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Toward a Better Retailing Model

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Retail CIOs “are increasingly aware that it’s difficult to make informed decisions about where to invest in multi-channel capability if you don’t have a clearly articulated multi-channel strategy,” Dale Achabal, executive director of the Retail Management Institute at Santa Clara University, said in a session entitled “Cross-Channel Leverage & Optimization: The State of the U.S. Retailing Industry.”

And since most merchants are now multi-channel retailers, this means that it’s difficult to invest intelligently in the business — indeed, it’s difficult to manage the business intelligently — without rethinking and revising your organizational strategy from top to bottom. “Mere presence,” he said, “does not constitute a multi-channel strategy. True multi-channel retailing is a better retailing model. Most retailers do not understand this and are not benefiting from it.”

So what exactly is true multi-channel retailing? The key, according to Achabal, is what he and his colleagues call optimization — by his description, the allocation of resources in an optimal way.

“This is not the same thing as ‘consistency’ or ‘integration,’” he said, “and it does not happen automatically. It needs to be a systematic, conscious part of your strategy. Having multiple channels gives you a lot of opportunities, but you have to push them. Cross-channel optimization focuses on leveraging the capabilities of emerging channels to impact the operating mode of the existing dominant channel.”

For a look at how this kind of thinking plays out in the real world, he offers the example of the Disney Company. Disney doesn’t have solitary, freestanding products: When it releases a movie, it also releases movie-related merchandise in stores, movie-themed McDonalds Happy Meals, ads and promos on the Disney Channel, books and comic books featuring the movie’s characters and a whole host of other products. If the movie is a success, it becomes a ride at Disney theme parks.

In essence, Disney links “every channel in a way that has a significant impact on their expense structure,” Achabal said. “If Disney releases a soundtrack CD from a movie, what’s their promotion cost? Zero. If you and I release a CD and want to sell any of it, what’s our promotion cost? Millions. This is a fundamental difference in how Disney operates from other entertainment companies” — and, he noted, it’s not a new concept. Achabal illustrated the point with a diagram from the Disney Company showing how all the channels nourish each other. Copyright date on the diagram: 1957.

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Well, yes, that’s nice, you may be thinking, but I don’t run a movie studio: I sell shoes or dresses or hardware. How am I supposed to do this in my business? “The basis of cross-channel optimization,” Achabal said, “lies in migrating activities across channels.” As an example he cited a merchant with two primary channels (three, to be completely accurate, but he combined two for simplicity’s sake): store and catalog/web.

This retailer has two primary “value levels” or competitive advantages: a dominant product assortment and extensive product knowledge. The company maintains its advantages — it keeps the value levels high — through product testing and constantly updating its product knowledge. Optimization comes from making strategic decisions about where to conduct these activities.

“Most in-store product testing is done on an ad-hoc basis,” Achabal said. “There’s no collecting of results in a data base and so no statistical analysis, plus it’s very expensive. Product testing is very easy to do online, however. You get very quick feedback, you start accumulating data you can actually do some analysis with and there’s a much lower cost.”

As a result, for most retailers cross-channel optimization would involve moving most or all product testing out of the stores and onto the web. The opposite is probably true for buying. Most retailers today have separate buying operations for online and stores because they were set up to be totally independent operations. Then there’s product knowledge. The associates have to know some things, but pounding deep product knowledge into their heads is probably not the best way to maintain this particular value level. Put it online and show the associates how to access it, and everyone, including customers, will be grateful.

Achabal and his colleagues chart four stages of cross-channel optimization. First, you align your fundamentals, making sure basic propositions (assortment, pricing) are in synch across channels. Then you achieve proficiency, becoming adept at foundational activities and integrating key customer-facing processes. You don’t really have different customers for the different channels, so don’t operate like you do.

In stage three, you exploit cross-channel capabilities and drive cross-channel collaboration, as in the product testing and buying examples above. Finally, you optimize resource allocation at the enterprise level and achieve permanent, repeatable cross-channel processes that offer a significant competitive advantage in terms of operating cost.

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Even in stage one, a retailer is doing itself some good by improving the customer experience, and this improvement continues, gradually, throughout the process. The real benefits, however, come not from an improved buyer experience but from changing the core operating model. Achabal cited a case study of a major home furnishings retailer with which the Retail Management Institute has done extensive work. At the beginning of the process this company was reasonably successful both in stores and online. It also had a significant catalog division, so it was, and had been for some time, a true multi-channel retailer.

“There were the usual questions,” Achabal said. “Who owns the inventory? Who gets credit for the sale? And with them there were the usual conflicts between the web and store operations.” This company’s stage-two achievement — its “aha” moment — was transitioning from being channel-centric to being brand-centric. “Management shifted gears and said we’ll give you both credit for the sale,” Achabal said. “Everybody — the stores, the catalog people, the web — still had their own organization, and each organization still had its own goals and objectives, but now part of everybody’s compensation was based on how well the brand performed — not their division, the brand.”

This enabled the company to leverage across channels in a new way. Specifically, it started using the catalog to drive store traffic. “Catalog people have the best analytics,” Achabal said. “Any time they drop a catalog they know what sales it’s going to generate. They also know how many catalogs they need to mail in a given area — that is, a store’s territory — to get the best return. But the stores also need promotional help, so to drive traffic to the stores, they mail more catalogs than they need.”

This isn’t free — the stores pay the catalog division for the extra printing and mailing costs — but relative to advertising in newspapers and magazines or on TV, it’s inexpensive. According to the Retail Management Institute, average promotional cost for stores in the home furnishings category is 6 percent of sales; the company in Achabal’s example does it for a quarter of that amount. This is a huge competitive advantage on its own merits, and the company is able to use catalog sales data to help determine the best sites for future stores.

And this is what Achabal meant when he said true multi-channel retailing is a better retailing model: It’s not just technology — it’s not even mostly technology — it’s 21st-century business strategy.