four ways to win for independent retailers

The 2014 Independent Retail Report

4 WAYS TO WIN

MARCH 2014

Joint Research from LoyaltyOne and the Retail Council of Canada

FOR INDEPENDENT RETAILERS

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As an independent retailer, you may not have much time to think specifically about your competitors.Between the daily chores of ordering and inventory management, hiring and training, keeping thebooks and pushing sales, it’s easy to think of the “competition” as a scapegoat that can be blamedfor problems like dwindling traffic or customer push back on pricing.

Independent retailers are more pressured than ever by large chains and online e-tailers. But theproblem is that if you don’t get specific about who the competition is and what they are doing, youmay struggle with competing effectively. Most retailers know their most threatening competitorsby name, but do they know how customers feel about those other retailers? Or why their mostloyal customers choose an independent store over a convenient website? Even more important, what

would make customers and prospectivecustomers flock to an independent instead of a retail chain?

To answer these questions for today’sindependent retailers, we turned to

the data. With the Retail Council of Canada, LoyaltyOne surveyed both Canadian consumers and independent retailers to create the 2014 Independent Retail Study, identifying the strengths thatindependent retailers have compared to their competition. The study confirmed that shoppershave different expectations for independent retailers. To succeed against their larger competition,independents must shift away from focusing on price, and instead focus on amplifying what theyalready do well, and what shoppers seek. Ultimately, the data revealed several significant opportunitiesfor independent retailers to strengthen their powerful advantages over the growing competition.

This report examines consumer preferences and decision drivers, then highlights ways that independ-ent retailers can leverage their existing strengths by doubling down on personalization, carefullycurating inventory, investing in social media, and leveraging location.

Independent retailers have significant opportunities to strengthen their positionin an increasingly competitive environment.

Facing down the competition means focusing less on price, and more on what independentretailers already do best.

Where Shoppers Spend

Shopper Snapshot Consumers maintain a deep connection with independent retailers, and still spend a significant portionof their dollar in those stores despite growing competition.

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Source: 2014 Independent Retail Study• Q:Thinking about your overall household purchases in the past 6 months, please estimate the percentage you have spent at each retailer type. • n = 1,010

Shopper Frequency

Source: 2014 Independent Retail Study• Q:Within the past 6 months, how often have you shopped at independent retailers? • n = 1,010

34% 32%17%

At least a few times a week

Every 2-3 weeks Monthly Once every few months or less

17%

Large e-Commerce Retailers (e.g. Amazon, eBay)

Large Retail Chains (In-store and/or online)

Independent Retailers (In-store and/or online)

8%

65%

27%

Although large retail chainscommand the majority ofeach shopper’s dollar,independent retailers claim asignificant portion of spend.

Independent retailers connect with customers frequently, with a significant percentage ofshoppers visiting weekly.

Large chains do command the majority of each dollar spent, but independent retailers still attractover three times the spend than that of online retailers. Frequency is another win for independentretailers, with 34% of consumers visiting an independent at least a few times a week.

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Shoppers report that they turn to retail chains and websites for certain purchases, including groceries,books, games, electronics, and clothing. They are likely searching for the best price for those items.But when it comes to certain specialty items including flowers, gifts and eyewear, consumers preferto buy from independent retailers over their larger counterparts. While many big-box retailers andlarge grocery chains have floral and optical departments, consumers would rather seek out a morepersonalized experience at their local independent store.

Source: 2014 Independent Retail Study• Q:Thinking about shopping for yourself or your household, please indicate where you typically shop for each of the following categories. Please check all that apply for

each category. • Independent Retailer, n = 1,010; Large Retail Chains, n = 995; Large E-commerce Retailers, n = 497

Top Categories by Type of RetailerShoppers prefer different types of retailers for specific categories. The chart below illustrates whereconsumers prefer to shop, and how independent retailers stack up against their larger competitors.

Drilling down to the different customer experiences at each type of retailer reveals what consumerstruly love about their favorite independent stores, and what they want to see more of. For example,when a customer walks into the door of her favorite independent retailer, she isn’t looking for a betterprice. Instead, her top driver is that she has made a decision to support her local economy. A closesecond is that she likely lives in the neighborhood and so the store location is convenient. She is willingto pay more for a local, interesting and unique inventory selection, something more “special” than shewill find online, or by driving to a distantly-located chain store.

