The i factor

tHE i fActORHow consumer demand is driving retail innovationA report from the Economist Intelligence Unit

S P o N S o R E d B Y :

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The I Factor How consumer demand is driving retail innovation

© The Economist Intelligence Unit Limited 2012

Contents

Executive summary 2

About this report 4

Today’s shifting landscape 5

Watching—and waiting—for the next big thing 7

Getting personal is key to meeting changing customer demands 10

Pioneering change—in-store and online 12

Where now? 16

Conclusion 18

Appendix: Survey results 19

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Retailers have every reason to feel that consumers are winning a technological arms race. Armed with smartphones and wider broadband access and coverage, consumers boast unprecedented price transparency and can call on customer reviews with the swipe of a barcode or the tap of a touchscreen. Increasingly, the shopping trip does not start on the high street, but rather during the lunch hour at work, at the bus stop or even in bed. When customers do hit the shops, more than ever they expect to know what is in stock and demand the ability to reserve it, pay for it and go.

This retail revolution is different from previous shifts because it is based on consumer-driven innovation. Previous innovations—such as self-service supermarkets, direct e-commerce sales and using credit and debit cards—were all cases of retailers offering consumers something that most did not know they wanted. The new omni-channel world of

consumers seamlessly researching and buying across mobile devices, computers and physical stores within the same shopping journey is one that consumers already inhabit. Winning over this new, omnipotent customer is not a question of merely opening a store in the right location and filling it with the best stock.

Retailers recognise the rise of a new, empowered consumer and understand the need for action. But there is a wide degree of variation in what it means for retailers of different stripes and in varying national markets.

In order to investigate how retailers are adapting, the Economist Intelligence Unit, on behalf of MasterCard, surveyed over 300 retailers from the UK, France, Germany, Italy and Russia. Approximately one-half of the respondents are C-level executives and 42% come from companies with annual revenue of €500m or more. The survey results were supplemented with eight in-depth interviews with senior executives from leading retailers. This report takes a step towards mapping the shifting terrain and sketching out how retailers are navigating it.

Key findings include:

Retailers are behind consumers in the technology arms race Only 3% of those surveyed are convinced that retailers are keeping pace with consumer demands for multi-channel retail. But retailers are often grappling with legacy systems that are hamstringing efforts to evolve as rapidly as the market. “Customers are coming into stores with 21st-century kit, the cloud in a handheld device, and retailers are using till

Executive summary

Customers are coming into stores with 21st-century kit, the cloud in a handheld device, and retailers are using till systems from the 1980s. The arms race has really switched to the consumers now.

Ian Cheshire, chief executive of Kingfisher, owner of B&Q and Castorama

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systems from the 1980s,” says Ian Cheshire, chief executive of Kingfisher, owner of B&Q and Castorama. “The arms race has really switched to the consumers now.”

Agility and speed give smaller companies the edge The first era of online expansion favoured the big players; now the smaller, more agile companies appear to have less difficulty responding to the rapidly evolving landscape. Nearly one-half (49%) of larger retailers in effect admit that they are hostages to the next big innovation by stating that some unknown technology will be the most important driver behind consumer expectations. However, just one-third of larger retailers are investing heavily in technology, compared to almost one-half (47%) of smaller retailers. Although the big players are waiting for the next revolution, the smaller players are experimenting at the forefront.

Watching and waiting for the next game-changing technology After seeing the impact on the industry that different technologies have had in a very short period, retailers are betting that there is another game-changer that will shake things up by 2020. The biggest agent of change in customer relationships will be an innovation that is unimaginable today, according to 34% of respondents. This lack of certainty can make it difficult for companies to decide where to invest. But other seismic shifts can be predicted and prepared for: 36% expect the next big shake-up to be the burgeoning middle classes of emerging markets and 31% flag the impact of an ageing population in mature markets, while 43% expect mobile devices to be the most important channel for interacting with consumers in 2020.

Physical stores take on a new role in the omni-channel landscapeBrick-and-mortar stores are expected to be a less important channel through which companies interact with their

customers by 2020 (dropping from 53% at present to 27% in 2020), compared with other channels such as mobile devices (rising from 32% to 43% in the period). However, just one-quarter of respondents expect to be able to reduce their high-street presence and over one-half (55%) say that they are turning their retail outlets into “showrooms”, recognising that although most purchasing will be conducted online in the future, customers still want to touch and try out products before buying.

Getting personal is the key to meeting changing customer demandsTechnology has enabled the consumer to research the market at great speed, either in-store, at home or on the move. Retailers must now try to keep pace, and so they are getting to know their customers better and using social media to meet changing customer needs. Some 37% of those surveyed are conducting more research on customer expectations and 38% are increasing their use of customer segmentation, while 39% of retailers are delivering personalised shopping experiences and 32% say that they are using social media to meet empowered consumers’ expectations. The leading players will be building greater personalisation into how they operate, for example through loyalty schemes or the automatic customising of websites.

Emerging markets will not wait to follow in the footsteps of developed marketsMiddle-class consumers in emerging markets will not wait until their markets are deemed mature before they demand to transact by mobile phone, order at home for in-store collection or take to social networks. The rise of the middle classes in emerging markets is the biggest factor expected to shape customer expectations by 2020 (36%), even beating the rising prevalence of shoppers armed with smartphones and tablet computers (30%).

