Selling innovation to the retail industryThis time, it really is all about the customer

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Retail needs innovationThe retail industry employs more people than any other sector in Australia and judging by the profits and

share prices of many leading retailers, it is a successful business to be in. At the same time, significant

changes are emerging in the consumer, competitive, technological and macro economic landscapes will

combine to reshape the retail industry over the next five to 10 years.

• Consumer.Changesinconsumerbehaviouranddemographicshavecreatedincreasinglyinformed

anddemandingcustomers.Retailerswillneedtofocusonprovidingaseamlessuserexperienceacross

multiplechannels.

• Competitive. Retailersareunderfargreatercompetitivepressureandthereisablurringofindustry

segments.Largerretailersarebeginningtoofferhealthcare,financialandtelecommunicationsservices,

whiletheinternethasblownopentheretailmarkettonewentrants.

• Technology.Innovativetechnologiesandpervasiveconnectivitywillallowpeopletoshopvirtuallyanywhere

atanytimeandtobecomevaluecreatorsaswellasconsumers.Theretailpotentialofsocialnetworking

technologiessuchasFacebookandSecondLifeisonlynowstartingtobeexplored.

• Macro economic.TheeconomiesoftheUnitedStatesandEuropeareslowing,whilethegreatestgrowth

potentialisinChina,India,Russiaandotheremergingmarkets.Retailersmustlearntosourcecompetitively

fromthosecountrieswhileretainingspeedtomarketfornewproducts.

These changes are affecting retailers around the world. Unique local conditions present additional challenges.

For example, retail is a labour intensive industry, in a booming economy, particularly in resource-rich

Queensland and Western Australia, many people can afford to be choosy about where they work. Unless retail

becomes a more interesting and exciting career option, retailers could struggle to recruit and retain staff.

The Australian retail industry has been slower than many other countries to react to these changing

conditions. Leading retailers in the United States and Europe have moved away from the traditional value

chain – which is concerned with getting the right product to the right store at the right time, based on

historical trends. They have reshaped their business models to create truly customer-centred organisations

that place the consumer at the forefront of everything they do.

The Innovation Index of Australian IndustryThe Innovation Index of Australian Industry, published

by IBM Australia and the Melbourne Institute,

thoroughly examined the changing levels of innovation

in Australia’s retail and other industries. It is the first

study to reflect the complex nature of innovation using

inter-industry, multi-indicator analysis.

Innovation is widely accepted as a key driver of

economic growth and productivity. The Innovation

Index of Australian Industry addresses the many

contributors to industry innovation by analysing

six data groups: research and development

intensity; patent intensity; trade mark intensity;

design intensity; organisational and managerial

transformation; and productivity.

The index captures innovation trends across retail

and 1� other categories of Australian industry over

15 years from 1990–�005. It tracks the evolving

innovation performance of the Australian economy

to give business leaders, analysts and policy

makers a rigorous and insightful measure to assess

industry and national economic performance.

Contents

Retail needs innovation ................................................................... �The Innovation Index of Australian Industry .......................................................................... �

Is Australian retail innovative? ................................................................................................ 4

Connecting retailers and customers ............................................... 4

A new business model for retail ...................................................... 5Turning customers into advocates ......................................................................................... 6

The role of technology ........................................................................................................... 7

Conclusion ...................................................................................... 8

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4 54 5

Is Australian retail innovative?Over the period covered by the index, the Australian

retail industry has closely followed the national trend

for innovation. Productivity growth in retail over the

15 years under review was 1.6 percent, slightly lower

than the overall average of 1.7 percent. The index’s

authors attribute this to the retail sector being the

country’s largest employer, limiting the opportunities

for labour productivity gains. In addition, the

industry has undergone significant changes to

operating conditions and distribution practices.

