Reengineering Retail

Doug Stephens, Joseph Pine

Buy on Amazon

Highly Recommend

Good primer on the recent history of retail and commerce tech. It's equally depressing and exciting - e-commerce is a huge trend that Amazon is dominating, but there are many great retail experiences that need to be created.


After leaving Amazon in 2013, Lore went on to found Jet with a simple operating thesis. Lore believed that by deploying advanced analytic technology, Jet could out-price Amazon, and in doing so, carve out a sustainable number two position in the market—a thesis Walmart clearly bought into. [Didn't know this is how Jet was created]

As Bezos once said, “Invention requires a long-term willingness to be misunderstood,”

Thus, Amazon Prime is not a loyalty program so much as it is a distinct product and service ecosystem underpinned with an elevated customer experience.

What’s particularly fascinating about many of Amazon’s innovations is that, as with Amazon Web Services, the company doesn’t merely think in terms of short-term products and services like most retailers. It thinks in platforms and networks. [This is how to build any consumer business - focus on the platform, content and brand ecosystem then sell inside of it]

So, in each of the first 60 minutes of Singles Day, Alibaba was transacting significantly more than what two—count ’em, two—Home Depot big-box stores sell in a full fiscal year.

There was a time when retailers could feel secure in the belief that buying certain categories of goods, such as clothing, furniture and automobiles, online was problematic. Increasingly, however, there are no safe-haven categories. In fact, Alibaba recently set a Guinness world record, selling sixty-five hundred automobiles online in one day!

THE REAL CHALLENGE for ecommerce companies is no longer to convince consumers to buy online, but rather to get the millions upon millions of items we’re buying to us in an ever-shrinking window of time.

A month later, rumors erupted that Amazon may have been in negotiations to purchase Frankfurt-Hahn Airport in Germany. The airport, which had been losing money for some time, had been for sale since February of the same year. Amazon, according to a German newspaper, was one of three bidders to come forward. It’s precisely this long view of strategy that makes Amazon so troublesome.

One study suggested that up to 55 percent of product-related searches are now being performed on Amazon instead of Google.

It’s safe to say, therefore, that the retail industry is largely being led by people who grew up believing in two immutable laws governing business strategy.

  1. Mass media was dependably effective.
  2. The consumer’s path to purchase was linear and largely predictable.

Media is abundant; attention is scarce

Americans still watch an amazing 4.3 hours of television per day.

What is absolutely consistent across the board is that almost no one is watching the commercials—not deliberately anyway. And you’re probably not either. Why would you? You have a supercomputer filled with fun and entertaining content in the palm of your hand! Why on earth would you watch dull commercials?

So the disparity between reach (the opportunity to consume an advertisement) and impression (the consumption of an advertisement) is now gaping and growing rapidly. Moreover, it’s a problem that can’t be easily solved simply by showing more ads, known as frequency.

The notion that you build a community on Facebook, and that we call people who manage the pages Community Managers, it’s always been a pipe dream. If you want a community, you need to build a community, and that means a branded community on a domain you own.

Consumers just generally hate advertising, and with precious few exceptions, we always have. The difference is that now we have the power and the technology to do something about it. [Organic is still king]

I’d take Jakeman’s theory a step further and suggest that advertising, as a concept, is simply no longer sustainable.

Our brains had become so adapted to online shopping, where one can refine a search, compare items and access loads of well-structured product information, that shopping in a physical store, without the benefit of those tools, had become almost impossible for our brains to manage. The result was essentially a cognitive meltdown.

This growing chasm between the ease and convenience of the online shopping experience versus the challenges and rigors of the offline experience will soon reach a tipping point, and it simply will no longer make sense to venture into the relative information vacuum of a physical store, as we know it today. To remain relevant, retailers will have to imbue their physical environments with the tools, data and technologies that consumers are becoming reliant on to make informed and frictionless decisions.

And, Forrester Research estimates that by 2020 more than 85 percent of all handsets in the world will be smartphones. Furthermore, the smartphone subscriber market will continue to grow at a five-year compounded rate of 9.5 percent through 2020.

