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The Future of Retail

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The closing session of NRFtech 2012 was devoted to a discussion of the future of retail led by panelists Bo Fishback, co-founder and CEO of Zaarly; Nihal Mehta, CEO and co-founder of LocalResponse; and Eric Koger, co-founder and CEO of ModCloth. Given that all three are committed entrepreneurs, what emerged from the discussion was not a shared sense of caution so much as a rueful collective awareness. What was cutting edge about the Internet 10 years ago (and mobile five years ago) is very much past-tense; furthermore, much of what seems relevant now – such as metrics about Facebook likes and Twitter followers – will soon be outdated as well. “It reminds me of people 15 years ago talking about hits and page views on their website,” Mehta said. “They would say, ‘I got 15 million hits. I’m gonna be rich.’ And I would say, ‘Um, no, you’re not.’ It’s the same thing with Facebook likes and Twitter followers. A huge number of the followers on Twitter are fake.” On the other hand, if the present is an unreliable guide to the future, so, too, is the past. During the Q&A session, an attendee asked the panelists whether they “study traditional retail for clues as to how to run your business, or do you just focus on this new world?” After a protracted silence, Fishback replied, “I don’t think we study, or really look at, any company older than Craigslist.”

Evolution of the marketplace The Q&A session was preceded by a series of brief solo presentations by each of the panelists. Fishback described Zaarly as a simultaneously globalized and localized combination of Craigslist and eBay. It’s attracted a fair amount of initial attention; actors LeVar Burton and Ashton Kutcher were among the company’s first supporters, and Hewlett-Packard (and former eBay) CEO Meg Whitman now sits on its board. “Two thousand years ago,” Fishback began, “if you wanted something, you headed out from where you were to find someone who had it or knew how to make it. Then about a thousand years ago, the five pillars of the marketplace — location, communication, logistics, information and payment — began to change.” In Fishback’s view, the very human element of commerce — haggling, pushing, high-speed patter — was first seen in the Turkish bazaar. The bazaar still exists, though today it represents only a small part of the worldwide marketplace. Many bazaar characteristics remain in modern malls, he said, though each successive marketplace improves on the previous one. Next came Benjamin Franklin, who invented, among many other things, the mail-order catalog. Fishback pointed out that some of the product categories of early catalogs came to be regarded by later generations of merchants as inappropriate for direct sale. “They sold houses in the early Sears catalog,” he says. “And they sold cars, and then everybody forgot about it. In the late 1990s, Meg Whitman said she could not believe somebody would buy a car on eBay. Users had to force them [to facilitate auto sales], and now it’s one of the biggest, most profitable businesses they have.” Fishback quickly noted more recent developments, from Amazon’s first homepage (“One Million Titles!”) to mobile retailing and the current scramble to provide same-day (and in a few extreme cases, one-hour) delivery. From all this, Fishback and his colleagues and backers seem to have reached two conclusions: What looks today like a logistical miracle — order fulfillment and delivery in a day or less — will shortly be the norm. The other is that the combination of high-speed logistics and super-abundant information will make “everything discoverable and anything possible.” The role of Zaarly, as Fishback sees it, will be to facilitate connections between the wanters and the sellers or makers. “Our vision,” he said, “I think is inevitable. The only question is, will we be the ones to do it?”

Location-based advertising Mehta has been working in the mobile marketing arena since 1999. LocalResponse devises ways for retailers to engage with consumers in or near one of their locations by means of a targeted ad, leading to a dialogue he calls the customer check-in: Someone tweets, “I’m in Walgreens,” and Walgreens replies, “See a fantastic price on razor blades in aisle 3.” While the company is relatively young, it is working with a number of well-established brands, including Coca-Cola, Kraft Foods, Aveda and General Motors. “The rising generation are digital narcissists with an indifference to privacy and a passion for over-sharing,” Mehta said. “We sample a billion pieces of content a day — half of it is Twitter, and much of that is extremely inane: ‘I’m going to the bathroom.’ And ... these teenagers have closed-loop feedback systems. Somebody who [posts] ‘I’m going to the bathroom’ will get 40 likes.” Mehta points to two trends that together constitute an opportunity for retail: location-based services and the sheer volume of digital chatter. “In the next 60 seconds,” he said, “there will be about a million Facebook status updates, a thousand Pinterest pins, 20,000 Tumblr posts, many foursquare mobile check-ins and about 200,000 tweets.” There are three different ways the retail industry can leverage this opportunity, he said. Walgreens’ direct response is one option; a second is geo-fencing, creating a zone within which consumers can “hear” from nearby merchants. A third is downloaded apps like foursquare or shopkick.

Love and fashion As narrated by co-founder and CEO Eric Koger, the evolution of ModCloth is essentially a love story — between two people, between the left brain and the right brain, between art and science, between a girl and her clothes and between a company and its customers. Koger was 16 years old when he founded a web development agency in 2000. Shortly afterward he met a pretty blonde with a passion for clothes named Susan Gregg. By 2002, he and Gregg were dating and preparing to go off to Carnegie Mellon University in Pittsburgh. Being natives of south Florida, they needed appropriate attire for a real winter; being in retiree-heavy territory, Gregg was able to find an abundance of vintage outerwear. She took that abundance to Pittsburgh, where they started trying to figure out ways to sell it. For three years that was more or less a sideline — they were in school and Koger was still running his company. In 2005 they moved into a rented house in Pittsburgh and started making the transition from one-off vintage goods to new merchandise. A year later, they graduated from Carnegie Mellon, got married and bought a house. Within two years, their side venture had overtaken the house. It was time to turn pro: The company moved into an actual business location and began to seek funding. “The combination of our left brain/right brain partnership and the constraints of bootstrapping the business led to an insight,” Koger said. “About a third of the goods we looked at were never produced, because we were making non-production-run-size bids. We knew we could make production-run bids on about 20 percent of the merchandise we saw — we just didn’t know which 20 percent we should bid on.” Meanwhile, ModCloth had been creating a close, collaborative relationship with its customer base – under-35 women interested in fashion and looking good, without scads of money. “We put about 50 new products on the site every day,” Koger said. “A third of our traffic comes from people who come on the site every day; 10 percent of the traffic comes from people who visit the site eight times a day or more.” That’s not just traffic; that’s a community. The Kogers and their colleagues created a program called “Be the Buyer,” putting pre-production design samples in front of the community and asking for both votes and comments. Koger ran statistical analyses of the results and, after a couple of iterations, developed a response-weighting model that closely correlated to sales. “Our ‘Be the Buyer’ products sell two-and-a-half times as well as our non-BTB products,” he said.

Lessons learned ModCloth appears to have found a successful and sustainable model for a particular, carefully focused Internet business. Asked to summarize his thoughts about the future of the fashion industry, Koger offered two lessons from his company’s experience: Data beats gut. His wife is an inspired, possibly brilliant merchant with great instincts, but it is the two-way relationship with their community that allows them to be right as often as they are. Content beats convenience. This was echoed by Fishback, who said, “I can’t emphasize enough how important quality is. You have to have it. As our content has improved, our social engagement has gone off the charts. But it costs time and money and attention.” Which may, in the final analysis, be what makes the future of retailing a lot like the past: There are no simple solutions and there are no magic shortcuts.