IBM believes technical innovation in retailing

moves in cycles of seven to 10 years. The industry

underwent a massive rush of activity in the years

leading up to the new millennium, when many

retailers massively overhauled their point-of-sale

and enterprise resource planning systems to

alleviate concerns about the Y�K bug. This explains

the significant peak in research and development

(R&D) activity and overall innovation that can be

seen in the index in the years 1999–�000.

This frenzy of activity exhausted the market, which

has since been in a period of consolidation during

which retailers learned to make better use of the

systems they had in place, rather than rushing to

adopt new technologies. However, IBM believes the

retail industry is due for a new phase of innovation,

in Australia and globally.

Retail was one of the few industries studied in

the index to be ahead of the national average in

organisational and managerial change. However,

improvements in this area have been modest, at

best, across all industries. IBM believes that to

address the significant changes the industry faces,

many of the traditional silos will need to break

down. Retailers will require a far more open and flat

structure, where people gain experience in a range

of areas and take multi-functional roles.

Retailers . . . Consumers . . .

Demand generation

Take a mass-market approach Usually ignore promotional catalogues or coupons because they don’t contain the products those customers buy often, or at all

Staffing Roster staff to minimise costs Complain they can never find someone to help them

Internet sales Maintain separate channels for online and in-store selling

Might prefer to choose items online and pick them up from their local store

Call centres Reward staff for reducing average call time

Feel they are rushed off the phone or don’t get all the information they require

From IBM’s experience working with retailers around

the world, it is clear that Australian retailers are

not as innovative as their counterparts in markets

such as the United States and the United Kingdom.

The closed and uncompetitive nature of the retail

industry in this country is a major reason for the

relatively low level of innovation.

Innovative foreign competitors pose a twofold

threat. German retailer Aldi’s successful entry into

the Australian market demonstrates that the local

industry is not immune to overseas competition.

And if Australian retailers want to expand into the

growing markets of Asia, they will encounter stiff

competition from major international competitors

such as Wal-Mart and Tesco, whose innovative use

of technology and business models gives them a

considerable advantage.

Connecting retailers and customersValue in retail is changing. Retailers are currently

focused on acquiring the right merchandising

and supply chain capabilities to deliver product

to the right place at the right time and for the right

price. But they increasingly need to find ways to

create value through innovation and enhancing the

consumer experience.

According to the paper Turning Shoppers Into

Advocates: the customer focused retail enterprise,

published in �006 by the IBM Institute for Business

Value, retailers are constrained because their

operations are divided into functional silos, each

with its own perspective on the customer and set

of expectations. This leads to a poor customer

experience because the managers of these silos are

more concerned about maintaining their individual

operations than considering the potential impacts on

the customer.

As a result, there are significant gaps between how

retailers do business and what consumers want

from them, as outlined in the table on page 5.

By placing greater emphasis on the customer

experience, retailers can transform their businesses

and close these gaps so that:

• Theshoppingexperiencebecomesmorefocused

onchannel,lifestyleandsegment

• Merchandiseselectionincludescategory,

segmentandlocalmarketneeds

• Assortmentdecisionsarebasedonoptimisingthe

basketsofcorecustomers

• Marketingbecomeslessmass-marketdrivenand

morepersonalisedbysegment

• Thebusinessmeasuresitssuccessbycustomer

satisfactionaswellasmoretraditionalmetrics.

A new business model for retailA customer-focused retail enterprise understands

the entire customer experience and delivers against

it to build customer relationships. To transform their

businesses, customer-focused retailers must integrate

six core capabilities into their business models.

• Consumer insight. Havingadeepunderstanding

ofcorecustomers’needsandusingthese

insightstodevelopaconsumer-drivencustomer

experience.Knowingwhoyourtopcustomers

are,howprofitabletheyare,whichproductsand

servicestheyprefer,howtheirshoppingneeds

varyandwhenandwheretheyliketoshop.

