Today, retailers almost universally recognize that digital has reshaped customer behavior and shopping forever. So why are so many traditional brick-and-mortar retailers still so far behind at creating the digital experiences that customers really want?
Foreword
This, the 2016 version of Deloitte’s New digital divide report, deepens our exploration of the growing gap between the digital experiences that brick-and-mortar retailers are delivering and the experiences that their customers actually want. It continues the work we have been doing since 2012 to track the impact of digital on consumers’ behavior and their shopping habits.
When we started writing the New digital divide and talking about digital influence, many challenged (and some laughed at) our belief that digital was changing the in-store shopping experience in ways that were not fully understood. But surprisingly quickly, those challenges were drowned out by a chorus of believers, and today there is almost universal recognition among retailers that digital has reshaped customer behavior and shopping forever. In fact, a quick listen to any earnings call will validate that retailers’ investments mirror that recognition and commitment to change.
So then why are so many traditional brick-and-mortar retailers still so far behind at creating the digital experiences that customers really want?
Simply put, it is because these retailers have focused excessively outward—looking primarily at their e-commerce competitors—while building their digital businesses in an attempt to anticipate customers’ needs and preferences, at the expense of paying closer attention to the cues their customers were giving them about what they really want. Add to this a multitude of distractions around hot topics such as big data, beacons, and virtual reality, and it is no surprise that many retailers over the last few years have sought to read the future through a telescope—putting an unhealthy focus on competitors—at the expense of listening to their own customers. This has only led to the digital divide getting wider.
The primary goal of this work has always been to help retailers refocus and close this gap. To that end, in this edition of the New digital divide, in addition to drawing on our research and client work, we’ve included a series of customer insights made possible by two important new sources of data:
- The Deloitte Retail Volatility Index, our proprietary measure of the forces driving shifts in market share across retailers
- Our unique relationship with Facebook, which has given us access to new insights around customer preferences and digital experience
All of our work suggests that many of the digital answers retailers have been seeking externally may, viewed properly, live within the walls of their own stores. Indeed, perhaps the most important thing we’ve learned over the last year is that the most accurate picture of the digital future at any retailer will perhaps be best viewed through a microscope, not a telescope—by looking carefully at what is close at hand to inform better decisions around influencing customer behavior rather than focusing on competitors.
Jeff, Lokesh, and Kasey
Digital influence and retail volatility
In 2016, digital influence continued its rapid growth, albeit at a slower rate than we’ve historically seen . Today, $0.56 of every dollar spent in a store is influenced by a digital interaction. And when we include the primary source of growth in retail—online sales—the impact of digital influence is even greater .
But even as digital influence has risen, retailers’ ability to influence the purchase journey has decreased. Why? Because the large e-commerce players, as well as digital platforms such as Facebook and Pinterest, are operating at such scale now that they are shaping customers’ definitions of what a great customer experience is. Not only that, but they are also simply more connected (often in real time) to the customer’s needs than the typical brick-and-mortar retailer.
How did this happen? Think for a second about the fallacy that any single retailer, which only interacts with a customer six to eight times per year (in a mostly transactional manner), can gather enough information to provide a meaningfully personalized experience. Contrast this with the kind of relationship, trust, and understanding of preferences and purchase intent that a digital platform like Facebook or Pinterest can create when they interact with that same customer for several hours a day.
As a result, almost universally, customers’ preferred method of locating, buying, and receiving products in-store has been redefined by their online experiences.
In addition, customers today can go to their Internet browser, have it search the broad, fragmented marketplace, and get exactly what they want. No longer do they have to settle for something that is close to what they want; the browser curates the exact assortment they are seeking, far more quickly and easily than a visit to the mall. This dynamic has led to a significant increase in the shift of market share as nimble small and mid-level players collectively steal share from larger, more traditional, at-scale retailers. This fragmentation and volatility in the market is reflected in Deloitte’s Retail Volatility Index. The competition is no longer coming from the big box across the street, but rather from a myriad of newer, smaller competitors, most perhaps too small to capture the attention of the big players, but each eating away at market share.