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About this report

In June and July 2012 the Economist Intelligence Unit, on behalf of MasterCard, surveyed 306 European retailers to investigate their views on the challenges facing the retail industry in the years to 2020—what are the opportunities and growth areas, how they are adapting to sector changes and how are they using new technologies to deliver an improved customer experience.

Respondents were drawn from the UK, France, Germany, Italy and Russia. Retailers were grouped by type—including independent retailers, department stores, supermarkets, specialty retailers and chains—as well as size (annual revenue of less than €500m and greater than €500m).

In addition, in-depth interviews were conducted with eight experts from leading retailers. Our thanks are due to the following for their time and insight (in alphabetical order):

l Federico Barbieri, senior vice-president of e-business at PPR

l Ian Cheshire, chief executive at Kingfisher

l Pilar Gonzalez, head of global payment strategies at Inditex

l Jody Goodall, head of solutions architecture at Kiddicare and Morrisons.com

l Mark Newton-Jones, chief executive at Shop Direct

l Andrea O’Donnell, commercial director at John Lewis

l Dr. Christian Plenge, head of architecture and innovation at Metro Systems

l Mike Shearwood, chief executive at Aurora Fashions

The report was written by Marcus Leroux and edited by Monica Woodley of the Economist Intelligence Unit.

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Today’s shifting landscape1The secluded, fertile pastures of old are vanishing. Merely having good stores in prime locations is no longer sufficient. The three biggest drivers of changing customer expectations over the past five years, according to survey respondents, are the rise of consumer empowerment, the proliferation of self-service and increased competition between products. Each is highlighted by one respondent in three.

Combined, these factors make a potent cocktail: consumers have more choice and are better informed than ever.

“The reality is that you’re competing with Amazon, whose operating profits are between 1% and 3%,” says Andrea O’Donnell, commercial director of John Lewis. “The competitive dynamics have moved significantly. You have to be as good as Amazon online and offer the same amazing experience as you do offline.”

But not all countries are at the same point or have been affected in the same way: more than one-third of British and Italian retailers (34%) highlight social media as having an impact on customer expectations, compared with only 11% in Russia. Differing levels of uptake by consumers inevitably shape the responses of retailers in those markets.

In a similar vein, companies of different sizes offer varying diagnoses of the factors behind changing consumer preferences. Companies turning over more than €500m are more likely to look for global explanations: 36% name globalisation as a primary factor behind customers’ greater expectations, compared with only 22% of smaller firms. Furthermore, 28% adduce the influence of the rise of high-net-worth and middle-class consumers in emerging markets, double the 14% of €10m-500m companies that do so.

Correspondingly, smaller groups are more likely to see communications technology, such as the rising prominence of smartphones and live online chats, as a big factor in changing customer expectations. Thus, although smaller companies Source: Economist Intelligence Unit.

What have been the main drivers of change in customerexpectations over the past five years?Looking at the % from each country that selected social media.(% of respondents)

Chart 1

Germany

France

UK

Russia

Totalrespondents

Italy

34%

34%

16%

11%

24%

25%

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see technology as the driving force behind market change, larger firms look to the global economy. The most significant manifestations of this will be explored later in this report.

Customers’ elevated expectations carry through to the final stage of the shopping experience—the payment transaction—and here retailers are slowly adding new options, with 38% of retailers

Inditex’s major rivals are also taking steps. Gap Inc, the world’s third-biggest fashion chain, has introduced Google Wallet to its Gap, Old Navy and Banana Republic stores in the US. H&M, which is the global number two, ought to have an even bigger incentive as it is a single-brand operator and sells at lower prices than Inditex. However, although the retailer has introduced a transactional online presence in some markets, it is yet to begin rolling out contactless payments.

Some retailers are actively engaged in driving standardisation across markets. Metro, Germany’s largest retailer, has developed a uniform method of payment using near-field communications that it believes can be rolled out internationally.

Dr Christian Plenge, head of architecture and innovation at Metro Systems, the IT division of Metro Group, says: “We are keen to move away from stand-alone solutions and to work towards a standard that can be applied throughout the industry—regardless of the provider, the platform and the devices used.” This entails greater co-operation with bodies outside the sector, such as card providers and mobile phone operators.

The onus on retailers to adopt new technologies can be immense. But external constraints can often be the true limiting factor.

Inditex, the world’s largest fashion retailer, knows this only too well. It operates in 82 countries ranging from Kazakhstan to Uruguay via its native Spain.

The company has transactional websites in about one-third of its markets. When the remaining two-thirds arrive will depend on the growth of online penetration in these local markets and awareness of Inditex’s roster of brands, which include Zara, Berskha and Pull & Bear.

It is also making early moves towards accepting contactless payment, with pilot schemes in Italy and Poland and the introduction of Google Wallet, a mobile-payment system, in its recently opened New York flagship.

First, there are legacy ePOS systems that hinder the introduction of contactless payment.

Even if a local market has an up-to-date integrated payment system, domestic limits on the amount that can be spent in a contactless transaction can reduce the benefits of introducing the new equipment.

Case study: Global landscape, uneven terrain

stating that they already use contactless payment to improve the customer experience. The UK is in the vanguard, with 52% having adopted the technology. So too, perhaps unsurprisingly, are larger companies. But the roll-out of contactless payment encapsulates the difficulties faced by multinational retailers when implementing new innovations (see case study below).

