Reshaping Retail

Why Technology is Transforming the Industry and How to Win in the New Consumer Driven World

Stefan Niemeier, Andrea Zocchi, Marco Catena

• Publisher: Wiley
• Year: 2013
• ISBN:
  9781118698884
• Edition: 1
• Topic: Business
• Subtopic: Vendite
• Index: Business

The modern retail system has worked to dazzling effect. From the 19th century, store owners emerged from small beginnings to set in train an industry that has seen some operators become nationally, even globally, dominant. Along the way, they turned retailing into an art, and then a science. Now retailers in emerging markets appear to be repeating the story all over again, except on a scale and at a speed beyond anything we have seen before.

Given all of this, it can be hard for those who work in retailing to accept that the industry as we know it is living on borrowed time, on the brink of transformation. There is now an urgency with which conventional store-based retailers must now act and the extent of the challenges this change represents in strategic, organizational, and above all, technological terms.

Reshaping Retail sets out the driving causes, current trends and consequences of a transformation in retail triggered by technology. The changes go far beyond making items available for sale on the internet. Starting by briefly setting the historical and business system contexts for retail and describe the role that technology has played in the creation of modern retail it then explains the underlying technological drivers behind the current revolution – radical changes in the capacity of both hardware and software, mobile telecommunications changes and the advances of the Internet.

Ultimately, success will hinge on more than competence; it will come down to a way of thinking. Customer-centricity will need to be valued not just by the store owner, as in the past, but also by all employees in the organization. It will need to become embedded in their daily tasks. The same applies to technology, which must be at the center of the organization and recognized as such by everyone.

With a combination of extensive desk and field research, interviews with leading retailers and technologists, together with the real world experience of practitioners in this area, Reshaping Retail will inspire and help store retailers to make the necessary transformation now to win in the new consumer driven world.

Chapter 1

A Brief History of Retailing

Co-authored with James Naylor

Today's senior retailers have endured a series of profound shocks and changes. During their careers, they have witnessed the dot-com bubble of the late 1990s, been swept along by a credit-fueled consumer boom, felt the pressure of financial markets' expectations of cross-border retailing, and been blasted by the macroeconomic consequences of a capital market crash and its aftermath. Those who struggle for economic survival day by day and week by week may feel they have had enough history already. Nevertheless, although these words may be of little comfort, the events have been merely the birth pains of a new era in retailing in which the retail landscape will change completely.

To understand this assertion, it helps to consider the nature of today's changes in the context of the history of retailing. We can organize our thinking by dividing the time line of retailing into three eras: the mercantile, the modern, and the digital. The era of medieval mercantilism was born of an embryonic banking system that made capital funding available for the first time and steadily increased the scale and scope of trade over centuries. The modern era, from the Industrial Revolution to the turn of the 21st century, ushered in mass production and the consumer society. In the present era, which got under way 15 or so years ago, another revolution is taking place: the conventional ways of retailing laid down and consolidated over the course of centuries are being thrown over in favor of a new order founded on three technological pillars—computing power, networking, and data storage capacity. We refer to this as retailing's digital era.

Retailers are by definition intermediaries, helping suppliers to find a market for their goods and customers to buy what they need or desire. In the mercantile and modern periods, retailers' role as the intermediaries between suppliers and customers—adding value to both and extracting profit for themselves in the process—was necessarily a narrow one. Retailers served a small, elite class of people until, progressively, more members of society moved beyond subsistence to become consumers. With the help of capital, new management techniques, and new technology, they grew steadily more skilled in that role, and steadily more powerful. The more skilled they became, and the greater the demand, the greater the scale at which many were able to operate while still delivering on the most fundamental requirement of a successful retailer: to match the flow of goods with information about supply and demand in order to earn the highest possible return on the money invested in inventory.¹ This was as much the challenge for the merchants of the Middle Ages who bought wool in England and sold it in markets in Bruges or Ghent as it is for today's retailers who operate hypermarkets of up to 220,000 square feet.

But in the digital era, the retailer's role as intermediary is under threat. Fifteen years ago, the new technologies that promised so much for e-commerce did not quite deliver, and the dot-com bubble burst. Today, a mature range of digital technologies is sending the industry a clearer signal. And these technologies are game changing. Traditional retailers no longer hold the monopoly on marrying information about supply and demand with the appropriate flow of goods. That truth is already apparent in the declining importance of the bricks-and-mortar store, which once embodied the convergence of the two. A new army of online retailers now harnesses the power of computing and the Internet both to aggregate demand online and to fulfill it. Understanding how retailers' power as intermediaries grew through the course of history helps explain why today's technology is so disruptive and brings home the magnitude of the changes afoot.

