the retail organisation of the future - practicology · pdf filethe retail organisation of the...

The retail organisation of the future

The case for change

Martin Newman – CEO Practicology

5/2/2014

www.practicology.com Page 1

Introduction

Over the past decade, the balance of power has shifted and the consumer is now very much in charge of where, when, how and who they buy from.

This has been driven by the proliferation of channels, product choice, fulfilment and returns options. The result of this is that the traditional 20th century retail organisation is at odds with 21st century customers’ needs and wants.

We have moved away from the old key driver of ‘location, location, location’ to ‘convenience, convenience, convenience’; and are rapidly moving towards the only model the customer is really interested in, which is ‘anything, anytime, anywhere’.

Here I set out some of the trends in changing consumer behaviour, and the structural and organisational challenges retail businesses will need to overcome if they are to remain competitive in our changing world.

The case for change

Many organisations articulate the importance of customer experience and have strategies in place to communicate this. The reality is that old functional organisational structures, reporting relationships and incentive structures work against those strategies.

Retailers have failed to properly address the diverse customer behaviour we see today; let alone anticipate and prepare for how consumers will want to shop and engage with them in the future.

The percentage of retail sales that are internet-based has risen - year on year - every month since the beginning of 2007, according to the ONS. It estimates 10.5% of total retail sales were online in October 2013. Moreover, online penetration peaked at 18.6% for retail sales in December 2013, said the BRC. According to the IMRG, online retail sales are now close to 20% of total retail.

These industry-wide averages conceal wide variations between product categories and individual retailers. The categories which have been most impacted by changes in consumer behaviour and demand – music, books, video, consumer electronics and household appliances – have all seen retail casualties.

Some 46% of Argos’ total revenues are derived online; and showing what’s to come, 20% of its total sales are via mobile devices.

Similarly, more than 25% of department store John Lewis’ sales are online. Its online growth has been so spectacular that, together with Waitrose, the total revenue of the John Lewis Partnership is expected to overtake Marks & Spencer’s during 2014.


Such dynamics undoubtedly require that by 2024, successful, high-growth retail businesses will bear little resemblance to today’s organisations. Within a decade, retailers will organise themselves much more specifically around the customer, requiring a step-change from many retailers’ current goals of merely acquiring a single view of their customers.

They will need one-to-one customer engagement strategies, focused on delivering a deeply personalised experience through all touch points and experiences the customer has with the brand.

We can already see the beginnings of this in play today with in-store clienteling, CRM programmes and online personalisation. However, much like the organisational structure challenges facing retailers, these approaches are not joined up and don’t deliver the 360 degree customer centricity required.

The next five to six years will be a time of significant organisational evolution for retailers as they work towards this vision of the modern retail business.

During that time, retailers will need to use bridging strategies and tactics to make this transition to an integrated customer first business with all operations re-engineered around the needs of the customer.

While each retailer will develop the structure that is right for them, the key to this transition will be developing core competencies and areas of expertise in customer engagement and experience, brand, and operations, each of which integrate elements of 2014-era marketing, merchandising, IT, store operations, and other functional areas.

How embedded in the business does digital need to become?

Retailers will need to digitally upskill from the boardroom to the shop floor. They need to take their organisations to a level where all employees are experts in all channels, and are capable of delivering the experience demanded by the customer and at the same time promoting the organisation’s multichannel customer journey.

This requires a significant cultural shift in the business, and it is no understatement to say that huge barriers to change will need to be overcome. It will be a balancing act to make the changes necessary – including personnel changes – while retaining the intellectual property, relationships and operational focus that makes these businesses successful today.


The cultural shift

For most retailers the move towards an embedded digital business requires significant cultural change.

So what is a digital culture? It has to be all-encompassing. It’s far more than simply creating digital tools or leveraging technology.

Customer Engagement: The customer has to be at the heart of this. After all, it’s their experience across different channels and touchpoints and their ability to ‘shop how they want’ that determine the success of multi channel retailers. Digital is the enabler to deliver this experience.