At the top of the old purchase funnel sat the need to build awareness, an objective achieved largely with the help of advertising media. Typically, advertising had three defined roles: to tell a brand story, to create urgency for a product or service and, above all, to drive consumers down the funnel toward a point of purchase.

Media was the communication component; the store was the distribution point. And for the better part of three hundred years, this has been the working dynamic between media and stores. But now, in a hyperconnected world, the purchase funnel is being turned upside down and media is becoming the store. There is no longer any friction of distance between the message about the product and the ability of the consumer to buy the product immediately.

Their goal is to make shopping online infinitely more experiential, intuitive, invisible, instantaneous and even, dare I say, human.

Rather than spending copious sums of money broadcasting ad messages to nebulous consumers, P&G believed brands were better served to focus keenly on shoppers as they took their final steps along the path to purchase. The shift in strategy was a clear sign to the marketing world that P&G regarded the store shelf—not mass media channels—as the most critical retail battleground and, at the end of the day, the only one that truly mattered. The final few feet of the consumer’s journey to a product was, at least in P&G’s mind, the ultimate moment of truth.

It’s what I call the replenishment economy, a future state in which sensors, devices and robust analytics manage most of our daily, weekly and monthly product needs for us. And it will render today’s marketing strategies for consumer packaged goods useless within a decade.

WhatsApp, Facebook Messenger, WeChat and Viber are now attracting more users per month than Facebook, LinkedIn, Twitter and Instagram. Increasingly, social networks are morphing into chat networks.

In a 2013 TED Talk, Kuchenbecker details a number of potential uses for haptography, and chief among them is online shopping. As she points out, the inability to touch and feel the products we shop for online has, from the beginning, been one of the most significant drawbacks for ecommerce, especially in the apparel and furniture categories.

When I asked Kuchenbecker what her ideal future for this technology looks like, she quite plainly said, “The next step is to get rid of the stylus.” She envisions a world where our natural instinct to touch and feel is baked directly into the devices and platforms we use to access the web—a world where we can touch and feel the virtual. So, if you think Amazon is deadly today, imagine a future where Amazon ceases to be a digital catalog and instead becomes an expansive virtual world that you can step into.

Imagine perceiving the scent of the leather sofa you’re considering, or being able to sample various bouquets of wine online before making a selection. Scent could very well be the ultimate digital content that tips the scales in favor of one product or business over another.

According to Wallace, it’s a system of commerce in which you could buy the things around you simply by looking at them. “So, I’m looking at your sweater,” Wallace says, “and I’m like, ‘Wow, it’s really nice.’ My system recognizes that I’m looking at your sweater; Alibaba pops up, recognizes that, makes me an offer and says if you buy it now you get 10 percent off. I also look down and I can see myself in it.” Then, Wallace says, with a simple acknowledgment, it can be purchased and paid for.

As long as humans shop for reasons beyond the mere acquisition of things, physical retail spaces will remain relevant.

The true joy of shopping lies in the delicate balance of relevance and randomness.

Crowds are the clearest and most immediate form of social proof, a reality that hasn’t changed since we climbed down from the trees tens of thousands of years ago. [Social proof key to everything in commerce]

It also tells us something important about shopping. A shopper’s dopamine levels will be at their highest in anticipation of acquiring the thing they seek, and those levels will be even higher if there’s a known risk of not getting it.

Research within specific categories of merchandise suggests that 91 percent of millennials prefer to shop in physical drugstores versus online alternatives, 68 percent prefer physical electronics stores, 84 percent prefer shopping in physical department stores and 83 percent prefer shopping in physical discount and mass retailers.

So, if we’re honest about it, the problem isn’t that millennials dislike physical stores; it’s that most store experiences suck. I’m not saying this lightly or for effect. I mean it sincerely. Most stores we visit are devoid of any theater, excitement or aesthetic delight, much less any sort of engaging physical experience.

Honestly, when was the last time you walked right out of a retail store and told a friend or family member about it because you were so excited about what you’d just experienced?

Too many retailers are simply bolting technology onto what is most often a mediocre customer experience instead of reimagining the customer experience entirely and then, where it makes sense, using technology to enable or enhance it.

It’s not about standing in the middle of a dusty warehouse speaking to a chatbot about product needs. It’s relating with an enthusiastic and delightfully human product expert who is empowered with technology that makes them even more expert.

