensitivity and increasing loyalty, as consumers buy more than just products. They’ll be purchasing “consumables as a service,” which will quickly become autonomic.

With additional loyalty, consumers will have a greater propensity to spend time with the brand, focused on non-commodity products and services, unique experiences, and higher-end, private-label, exclusive-branded products that typically result in higher profit margins.

Digitization: The way to consumers’ hearts

Reaping the benefits of retail polarization through consumer replenishment services requires setting key capabilities in place:

  • A predictive analytics platform that lets you analyze and forecast data in real time.
  • Live insight into historical buyer behavior patterns.
  • The ability to access and process geo-location data in real time.
  • Real-time access to traffic and weather data.
  • Advanced forecasting to predict when and where goods are needed.
  • Optimization capabilities for determining the best methods for getting products to stores or directly into customers’ hands.

Retailers with these digital capabilities will be positioned to offer unparalleled customer value and convenience, allowing them to grow what their consumers’ spend, and increase share of heart and mind, all while improving the bottom line.



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