The business needs to change its mindset from one of ‘We have products we think you’d like to buy’ to ‘We are a customer service business that just happens to have nice products you might like to buy.’

With the emphasis on the customer service piece, retailers will be putting customers at the front and centre of everything they do and leveraging digital to deliver the optimal experience.

Commercial imperatives: There are many issues that supress the commercial performance of multichannel retailers. Too many ecommerce teams are technically sound but commercially ineffective. They are not traders.

Also too many retailers struggle to evaluate the halo effect of multichannel and therefore haven’t joined up their channels to deliver the experience customers require.

How many retailers ensure that the right product is available in the right channel at the right time? Working in siloes - whether that’s with a separate ecommerce team or disjointed range planning and merchandising - means the customer is not presented with what they want to buy, where and when they want to buy it.

Actionable insight: Big data, small data, whatever-you-want-to-call-it-data, we have more of it than we ever had before and therefore we can leverage date to engage on a far more personal level than ever before. But data is only data. It’s not insight, and therefore we need to ensure we instil a culture of wanting to understand what the data is telling us and therefore the actions required to improve performance.

Empowering your teams: Is a team across all touch points that is empowered to deliver the experience demanded by customers? Argos Digital Director Bertrand Bodson speaks about its store team providing the biggest potential digital army in the country. Think about it, most retailers’ store teams are of an average age below 30, almost all of whom are early digital adopters. Empowering them to leverage clienteling solutions or mobile tills is second nature.

Flexibility: The ability to fail fast and to innovate in order to stay ahead of the game is crucial. Yet most retailers still work with a fairly fixed annual roadmap.


Matching the pace of change: The space we’re in is changing so quickly, every day new developments ensure that customer expectations of their shopping experience is changing constantly and therefore we require a culture that ensures we keep up with the pace of change the customer is experiencing.

Innovation: Aligned with the above is the requirement to continually innovate. Retailers cannot afford to only keep pace with the market, they need to be continually evolving and improving how they operate.

Team realignment: Retailers need to align their teams to work more closely together. This is not just about channels. It’s about aligning marketing, merchandising, supply chain, customer service and all other operational functions to ensure the whole value chain is being considered.

Some players have clearly begun this transformation.

Tesco, Argos and Marks & Spencer are among the first retailers to create London-based digital labs or ‘hubs’ to attract technical talent and act as a catalyst for digital innovation.

The C suite

Cultural change comes from the top.

A significant percentage of retail CEOs lack digital experience and deep domain expertise. While many of them have a high-level understanding of how the customer journey is evolving, they struggle to envisage the proposition they must deliver to address this and to effectively challenge the digital leaders within the business.

It is also likely that they will lead the beginning of the transition of the business; but unlikely that they will be the right people to deliver the joined up, customer-centric business of 2024, providing what customers want, where and when they want it.

Experienced digital operators who have made it to the top job are still relatively rare and unproven.

It’s an encouraging sign that Home Retail Group has appointed John Walden to replace Terry Duddy as its chief executive; after buying into the transformation plan he has put in place for Argos. Walden spent eight years at Best Buy where he launched its first online offer, was previously COO of online grocer Peapod and more recently was Chief Customer Officer for Sears.

However, another CEO with a digital pedigree, Mothercare’s Simon Calver – who is ex-LoveFilm and Dell – is battling negative headlines. Despite some progress in business transformation, the retailer’s latest results saw revenue declines for both its international and UK businesses.

And these are still the exceptions. With most retail CEOs unlikely to be unseated by a digital leader anytime soon, they must work with their multichannel and ecommerce directors of today to deliver what’s required.


Digital leaders to pick up the baton

Their breadth of skills across technology, range/product, content, marketing, supply chain, fulfilment and customer service - allied to their depth of experience in the digital domain - leaves ecommerce and multichannel directors well placed to become the business leaders who complete the transition of retail organisations to customer-centric businesses.

Retailers will need to think of themselves, first and foremost, as customer service businesses that happen to sell a range of products, rather than product-centric businesses.

