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The Evolving Role of “Gut Instincts” in Retail

BY CSA STAFF

By Michael Haydock

The retail industry might just be the last bastion of the gut instinct.

In my 20 years working with apparel merchants, department stores and big box companies, I’ve seen bosses make bet-the-company decisions on little more than a "feeling." Retailing is that kind of a business – it’s filled with wonderful visionaries who have an uncanny sixth sense for the nascent trend – or, the moment when a powerful trend is about to falter.

Managing with your gut isn’t going away anytime soon — nor should it. Nevertheless, recent years have seen an important shift in consumer behavior, suggesting that sellers need a few more tools in their bag.

For one, the retail environment is becoming much more seasonal. It used to be that the major retail seasons – or selling opportunities — were Valentines Day, Black Friday and Christmas. Today, however, the previously minor seasons of Easter, Dads and Grads (in June) and Back- to-School are becoming much bigger – shoppers are spending a lot more during these periods. And new seasons – or mini seasons — are popping up regularly. Cyber Monday is quite recent. And Teacher Appreciation Day is even newer.

Adding to the complexity, shoppers are creating their own "buy times" or "wait times" among product categories. I produce a forecast of retail sales in the electronics and appliance sector, and I noticed this new phenomenon after the 2008 economic downturn began.

Prior to the recession, consumers had plenty of disposable income – or at least plenty of credit – and thought nothing of buying clothing, electronics, home goods, you name it, all in a concentrated time period. Today, they’re still buying, but they seem to be staggering their purchases. Their motivation may be to better manage their disposable income and balance credit outlays. A typical shopper in 2010 might buy a smartphone and then wait a few weeks or a month before taking home that new 50-inch television.

The result of this category rotation, combined with increased seasonality, is that trends are more important now, and they also form and dissipate more quickly. They’re harder to anticipate. A retailer that fails to catch one of these buying waves is missing an opportunity.

In this new environment, the gut instinct can be substantially enhanced with a discipline known as predictive analytics, which blends algorithms and information – customer buying patterns, government statistics on disposable income, package shipment data, etc. – to peer into the future.

The good news is, most retailers have already made the investment in capturing the customer data, which is the necessary first step in developing an analytics capability. Many already use this data for traditional analytical applications, such as sales forecasts.

But the most sophisticated merchants have started to move beyond simple forecasting to predicting how particular products will resonate with specific customers. Armed with this information, they can target these customers with highly-individualized marketing initiatives – ranging from traditional advertising to cell phone ads. A few retailers are even using analytics to predict what "next action" they should take with each customer, based on all previous interactions with the customer.

It works like this: the retailer builds data models that incorporate what is known about a customer – items he or she has purchased (or returned), any complaints the customer has voiced, relevant buying patterns (e.g. likes to shop sales). Then, the next time the customer visits, either in person, on the phone or online, the retailer is ready with a customized approach. It might be recommending a certain product. Or, if the analytics indicate that the customer isn’t ready to buy just yet, the retailer might helpfully suggest that he or she read a product review that just appeared in a magazine.

Analytics is helping these retailers – some with tens of millions of customers – evoke a time when personalized service was common among the Mom and Pop stores that ruled the retailing landscape. This personalization – the feeling that a retailer understands you — is what drives customers to remain loyal.

It’s not an either/or choice – instinct versus analytics. The best retailers are almost uncanny in their ability to marry their gut with really sophisticated data models and algorithms. They use sheer instinct to inform the analytics – and vice versa.

Retailing is one of the most competitive industries on earth. Merchants who excel in both the art and science of selling are likely to gain a big, sustainable advantage.

Michael Haydock is retail analytics leader of IBM Global Business Services.

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A cross channel action plan

BY CSA STAFF

By Andrew Macey

Black Friday sales for 2010 were up only 0.3% over last year, yet online sales are up 16% against last year. Sixty percent to 70% of offline, store and catalog sales are now impacted in some way by digital commerce, either through comparative ratings and reviews, research, or targeted promotions and personalized campaigns. Almost all retailers are making significant investments, ranging in scale from about 1% to 3% of revenue, in cross-channel capabilities including online, mobile, and social media to build brand and drive new revenue streams.

Despite all this momentum and spend, however, few companies have managed to successfully bring together the thinking, skills, and experience required to create a unified, successful cross-channel organization. What’s required for a company to build a successful cross-channel organization? How does one ensure maximum return on all those investment dollars?

The first and most important step is to think of cross-channel as a combination of touch-points that together must create a seamless customer experience, and an organization has to accommodate that change in thinking. It doesn’t matter whether your customer is buying online to pick up in the store, returning online purchases to the store, doing comparative price checks on a phone while in the store, or using mobile coupons in the store – marketing and merchandising have to be able to work together to create that seamless customer experience. A helpful tool to use is a day-in-the-life map of what your customer actually does and wants to be able to do as s/he moves from online to store to catalog and back again. Design a set of experiences around those day-in-the-life scenarios.

