The Shopping Revolution, Updated and Expanded Edition

How Retailers Succeed in an Era of Endless Disruption Accelerated by COVID-19

Barbara E. Kahn

• Publisher: Wharton School Press
• Year: 2021
• ISBN:
  9781613631133
• Topic: Business
• Subtopic: Retail Industry
• Index: Business

Featured in The New York Times, Bloomberg, and Vox, The Shopping Revolution is "a brisk and thought-provoking anatomy of shopping in the 21st century" (Kirkus Reviews). The retail industry was already in the midst of unparalleled disruption. Then came COVID-19. In a fully updated and expanded edition of The Shopping Revolution: How Retailers Succeed in an Era of Endless Disruption Accelerated by COVID-19, Wharton professor Barbara E. Kahn, a foremost retail expert, examines the companies that have been most successful during a tsunami of change in the industry. She offers fresh insights into what we can learn from these companies' ascendance and continued transformation in the face of unprecedented challenges.Kahn, also the author of Global Brand Power: Leveraging Branding for Long-Term Growth, examines: In a brand-new chapter, how companies in China, like Alibaba, JD.com, and Pinduoduo have changed the game;How Amazon became the retailer of choice for a large portion of the US population, and how other companies have chosen to work with them or have to compete against them; How Walmart beat out other grocers in the late 1990s to become the leader in food retailing, and how they must pivot to hold their leadership position today; How Warby Parker dared to compete against Luxottica in the lucrative eyewear business, and what that can tell start-ups about how to carve out a niche against a Goliath; How Sephora drew away customers from once-dominant department stores to become the go-to retailers for beauty products.
Kahn argues we are just witnessing the start of the radical changes in retail that have been hastened by the pandemic and will revolutionize shopping in every way. Building on these insights, Kahn offers a framework that any company can use to create a competitive strategy to survive and thrive in today's—and tomorrow's—retail environment.

Chapter 1

Gain a Competitive Edge
The Kahn Retailing Success Matrix

In This Chapter

• The Kahn Retailing Success Matrix

• Four Leadership Strategies That Offer Superior Value

How did Amazon become the retailer of choice for a large portion of the US population? How did Walmart beat out other grocers in the late 1990s to become the leader in food retailing? How did Warby Parker make a dent in the once-untouchable Luxottica’s lucrative eyewear business? How did Sephora draw customers away from once-dominant department stores to become the go-to retailer for beauty products?

The answer is that each of these retailers raised customers’ expectations in at least one key dimension of value: Walmart focused on low cost. Amazon looked to convenience. Warby Parker offered hip, branded eyewear to millennials. And Sephora strived to provide a superior in-store customer experience. Each, then, became the market leader to targeted segments of customers and has enjoyed enormous success.

But in today’s competitive world of retailing, keeping a leadership position based on only one aspect of customer value—one area of excellence—is not sufficient. That’s why each of these companies has also leveraged its inherent advantage in one dimension and offered excellence on a second dimension.

Today, Amazon not only offers convenience in shopping but also guarantees very low prices. Building on its operational excellence and guaranteed lowest price strategy, Walmart purchased Jet.com to build up Walmart.com and provide a better omnichannel experience. Warby Parker eliminated the middleman to offer eyeglasses directly to the end user, providing significant cost savings. Sephora built a huge loyalty program that combines in-store and online shopping behavior to provide a personalized, convenient experience for each of its customers.

These retailers offer individual examples of successful strategies. To generalize these successful approaches so any retailer can map out a strategic plan, I built a framework flexible enough to use across different retailing verticals and different customer segments. Because of the framework’s origins on basic assumptions, the strategic implications generalize beyond retailing to other industries.

Mapping Successful Retail Strategies: The Kahn Retailing Success Matrix

Most classic frameworks of retail strategy are missing a critical dimension: the customer perspective. It is a significant and startling omission.

After all, when customers go shopping, they want to buy something they value (product benefits) from someone they trust (customer experience). More than ever, this idea of trust is critical. Customers demand that retailers and brands offer value to society and that their business practices not be exploitative or deceptive. Providing genuine value will result in long-term customer loyalty.

Customers have lots of choices, and they gravitate to the retailers that offer them the best value on the dimensions they care about. In other words, retailers have to provide some kind of superior competitive advantage beyond what is being offered by the competition. This superior value can be delivered either by providing a more trustworthy or pleasurable experience or by removing pain and inconvenience from the retail experience.

