Customers in the Driver's Seat

Picture this: a shopper peruses your store aisles until finding the item she's looking for. But she's nowhere near making a purchase decision. Instead, she aims her camera phone at the product's barcode, clicks to scan it, then clicks again to send. But what if she doesn't have a camera phone? No problem, she can manually enter the bar code numbers and almost instantly, Amazon.com, Shopping.com or another retail service fills the phone screen with detailed product information, reviews and — get this — a list of competing retailers, all within two or three miles.

It gets worse. There are maps and directions, in-stock positions and real-time competitive pricing information in her phone. For good measure, a few online merchants and maybe even the manufacturer's buy-direct website are also on the list. To sweeten the pot, some retailers throw in an instant electronic coupon or offer free shipping.

One more click and the deed is done. The purchase is made, from a competitor — all while she's standing in your store.

The scenario is very real, and it may be happening somewhere right now. "Anything that's going to help the end consumer with information or help them make a purchase decision, they're going to use," says Ashish Muni, chief technology officer for New York-based Scanbuy, one of the early developers of scanning technology.

With more than 225 million cell phone subscribers in the U.S. alone — many with cameras, Internet and email functions — Muni sees an almost unlimited market waiting out there to be tapped. For the most part, cell phones have been overlooked as a marketing and shopping device, even though they've already eclipsed the market penetration of personal computers, says Retail Forward vice-president Jim Crawford, the Columbus, OH–based consultancy's expert in next-generation technology.

Now they're poised to become the next powerful wave in the retail marketplace. Some 40 percent of cell phone users use text messaging; 12 percent, picture messaging; and 8 percent, email from their phones. Not to mention all the Web browsing going on.

"We're entering a new world where consumers expect to be able to touch you as a retailer or manufacturer anywhere they are," Crawford told attendees at the consultancy's 2005 Strategic Outlook Conference

"Because of the 'Google Effect,' we have this idea that we can have access to anything we want at any time. Just going online and connecting up is raising the expectation that we will be able to get answers," agrees Lois Huff, senior vice president of Retail Forward.

In 2006, the Internet is expected to record sales of about $159 billion — compared to $141 billion in 2005 — according to Forrester Research. And online retail sales are expected to grow to the quarter-trillion-dollar mark by 2011.

The broadening of consumer choices and perspective means the retail marketplace will become suffused with inexpensive, high-quality goods that essentially look and act the same. The right item at the right price at the right time — that old retail cliché— will become virtually meaningless. Product traits like quality, consistency and selection will soon offer only a baseline, with little or no visible differentiation between brands. Retailers who seek to differentiate strictly on price will likely get beaten up.

"The consumer is in the driver's seat, because, frankly, they can go anywhere and buy the product they want at the price they want," says Marshal Cohen of Port Washington, NY-based consultant NPD Group.

So how do retailers solve the problem of appealing to consumers with a glut of choices? According to Huff, a multi-channel strategy is the way to go. "In an anything, anytime, anywhere environment, we need to look at how we're marketing and selling products to make them unique. We also need to focus on microniches."

Consider Williams-Sonoma, which refers to itself as an omnichannel retailer. This merchant is not only in stores, catalogs, online and in the air, it's also sliced its brand into multiple businesses, classified by consumers' lifestyles and stages; the stores include Williams-Sonoma, Pottery Barn, PBTeen, Pottery Barn Kids, Hold Everything, Williams-Sonoma Home and West Elm. Count them: seven core businesses multiplied by three-plus channels — and the company is still hunting for the one or two consumers it's missed.

Or consider eBay. Browsing through its recently redesigned New Toy Finder, one finds a few thousand "stores" selling online through the site. Not a retailer itself, eBay may have hit on the best of all online worlds as the great enabler in the worldwide bazaar.

Of course, at the opposite end of the spectrum is Wal-Mart, which offers the opposite of niche shopping. Despite recent setbacks, the world's largest merchant just keeps rolling along: having identified its supercenter format as the primary domestic growth vehicle, the company plans for 3,100 units to come online by 2010, according to Retail Forward.

Wal-Mart may be the 800-pound gorilla in the retail industry, but at least it can be seen. The invisible threat comes from the thousands of fire ants swarming at the edges of the retail landscape. Fickle consumers have rapidly proliferating choices about where and how to shop — and what to buy. They perceive that they have more power than ever before, and while that's only partially true, they often wield it with unrestrained glee.