IntheUnitedKingdom,officesupplyretailer

Staplesredesigneditswebsitebasedonaseries

ofusabilitystudieswithcustomers.Staplesused

thisdatatocreatesevenpersonasoftypical

customers,identifytopcustomersandbuildnew

websitefeaturesthatdirectlyaddressedtheir

needs.Thisapproachdrovehigherconversion

ratesandincreasedaverageordersizesfollowing

thesiterelaunch.

• Personalised dialogue.Deliveringtimely,relevant

andcustomisedcommunicationtocustomers

acrossmultiplechannelsandtouchpoints.

USdepartmentstoreNordstromreplacedsales

people’scustomerbookswithadatabasethat

automaticallyassembledtransactionhistoriesand

preferencesforkeycustomersandmadethisdata

availableatpointofsale.During2005,Nordstrom

reportedthatone-thirdofallsalesresultedfrom

interactionsbetweensalespeopleandcustomers

facilitatedbythenewsoftware.

• Multi-channel execution. Coordinatingand

integratingsaleschannelstodeliveraconsistent

customerexperience,forexample,allowing

customerstobuyonlineandpickupfromashop;

buyonlineandreturntoashop;orcheckonline

forreal-timeshopinventory.Behavingasasingle

brand,regardlessofwhichchannelcustomersuse.

Recognisingthatmulti-channelcapabilities

arebecomingaprerequisiteforitsshoppers,

USelectronicsretailerCircuitCitynowoffersa

guaranteethatonlineorderscanbepickedupat

astorewithin24minutesoritwillprovideaUS$24

giftcertificate.

6 76 7

• Tailored offers. Providingameaningfulshopping

experiencetohigh-valuecustomers.Making

systematicuseofcustomershoppingdatatooffer

productsandservicesthatalignwithcustomers’

expectationsandshoppingoccasions.

USretailerWal-Martinvestedintechnology

todevelopbettercustomerinsightsand

segmentationcapabilitiesandusedthisdatato

tailortheproductsitoffersandthewayitsells

them.Forexample,inPlano,anaffluentsuburbof

Dallas,Texas,ithiredalargenumberofconsumer

electronicsspecialists,doubleditspurchasesof

organicproductsandofferedaselectionof1,000

winesrangingfromUS$4toUS$500.

• Staff commitment.Sustainingemployee

commitmentsostaffaremotivatedtosatisfy

customers.Hiringtherightpeopleandgivingthem

meaningfultrainingandthetoolsandinformation

theyneedtofocusoncustomers.

IntheUS,TheContainerStorehiresself-

motivated,team-orientedpeoplewithapassion

forcustomerservice,paysthemhigherthanthe

industryaverageandgivesthem241hoursof

formaltraininginthefirstyearofemployment

(comparedtoanindustryaverageofeighthours).

Ithasaturnoverrateof10percent,compared

toanindustryaverageof110percent,andis

consistentlylistedinFortunemagazine’s100Best

CompaniestoWorkFor.

• Organisational alignment. Collaborating

seamlesslyacrossdivisionstosatisfycustomer

needs.Thismayinvolveaddingnewrolessuch

as‘customerchampion’or‘dataanalyst’that

representthecustomervoiceacrossthecompany.

In �006, Wal Mart added new departments for brand

management, category marketing and customer

insights. It moved executives to markets around the

United States so they could be closer to customers.

It also gave field staff more authority over what

products to carry and provided a support team that

followed trends in fashion, food and electronics.

The role of technologyTechnology forms an essential part of this new

retail business model. To become customer-

focused enterprises, retailers will need to invest in

new IT capabilities and make changes to people

and processes.

The Y�K experience swept out many of the

cobwebs in retailers’ technology infrastructures,

such as removing decades-old mainframe systems.

Technology and the retail industry have moved on

considerably since the year �000, but many retailers

are now saddled with an inflexible IT architecture

that doesn’t easily support their business objectives.

To transform the customer experience, retailers must

place customer interests at the centre of their IT

architectures and develop capabilities such as:

• Capability integration.Integratingsystemsacross

multiplechannelssuchasshops,websitesand

callcentres,socustomerscanplaceorders,make

stockinquiriesorreturnproductsthroughthemost

convenientchannel.

