What’s in Store? Total Transformation.

Successful merchandising in the evolving retail environment demands an enterprise-wide transformation

The world of retail is changing rapidly and these changes are impacting more than physical store environments—they are forcing product manufacturers to alter nearly every aspect of their go-to-market strategy. Knee-jerk reactions to market disruptions will no longer suffice – brands need predictive strategies that are actionable and forward thinking.

While Clarion USA, a consumer electronics brand, put plans in place to discontinue all brick-and-mortar product distribution in the United States in favor of selling exclusively through Amazon.com and other online-only retailers, this blanket approach could prove risky for most brands.

Clarion's move may work for them, considering the company's unique position:

1. Clarion operates in a high-end, low-volume segment of consumer electronics — a product category that has already migrated to e-commerce.
2. Clarion operates through a complicated dealer network, not a handful of key national accounts. Scaling back on distribution will save time, money and resources.

While Clarion's move is drastic, it exemplifies the growing need for manufacturers to re-evaluate how they do business. Manufacturers must move beyond questioning how their products are merchandised to how they are produced and distributed. How can companies optimize warehouse, manufacturing, product development and even material sourcing operations?

The Brick-and-Mortar Store is Still the Center of Retail Activity

While RetailNet Group (RNG) believes that digital shopping activity will drive up to 50 percent of all retail sales as soon as 2020, it only expects 15 percent — or even less — of those sales to leave the physical store entirely. How does that work? In RNG's forecast:

  • 25 percent of retail purchases will take place online.
  • 10 percent - 15 percent of those orders, however, will be picked up at a store through "click and collect" services.
  • 25 percent of retail purchases will be made by shoppers using personal mobile devices while in a physical store.

As a result, only 10 to 15 percent of forecasted digital sales will be "purely" digital - the remaining 50 percent of sales will still take place as traditional checkout transactions.

So, product manufacturers beware: brick-and-mortar still reigns supreme. 

On the Flip Side

Conversely, these statistics also highlight the need for updates to the traditional store format to fulfill new shopping realities.

Retailers must find ways to enable, capture and record the 25 percent of digital sales that will take place within the store on mobile devices and the ten percent to 15 percent that will be purchased online and picked up in-store. Kantar Retail describes these emerging needs as the evolution of stores into both experiential shopping environments and robust delivery hubs.

Both efforts will require the assistance of product manufacturers because the traditional practices of category management, product merchandising and P-O-P advertising all must evolve. For starters, retailers and manufacturers will need to work together to determine what products and categories even need to be stocked on shelves.

The Shift in Retailing Focus

RNG expects merchandising to steadily shift away from a standard product towards broader "experiences and events." With this move, less space will be allocated for specific SKUs and more will be dedicated to shopper solutions that create convenience and drive traffic.

Supermarket retailer Ahold's recent emphasis on meal kits, pictured above, is just one example of this new movement.

Meanwhile, according to Chief Operating Officer Allan MacDonald, Canadian Tire is employing a new strategy designed to "take the shopping experience to a whole new level. The 140,000-square-foot store boasts a unique mix of "old school" merchandising concepts (themed departments, brand shops, product showcases) and more than 100 digital screens serving up product information, recommendations and additional purchase options.

Even more revolutionary is the home improvement retailer Lowe's newly implemented experiential strategy, which now has 19 U.S. stores equipped with a "Holoroom"—a virtual reality experience that lets shoppers design their dream room and preview how it will look by moving through a simulated environment.

This kind of enhanced shopping experience is undoubtedly more engaging than standing in front of a typical fixture showcase in the store. It delivers the “retailtainment” needed to engage customers and provides an experience that is unattainable online, making it worthwhile for shoppers to continue making trips.

Ultimately, these new shopper technologies may allow Lowe's to carry less inventory in the store and simplify its distribution chain. Will Lowe's become nothing but a warehouse of VR rooms with no tangible products to buy onsite? Likely not, since there will always be a need for gratification faster than even an Amazon drone can deliver it. But a strategic mix of merchandise and experience may be the future blueprint for success.

Implications Beyond the Store: Supply Chain Overhaul

It's easy to see, that this trend will have a greater impact on manufacturers than simply pivoting how their products are sold.

The entire “supply chain” needs an overhaul.

The antiquated practice of shipping mass quantities of product to strategic points for distribution at individual stores is no longer sufficient. The standard 52-week "set and pray" distribution model must evolve into a nimble system that allows manufacturers to react to more frequent —even daily — demand at the local level.

To keep pace, Target recently hired an Amazon veteran as their Chief Supply Chain and Logistics Officer to "transform" the retailer's supply chain operation (Amazon promptly sued, by the way).

Procter & Gamble also raised eyebrows a few years ago when it became one of the first manufacturers to let Amazon set up shop inside a warehouse and direct-ship P&G products to consumers.

These efforts to streamline supply chain management all work towards reducing overstock of unnecessary inventory and curbing delivery turnarounds.

Beyond reimagining the supply chain lies brand management. Traditionally, SKU proliferation was intended to drive sales momentum, not respond to consumer demand. This strategy seems to be proving out online, where most shoppers are still buying a consistent, concentrated number of SKUs.

But the shift toward smaller, experiential stores will leave room for only the highest-volume or highest-potential SKUs. Future brand portfolios will likely involve fewer items in mass production and, when necessary, the rest at the ready for custom orders. (My M&M's, anyone?)

Volume has always been the name of the game, not only for sales, but also for driving manufacturing and warehousing efficiency. However, future success will now depend on flexibility and speed.

Implications Within the Store

The bottom line is that in-store merchandising has become more complex. Manufacturers can no longer rely on solely displays to supply additional volume and drive incremental, promotion-driven sales. Product manufacturers, and their merchandising partners, need to work with retailers to develop merchandising strategies that enhance the store environment, keeping the brick-and-mortar store relevant in the minds of shoppers.

Likewise, manufacturers and merchandisers must work to implement digital technologies that can

  • Help shoppers make device-enabled purchases.
  • Promote products not carried in store.
  • Bridge the gap between physical and e-commerce.

Innovation Vs. Renovation

A recent study from Accenture found that the CPG industry has focused too much on "renovation,", "with new product development increasingly characterized by line extensions … and few breakthrough innovations," and not enough on true innovation.

On one hand, Clarion’s new distribution strategy may be a move towards futuristic modes of shopping. On the other hand, it is perhaps leaving the door open for an innovative competitor to pioneer new merchandising concepts that will attract shoppers to brick-and-mortar locations and encourage tactile experiences with the products. The shift to e-commerce is no longer innovation—consumers expect these offerings. The true innovator considers where digital and physical intersect.

While antiquated notions of the store must be left behind, we shouldn't be leaving the store just yet.