There is some evidence that retailers are elevating digital leaders into positions where they can have the impact that will be required.

Take the example of Marks & Spencer. Laura Wade-Gery sits on the main board in her position as Executive Director for Multichannel. This is no cure-all. The business has a huge journey to undertake to transform itself in a way that will meet the needs of customers in 2024.

But there are some positive initial signs from the parts of business without legacy issues. As M&S has sought to re-enter countries such as France it has done so with a firmly multichannel agenda – new stores going hand-in-hand with new country sites.

B&Q’s parent Kingfisher has also propelled Steve Willett into a group leadership role – as Chief Executive of Group Productivity and Development – after his success at turning Screwfix into a customer-oriented multichannel business while at its helm.

House of Fraser has been one of the most, if not the most, innovative department store in recent years. It has opened stockless stores to extend its reach, driving cross-channel sales through click-and-collect and in-store ordering, and developing sector-leading fulfilment options including buy before 10pm for next-day delivery. Much of this has been as a result of multichannel having a seat at the boardroom table, first through Robin Terrell and now with Andy Harding heading up its multichannel proposition.


The siloed state of play

In almost all organisations, ecommerce has been set up as a silo - either as an ecommerce business unit or in some cases as a ‘direct’ team within the organisation.

Marketing, buying and merchandising, IT, store operations, ecommerce – it’s the retail organisation we know and love. Unfortunately, most retail organisations are not structured to serve today’s customer and their cross-channel, cross-device, socially-infused behaviour. Why? Fundamentally, today’s retail organisations are set up first and foremost to serve the brand, not the customer. As retailers, we ask the customer to buy from us and thereby deliver margin, sales and a return on investment.

The model below highlights the challenge with most retailers still operating in siloed channels. There are no economies of scale. There is much duplication. But, most importantly, the customer loses out due to inconsistent assortment and marketing communications across channels, as both are being driven by different teams.

Multiple channel retailers with little or no integration


Progress that is being made in organisational structures may not be a step far enough for the challenge ahead. At Tesco, Michael Cornish has been made Group Digital Officer after impressing at Blinkbox; a digital business he founded, which Tesco bought.

His brief is to help the business adopt a customer-led approach to online services. It’s a great aim. But he’s based at Blinkbox’s London headquarters, when Tesco’s main business is based out of Hertfordshire. It’s the same story of silos and narrow remits.

It will be interesting to see the results Cornish achieves in really meeting the needs of Tesco’s customers when most will engage with the business both online and offline.

Today’s customer moves seamlessly across channels and other touch points, looking for value - a relationship of some kind with the retailer - to feel valued and perhaps even that they’re making a difference somehow in their choice of product and retailer.

The customer is mobile-savvy and expects all of a retailer’s touch points to work together (why wouldn’t they?). As retailers, however, we know that current hierarchies, reporting relationships, even P&L and incentive structures are simply not designed to deliver on what the customer assumes is an entirely logical - if largely invisible - infrastructure to support how he or she shops now.

The model below represents a focus on serving the customer and aligning all of the business functions and operations to achieve this goal.

The organisational model retailers should be moving to


In addition to the cultural challenges outlined earlier, current obstacles to the customer-centric retail organisation of the future include organisational situations such as:

A merchandising team that is divided by channel. Some parts of the team are focused on “drive aisles” and “floor sets” in stores, while others focus on how to present products online (where the customers purchase process often starts) – all while trying to serve the same customer.

Few retailers to date have organised their merchandising experts into teams that are focused on customer segments or needs groupings. Wouldn’t that be a truly customer centric way to plan the range?

Also, merchants still often define merchandising or product categorisation in terms of how the merchant buys the product, rather than how customers shop and expect to find product. Fashion and luxury brands are particularly guilty of this, creating inward looking terminology to represent ‘collections’ that customers have never heard of.

New Look provides an example of what can happen when online and offline buying and merchandising teams are siloed by channel. There was a reorganisation last year to unravel a structure that had seen branded buyers for stores and online having little, if any, contact with one another; and essentially being in competition in terms of delighting customers and supplier relationships.

