There are so many disastrous results of Companies going into Retail. It usually starts this way: How difficult can it be to sell Merchandise in Stores? Rent a proper sized Space at a good Location, arrange the Merchandise nicely, get some Processes for Payments and Logistics in place – et voila! Then repeat that multiple times by scaling the number of Stores and there you have it, your own Chain of Brick and Mortar Stores.
After all, Shops and Shopkeepers have been around since time immemorial, it’s not exactly Rocket Science, is it?
Doom follows. The new Chain is not turning out a Profit, as Customers do not show up in the store and if they do, they do not buy enough. So Companies start to tinker with the Store Design, different Products, different Locations for certain Products inside the Store, they vary the Assortment Size, the Number of Products in the Store, Sales Approaches, Trainings, they exchange Leaders, they try different Store Locations, new Marketing Initiatives etc.
While tinkering, come up with apparent Revelations, for example: Oh, if I increase the Assortment Size, I get more Revenue. Apparently, the Customer wants more choice! So they order even more Stuff, creating an Inventory Surpluses which increases the number of Items displayed per Square Meter in the Store as well as to clog up the whole Supply Chain, thereby, in turn, increasing Working Capital, decreasing Profits further.
Some Companies even to scale out of the Profitability Gap by adding more Stores. Economies of Scale to the rescue! Thereby the problem is compounded – if you scale a Store Format that is not performing you end up with a nonperforming Chain of Stores. Your Problems just increase. If you scale Shit you are going to end up with an even greater Pile of it.
What is so difficult about building up a Retail Chain?
Retail is different
Building an attractive, profitable Store is hard.
Scaling – the process of adding Stores and thereby Expenditure en Masse – is even harder, as the Entrepreneur has to learn to rely on Processes and Standards. The owner simply can’t be everywhere at the same time.
For a Company that originated in E-Commerce, this can be hard. After all, the Transparency of the Online Store is hard to replicate in a chain of Brick and Mortar Stores. People and Processes are notoriously harder to change than coding on a Web-site.
So how should an E-Commerce Company strive to build up Retail Stores?
The one unifying Concept
A Business should be more than the sum of its Parts. Each Part should strengthen the other part. Each Part does not need to be unique, but the Combination of all Characteristics of a Company has unique value to the Customer.
Let’s have a look at an Example which is based on a real live Retailer. I have modified its business model in several key aspects for the sake of privacy.
First, comes the Choice of which Market to enter. In the words of Harvard Professor Clayton Christensen, the challenge is to find out the job to be done.
Let’s explore the example Workwear Retailer above. The unifying Concept could be described as follows:
With the rise of the Service Economy, the Self-Awareness Craftsmen in small Businesses changed. These Professionals are knowledgeable, dynamic and proud Individuals. They seek not only function in the Things they are wearing, they seek some Style too, above the gray and black Work Suits of the Past. That is the Job to be done: To offer passionate Craftsman style which is not only serving their self-esteem but is perceived by their Customers to be professional looking, too.
Everything else follows from that:
- The Product: Fashionable Workwear
- Customer Experience: Function, Fashion & Nudges to buy other Merchandise (e.g. that Elite hand tool everyone hold in awe) displayed in curated Environments for limited times only
- Sales: Dynamic, open, personal and honest communication of the Sales Staff to Customer
- Store Design: Big enough to allow some Space to be set-aside for “Gigs”, i.e. limited time displays of Merchandise in visual attractive Spaces, but small enough to allow the Sales Representative to be close to the Customer
- Real Estate: Relatively inexpensive Locations on the Periphery of Cities, yet on the Traffic Arteries that are passed by Craftsmen every morning and evening on their way into and out of the city
- Logistics: Able to handle own Merchandise, 3rd party Deliveries and to organise “Gigs”
- Sourcing: Always on the look-out for the better and new on the Market. No own branded Merchandise, but the promise to provide the Best of the Best Merchandise that is available on the Market- always
- HR: Focus on hiring Craftsman to do the Sales, in order to share the Clients Language and Culture
- Finance: The Financial model is dominated by Curation, allowing inventories not to be held by the Retailer, but by its Suppliers. The Business thrives on the improved return on Capital, not so much on margin, as the Target Demography remains price sensitive
The Hedgehog Concept
This focus on a simple, unifying Concept is the key Requirement of any successful Business. Jim Collins has named this, in the classic book from 2001 “From Good to Great“, the Hedgehog concept.