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After seeing the impact on the industry that different technologies have had in a very short space of time, retailers are betting that there is another game-changer that will shake things up by 2020. Some as yet unknown technology is the second most popular choice for the main driver of changing customer expectations by 2020 (34%), behind only the inexorable and long-foretold rise of the middle classes in emerging markets (36%).

The strength of the response masks an illuminating divergence. The gap between smaller firms and larger companies here is a colossal 25 percentage points. Similarly, it appears that the higher up the organisation you travel, the more fatalistic—or some would say realistic—the responses are. C-level executives are more likely to say that some unknown and unforeseen technology will transform customer expectations between now and the beginning of the next decade.

However, although the big players are waiting

for the next revolution, the smaller ones are experimenting at the forefront.

Whereas the first wave of online expansion—broadly between the foundation of Amazon in 1994 and the onset of serious “click-and-collect” initiatives around 2007—favoured the first mover and those with sufficient scale to attract traffic and spread investment over a larger cost base, the second, multi-channel phase favours fleet-footed operators who, often by dint of being latecomers to new technology, can tailor a new system to their own specifications.

“At the moment, the fast-follower, the small and the nimble, have got more flexibility than the big boys. But the major retailers who are investing heavily in this are becoming more agile too,” says Mr Cheshire of Kingfisher. The established players are more likely to be locked into powerful but unwieldy IT systems.

The scale of what companies must manage in just one area of technology, payments, shows the threat to inflexible incumbents—and the potential cost of inaction. The volume of global contactless card transactions will rise from 3.5bn in 2009 to 31.8bn in 2013, according to US-based market-research company, the Yankee Group, while the value of mobile payments, either through near-field technology or remote transactions, will rise to US$1.3trn by 2017, according to Juniper Research of the UK.

The case study on the following page contrasts how two retailers of differing sizes dealt with technological innovation.

Watching—and waiting—for the next big thing2

What do you believe will be the main drivers of changingcustomer expectations by 2020?Some technology which cannot be predicted right now(% of respondents)

Chart 2

49% 37% 34%23%

Companies with€500m or more

Companies with€10m to €500m

C-suite Total respondents

Source: Economist Intelligence Unit.

At the moment, the fast-follower, the small and the nimble, have got more flexibility than the big boys. But the major retailers who are investing heavily in this are becoming more agile too.

Ian Cheshire, chief executive of Kingfisher

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from a new automated distribution centre to rewriting the job description of its shop-floor staff and overhauling its website.

“Four years ago, we made a decision to be a multi-channel retailer because we recognised that added value to shopping,” she says.

The project included customer research, a dramatic expansion of the number of products stocked online and retraining its 27,000 partners in what customer service means.

“We spent a lot of time with partners talking about the changing nature of the shopping experience and how more shopping trips started online. We turned them into brand advocates, changed their job description and their KPIs [key performance indicators]. That was a key area.”

That meant explaining to a traditional workforce who have been trained to “think that good service was selling physical products to a customer in a shop” that they were also responsible for online sales in their catchment.

For Ms O’Donnell, multi-channel represented a leap of faith: “It was a big gulp to swallow.” It was a bet, in the form of tens of millions of capital expenditure, placed on the basis of a long-term vision of consumer behavior—not a £2,000 punt on a smartphone app.

Multi-channel retailing is the buzzword of the era. But the differing paths retailers take to get there are illuminating, and offer a revealing glimpse into why attitudes differ between companies of varying sizes.

Aurora Fashions, the British owner of clothing brands including Coast, Warehouse and Oasis, is a mid-sized retailer that, in the words of its chief executive, Mike Shearwood, is prone to the odd “mutation”.

“One of the guys from Oasis came and asked for £2,000 to develop something in 2009,” he recalls. The result, he says, was fashion retail’s first transactional iPhone app. “Sales through mobile now are 10% of the digital channel.”

Letting things happen and following the customer is the modus operandi. “We have integrated our IT, e-commerce and retail teams. They all talk to each other and don’t do things in silos. When they develop something, they do it with another relevant part of the business. The testing is much quicker than the old way of doing IT projects, and a lot more flexible.”

If Aurora adopts technology through evolutionary mutation, then John Lewis, another British retailer with a turnover approximately ten times the size of Aurora’s, adopts technology through intelligent design.

The company’s commercial director, Ms O’Donnell, was in charge of transforming John Lewis into a multi-channel retailer—a project that spanned along the supply chain

Case study: Experiments at the edges or innovation by command?

What is standing in retailers’ way from adapting to the new landscape? Inconsistency across different markets was by far the most common response, with 64% of respondents highlighting it as a problem. Payment-on-delivery is more deeply rooted in some markets, such as Germany, which poses problems for online sales. Similarly, there is no industry standard for contactless or near-field communication (NFC) payments.

Dr Plenge of Metro Systems says that contactless payment was a “great opportunity” for the world’s fourth-largest retail group and its customers, adding: “NFC payment using a smartphone is currently the most technically sophisticated solution—we think it has a very big potential to become a common payment method

because the smartphone is already the ‘all-purpose device’ of our customers.

“But mobile payment has to be as easy for the customer as paying with a credit card, otherwise it won’t catch on. Currently, different players on the market—banks, mobile carriers, smartphone producers, et cetera—are competing to establish their own NFC solution as the industry standard.”