Recognize that any organization has to evolve over time. It’s not reasonable to believe that all best practices and new ideas can be adopted from day one. A framework that can be helpful to gauge relative strength is the use of a maturity model with varying levels of maturity as they develop more cross-channel capabilities. Aspects of the organization should be evaluated, designed, and built with respect to different criteria i.e. incentives and rewards, people and culture, business processes, technology, and internal structure as companies develop a more sophisticated set of capabilities.

Figure out where the current organization lies within the maturity model by assessing its capabilities in each functional area, including marketing, merchandising, web commerce, fulfillment, customer service, international expansion, and IT. Consider the ability to design and execute things like targeted campaigns, seamless cross-channel support, dynamic and consistent pricing, or cross-channel analytics. Evaluate against several criteria including depth of skills relative to the future vision, readiness and ability to change, and expected impact and size of impending change.

There is no one best model for cross-channel organizations, despite the intuitive appeal such an idea offers, but there are a small and finite number of viable options that can be adapted, and the core element of best thinking revolves around developing a cross-channel or digital Center of Excellence (COE) that serves as the building block for future capabilities for domestic and international needs.

The first model is a COE or digital operations hub with strategy, website, mobile, and capital spending responsibility, but no direct P&L. IT, such as it relates to digital, online, and call center operations, is part of this organization, and the organization serves its business line P&L counterparts through named liaisons that help prioritize capital spending and investment across the company as a whole. In this model, there is a great ability to try new ideas, experiment, and learn without disruption to the traditional, P&L-based business lines.

The second model is a digital operation COE that has its own P&L for direct sales. Website, call center, and fulfillment for any digitally-enabled orders run through this organization. This simplifies investments, since there is no longer competition between channels, but the change is large and it’s a big strategic shift to execute in this model.

Finally, the most sophisticated version of the cross-channel organization is where digital is embedded within each business line, and it is no longer a separate organization. This is the most evolved and advanced organization, and the hardest to achieve without a lot of duplicated cost in various brands or business lines.

It may sound obvious, but it’s worth reiterating that there is no one-size-fits-all best practice. The challenge is to decide what functional aspects of a digital or cross-channel organization should constitute the COE for a given company. A good way to think through how to build the COE is often to distinguish between things like transactional commerce capabilities versus creation, development, editing, and publishing of content. Content generally should be locally produced (or outsourced), but in accordance with standardized workflows, methods, and tools that govern how content will be published, maintained, and reused across channels. It also assumes a content management system to enable reuse.

The benefits of centralizing a lot of business functions include generally lower total cost, more control, and clear standards. Potential negatives are that a COE runs the risk of being further removed from the customers than are the P&L business lines, and the fact that response to the market could be slower than if driven within P&L-based business lines. On the other side of the coin, decentralizing digital functions can create a quick response to market needs, but with a loss of central control, consistency, and standards and a likely increase in duplication and higher total cost to the company. For all these reasons, a balanced approach to a COE that evolves over time is usually most appropriate for customers, employees, and company needs.

In conclusion, there is no better time for any company to be moving toward a new set of digital and cross-channel capabilities. Momentum is strong, future growth in digital is all but certain to continue, and consumers will continue to expect more seamless interactions that build brand experiences, boost loyalty and retention, and bring in new customers – but planning, creating and evolving the digital organization to make use of any investments in social, mobile, or cross-channel commerce is the hard part, and without the right organization, it’s impossible to win.

Andrew Macey is VP strategy at SapientNitro (www.SapientNitro.com), where he is primarily focused on helping companies think through the challenges and benefits of future business models, organizational capabilities, and new ways to create meaningful and rewarding experiences across channels for business and consumer customers.

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Consumer confidence at highest level since June

BY CSA STAFF

New York – Optimism about the U.S. economy grew in November, pushing the latest reading on consumer sentiment to the highest level since June. The Consumer Confidence Index rose to 54.1 in November, up from a negatively revised 49.9 in October, the Conference Board, a New York-based research group that compiles the index, said Tuesday. Economists were expecting the index to increase to 52.

"Consumer confidence is now at its highest level in five months, a welcome sign as we enter the holiday season," said Lynn Franco, director of The Conference Board Consumer Research Center. "Hopefully, the improvement in consumers’ mood will continue in the months ahead."

The percentage of Americans expecting business conditions to pick up over the next several months increased to 16.7% from 15.8% last month, and fewer expected circumstances to worsen. Consumers were also more positive about job prospects, with 15.5% expecting more jobs in the months ahead, up from 14.5%. And over 10% are anticipating a boost in their incomes, according to the report.

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