Focus on one simple, unifying concept. Everything else is irrelevant.
A Hedgehog is inferior to a Fox in so many aspects. But he does one thing well, which makes him unbeatable.
To find the Pillars of Success, to orchestrate them in a way that all those Pillars support one another is key to any Business, not just Retail. Let’s take a harder look at Retail next.
The heart of Retail: Excellence of Execution
After finding out, what the unifying, “Hedgehog”, Concept of the Retail Business will be, the next Task is to turn the Concept into Reality. A Reality that is physical: There are Stores, there are lots of part-time Workers, there are logistic Operations with a lot of Concrete Buildings and Automation Equipment, there is the never-ending task of Store refurbishment.
Optimal Execution is about setting Standards, fostering Discipline and creating a sense of Responsibility in all parts of the Business. But, more and more in our digital Age:
- some old Truth remain valid, e.g. the Product must be excellent
- some Truths get even more true, e.g. the Customer has always been key, but now there are even more ways to serve a Customer than ever before
- and there are new Truths, e.g. Customers are not limited to maintain a Relationship to the Seller, modern Media enables Customers to get engaged with other Customers very easily
The Consultancy Boxwood has put that very nicely in a small Model:
- Leadership: Great Leadership has been visionary already in the days of Caesar or Napoleon. But with Digital Technologies, engaging has been made much easier and there are new Ways to engage up to a level that Employees can be empowered with Autonomy, never known to salaried Workers before
- Operating Model: Focus has always been the Hallmark of a successful Company. But with the options of Companies vastly expanding and the Rate of Change ever increasing, a Company needs to stay capable of coping with the Complexities of, for example, Omnichannel while at the same time preventing Processes to get so varied and improvised, that Efficiency will never allow the Company to create a Profit. The Ability to translate Insights gained by Data Analysis into Action is a vast Game Changer
- Change capability: Changing is dangerous. There are Uncertainties and Costs associated with any attempt to deviate from an existing Practice. Retailers scrutinize and Test every move they make in Detail, before exposing their whole Network of Stores to it. Trying one thing in a limited number of Stores, while trying something else in others, is even more important in the Digital Age. The new Truth in all of this is, that the Speed and the Number of Tests need to increase considerably, compared to the old, hierarchical way of initiating Change. There is a Trick to learn from Agile Organisations here.
The future of Retailing
Moving into Retail from E-commerce needs
- very deep Thought on the one unifying Concept in order to come up with…
- a Business Model that can be tested before…
- scaling the number of Retail Store with execution excellence
All the “new Truths” in the Boxwood Model point toward e-Commerce Companies having an advantage over traditional Retailers. After all, the Nature of E-Commerce businesses is Agile, is Data-centric, the Work Culture is more empowering and dealing with user communities via social media or affiliates is daily Business.
But it is no home run. The old Truth of Retailing remain true and even more true than ever. There is no faking in Retail: 10 years rental contracts, physical refurbishment, huge workforces etc. are for real. Scale too early and with inferior operational Skill and Disaster will follow.
Few E-Commerce Companies do venture into Retailing, yet. Amazon seems to be gearing up (How would an E-Commerce Company get into Retail? Part 1/2) and the Gig-Economy is on the rise.
Chances are, that Technology will be a lever that E-Commerce Companies will use not only to go into Brick & Mortar but to disrupt it for Good
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