And we still see differential pricing for the same products across different channels. Customers don’t understand this, even if retailers have credible commercial reasons for doing so such as differential costs of sale or trying to be price-competitive against online-only peers. Channel proliferation has made this more difficult to manage for brands in particular.

Customers of a fashion brand with a wholesale channel may find that the same item is on sale at different prices not only at the brand’s own site and stores, but at a different price on a department store’s website or a flash Sale site such as Brand Alley.

Similarly, merchandisers for different channels often find themselves unable to make optimal decisions due to the constraints of the stock pools they are working with. Refusing to hand over stock to a website that could sell it three times over in order to maintain a full range in stores where it’s not selling is still an all too common complaint.

The marketing function is often divided and disjointed and split by channel or areas, which ultimately creates disparate views of the same customer or at the very least render the organisation incapable of having a single view of the customer. Current organisational approaches exacerbate the issue. Defining teams and departments as “brand / direct / CRM” and “offline / online” perpetuate a divided view of any single customer.

Additionally, few marketing teams are juggling both the emotional (brand / story) and analytical ends of the marketing spectrum – most brands today are generally good at one or the other, but rarely good at both.


The IT organisation’s first thought is of managing risk rather than the impact to the customer. As a result, many IT organisations are more focused on employee and internal analysis tools than they are on customer experience.

Furthermore, many IT teams continue to be independent, rather than living within each area in an organisation to be stronger partners in delivering on customer needs. Imagine how much more effective IT would be if there was an agile development team with a fail fast approach attached to key customer facing areas of the business!

A digital team that is too often standalone with a patchwork of connections to other organisational teams. Unsure of what to do with all things digital, many retailers have done with digital exactly what they do with other functions: created a silo. As with all silos, this situation sets up internal competition for budget, resources, and attention from yet another area within the organisation without serving their customers’ needs.

A distribution and supply chain function that in many cases still segregates stock for different channels. To this end, there isn’t a single pool or even a single view of stock, and so products are not being sent to the channel where the demand is. In addition to these organisational obstacles the reality is that many retailers today simply are not customer-led in the first place. How many retailers truly put the customer front and centre of all they do?

The various models we see in today’s market include companies led by merchants (“product first” strategy); by brand (leveraging the aspiration and emotional engagement of the “label” versus specifically their product or service); and technology (focused on how technology can provide a better experience and differentiation). All too few have genuinely adopted a customer-led (“customer service first”) strategy. To be successful, retailers both in the short, medium and long-term, need to restructure from the ground up; using the customer as the focal point for how they set up functional teams to optimally serve that customer.

Each company will tailor its 2024 structure to its particular customer, product and brand. Some will employ organisational change models such as RACI (responsible, accountable, consulted, informed) to frame the resource plan and realign accountabilities.

The RACI change model can help to realign responsibilities


We agree with our friends at Shop.org that while retailers will adopt different organisational structures, the successful retail organisation of 2024 is going to be anchored in four core competencies or areas of expertise: customer experience, brand, operations, and administration.

Customer experience. This is where the role of a Chief Customer Officer comes into its own. Customer experience will cut across the value chain of a retailer’s business, as it has to involve all aspects that affect the customer experience. Spanning customer acquisition, retention and satisfaction and this core competency will include functions such as:

o Product management o Visual merchandising (in stores and in digital channels) o User experience (“UX”) – across all touch points o CRM and analytics(Including loyalty) o Product imagery (including static and video) and copy o Transactional marketing (i.e. paid search, email, CSEs, etc.) o Store operations and staffing o Customer service o Fulfilment: ‘The last mile’

Brand. This competency focuses on the emotional impact that the company

develops and inspires in its customers. This area hones the emotional impact of the brand and tells the story, both internally and externally. Functions involved here include:

o Creative o Product selection (i.e. buyers and/or product developers)

Operations. This is no longer about retail operations. This area provides the

infrastructure that the Customer Experience group needs to execute. Functions here include, among others:

o Supply chain - Inventory planning and allocation o Employee tool technology such as ERP, order management, warehouse

management, network, database administration and so on o Shipping – to warehouses, stores, and directly to the customer,

encompassing new and evolving options such as buy online and pick up in store, third party lockers, same day delivery, and more

Administration. This area provides the overall company infrastructure such as

the executive team, HR and finance departments.