There are also routine internal challenges: although the cost of inaction is staggering, responding to the omni-channel challenge is not cheap either. Over two-fifths (43%) of respondents think that the adoption of cumbersome IT platforms is preventing retailers from moving at the same pace as the consumer when it comes to offering multi-channel

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opportunities, and the cost of adoption has to be a major factor in this choice.

The expense, for larger companies especially, is considerable. Kingfisher is in the midst of spending £70m (US$110m) on “rewiring its internal systems” to enable the company to become an omni-channel retailer. Ms O’Donnell reckons that it requires between £40m and £50m for John Lewis to stay ahead of the game: “An incremental 30% to 50% onto your IT bill per annum is what it takes if you want to be a leading omni-channel retailer. We believe this investment will create barriers to entry.”

The decision to adopt a new technology is often painful, either because it requires investment or because it forces compromises in the way retailers operate. M commerce is a case in point.

“More and more people are using their idle time, whether at the bus stop or in the car, to go online—on social networks, browsing the web or to shop. It’s only natural that you would expect people to transact as well,” according to Mark Newton-Jones, chief executive of Shop Direct, whose brands include Littlewood and Very. “That requires creative effort and systems integration—and also cash.”

Few retailers relish the chance of trying to inspire customers with a selling space that is only a few inches wide, nor will they jump with joy at the expense involved in repurposing their websites and, in Shop Direct’s case, their internal systems.

But following the customer is no longer optional. “In a lot of organisations there’s internal resistance to change,” says Mr Shearwood of Aurora Fashion. “We have tried to take a view that if it’s right for the customer it will be right for us eventually.”

More and more people are using their idle time, whether at the bus stop or in the car, to go online—on social networks, browsing the web or to shop. It’s only natural that you would expect people to transact as well.

Mark Newton-Jones, chief executive of Shop Direct

In a lot of organisations there’s internal resistance to change. We have tried to take a view that if it’s right for the customer it will be right for us eventually.

Mike Shearwood, chief executive at Aurora Fashions

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How are retailers responding to the new omni-channel terrain? If they are spurred on by a need to follow consumers, it should be of little surprise to find that retailers are obsessing over understanding their consumers better and then adapting the shopping experience.

Analysing and understanding the consumer is the biggest area of activity for retailers trying to pre-empt their customers’ shifting needs and desires. Personalising shopping experiences, working on customer segmentation and researching their expectations are the most popular steps, far outranking more operationally focused measures, such as integrating multi-channel payments.

Personalisation is higher up the agenda for e-retailers and specialty stores than for others. E-retailers have the advantage of being able to reorganise their shop layout according to a customer’s ordering history—the equivalent of a supermarket hastily rearranging its aisles every time a customer walks into a store. For specialty stores, personalisation is seen as a key weapon in the fight against general merchants.

As luxury moves online, it too will seek ways to differentiate itself through personalised, one-to-one service. François-Henri Pinault, chief executive of French luxury-goods group PPR, raised the possibility of using online orders to reach markets where the company does not have a physical presence through a network of personal tailors who carry out home visits.

Perhaps more intriguing are the responses of discount and convenience stores, which comprise the keenest group of retailers that are using personalisation and customer segmentation. This is despite their reputation as being the most insulated corners of the high street from the technological revolution in how customers shop. For example, what would personalisation look like in the convenience sector?

Getting personal is key to meeting changing customer demands3

Chart 3

How is your company currently adapting in order to prepare forchanges in consumers needs and expectations?(% of all respondents)


Delivering personalisedshopping experiences

across multiple channels

Increasing use ofcustomer segmentation

Increasing research intoconsumer expectations

Increasing use ofcustomer analytics to

personalise service

Increasing use ofsocial media

Increasing use/upgradingof CRM systems

Integrating our onlineand offline shopping

experiences

Focussing onbrand building

Increasing use of customeranalytics to assess

customer behaviour

Integrating multi-channel payments

Using paymentinformation to build

consumer intelligence

39%

38%

37%

34%

32%

32%

30%

20%

19%

5%

2%

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J Sainsbury’s “coupon at till” scheme might offer a pointer: customers receive targeted money-off vouchers at the point of sale (POS). It is more immediate than the standard loyalty scheme, and more personalised than conventional voucher schemes.

Metro has recently introduced a real-time couponing scheme, allowing customers to select online coupons with their smartphones at the POS. “We see a great potential for digital and personalised couponing with mobile solutions,” added Dr Plenge.

It is clear from the survey that retailers feel compelled to act in response to customer requirements rather than, for example, in the hope of cutting costs. Some 42% say that their adaptations would win customers’ loyalty and strengthen their brand, compared with cost-cutting measures such as reducing their high-street presence (25%) and customer-support costs (29%).

However, the proactive reasons for adopting change (increased loyalty, for example) are far more likely to be mentioned by smaller businesses, with larger firms more likely to emphasise cost and efficiency savings. This again underscores the more proactive approach of more nimble players.