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Source: 2014 Independent Retail Study• Q:What are the top 3 most important reasons why you shop at ___ retailer over other stores? • Independent Retailer, n = 1,010; Large Retail Chains, n = 995; Large E-commerce Retailers, n = 497

Shoppers seek out independent retailers not only for their one-of-a-kind product selection, but for small-scale, one-on-one service. Customers want a meaningful shopping experience: one full of recognition,personalization and the karma-rich payoff of supporting a fellow community member. By contrast, apurchase at a large retailer or website is usually based on cold, hard price – including the financialbenefits of a rewards program.

Top Shopping Reasons by Type of Retailer

Shoppers choose national retail chains and online sites for better prices, but they shop independentsfor convenience and the “karmic value” of supporting the local economy.

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Source: 2014 Independent Retail Study• Q: Below is a list of attributes that may or may not apply to different retailer types. For each attribute, please select one retailer type that you think does a better job than

the other two. • n = 1,010

Key Performance by Retailer Type

Percentage of Respondents Who Think One Retailer Type Outperforms the Others

These insights reveal key opportunities for independent retailers to grow. Fortunately, customer expectations align with the existing strengths that independents already have.

Where Independents Can Excel Today’s shoppers may be buying at large chains and online sites, but more than ever they are seekingsomething for which independent retailers have long excelled – personalization. Large companies knowthis, and are striving to create that special boutique experience, often via a loyalty program or other

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customer relationship management (CRM) strategy. But independent retailers have already won thebattle over customer expectations in that arena. Independents are uniquely positioned to providebetter customer service, differentiated products, more meaningful communications, and convenientlocations. Not only are these an independent’s strengths over the competition, but that overall experience is what customers want when they choose their local store over a chain or website.Below, we explore four ways to strengthen that competitive advantage.

Prioritize personalization

Independents often focus on price wars, with 33% of independent retailers in our study reportingthat their biggest challenge is to keep prices competitive with large chains. Competing on price is stilla key business strategy for most independents: 58% have everyday low prices; 38% run frequent

promotions to drive traffic; and 13% offer price matching.

The truth is that independents simply can’t compete on priceagainst the scale of the Walmarts of the world. The good newsis that they shouldn’t even be trying. Competing on price isa mistake when that’s not what customers are looking for at

an independent – 81% of consumers we surveyed do not expect independent stores to price-matchlarge retail chains. Fully 68% would rather shop at a local store that offers personalized productsand services even if the price is slightly higher.

Instead of focusing on pricing, independents must embrace a personalization strategy, one based onthe habits and preferences of their most-profitable customers.

Know more customers: 45% of independent retailers claim they have asked customers for theirfeedback, but only 30% of consumers think retailers have done so. This is likely a simple coveragegap, with retailers failing to reach out to all of their most profitable customers for information andinsights. 53% of customers surveyed want to be able to make product and service recommendationsto retailers. Independents have the advantage ofbeing able to connect with customers on a morepersonal level, and can leverage this by lettingconsumers communicate their ideas on whatproducts or services the store can offer, or how tomake the store layout more navigable. Provide incentives to those who are willing to give feedback.Retailers can also visit social networking and review sites to read what consumers are saying abouttheir experiences.

Only 30% of consumers canrecall independent retailersasking them for feedback.

Independents have the advantage ofbeing able to connect with customerson a more personal level.

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Reward best customers. 46% of small businesses indicate that they delivered personalized serviceto their regulars (by surprising and delighting them with special rewards and perks, for example, orpre-ordering products and having them ready for pick-up when they arrive). But only 19% ofcustomers think independent retailers send them special offers to bring them back after a visit.Retailers must find creative ways to make their customers feel special. For example, a clothing andaccessory shop can record what styles and items their best customers have purchased, and contactthem when similar products or matching pieces arrive.

Empower employees: Store owners may recognize best customers, and instinctively know how to treatthem, but associates sometimes fall flat. Customers are paying attention – of those who make morethan 50% of their purchases at independentstores (n=158), 56% believe that being treatedlike a valued customer is very important, and54% think it is essential to have helpful andpassionate store associates. But only 27% ofindependent retailers think they invest enough time and money on training and retention. Retailers cankeep the personal touch consistent by relying on affordable and accessible technology. For example,online backup services (also called cloud backup services) securely store customer data on a remoteserver and automatically manage regular backups. They also allow store managers/associates toaccess customer data remotely. Then, equip the in-store associates with tablets that contain timelyinformation about customers and products so they can identify regulars and make recommendations.