Figure 1.1. The Kahn Retailing Success Matrix

These two ideas result in a simple 2 × 2 matrix that is surprisingly effective at categorizing the most successful retailing strategies today. The framework is very flexible and is therefore relevant across different verticals. Plotting strategy on this framework also provides a mechanism to measure progress at delivering this value relative to customers’ expectations and competitors’ actions (see figure 1.1).

The “Retail Proposition,” the horizontal axis of this 2 × 2 matrix, represents the first principle: Customers want to buy something they want (product benefits) from someone they trust (customer experience). “Superior Competitive Advantage,” the vertical axis, represents the second principle: In order to win customers, retailers must offer products and experiences that are better than the competition’s.

This matrix spells out four basic strategies. The first two strategies, illustrated on the top row, differentiate themselves by providing a more trustworthy relationship with the consumer and by providing more pleasure and more benefits; the second two strategies, illustrated on the bottom row, differentiate by eliminating pain points.

1. Lead on Brand: Offer Branded Product Superiority

Retailers in the Product Brand quadrant offer branded products that provide more differentiation, more value, more pleasure, and ultimately more trust with a particular customer segment, as compared with other products on the market. Here I am specifically referring to the value that comes from branded product. It is the product’s brand equity that brings the customer into the store.

There are several ways retailers can leverage the value offered through products that have strong brand equity. First, there are multibrand retailers that carry multiple lines of strong branded products that “pull” the customer into the store. Good examples include Nordstrom, Best Buy, or Kroger. The retailer’s own brand name may also be a draw, but here the differentiated focus is on the well-known and well-respected branded products. These retailers may also offer private-label or store brands, but these brands typically differentiate by offering some kind of price advantage—rather than the quality and superiority offered by the more powerful brands.

Other retailers in this quadrant include high-quality brands that are sold directly to the end user. These are known as vertical brands, and the product brand name is the same as the retailer’s brand name. Examples include luxury brands like Louis Vuitton or Hermès, specialty retailers such as Lululemon or Zara, or the newer digitally native vertical brands such as Warby Parker or Glossier.

In all of these cases, these brands have developed deep emotional connections with consumers and a strong narrative; their customers frequently become brand advocates. In the luxury markets, these brands have heritage, exclusivity, and prestige. For the nonluxury brands, they have strong identity and values that resonate with their devotees. These brands offer a “point of view”—and a brand culture that consumers want to be associated with.

In addition to strongly branded products, retailers that excel in this strategy are typically very good merchants. Retailing analyst and journalist Walter Loeb describes merchandising as the “instinctual ability to choose the right items to round out merchandise presentations.”

He continues: “The best merchants intuitively know how to select products with care and make sure that their newest assortments are fashion-right, fresh, attractive and in sync with other merchandise their buyers had bought before.”⁶

Retailers in this quadrant also excel in design and style. The challenge is to be able to accurately predict the “next” trend. The product assortments have to be easy to process and aligned with the brand values; this usually involves curation (especially in physical stores) or the right filtering and categorization structure if the assortments are online, as well as catering to the “long tail.” Finally, leaders in this quadrant may also compete on state-of-the-art technology. All in all, the leaders here succeed in developing an innovative culture where new ideas are embraced and commercialized quickly.

2. Lead on Experiential: Offer Enhanced Customer Experience

Physical retailers competing in the Experiential quadrant are always challenged to bring customers through the door. Amid the COVID-19 pandemic, retailers have had an even higher hurdle to entice customers into their stores. First and foremost, the customer has to feel safe in the physical environment. Second, the physical experience has to offer something more than an online alternative. People may choose to go to physical stores because of immediacy, because they want to touch and feel the product, or because they want the security of the social interaction. But to be a real leader in this quadrant, the retailer has to create an experience that provides the customer with more pleasure, more excitement, and more fun than other retailers.

Post-pandemic retailers have had to move to a low-touch environment for safety reasons, but they still want to offer the benefits the high-touch milieu used to provide. This has necessitated changes for retailers like Eataly, Whole Foods, Trader Joe’s, Lululemon, and Sephora, which have had to adapt but still want to bring consumers joy. Sampling foods or trying on makeup or new clothes is trickier amid the pandemic, but sophisticated retailers have figured out ways to continue to make the in-store environment more experiential. New techniques involve leveraging technologies like AR or developing clever new packaging alternatives or dressing-room options to offer sanitary solutions. Figuring out ways to add in the social element but still provide the necessary social distancing has also been part of the new equation.