With the increasing value of customer data and analytics, it would be easy to assume that the loyalty card is coming to the fore. But, according to retailers, the loyalty card is becoming yesterday’s solution. Only 8% disagree that loyalty schemes are now expected by consumers but have little effect on their company’s sales. Loyalty schemes seem to be grudgingly accepted as a necessary evil rather than the gateway to valuable customer data they were once considered. Strikingly, the disenchantment seems to be strongest among supermarkets—where the use of loyalty cards was pioneered and is most

entrenched. In no market did more than one retailer in seven believe that loyalty schemes boosted sales.

So where are retailers turning for information about their customers? Web analytics seem to be helping to fill the void.

Jody Goodall, head of solutions architecture at Kiddicare and Morrisons.com, says that currently the brands eschew a loyalty card, instead, they glean information from web analytics and simply by asking customers about themselves when they order online. However some sort of loyalty or reward scheme is very much on the future agenda.

As the online operations of traditional retailers increasingly come to the fore, the data they provide may become more valuable.

Mr Shearwood says that geolocation technology means that it is increasingly feasible seamlessly to link up e-commerce, m-commerce and stores. If it is raining solidly in the south-west (of the UK), he says, customers browsing the mobile-enabled website on their smartphone would immediately see the latest offers on raincoats, just as they would if they walked into a store. Similarly, the website layout could change for IP addresses or customer accounts linked to the south-west. This could open the door to price discrimination: charging customers different prices for the same product on the basis of information, for example, on their user history. However, many retailers will be reluctant to risk the ire of consumers. But the personalisation of websites based on order history is already in use by Ocado, an online grocer.

Using the Internet as a window to what customers are searching for is also more reactive than waiting for batch-processed data. “Last week I knew that the most searched item of womenswear was a one-shoulder dress”, says Mr Newton-Jones of Shop Direct. “I don’t have to do any research, which is always backwards looking. This is live.”

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The survey sketches a roadmap of the innovations that will be introduced to stores in the coming years. QR codes, despite their increasing prevalence in magazines, advertising and packaging, remain decidedly rare, with only 8% of respondents using them. Location-based technology will become more commonplace by the end of the decade, as will staff roaming the shop floor with mobile-POS equipment.

However, contactless payment is already firmly in the pipeline. Some 38% of those surveyed

Pioneering change—in-store and online4

said that they use it currently, rising to 44% next year. Russian retailers lag their European counterparts, as would be expected of a rapidly developing market. But in important areas such as contactless payments and data collection, Russian retailers expect to have closed the gap by 2020.

Kingfisher is using QR codes on packaging and on the edges of shelves to link to demonstration and how-to videos that can replace leaflets. Its Castorama chain in France has attracted 6.5m video views, including user-generated views. B&Q, its British counterpart, has racked up 2.5m views.

Shop Direct is also putting store by its online videos, shot at its custom-made studios. Some 70% of clothing on its website is now accompanied by a video, with the aim to reach 100%. Mr Newton-Jones says that there is a three-fold advantage: first, the conversion rate rises because customers can see how the garments hang; second, return rates decline as customers are less likely to change their minds when the item arrives; and finally, having video content also gives its products a leg-up on Google searches.

If customers can now shop anywhere they can get a phone signal, it will doubtless increase the number of sales opportunities. But it will also make consumers more demanding.

Aurora introduced an industry-leading 90-minute delivery service in 2011. Its record to date is 14 minutes and 55 seconds. In one example, a woman arrived at a wedding ceremony wearing

Chart 4

Which of the following technologies do you currently use todeliver an improved customer experience?(% of all respondents)


Data collection(eg, based on previous

purchase history)Contactless payment

technology

Social media tools

Technologies to enhancee- and m-commerce

Self-service kiosks

Employees in-storewith mobile-POS

'Swipe and go'

Location-basedtechnologies

Quick response codes

'Next generation'loyalty engines

40%

38%

36%

35%

32%

29%

28%

23%

9%

7%

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the same dress as another woman. She was able to order a new dress in time for the reception.

Overcoming the fear of showrooming The phenomenon of showrooming holds some fear for brick-and-mortar retailers. On the positive side, it implies that consumers still want to go somewhere to see, touch and feel physical goods. This is good news for those retailers that incur the inconvenience of rent, rates and overheads. The bad news is that a shop may well be a showroom, but not necessarily your showroom. Customers armed with smartphones, sometimes equipped with barcode scanning apps, can avail themselves of a traditional retailer’s

advice, enjoy the plush surroundings and then order the same product from the cheapest online pureplay. Store groups in the US have reacted furiously, with some blocking out WiFi signals.

This particular iteration of multi-channel retailing is already happening in Europe. Some 55% of respondents say that they are turning stores into showrooms because more sales are conducted online, against only 18% who disagree. This is even the case for franchises, which historically have had good reason to fear direct online sales (52%) and for independents, which may be forgiven for not having fully fledged transactional websites.

Next year By 2020

Which of the following technologies do you plan to use in the future to deliver animproved customer experience? (% of all respondents)

Chart 5

Contactless paymenttechnology

Data collection(eg, based on previous

purchase history)

'Swipe and go'

Technologies toenhance e- and

m-commerce

Social media tools

Location-basedtechnologies

Self-service kiosks

Employees in-storewith mobile-POS



'Next generation'loyalty engines

26%44%

31%41%

28%38%

32%16%

18%7%

14%35%

33%27%

35%27%

33%26%

41%26%

14



Those most reluctant are specialty retailers—only 34% say that they are turning stores into showrooms. It is specialists that have the most to fear from the freerider problem of online stores benefiting from the service and store network of their rivals. The role of suppliers here could become crucial.