The mercantile era

The traveling merchant of the late Middle Ages was the first recognizable retailer in the sense we understand the term. For centuries, his predecessors in trade had taken products they had made to markets and fairs, by foot or horse or ox, and sold them directly to local people. In contrast, the retailer who emerged in Europe in the 13th century was a middleman, buying goods from producers and selling them from town to town and village to village. For most people, however, many if not all of their material needs were provided through self-sufficiency. In a largely urban, post-industrial society, we readily forget a world of smallholdings and subsistence, in which informal barter was as important a means of exchange as money transactions.

Under the most basic model of business in this era, the merchant financed his own operations and carried out his own freighting activities. He bought goods from specialist centers of production (such as linen from Reims), organized mule trains to traverse mountain and plain, and distributed his wares through markets, fairs, and networks of peddlers. The expansion in money supply as silver production in Europe increased in the 13th century enabled him to go farther and expand his business. Venture capital had arrived, increasing the scale and scope of trade and bringing about the first wave of internationalization.

Eventually, sea routes pioneered by the great voyages of discovery in the 15th and 16th centuries enabled this merchant's successors to reach around the globe, exchanging an ever-widening variety of goods. By the beginning of the 18th century, Europeans had become accustomed to fabrics from India, tea and porcelain from China, lacquer work from Japan, and tobacco from America, as well as more locally produced imports, such as wine from France. Of course, these were luxury goods, or at any rate staples only for the very rich.

At the same time, these retailers were gradually being relieved of the need to spend long periods away from home, thanks to resident merchants, who began acting as agents for purchase in sourcing markets such as Bruges, Genoa, and Casablanca. And the emergence of dedicated providers of transport freed merchants to concentrate on selling their goods. Two types of generalist businesses took root: mercers, who provided haberdashery items such as silks and linens, and grocers, who supplied dry food provisions, household goods, and hardware. There were dealers and the precursors of what we would call shops, but for several centuries, there was little separation between wholesalers and retailers. Business was carried out in proximity to both domestic living areas and workshops for craft production. Gradually, particular towns and even streets became associated with specific commodities: London's Haymarket was home to traders of hay and straw, for example.

The founding of the great international trading enterprises, following the great voyages of discovery, brought a surge of imports into Europe and a progressively stricter delineation between wholesale and retail. The East India Company, established in 1600, cleared its stock with regular auctions, consciously rejecting the opportunity to develop a full “retail” activity. That opportunity was available for others to take.

Hence, by the 18th century, shops had become a common feature of London and Paris. In London, certain streets, notably Cheapside, were becoming dedicated to retail, while in Paris, covered shopping arcades, or passages, were established. The shop owners understood what goods were available and selected those that would meet customers' needs or that customers might like, because much was new to the market. And because each merchant knew most customers by name, it was relatively easy to purchase stock that was likely to sell. There was little that resembled mass production, even by the middle of the 18th century.

Craft manufacture remained entwined with merchandising and selling: a shop would have a workshop behind or above it, and products tended to be made to order and customized. But the merchant-retailers who owned a general store in the village or town spread their sourcing footprint wide in order to link producers as well as other merchants with consumers. The accounting records for one such store—Abraham Dent's shop in Kirkby Stephen, a small town in Yorkshire, England—show just how extensive sourcing networks were. During the period covered by the accounts, 1756 to 1777, Dent stocked a range of dried grocery items (tea, sugar, flour), as well as wine, brandy, soap, candles, and a limited range of textiles.² He could loosely be said to have commissioned his own “private label” for stockings. What is most striking is that Dent drew his stock from 175 suppliers in 48 towns and cities across England. The mercantile era had advanced a long way.

The modern era

The onset of the Industrial Revolution in the mid-18th century marked the beginning of a long wave of change and technological innovation, from the telegraph to the computer, which endured until the turn of the present century. It saw the development of retailing from Abraham Dent's provincial general store to the hypermarket chain bent on overseas expansion and the vertical retailing model of the Spanish clothing brand Zara as globalization shrank the world at the close of the 20th century. Each development in between—the department store, the mail-order catalog, the self-service supermarket, the edge-of-town category killer—represented an advance in consolidating the power of the retailer as mediator between supplier and consumer. Only the retailer could match supply and demand on a large scale and thus sell at low prices, profitably.