These core competencies will also include components of today’s marketing, merchandising, digital, IT and other teams. In 2024 the key difference will be that the businesses will be focused on one thing: Delivering on customer needs and expectations rather than focusing on marketing goals versus merchandising goals versus IT goals. Please note that these are core competencies, not necessarily a model for an organisational structure. For example, some retailers may combine customer experience and brand into one team or area, while others will find it necessary to keep the two apart.


So what are the roles required to drive change and what new roles will we see evolve?

A change agent!

While the current multichannel or ecommerce director may well have the vision for what the multichannel customer experience should be, do they have the skills and experience required to drive the change programme to re-engineer the business in order to deliver the vision? Or does the business need to bring someone in or to engage an external supplier to support the change management and transformation of the business?

Some retailers have split this role in two, with a Trading Ecommerce Director and Technical/Development Ecommerce Director. Doing this allows a retailer to retain maximum focus on revenues and profitability from multichannel retailing today; while at the same time addressing the roadmap and business change agenda.

One new role emerging is that of the chief customer officer or customer director.

This is someone whose responsibility it is to ensure the customer experience is consistent through all touch points. However, customer experience on its own will never be enough to deliver the fully rounded experience required by the customer as marketing communications is a key component and therefore in our opinion should also sit with the CCO.

The next big battle ground is around personalisation and engagement, and the CCO should be the person most capable of delivering a more engaging and personalised experience with the brand.

What background should this person have? It requires a mix of skills and experience:

Multichannel, with a bias towards online Digital experience so they have the vision and practical experience to deliver the

store experience Ideally marketing experience both brand and performance based so that they

can ensure consistent and joined up communications with the customer

CIO (Chief insight officer)

Retailers have masses of data but not insight. And they often lack the skills in the business to effectively interpret data and turn it into actionable insight. To this end, we are likely to see a new role emerge that focussed on surfacing actionable insight from across the value chain of a multichannel business.

This will have both an internal and external focus. From cause and effect perspectives, the internal factors are the cause and the effect is the impact on customer experience.


Digital/Multichannel CTOs

There will be continual demand for Chief Technology Officers with a strong digital bent and core multichannel backgrounds who have owned the roadmap for digital and multichannel transformation.

Digital CEOs

For those of you not there already, that’s where you’re all headed! Who better to lead the retail business of tomorrow than those responsible for re-shaping the customer proposition and leading the transformation to a more integrated multichannel business and who puts the customer at the heart of all they do?

Take care…

Retailers would be wise to adopt a bridging strategy before they embark upon a full multichannel integration programme. If they move too quickly down this path there is a danger they will lose the momentum from online and the halo effect it has on the rest of their channels.


About Practicology

Practicology is a strategic multichannel consultancy with offices in London and Sydney. Founded in 2009 by experienced retailers Martin Newman and Mark Lewis, we have more than 100 years of experience in ecommerce and multichannel between the members of our growing team. We offer an end-to-end portfolio of services including strategic consulting, platform selection, site design and content, analytics and insight, conversion rate optimisation, trading and digital marketing. Clients include Hobbycraft, House of Fraser, Thomas Pink, Ted Baker, Hotel Chocolat and National Geographic.

Practicology’s primary goal is to help clients deliver outstanding results. All of our consultants have held senior client-side ecommerce positions, giving them a unique understanding of clients’ challenges. Practicology doesn’t just provide clever theory – we work with each client from strategy to execution, with a focus on practical and profitable outcomes.

Our Website Usability Report is available at www.practicology.com/publications

Follow us on Twitter at www.twitter.com/practicology

Follow our updates on LinkedIn at www.linkedin.com/company/practicology

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