The demands of multi-channel retailing also mean that there are fewer hiding places for dual-pricing policies between the Internet and stores. John Lewis took the decision to drag its Never Knowingly Undersold pledge online, albeit with a caveat excluding Internet-only retailers, and the big electrical retailers are moving towards pricing parity.

WM Morrison’s Kiddicare was a pioneer of the multi-channel showroom. Bespoke online-ordering kiosks are available in its stores. It is sanguine about the threat of customers test-driving its buggies before buying them from Amazon.

“We will give you free WiFi, PCs even, to help you make your purchasing decision, whatever that might be,” says Ms Goodall. “Since the advent of multiple stores in towns, people have walked around and checked prices. Technology has made it more transparent, more immediate and now people are doing it in-store with mobiles.”

Similarly, Sportscheck, the German sports retailer, introduced online browsing tables and in-store iPads to its stores two years ago. This circumnavigates the classic problem faced by sports stores: how to display low-margin, awkward-to-stock sports equipment. Customers can also benefit from in-store service instead of being left to sink or swim online.

The train of thought here is that, since there is no hiding place, one may as well be as transparent as possible and earn the goodwill of parents at a time when they are in need of advice. And, of course, price match if one has to.

The social media challengeDespite the buzz over social commerce, the results betray a lack of certainty regarding how social networks will affect the industry. The UK and Germany are further ahead than their counterparts. British retailers are more likely to say that social media has driven change in customer expectations in the past five years, but less likely to say that it will do so between now and 2020.

Accordingly, British and German retailers appear to be thinking more actively about how they use social media. For example, 51% of British retailers say that more empowered consumers will necessitate a new social media policy, compared with 35% overall.

Federico Barbieri, senior vice-president of e-business at PPR, social networks provide a quandary for the luxury industry as a whole.

“[Social media] builds networks of people based on relationships, common interests or occasions. Historically luxury brands built their awareness through word of mouth among those few who could afford them - it was still exclusive and discrete, so in line with luxury values,” he says. “[But] times have changed and now social media is doing that job, mixing people who would never be a customer with core customers. For luxury brands, it is key to understand how to play in that complex field rather than just do it [social media] because its happening.”

Luxury brands are beginning to grapple with how to engage on a forum as democratic and open as social media in a manner that is appropriate for a sector that thrives on exclusivity and scarcity. The case study on the next page shows how retailers can use social networks to create communities for their customers.

Since the advent of multiple stores in towns, people have walked around and checked prices. Technology has made it more transparent, more immediate and now people are doing it in-store with mobiles.

Jody Goodall, head of solutions architecture at Kiddiecare and Morrisons.com

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elements of Groupon and collective buying.”

“We bought a web platform which we have adapted to help streets to get together to share, borrow from each other or buy equipment as a street,” he explains. “That’s been on trial this year and we’re hoping to scale up to a national roll-out.”

Thus, instead of paying £50 for a powertool that will be used once and stowed away in the shed, members will be able to pay a fraction to borrow one from an assigned neighbour whose contact details would be available on the website.

“We’re trying to think differently about the retail relationship with our customers.”

He adds: “All of this relies on technology that just wouldn’t have been possible ten years ago.”

Screwfix, Kingfisher’s trade business, hosts online forums where tradesmen share tips and upload home-made instruction videos of projects they have worked on. The electricians’ area of the site alone has nearly 40,000 discussions.

Castorama, a French home-improvement chain owned by Kingfisher, has devised an innovative way of allowing its customers to benefit from each other’s expertise. Les Trocs’heures is a free website that allows customers to swap their DIY expertise (troc is French for barter or swap).

“Say you’re a gardener but you don’t have a clue how to lay a floor. You can swap with somebody who’s good at flooring but not much cop in the garden,” explains Ian Cheshire, group chief executive of Kingfisher. “It’s doing surprisingly well on a slow burn.”

Users upload a profile including their location, availability and areas of competence. The website already has 3,500 members and has facilitated more than 1,000 swaps.

It is one of a series of peer-to-peer schemes that Kingfisher has set up. In the UK, it has launched a pilot scheme called Street Club, which aims to introduce group-buying for tools. “Think of it as a local social network with

Case study: Building a community of customers

16



Ten steps in pursuit of the omnipotent consumer for 2020

1. Mobile devices will become the first port of call for engaging with customers. Whether it is through the use of near-field communication technology or using geographical positioning capabilities to offer targeted discounts, or simply ensuring that mobile-optimised websites carry the hand-writing of a brand, mobile will be the shop front of tomorrow. Today, mobile devices are being used by just 32% of retailers to communicate with customers, but when asked about their expectations for 2020 it is the most common channel of communication, with 43% suggesting that it is set to overtake stores, call centres and direct mail.

2. The high street will make a comeback. The omnipotent consumer is more demanding than their traditional high street or online-only cousins—retailers must assure the “omni-shopper” that they have what they want, when and where they want it, and will therefore win their trade. Online-only players are already seeking physical presences. Amazon is experimenting with lockers and recently signed up a partnership with Collect+ to use its network of 5,000 cornerstores for deliveries and returns. Even retailers with significant store presence are taking similar steps: John Lewis will deliver to its Waitrose sister chain, a model that it will soon extend to third parties. Only one-quarter of respondents hope that by meeting customers’ new demands they will be able to reduce their

Where now?5high-street presence, leaving it well down in the list of objectives.