• Information integration.Developingareal-time,

event-drivenviewofcustomerdata,suchas

transactionhistories,preferencesandprofiles

acrossallsaleschannels.

Turning customers into advocatesIf the benefits in the examples above don’t speak

for themselves, there is another overarching

reason to develop a more detailed knowledge of

customers and talk to them individually: it turns

customers into advocates.

If customers have a bad retail experience, �1

percent will tell more than one person about it and

nearly half of all customers will avoid a store based

on someone else’s experience. On the other hand,

79 percent of customers will commit to a deeper

product or service relationship with a brand after a

satisfying experience1.

Advocates stay loyal, recommend the brand to their

friends and spend more. Dealing with the same

customer across multiple channels can double or

even triple their spending.

UK grocer Tesco is renowned worldwide for

the way it gathers sales data from more than 10

million consumers a week and mines it to develop

deeper knowledge of customers and build lasting

relationships with them.

When Tesco prints out a discount coupon at the

check out, it will be for a product it already knows

the customer usually purchases. It also tracks

customers through their lives. For example, if a

customer starts regularly buying nappies and baby

food, Tesco will send offers for baby wear. After a

couple of years, the offers might change to toddler-

related products, then back-to-school merchandise

a few years later.

And it works. In an industry where a coupon

redemption rate of one or two percent is common,

Tesco’s is more than �0 percent. Since the launch

of its Club Card loyalty program in 1995, its market

share has grown from 16 to �1 percent.

• Information architecture and business intelligence.

Buildingarobustdatawarehousethatprovides

asingleviewofthecustomerandusesbusiness

intelligenceenginestosupportcustomeranalytics

andinsights.

• Application integration.Ensuringapplicationsthat

supportactivitiessuchasmerchandiseplanning,

forecasting,assortmentsandpromotionshave

readyaccesstocustomerdataduringpre-season

andin-seasonplanning.

• Service-oriented architecture. Underlyingthe

previousfourcapabilities,designingITsystems

asdiscreteservicesthatcanbeintegrated

andrepurposedtoaddressnewandchanging

requirements.Withthisflexibleinfrastructure

inplace,retailerscanquicklyadjustbusiness

strategiesandmodelswithouthavingtoripapart

existingITsystemsorstartfromscratch.

1 The Jay H Baker Retailing Initiative at Wharton and The Verde Group, 2006, The Retail Customer Dissatisfaction Study.

ConclusionRetailers around the world are re-examining their business models

in light of the changes sweeping the industry. Shifts in the consumer,

competitive, technological and macro economic landscapes will

reshape retail in the coming decade. This change is already under way.

The InnovationIndexofAustralianIndustry shows that Australian

retailers have kept pace with other local industries. However, IBM’s

experience working with retailers worldwide shows that when it comes

to innovation, the local sector is falling behind its overseas competitors.

Australian retailers can no longer rely on their geographically and

competitively insulated market, as consumers experience the best the

world has to offer through travel and the internet.

Innovative retailers overseas are re-engineering their business models

to make the customer experience the organising principle behind all

their efforts. This is not just lip service to “the customer is at the heart

of everything we do”; it is a fundamental transformation.

This journey will take many years and require strong leadership to push

through the necessary changes in culture, organisation, processes

and technology. As a first step, retailers should consider what they

want their ideal customer experience to be, then review and adjust

their existing capabilities to deliver that experience. This will provide a

roadmap that prioritises the things that matter most to customers.

Retailers that successfully navigate this journey will turn consumers

into advocates and create a sustainable competitive advantage.

For further information please contact:

Adrian Jones

Associate Partner – Retail Sector

IBM Global Business Services

Phone: 0� 96�6 6599

E-mail: arjones@au1.ibm.com

ibm.com/industries/retail

IBM Australia Limited Level 1� 601 Pacific Highway St Leonards, NSW �065

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