Curate inventory

Customers shopping at an independent retailer are seeking quality, not quantity - 42% ofshoppers say they feel overwhelmed by the number of choices offered by online giants and largeretailers.

Retailers instinctively know this, with 72% of independent retailers indicating that in order to staycompetitive they sell more unique and interesting products that are not available in other stores. Butit’s clear that independents aren’t fully embracing the competitive strategy of “inventory curation” –

the careful selection of specialized products or servicesdesigned to appeal to top customers.

This is a missed opportunity for many independent retailers. Specializing in selective inventory and services

Only 27% of independent retailers thinkthey invest enough time and money ontraining and retention.

42% of shoppers are overwhelmedby the selection offered by onlinegiants and large retailers.

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can help independents both appeal to the target customer base and also keep operation costs low.Independent retailers have the opportunity to showcase a more limited array of products that arehand-picked to appeal to high-value customers. For example, instead of competing with large chainson front-of-store pricing, a pharmacy could keepa modest front-of-store selection while focusingon a well-staffed prescription-drug dispensary. Apharmacy in an area with an aging populationcould focus on senior care.

Curating inventory also means creating a more“local” experience. Buying local and supporting the local economy are the two top reasons that cus-tomers shops at independents, but among the retailers we surveyed only 19% are using this as one oftheir strategies.

Admittedly, providing local and/or artisanal goods may not be possible in all industries. But independent retailers can demonstrate their support for the local economy and community by participating in street fairs, sidewalk sales, sponsored events, regional circulars, or loyalty programs.

In our study, 45% of independent retailers indicated that they have already built product assortmentsbased on regular customers’ shopping habits. Customers have noticed, with 40% believing that independent retailers offer product assortments that make it easy for them to choose what they need.This is a good start, but there is room for growth in these statistics.

Own social media

Independent retailers may not have the time (or budget) to invest in mass media promotions,but many are finding great value in social media marketing. 53% utilize social media to promote theirproducts and of these, 55% plan to increase their investment in this platform. It’s a smart move:67% of those using social channels (n = 339) agree that they have seen a good return on investmentfrom their current activity.

The research shows that social media resonates strongly with customers, who aremore likely to engage with and advocate forindependents than large brands via these

channels. 33% of customers would recommend their favorite local shops via social media, whileonly 17% would recommend large retail brands. When it comes to “follows” and engagement, 23%of customers connect with local retailers versus only 18% engaging with large chains.

Specializing in selective inventory andservices can help independents appealto their target customer base whilekeeping operation costs low.

Invite consumers into the conversation by creating interesting, relevant dialogue.

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When communicating with customers via social media, independent retailers can focus on their bestclients, especially those with a wide network who are willing to share their shopping experiences withothers. It is critical to avoid “creepy” behaviors, such as posting too-frequent updates, tracking cus-tomer locations, or forcing customers to share or “like” posts. The more effective approach is to invitethe consumers into the conversation by creating a dialogue that is highly relevant and interesting, asthose are more likely to be shared naturally. For example, Foiled Cupcake, a Chicago-based cupcakeshop, began their business using Twitter. The retailer connected with its target demographic to discusstheir interests. As a result, they have drawn over 90% of their customer base from social media.

The size of this opportunity becomes clear when analyzing how independent retailers are currentlyusing social media.

Primary Business Objectives for Social Media

36%

27%

14%

13%

9%

Driving store traffic

Building brand awareness and reputation

Managing customer relationships

Generating leads and building relationships with prospects

Engaging existing customer

Other1%

Independent retailers are focused on using socialmedia to drive traffic andbuild brand awareness, butmissing the opportunity togrow customer engagement.

Source: 2014 Independent Retail Study• Q: You indicated that your company uses social

media, discussion forums, or customer review andrating sites to grow your business.Specifically, what are the objectives you are aiming to achieveusing these social channels? What is your primaryobjective? Please check only one.

• n = 339

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Stay local

Proximity has traditionally been one of the top reasons why customers visit independentstores, and 35% of consumers say their top reason for shopping locally is because they live nearby.However, brick-and-mortar independent retailers could potentially lose this advantage to online ormobile stores that are just one click away. 55% of shoppers report that saving time is one of the topreasons they shop online, with 34% saying they shop online specifically to avoid dealing withcrowds and traffic.