3. Stores will embrace their new status as showrooms. There is a temptation to push back against online prices and product comparison in an attempt to preserve margins. This will recede as retailers become more adept at using their multi-channel flexibility to make sure that, once customers cross the threshold, they are offered a range of product and delivery options. This will mean building incentives for online sales into store staff’s pay structure. It also means that price matching will become the norm, not the exception.

4. E-commerce will develop a human touch. Online retail will become an experience in itself, not just a means to an end. Pureplays are grappling with how to deliver service in real time, while brick-and-mortar retailers are desperate to express ethos and translate their “handwriting” online. This means more live chats. Only 2% are using instant messaging to communicate with customers—but 21% say that they will do so by 2020. This is a technique pioneered among e-retailers, 13% of whom are already using it. Websites will also become increasingly dynamic, automatically tailoring search results and architecture to a customer’s history.

5. Contactless mobile payments will reach critical mass after standardisation. Competing systems and inconsistent regulations are a barrier to adoption by retailers. The rivalry between different consortium-backed systems, and Google Wallet, means that an industry

17



standard has yet to emerge. Dr Plenge of Metro Systems notes: “Mobile payment has to be as easy for the customer as paying with a credit card, otherwise it won’t catch on.”

6. Bespoke technology will be a source of advantage. Being locked into unwieldy IT platforms can restrict moves towards multi-channel or international development. There will be more deals such as Morrisons’ acquisition of Kiddicare, PPR’s tie-up with Yoox (an online-only fashion retailer) and supermarket groups buying digital media retailers in order to acquire successful technology. Similarly, there has been a succession of large retailers, such as Mothercare and Marks & Spencer, announcing that they will stop using the Amazon platform.

7. Price will be neutralised as a weapon. The omnipotent consumer has as good a view of competitor pricing as the retailer has. In the absence of differentiated pricing, low prices will be the ticket to entry, not a guarantee of winning the prize. Convenience, service and exclusivity will be the key drivers—retailers clearly feel compelled to act in response to customer demands, rather than in the hope of cutting costs.

8. The etiquette of the omnipotent landscape is still being written. Retailers must mind their step. Is it overbearing to phone a shopper who has abandoned an online transaction to offer assistance? Will consumers accept

technologically enabled price discrimination as long as it is packaged as a “reward” for a lucky few? When is it appropriate to enter a conversation on social media? The code of conduct offline has been built up over millennia. The unwary retailers will find out about the new code of conduct the hard way.

9. The global population of omnipotent consumers will explode. There is widespread recognition that first-generation consumers in emerging markets will reshape the industry—only 19% of respondents see it as a factor behind changing expectations in the past five years, but 36% believe that it will be a driving force over the remainder of the decade.

10. The concept of “retail” needs to be flexible. Even by conservative estimates, more than one high street shop in ten is empty in the UK. In France, the most successful e-commerce model is the “drive” concept, used by hypermarkets so that customers can click-and-collect orders without leaving their cars. Meanwhile, initiatives like Amazon’s collection lockers and third-party drop-off points are taking off. How long will it be before retailers with excess store space or landlords of empty shops become repositories for other people’s goods? Smart retailers will embrace the opportunities brought about by this flexibility while considering how changes might affect consumers’ perceptions of their brand.

Mobile payment has to be as easy for the customer as paying with a credit card, otherwise it won’t catch on.

Dr. Christian Plenge, head of architecture and innovation at Metro Systems

18



Conclusion

The test presented by omnipotent consumers is daunting. They know what the market is offering, at what price and at a speed unimaginable a decade ago. Retailers are responding but some are reverting to the comfortable, for example abandoning “troubled” low-margin markets where online presentation is highest—a move sometimes born of necessity, but as often out of ludditism.

Solutions are not one-size-fits-all, as demonstrated by the range of innovations highlighted in this report. But successful retailers will accept the challenge laid down by “omni-shoppers” and use the new environment as an opportunity to refigure their businesses.

19



Appendix: Survey results

Increased competition between product/service providers

Proliferation of self-service (ie, booking a holiday online rather than through a travel agent, self-service check-outs at grocery stores, etc)

Customer empowerment

Increased amount of available information to consumers

Globalisation

Social media

Communications technology (smart phones, web chat, etc)

The rise of middle-class and HNW consumers in emerging markets

The need to compete on brand in a crowded marketplace

Changing demographics

Increased information available to companies on customers through analytics

Decreased customer loyalty

Other (please specify)

37

33

32

30

28

25

21

20

19

12

5

2

3

(% respondents)What have been the main drivers of change in customer expectations over the past five years? Select up to three.

20



Growing middle class of consumers in emerging markets/increased per capita incomes

Some technology which cannot be predicted right now

Increasing global competition

Changing demographics (ie, ageing population in many developed markets)

Increasing use of smartphones, tablets and other portable web-enabled devices

Personalisation technology

Increasing outsourcing of service jobs to emerging markets

Increasing customer empowerment

Social media

Decreasing customer loyalty


Don’t know

36

34

33

31

30

30

27

21

14

5

0

2

(% respondents)What do you believe will be the main drivers of changing customer expectations by 2020? Select up to three.

