View from the Marketplace
Evolving Beyond Coupons and Mobile Apps: Retail Technologies in the Sensor Economy
“In the struggle for survival, the fittest win out at the expense of their rivals because they succeed in adapting themselves best to their environment,” scientist Charles Darwin wrote in the 19th century. Today, Darwin’s observation applies equally well to the retail industry, particularly in North America and other developed regions where, thanks to information technology, retail is undergoing a rapid, tectonic-scale evolution like few other industries have ever seen.
Retail’s economic impact is, simply put, mammoth. In many countries, it accounts for about 8 percent to 14 percent of gross domestic product (GDP) and as much as 10 percent to 20 percent of total employment. In the United States, consumer spending (which includes retail) accounts for 70 percent of GDP, and the industry supports nearly one out of every four jobs while contributing a whopping $2.5 trillion a year to the economy, according to the National Retail Federation.
Meanwhile, retail is no stranger to technological upheaval. From the invention of the cash register (1883) to the creation of the Universal Product Code (1970) to the launch of the loyalty card (1981), a long series of innovations has changed the retail process. But the Internet has also changed the way the world shops. And while retail is ultimately still less about transactions than it is about relationships between buyers and sellers, retailers must adapt to those changes or die.
Before the 21st century, the retail game plan was fairly straightforward: figure out ways to bring consumers into the store, then provide special offers or incentives to close the deal. The Internet has changed that formula. As consumers continue to rapidly adopt — and, indeed, even wear — new technologies, they remain one step ahead of most retailers.
Today, consumers don’t just walk in and buy. They stand in stores, use their smartphones to comparison-shop, read opinionated reviews online, and solicit social input from their families and friends. Finally, when they’re ready to purchase, they go online, often to different stores than where they did their research. Therein lies the challenge: how can retailers remain profitable when consumers expect commoditized pricing, rich product assortments, and superior levels of service, all at the same time?
Today’s Retail Technologies
The good news is that technology giveth as well as taketh away. As consumers gain unprecedented access to innovative new technologies, so do retailers. Many industrial-strength technology tools that were once available only to large corporations are being affordably reinvented and delivered via the cloud, much to the delight of smaller merchants. A slew of disruptions also has helped level the retail playing field, in areas as diverse as payment services (think Square), cash registers (think iPads instead of traditional tills), global marketplaces (think Etsy), and new business models (think pop-up stores). Even the larger software vendors such as SAP and Oracle have gotten into the act, offering sophisticated big-data and analytics applications that run in the cloud in real time, providing retailers with the data edge they need to succeed.
To win in today’s brutal Darwinian landscape, retailers should understand and leverage two key trends:
- Data is everywhere. The ability to manage big data efficiently and effectively is becoming more commonplace, and more critical than ever for success.
- The sensor economy is taking hold. Cisco estimates that, by 2020, more than 50 billion devices will be connected to the Internet “grid,” monitoring things, making decisions, and radically transforming the world as we know it. These devices (collectively referred to as the Internet of Things) will be a diverse bunch, ranging from mobile devices to “smart” parking meters, road sensors, and thermostats. They will power a whole new way of doing business.
About 156 million Americans — just over 65 percent of the mobile market — owned smartphones in the last quarter of 2013, according to a report by comScore, an Internet analytics company. That’s up 6 percent from the previous quarter. If you marry the capabilities of a mobile phone to the information that is (or will soon be) coming from these sensors, you’ll find a veritable treasure trove of data that retailers can intelligently mine to add the value that consumers seek.
For example, imagine being able to not only identify customers as they walk into a store, but also instantly analyze their entire purchase histories, including which items they’ve selected at which prices, and which ones they’ve returned. Armed with that knowledge, a retailer can decide exactly which offer will maximize the potential for a transaction with a specific customer.
The retail strategy goes well beyond simply offering coupons to include messaging (for example, deciding which messages individual consumers see when they walk past an electronic display), social engagement (for example, inviting consumers to join a specific car-owners’ club that confers relevant benefits), or perhaps even the ability to negotiate prices (for instance, offering shoppers a price break if the initial price doesn’t appeal).
Retail Technology Startup Stars
The SAP Startup Focus program works with startups in the big-data and the real-time and predictive analytics spaces, helping those companies build innovative applications using the SAP HANA database platform. The program serves more than 1,500 companies, but a few deserve special recognition here, because they’re doing precisely the kind of work that will help define retail’s future.
Optimus Advantage™, a Chicago-based software developer, estimates that about 30 percent of potential sales are lost because the customer feels the price isn’t right. Optimus’s Marketplace application allows consumers to negotiate item prices in real time at retailers’ websites, helping to boost the rate of successful sales. The app also includes an intelligent coupon (an iPON™), an electronic store credit that a consumer can apply to a future purchase. Imagine having an iPON that can be stored online and accessed anytime, and that can be used on a broad merchant network or traded with other consumers in the marketplace. Suddenly, paper-based coupons and their less-smart digital equivalents look like endangered species.
Kopi, based in Hong Kong, and Infonomi, based in Turkey, are startups working in a similar space. Both have developed Apple iBeacon-based monitoring systems that allow retailers to place networks of such devices in their stores to track consumers’ mobile phones (or at least those phones with the appropriate app installed). The systems provide real-time personalized offers and promotional incentives based on consumers’ individual purchase histories. These retail technologies can also:
- Pinpoint the locations of certain kinds of displays and exhibits, helping consumers find them more easily.
- Help retailers better understand consumer in-store shopping patterns and traffic flows, so that they can stage the space more effectively.
- Enable a more seamless checkout experience by accepting mobile payments and integrating their loyalty programs with them.
- Improve indoor mapping, which GPS doesn’t do very well.
The Disappearing American Mall
Shopping malls have a special place in American pop culture. They’ve been the place for teenagers to hang out not just in real life, but even in the movies (as just one example, consider the 1991 movie “Terminator 2: Judgment Day,” in which cyborgs sent from the future to protect — or kill — an adolescent named John Connor track down the young man in a mall).
However, shopping malls will inevitably suffer as retailing evolves. The recent recession and changes in consumer behavior — especially the migration to online shopping — have already cast their shadows: over the next 10 years, about 15 percent of U.S. malls will fail or be converted to non-retail space, according to Green Street Advisors, a real estate research and analytics firm. That’s an increase from just two years ago, when the firm predicted that 10 percent of malls would fail or be converted.
But then again, despite all the gloom and doom — and despite all the amazing growth we’ve seen in e-commerce in recent years — online shopping still accounts for only 15 percent of total retail sales in the United States, according to Statista, a statistics company. Statista expects online retailing to remain flat at least through next year.
Meanwhile, with all the technological tools at its disposal, the retail industry should be able to take an approach that Darwin might appreciate by morphing from a dinosaur to a bird — profitably.