"It's a bit of a dance," says FAO Schwarz President Ed Schmults. "Do you want to be 100 percent driven by what your customers want, or do you want to move them as well? I think that dance moves back and forth between being totally customer-driven and establishing new directions and opening new doors [for consumers] to look into. That's what's exciting about retail for me. Despite all the science and all the analysis, there's a lot to it — and [making those decisions] is what great merchants are all about."

Whether consumers' power is real or perceived, merchants are still trying to direct their shoppers where they need and want them to go. That has pushed insurgent companies further into each other's markets, as they seek room to grow and acquire greater market share. Low-price value player Wal-Mart is now trying to push further into Target's market with higher price points and more of a selection of trendy merchandise. Meanwhile, Target is digging in deeper and expanding its designer and fashion appeal while hammering home its higher quality message with the slogan "Expect More. Pay Less."

The problem, notes retail veteran Maxine Clark — chairman and CEO of Build-A-Bear Workshop, St. Louis — is not that there's too much choice, but that there is too much sameness. Complicating the process even more, products formerly available only at independent specialty stores are now leaching down to the mass market, lured by the big box lust for volume and market share.

That means a merchant like Target saw the need and identified the opportunity to venture into heretofore specialty store-only SKUs, such as Thomas the Tank Engine or technology and learning-oriented toys.

"At Target, you can find so many wonderful categories … that when you go to a specialty store it's not all that different, except for some of the stuff at the top of the line," observes Clark. "It's getting harder for specialty stores to differentiate themselves. Their cost structure is always higher, so they wouldn't be able to meet the prices at a Target."

The points of differentiation, according to Clark, are price and newness. Treading on traditional specialty store turf may come to be be viewed as mandatory for mass merchants trying to get away from Wal-Mart, or anyone trying to differentiate themselves within the broad ocean of mass retailers.

In an era of hedge funds and private equity owners of retail stores, many investors believe that the science of retailing can be demystified. They feel that the shorter-horizon business model will deliver higher returns on investment through merchandising — or hard assets. The standard has moved from a merchandising philosophy of return on inventory investment to a banking-based philosophy of return on invested capital, and, more recently, levered return on equity.

All the while, mom-and-pop independents desperately search for a niche where they can exist alongside the retail behemoths. As these stores churn, a few standouts emerge — sophisticated and shining examples of how retail can still be done well with scrupulous attention to detail, sharp merchandising and focus on customer experience.

No wonder brand managers and merchants alternately tussle and conspire to extend product lines — even from the day of their introduction. It's no surprise that all the discussions about retail company valuations and real estate over the last few years have partially clouded the focus on arguably the most valuable and important real estate in the equation: shelf space.

And while it's difficult to imagine that shelf space would ever become less valuable, even that paradigm is being influenced by the e-world. For example, Target.com is producing triple-digit sales growth as it helps to extend product assortments beyond store capacity. And Target's online store has also become something of a merchandise laboratory, a testing ground for new products and merchandising concepts, as well as an adjunct to category management, according to company president Greg Steinhafel. The online assortment grew from about 70,000 SKUs in 2004 to nearly 200,000 items this past holiday season. What that means is a faster response to market conditions, with decidedly less risk.

"If an item sells well on Target.com, our store merchants are able to capitalize on that trend and quickly place an order for merchandise to get in Target stores," Steinhafel explains.

It's possible, however, that consumers are being presented with too many choices, and that SKU proliferation has surpassed the point of diminishing returns — at least in some areas. Jim Singer, vice president for Retail Practice at ATKearny, New York, suggests that such a surfeit of product can even lead consumers to regret — that is, feeling sorry they made their choice and purchase because there might have been something better or cheaper.

The theory, which Singer has been testing and validating, was born from a relatively obscure book, The Paradox of Choice, by Barry Schwartz, a business professor.

"The conventional wisdom is that if you have more shelf space you'll have more market share," Singer explains. "In fact, what we're finding is that [retailers] can actually take their assortments down significantly — 20 percent to 30 percent — and still maintain their top line."

"Of course, you can't generalize across all categories, but it's a pretty courageous thing," adds Singer. "It's always easy to add a SKU, but it's courageous for a manufacturer or retailer to take it off. The bigger scheme of getting better and smarter on the shelf is de-proliferation where it makes sense." That will offer more opportunities to innovate with different merchandise, according to Singer.

Said NPD's Cohen, "Ten years ago, the manufacturer was the driving factor. Then it was the retailer. Now the consumer is saying, 'Hey, I don't care what you put on the shelf, I'm going to buy what I want to buy, and I'm going to go find it where I need to find it at the best possible price.'"

That's a change the industry will have to get used to.