New customer service strategies

New marketing strategies

New payment solutions

New social media strategies

New ways to increase customer loyalty

New ways to increase customer trust in our brand

Expanding into new markets

New pricing strategies

Partnering with other companies to strengthen our brand

Partnering with technology companies to help us manage the transition to multi-channel retail

No implications

Not applicable, I don’t believe consumers actually are more empowered than in the past

42

41

40

35

35

34

26

18

9

6

0

0

(% respondents)What are the implications of more empowered consumers for your company? Select all that apply.

21



Delivering personalised shopping experiences across multiple channels

Increasing use of customer segmentation

Increasing research into consumer expectations

Increasing use of customer analytics to personalise service

Increasing use of social media

Increasing use/upgrading of CRM systems

Integrating our online and offline shopping experiences

Focussing on brand building

Increasing use of customer analytics to assess customer behaviour

Integrating multi-channel payments

Using payment information to build consumer intelligence


39

38

37

34

32

32

30

20

19

5

2

1

(% respondents)

How is your company currently adapting in order to prepare for changes in consumers' needs and expectations?Select all that apply.

Increased customer loyalty

Stronger brand

Cost efficiencies through targeted marketing

Reduced customer support costs

Better customer intelligence

More efficient payment systems

Reduced high street presence

Increasingly globalised customer base

Broader product/service range

More personalised product/service offerings


42

42

33

29

29

28

25

15

13

5

1

(% respondents)What do you believe those adaptations will deliver for your company? Select all that apply.

22



Inconsistency of experience across different territories (eg, some markets adopting new technology faster than others globally)

Adaptation of cumbersome IT platforms to meet new consumer demand

Lack of audience intelligence to stack up the case for investment

Lack of internal co-ordination and alignment

Supply chains which are not designed to serve multi-channel businesses

Not applicable, I think retailers are keeping pace with consumer expectations

64

42

42

22

11

3

(% respondents)

What is preventing retailers from moving at the same pace as the consumer when it comes to offering the multi-channelopportunities consumers want?

1 Agree 2 3 Disagree

We are turning our retail outlets into “showrooms” as most purchasing will be online in the future.

Creating a seamless customer experience via online and offline channels is key to my company’s success.

We are investing heavily in technology to support our ability to deliver an effective multi-channel experience.

Loyalty schemes are opening up new ways for my company to market and sell our products.

Loyalty schemes are now expected by consumers but have little effect on my company’s sales.

55

43

41

36

51

28

37

29

54

42

18

20

30

11

8

(% respondents)Do you agree or disagree with the following statements?

Data collection (eg, based on previous purchase history)

Contactless payment technology

Social media tools

Technologies to enhance e- and m-commerce

Self-service kiosks

Employees in-store with mobile-POS

'Swipe and go'

Location-based technologies


'Next generation' loyalty engines


40

38

36

35

32

29

28

23

8

7

1

(% respondents)Which of the following technologies do you currently use to deliver an improved customer experience? Select all that apply.

23





'Swipe and go'


Social media tools


Self-service kiosks





44

41

38

35

27

27

26

26

16

7

0

(% respondents)

Which of the following technologies do you plan to use to deliver an improved customer experience in the next year?Select all that apply.



Self-service kiosks

Social media tools



'Swipe and go'





41

35

33

33

32

31

28

26

18

14

2

(% respondents)

Which of the following technologies do you plan to use to deliver an improved customer experience by 2020?Select all that apply.

24



Stores/outlets

Email

Telephone/ call centre

Website

Social media

In person/sales force

Mobile devices

Mail

Instant messaging services


53

44

43

38

37

36

32

13

2

3

(% respondents)

Which of the following are the most important channels your company uses to interact with customers now?Select your top three.

Mobile devices

Website

Telephone/ call centre

Social media

Mail

Email

Stores/outlets

In person/sales force

Instant messaging services


42

38

38

37

37

32

27

21

21

4

(% respondents)

Which of the following will be the most important channels your company uses to interact with customers in 2020?Select your top three.

25



UK

France

Germany

Italy

Russia

23

22

22

21

12

(% respondents)In which country are you personally located?

Independent

Department store

Chain

Speciality retailer

Supermarket

Franchise

Warehouse retailer

E-tailer

Convenience retailer

Discount retailer

36

23

19

18

17

15

11

8

8

2

(% respondents)What type of retailer is your organisation? Select all that apply.

Board member

CEO/President/Managing director

CFO/Treasurer/Comptroller

CIO/Technology director

Other C-level executive

SVP/VP/Director

Head of Business Unit

Head of Department

Manager

Other

4

23

6

2

14

17

15

19

1

0

0

0

0

0

0

(% respondents)What is your job title?

26



Food

Durable goods

Soft goods or consumables

Intangible goods/services

40

37

33

8

(% respondents)What type of goods does your organisation sell? Select all that apply.

Less than €10m

€10m to €500m

€500m to €1bn

€1bn to €5bn

€5bn to €10bn

€10bn or more

0

58

25

16

2

0

(% respondents)What is your organisation’s global annual revenue in euros?

Globally

Europe only

My country only

My city/region only

9

40

45

5

(% respondents)Where does your company operate?

While every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in this white paper.

Cover image - © RichVintage/istockphoto

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