Even traditional retailers can add experiential components to routine shopping tasks. Duane Reade has divided its stores into health, beauty, and food centers—each of which offers high-touch experiences such as clinical access, hair and nail services, and instore food services. Costco makes the shopping experience fun by training customers to understand that they can never know for sure which brands will be carried at any particular time. This promotes excitement and discovery in-store. T.J.Maxx and Burlington also promote this kind of treasure hunt experience, which encourages customers to come back to the store frequently to see what unexpected brands and styles are available.

Other experiential retailers offer education. For example, Eataly and H-E-B offer cooking and wine classes as well as catering services. Sephora and Ulta allow customers to experiment and learn about their products in-store. Showroom models, like those of Warby Parker and Bonobos, allow customers to interact with knowledgeable sales associates, then purchase the products they want online.

Another avenue that retailers have used to supplement the in-store customer experience involves becoming part of the local community. Some of the more successful retailers have become community centers, such as the Apple store. Other retailers (before COVID-19) have hosted events such as book readings, celebrity talks, and community get-togethers. Lifestyle brands, like Nike or Lululemon, often offer aerobic or yoga classes, rock-climbing walls, or basketball courts. Pop-up stores within stores can create excitement, “newness,” and showcase innovation.

Brands can also add experiential components through the digital shopping interface. Some of the most creative experiential strategies are being debuted in China with shoppertainment and livestreaming (see chapter 7). Stitch Fix provides a particularly innovative customer experience that is redefining shopping. Stitch Fix relies on the customer’s inputted preferences as well as sophisticated algorithms based on artificial intelligence (AI), which are then edited by expert stylists, to choose personally curated items for each customer. There is a style fee every time customers order a box, or a Fix, which contains several items from which customers can choose what they like while sending back the rest.

3. Lead on Low Price: Offer Operational Excellence, Lowest-Cost Efficiencies

Retailers in the Low Price quadrant provide reliable products or services at the lowest prices, and therefore offer customers the most savings. Retailers that can consistently offer the lowest prices have developed operating models that can efficiently manage inventory, keep overhead costs down, eliminate unnecessary intermediary steps, and reduce transaction costs at every step. Good examples include Walmart, Costco, T.J.Maxx, and Burlington.

Retailers that deliver operational excellence strategies, as defined originally by Michael Treacy and Fred Wiersema in The Discipline of Market Leaders (1995), are companies that look for creative ways to minimize overhead costs and eliminate unnecessary transaction costs. They also offer reliability and efficiency, excellent customer service, and strong customer-focused policies for returns. These retailers build their entire business models around these goals.

The leaders in this category often identify a creative means for achieving cost advantages over and above the competition. In pursuing a low-price strategy, Warby Parker founders and co-CEOs Neil Blumenthal and Dave Gilboa recognized that if they sold eyeglasses directly to the end users online (when 98% of the purchases were historically made in physical stores), they could reduce margins significantly.

In the 1960s, Sam Walton, who founded Walmart, recognized that the “high-low” pricing strategies that were being used by most grocers at the time resulted in uneven demand and high costs in managing inventory and distribution. To correct these inefficiencies, he implemented an “everyday low pricing” (EDLP) strategy that allowed Walmart to significantly reduce costs by reducing the costly peaks and valleys in demand. He supplemented these cost savings by revolutionizing the way retail companies manage their supply chains. Walmart practiced unprecedented coordination with its suppliers, sharing real-time sales data with the manufacturers that stock its shelves.

4. Lead on Frictionless: Offer Comprehensive Customer Understanding and Total Convenience

Retailers in the Frictionless quadrant prioritize providing a friction-less customer experience that eliminates all pain points and offers the customer the easiest and most convenient way to shop. The key deliverable here is a simple, seamless integration of the shopping experience across all touchpoints. This requires the capture and analysis of all available customer data. Constantly analyzing the data allows for customization and personalization. The best example here is Amazon—first through its online platform, subsequently via its integration with physical-store pickups, lockers, and its own stores, and eventually through data collected in the connected home. Amazon also competes effectively in this quadrant by offering one place to shop for all needs. Amazon has been called the “everything store.” This ability to b...