As share shifts, the single biggest challenge many retailers are facing is the cultural gravity of their own traditional functional processes, talent practices, and business models (in functions including merchandising, marketing, and supply chain). The pull of these traditional structures is so great that these retailers, should they remain overly outwardly focused on their competitors’ practices, are destined to remain 12–24 months behind in recognizing and meeting their customers’ changing needs. For example, many retailers are still utilizing the same traditional key performance indicators that have been used for years rather than evolving how they define success to keep up with changing customer desires. Several examples:
- Retailers have been painfully slow at moving from a legacy “campaign” mind-set (where everything is planned around sales events) to a “customer” mind-set (where the planning process is built around the needs of different segments of customers instead of sales events).
- We regularly see historical attribution models that do not properly recognize customer interactions across channels or ascribe the proper importance to different interactions along the customer journey (that is, helping customers easily select and validate products may just be the most important customer interaction on the path to purchase).
- Adding to this confusion, the traditional approach to measuring cross-device usage frequently overstates key metrics such as audience size and engagement—introducing even more “noise” into many of the budgeting and planning processes.
- The staffing and talent models in key business functions such as social media, media planning, and customer relationship management (CRM) do not recognize how these business functions have changed with the advent of the large digital platforms. Long-standing disciplines such as buying media have completely changed in today’s environment and require very different skill sets than these functions did even 12 months ago.
Reliance on these traditional approaches leads to flawed budgeting and decisions. Retailers need to not only understand these changing needs better and work toward breaking free of outmoded ways of operating, but also completely revisit the historical data they have, build partnerships for data they wish they had, and find ways to generate data they never knew they needed.
The takeaway? Don’t try to build everything yourself! Retailers should embrace the native capabilities of their digital touchpoints and integrate with platforms where their customers are already interacting at scale rather than trying to build such platforms themselves.
Moreover, thriving in disruption requires taking a new look at one’s own financial structure, organizational structure, and ecosystems to drive the agility needed to respond to and anticipate the needs of today’s digitally connected consumer. Where to start? Consider resetting legacy planning and budgeting functions: Traditional budgeting and return on investment measures simply have not kept pace with shifts in customer behavior. For example, few retailers leverage an integrated budgeting/planning process that plans holistically across channels. This oversight often results in two things: double and triple counting key metrics such as customer interactions, and failing to recognize programs that are decreasing in productivity.
As a result, increasingly, we are seeing senior management express frustration as multiple business units claim individual credit for the same result. To quote a senior executive we spoke with recently, “My sales are flat, but if I added up all of the incremental ‘wins’ each of my functional leaders is reporting, our business would have grown by 20 percent.”
Under the microscope: The path forward
Encouragingly, our work illuminates huge pockets of untapped sources of insight that, perhaps surprisingly, live within most retailers’ own four walls. A focus on where to look and how to better understand this information can significantly accelerate the journey to digital effectiveness, providing competitive advantage and differentiation. Our research suggests that retailers should focus on two primary areas to deepen their understanding: customers and categories.
CUSTOMERS: THE MILLENNIAL MIND-SET
Each year, our digital divide research reveals new and exciting developments about how customer behaviors are changing. This year, our work revealed a rapidly accelerating dynamic in customer behavior that we call the “Millennial mind-set.” In short, we are seeing demographic groups that have displayed historically lower levels of digital influence start to embrace some of the newer digital features and functions available in the market.
That said, there are clear limits as to just how far consumers will go in using digital services when making purchase decisions. For example, while we see older customers adopting the use of mobile devices to locate products, we do not see them fully embrace more sophisticated mobile capabilities such as mobile payment systems. This continuum of adoption and usage suggests that retailers will need to manage a delicate balance of introducing newer functionalities while simultaneously maintaining an acceptable service level with their less digitally sophisticated customer base.
Retailers can help themselves in this effort by understanding the customer journey and the key elements, or “moments,” of that journey that contribute to the overall customer experience. According to our analysis, each such moment is potentially subject to digital influence.