Recognizing this growing problem, 42% of independent shops say that largeonline retailers like Amazon pose a greater threat to them than the retailchains. However, only 34% of independent retailers have a web store. Of thosewho do not have a web store (n = 404), only 61% have a website.

For independent retailers, technology can enable two key survival strategies:Adding and maintaining an online store, and making each transaction feel“local” and easy for the customer.

Understanding and responding to customer preferences is easier for online retailers who can gathertransactional data and shape the customer experience in response – as Amazon pioneered with itspurchase recommendations engine. To compete with this level of online relevance, independent retailers must extend personalization to all customers, both online and in-store. This can be accom-plished by instituting a CRM or loyalty strategy, designed to capture data that can then be deployedto enhance the customer experience.

For 70% of independent retailers, the existing loyalty strategy is to build relationships with customersthrough personal interactions. The limitation of this strategy is that it doesn’t engage the entire targetcustomer base. Only 27% of independent retailers have their own loyalty program for their customers,and among those without a customized loyalty solution (n = 447), 47% want to have one but lack theresources or expertise.

Investing in technology and keeping it up-to-date is an ongoing challenge for independents, with52% saying they are overwhelmed by keeping up with new and evolving technologies. One solutionis to partner with other businesses running existing loyalty programs that are set up to share datamanagement and collection.

of independent retailers have a web store.

Only34%

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Conclusion Independent retailers must shift from the mindset of competing based on price to supercharging whatthey already do best: providing a personalized experience, offering unique and differentiated products,connecting via social media, and offering a friendly, “local” encounter both in-person and online.

To win against retail chains and digital supercenters, today’s independent retailers must institution-alize these core competencies by adopting increasingly accessible and affordable technologies, andby using informed marketing approaches. Success for independent retailers is about amplifyingwhat they already do well – which happens to be exactly what customers are asking for.

MethodologyThe research findings are based on the results of two online surveys conducted in January 2014.

• A survey of a representative sample of 1010 Canadian customers. • A survey of 613 independent retailers in a variety of industries (grocery/market,

pharmacy/health, clothing and accessories, specialty retail, etc.).

ABOUT THE

Retail Council of Canada’s MySTORE divisionThis survey was conducted in partnership with Retail Council of Canada's MySTOREdivision – a vibrant community of independent retailers of all formats across Canada.Our passion is retail, our strength is our members, partners and staff and our promiseis to be the Voice of Independent Retail in Canada.

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ABOUT

LoyaltyOneLoyaltyOne is a global leader in the design and implementation of coalition loyalty programs, customeranalytics and loyalty services for Fortune 1000 clients around the world. LoyaltyOne’s unparalleledtrack record delivering sustained business performance improvement for clients stems from its uniquecombination of hands-on practitioner experience and continuous thought leadership. LoyaltyOnehas over 20 years history leveraging data-driven insights to develop and operate some of the world'smost effective loyalty programs and customer-centric solutions. These include the AIR MILES RewardProgram, North America's premier coalition loyalty program; a majority stake in European-basedBrandLoyalty, one of the largest and most successful campaign-driven loyalty marketers outside of theAmericas; and a working partnership with Latin America's leading coalition program, dotz. LoyaltyOneis also the owner of COLLOQUY, a group dedicated to research, publishing and education for theglobal loyalty industry.

LoyaltyOne is an Alliance Data company. For more information, visit www.loyalty.com.

linkedin.com/company/LoyaltyOne facebook.com/LoyaltyOneCoConnect with LoyaltyOne

@LoyaltyOneCo

ABOUT

The AuthorAs Senior Director of Research and Development at LoyaltyOne, Jeff Berry managesresearch initiatives in North America and internationally. With more than 15 years ofexperience in loyalty marketing, analytics and customer engagement, Jeff managesand directs the development of LoyaltyOne’s thought leadership content includingresearch and best practices for global loyalty marketers. Jeff’s background in client

management, business development and consulting in both the B2B and B2C spaces make him anexpert who has experience in the theory and practice of loyalty marketing. An engaging presenterwho is a frequent speaker at loyalty conferences, Jeff has also been featured in such media outletsas CNBC, National Post, Direct Marketing News, Target Marketing and Strategy Magazine and writesa blog for the Canadian Marketing Association.

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