Consumer society

At the start of the Industrial Revolution, conditions were ripe for the creation of a more consumer-oriented society. As in the mercantile era, mediation between manufacturers and customers defined the retailer's role. What changed, and would continue to change, was the scale of its operations.

The period marked rapid advances in manufacturing efficiency as industrialization harnessed human capital and automation to replace the craft economy with mass production. Goods began to be produced in larger quantities. In addition, items that hitherto had been expensively imported luxuries could be readily copied. Chinese porcelain is the obvious example. For years, Chinese producers alone possessed the manufacturing knowledge to combine kaolin, feldspar, and quartz at very high temperatures. But a combination of research by German chemists and the observations of a French Jesuit who traveled through China led to the first European production of porcelain, in Meissen, Saxony. Other centers of production quickly became established. In the southwest of England, china manufacturing emerged in Bristol, using kaolin (or “China clay”) from Cornwall. More famously, Josiah Wedgwood set up pro­duction in Stoke-on-Trent. Comparable advances were made in the manufacture of textiles, furniture, and ornaments. As economic historians have pointed out, this “imitation” of Asian technology was a distinctly 18th-century virtue for Europeans—the equivalent of what we would now call “teardown.”³

The Industrial Revolution saw a social revolution, too, characterized by the emergence of a new proletariat and of the cities in which they lived. The slow growth of a consuming class accelerated until this demographic eventually outnumbered and surpassed in economic significance the traditional agricultural laboring classes. A tier of administrators, clerks, and other functionaries emerged in parallel—all ready to consume affordable versions of luxury items. The same course of events is now unfolding in the world's emerging markets, although at an extraordinary speed in comparison.

Transformed communications, including transportation systems to carry messages, also underpinned the rise of consumerism. The underlying transportation technology did not change (it was still the horse), but better roads and transport scheduling made a vast difference to the ways in which economic agents could communicate with one another. Thus, a journey from London to Manchester took some three days in 1750 but just 18 hours by 1836.⁴ When the railways arrived, the effect was even more striking. Markets opened for perishable commodities, for example; so back in Manchester, the greater supply of fresh fish from the coast caused the price of fish to fall by 70 to 80 percent.⁵ Information flowed faster, too. With retailers better informed about what suppliers had to offer and what customers might want, they could arrange to have the right goods delivered more quickly.

The emergence of specialist retailers

The rise in both supply and demand created conditions for the emergence of more specialist retailers, choosing to sell a certain range of goods in order to build distinctive value propositions. But this innovation required some important enabling steps in the new urban centers for retail, which emerged first in London and then in cities across Europe and North America: municipal investments in paving and lighting, as well as the gradual realization by city authorities and private developers alike that the construction of specialist shopping areas served their economic interests.

The department store

The most prominent subtype of specialist retailer, the department store, arose from the activities of textile retailers as they extended their range and enlarged their shops in the early and middle years of the 19th century. It was a dramatic development, and contemporaries were well aware that something new was emerging; they often described these businesses as “monster shops” or “monster houses.”⁶ But the specific identity of the department store developed from a concept of universality that went beyond a broad range of clothing categories.

The first generally recognized department store in this sense was Bon Marché in Paris. It was a single-site operation—but on an unprecedented scale—that moved into progressively larger premises. By the 1870s, when it was located on the city's rue de Sèvres, it had become the world's biggest retail business by sales, the primus inter pares (first among equals) of monster shops.⁷ The store showcased the cutting-edge practices of its day by adhering to fixed prices (reinforcing its position as a trusted intermediary) and placing advertisements in newspapers to spread the word about the vast array of goods for sale. In turn, advertising, particularly from specialist retailers, enabled newspapers to expand rapidly.

Around the world, retailers copied the department store format. In London, William Whiteley, who started out in 1863 with a single drapery store, followed the monster store route by acquiring adjacent shops to offer a total of 17 different departments. In Chicago, Marshall Field's opened in 1887. Another Bon Marché was established in Seattle in 1890, and Harrods, which had blossomed from small beginnings in the first half of the nineteenth century, progressively rebuilt in London's Knightsbridge in 1905 to arrive at the store we know today.

The department store was one of society's most influential institutions and a beacon of modernity. Initially, it was characterized by volume as well as breadth of range, and the aggregation of a large number of items enabled department stores to offer low prices. Besides leading change in the availability and assortment of goods, department stores were early adopters of numerous new technologies; in America, they were among the first to use mechanical data-processing equipment to analyze sales. They also pioneered methods in areas such as inventory control, credit policy, promotional techniques, and hiring practices. In addition, the departm...