All indicators suggest that millennials are desperate for outstanding live shopping opportunities. They’re dying to discover retailers that can engage them with amazing products with which they can play, learn, experiment and have a remarkable time doing so. They long for moments that they can’t replicate at home or on a mobile device.

The intrinsic problem is that the core metrics used to judge the productivity of a retail store—the very measures by which success in this industry is currently defined—are conspiring against the vital evolution of customer experiences. Any attempts by retail executives to be creative, innovative, daring or disruptive ultimately get measured using the most conventional and passionless yardstick of them all—sales per square foot. In essence, we’re attempting to create retail poetry by using algebra. And it just doesn’t work.

Consequently, online is where you’re likely to spot the next cool new product—not in a store. And this is a huge, glaring existential problem for retailers.

What Sonos understands is that the world has no need for another electronics store. It needs beautiful spaces where people can gather to celebrate the unique sensorial joy of listening to music.

Legendary Disney theme park designer John Hench once said, “Story is the essential organizing principle behind the design of the Disney theme parks.”

Our role as consumers will steadily evolve from product transportation to product co-creation.

In fact, Pirch stores deliver a stupefying three thousand dollars per square foot in sales on average, placing them ahead of a pantheon of industry leaders including Apple and Tiffany & Co.

In short, the role of the shopping space of the future will not be to convert shoppers into buyers; it will be to turn shoppers into fanatical, lifelong converts and advocates for the brand.

Physical shopping spaces will ultimately prove to be the most powerful, immediate and measurable form of media available to a retailer or brand.

  • First, because physical spaces will allow consumers to have retailer- or brand-related experiences that cannot be fully replicated online, making them extremely special.
  • Second, because in a world of fleeting and fragmented attention, shopping spaces are an opportunity for shoppers to be fully (cognitively, emotionally and physically) engaged in a branded media experience that no other media format can consistently promise.

In fact, one study suggested that 55 percent of U.S. consumers and 63 percent of U.K. consumers have no interest whatsoever in following brands on social networks.

And yet when we walk into most retail environments, we are entering digital deserts that are barren of any meaningful social content at all. There’s not even a hint of the reviews, ratings or other user-generated content that we have become so accustomed to incorporating into our buying behavior.

Part media outlet, part sales agent, part design firm, experiential retailers will use their physical shopping spaces to perfect the consumer experience across a category or categories of products. [This sound so fun]

But monetizing experiences is precisely what Shechtman and her team at STORY do. And they do it between eight and twelve times each year. Put simply, brands pay STORY to tell their stories.

CEO and co-founder Vibhu Norby believes that retail “will ultimately be a marketing function and not a sales function. That’s what vendors are paying for at b8ta, [thousands of] people a month trying and seeing their products for the first time.”

No one needs what you sell. That’s the bad news. The good news is that the world desperately needs how you sell what you sell—the unique, remarkable and ownable experience you design around your product.

While the need to create remarkable experiences may sound like something to be taken for granted, consider how few companies are truly differentiated in how they do business. Most shoe stores are the same. Most quick-serve restaurants do what they do in an identical fashion. Most department stores are indistinguishable from one another.

Most corporate reward systems are biased toward success, and that’s a problem when it comes to innovation because many of the most innovative ideas are not immediately successful in a conventional business sense.

As we look to the future of retail, how can we apply Teller’s 10× principle to the customer experience? How can we ensure that we innovate to a place that is not merely incrementally better than what we have today but an exponential improvement?

Consumers are now benchmarking their experiences laterally, and retailers must benchmark their performance accordingly. It’s no longer good enough for department store A to be a little better than department store B. That only means that department store A will declare bankruptcy a little later than B. Instead, the question for department store A should be, how good is it compared to experiences offered by, say, Etsy, Spotify, Walt Disney World or Virgin Airlines?

What is abundantly clear from my research, however, is that the best, most successful and future-facing companies obsess about their customer experience above all else.

When all is said and done, though, the real art of executing the most highly engineered experiences is to make them look like they’re not highly engineered. True mastery occurs when you can make the meticulous artistry and difficulty of something look effortless—an art Italians call sprezzatura, or studied carelessness.

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