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A Brave New World


Remember when retail gurus used to say that when it came down to it, retail strategy was all about location, location, location? Location still matters, but not as much as it used to. With the explosion of online retail, brick-and-mortar retail strategies are changing. But it's not just location that has receded in importance. Price and selection don't matter as much anymore either.

Strategic changes are rippling through the retail world today, driven by the interplay between brick-and-mortar and online retail.

What changes? Here are three:

  • Traditional retail differentiators don't work anymore.

  • Brick-and-mortar retail stores are adopting strategies used by online stores.

  • Online strategies and brick-and-mortar strategies are merging into focused, powerful retail strategies.

Retailers that don't tailor business models and strategies to emerging realities will find themselves in a tailspin, according to a recent report from Deloitte Consulting LLP entitled, "A Race to the Bottom: How to survive in the new retail environment."

The study makes it clear that in today's marketplace competitive attributes such as price, selection and location are being reconsidered as noted competitive differentiators. Translation: Price, selection and location are less important, today.

"Product and service have become the real differentiators," said Rod Sides, a Deloitte principal and co-author of the study.

Price used to be a key differentiator, but now many other retailers can match low prices.

"You don't have to be the lowest price," Sides explained. "But you have to be competitively low. A consumer might reason that it's worth a 5% premium on a $50 item to get it now, instead of waiting a day or so for an online shipment."

Competitive pricing remains important to making a sale, but it won't differentiate a product or retailer like it used to.

Even vast selection doesn't differentiate anymore either. The reality is products spanning entire aisles in big-box stores can't compete with online's endless aisles.

Then there is location.

"Location is important for brand building, but a customer can buy a product anywhere, anytime without a store," said Thomas F. Quinn, a principal with Deloitte and co-author of the study.

Today, successful retailers differentiate their brands with products and service. Consider Apple.

"Apple is driving the new normal in retail," Sides said. "If there is one concept today that a majority of our retail clients are trying to emulate, it is Apple."

For Apple, retail strategy is all about products and service. The Apple brand stands for innovative, distinctive products, from the iPod to the iPad. It also stands for service. Excellent service in Apple's physical stores and digital stores drives sales in both venues. Premium products and premium service enable Apple to charge premium prices.

Upscale department stores have always combined high-end products with excellent service. Today, that excellent service includes filling online orders from stores near buyers. Shipping is less expensive and faster, two customer service benefits. Sometimes customers come to the store to pick items up, another customer service benefit that also holds down store costs.

"A number of upscale department stores now pull inventory from stores to fill online orders," Quinn said. "Many of our clients today are trying to duplicate that."

It's more complicated than it looks. It adds complexity to buying decisions and the way products are allocated among stores and distribution centers. It also requires material handling crews in stores to receive, rack, pick orders and ship merchandise.

"Upscale department stores understand that customers want exclusive products and excellent customer service that includes getting products to online customers fast," Quinn added. "These stores are making that work. As a result, price isn't as big a pressure point for them."

Most retailers don't have exclusive products and the financial ability to pay for excellent service. But they can still find a strategic balance — and they should start searching for it now. According to the Deloitte report, brick-and-mortar retailers need to better leverage their operating base if they want to remain competitive.

"In a lower-cost operating model, a retailer must ensure that incremental dollars invested in labor or real estate have value," Sides says. "One strategy might be fewer, smaller stores and more distribution points."

That helps to rebalance real estate investments. Fewer, smaller stores cost less, as does distribution real estate. The stores would build the brand and drive online sales. Service comes from swift delivery of online orders.

"You can't be in the middle," Sides said. "You can't have a high-cost structure and an undifferentiated value proposition, because then you will be forced to cut prices to make sales. And that's the race to the bottom."

Michael Fickes is a contributing editor to Chain Store Age.

The interplay between physical stores and online is driving strategic changes throughout retail.

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