omni-channel 2014: double trouble€¦ · omni-channel 2014: double trouble 2014 benchmark report...

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Omni-Channel 2014: Double Trouble

2014 Benchmark Report

Nikki Baird and Brian Kilcourse, Managing Partners

August 2014

Sponsored By

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Executive Summary

Consumers now expect to begin and end their shopping experience in the digital domain, or augment their store experience with digital mobile. It’s no longer an option. It’s a requirement.

Retailers who don’t offer a seamless experience that traverses the digital and physical domains are at a disadvantage. For consumers, it’s just shopping, redefined. Key results from this year's retail channel benchmark:

• Although all retailers see the opportunity to sell products via digital selling touch points, Retail Winners far more than Laggards see an opportunity to use the digital domain to drive more traffic to stores.

• Almost one-half of Retail Winners say that digital channels influence 10-50% of their store sales. On the other hand, 50% of Laggards feel that digital influences 5% or less of their store sales. Forty-two percent of Winners indicate that 10% or more of their sales come directly from online/digital channels vs. 20% of Laggards.

• Retail Winners know that a good customer experience in one channel is not enough to maintain loyalty, but are concerned that consumer expectations outpace their ability to deliver a satisfying cross-channel experience. Laggards' top concern is that digital channels expose them to new competition.

• Omni-channel fulfillment is perceived as the top omni-channel opportunity, followed by improved operational execution across channels. To aid in executing an omni-channel fulfillment strategy, system-wide inventory visibility is perceived as the most valued capability by 93% of retailers, but only 45% indicate that they can enable that now, and less (39%) are making that happen via system synchronization across channels.

• The top organizational inhibitors are lack of integration across channels for order management and inventory. Winners in particular hold this view. This finding represents a shift in retailers’ focus from “one view of the customer” in prior years’ studies, underlining the growing importance of omni-channel fulfillment. But that doesn’t mean retailers have abandoned efforts to consolidate customer data across channels; in fact, they still very much see the need. Legacy store systems also get in the way of cross-channel synchronization, and retailers believe replacing them with more modern technology is now very important.

Based on our data, we’ll also offer several in-depth and pragmatic suggestions on how retailers should proceed. These recommendations can be found in the Bootstrap Recommendations portion of the report, which begins on page 25.

We certainly hope you enjoy it,

Nikki Baird and Brian Kilcourse

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Table of Contents Executive Summary ........................................................................................................................ ii Table of Contents ........................................................................................................................... iii Figures ........................................................................................................................................... iv Research Overview ......................................................................................................................... 1

Why This Study Was Conducted ................................................................................................. 1 Why Winners Win ........................................................................................................................ 2 RSR’s BOOT Methodology .......................................................................................................... 3 Survey Respondent Characteristics ............................................................................................ 4

Business Challenges ....................................................................................................................... 5 Mobile-izing .................................................................................................................................. 5 How Is That Working For You? .................................................................................................... 6 Winners’ Relentless Focus .......................................................................................................... 6 Variations On a Theme ................................................................................................................ 7

Opportunities ................................................................................................................................. 10 Fulfillment Moves To Top Of The To-Do List ............................................................................. 10 Another Winning Differentiator ................................................................................................... 12 A Long Way To Go .................................................................................................................... 13

Organizational Inhibitors ................................................................................................................ 15 Two Horses, Mid-Stream ........................................................................................................... 15 The Shifting Winds of Change ................................................................................................... 16

Technology Enablers ..................................................................................................................... 19 Real Progress? .......................................................................................................................... 19 Of Money and Mouths ............................................................................................................... 20 Getting Off The Merry-Go-Round .............................................................................................. 22 The Promised Land ................................................................................................................... 23

BOOTstrap Recommendations ..................................................................................................... 25 Change What You Can, Accept What You Can't ....................................................................... 25 Measure, Measure, Measure ..................................................................................................... 25 Even in Omni-Channel Supply Chain, It's All About the Customer ............................................ 26 Heads Up, Merchandising is Next ............................................................................................. 26

Appendix A: RSR’s Research Methodology .................................................................................... a Appendix B: About Our Sponsor ..................................................................................................... b Appendix C: About RSR Research ................................................................................................. c

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Figures Figure 1: Leveling Off ...................................................................................................................... 1

Figure 2: Sell – Wherever, Whenever ............................................................................................. 2

Figure 3: Winners Seize On Digital’s Influence ............................................................................... 3

Figure 4: Work-in-Progress ............................................................................................................. 5

Figure 5: Pushing Digital ................................................................................................................. 6

Figure 6: Looking Out vs. Looking In ............................................................................................... 7

Figure 7: Different Strokes .............................................................................................................. 8

Figure 8: The “What” And The “How” ......................................................................................... 10

Figure 9: Inventory Visibility – Still Cloudy .................................................................................... 11

Figure 10: Winners Connect the Opportunities ............................................................................. 12

Figure 11: High Points for Value ................................................................................................... 12

Figure 12: The Sum Of The Parts ................................................................................................. 13

Figure 13: Taking a Priority Shift in Stride ..................................................................................... 15

Figure 14: Conflicting Signals ........................................................................................................ 17

Figure 15: Moving On Up .............................................................................................................. 19

Figure 16: Nowhere to Go But Everywhere ................................................................................... 21

Figure 17: The Next Crazy Venture ............................................................................................... 22

Figure 18: Coming to Terms? ........................................................................................................ 23

Figure 19: Troubled Times for POS .............................................................................................. 24

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Research Overview

Why This Study Was Conducted RSR has benchmarked retailers’ attitudes about the challenges and opportunities associated with the harmonization of existing and emerging selling channels since 2007. It’s useful to look back and review how much has changed since then. In 2007, “mobile” wasn’t even on the map; “Multi-channel retailing” was considered to be a combination of stores, Internet, and catalog sales operations that often functioned independently of each other. The top challenge for multi-channel retailers was to improve operational efficiencies between their channel operations. But even in 2007, retailers were becoming concerned about the consistency of the customer experience. Retailers rated “creating a single brand identity across all channels” as the top business opportunity in that study.

Fast forward to 2014, and we see how that opportunity has blossomed into a whole new way of shopping. Although in the past several years we’ve seen that the profit value of a cross-channel shopper consistently exceeds that of the single channel shopper, that advantage is beginning to level off (Figure 1). Why? It’s simply because for consumers, the ability to be able to begin and end their shopping experience in the digital domain, or augment their store experience with digital mobile, is now taken as an expectation. In other words, a retailer is only disadvantaged if it doesn’t offer a seamless experience that traverses the digital and physical domains. For consumers, it’s just shopping, redefined.

Figure 1: Level ing Off

Source: RSR Research, August 2014

As we said in our 2013 report on Cross-Channel retailing, the undeniable consumer trend towards more complex paths-to-purchase that blend the digital and physical shopping experience almost makes any discussion of a single “selling channel” irrelevant.1

1 Omni-Channel 2013: The Long Road To Adoption, Benchmark Report, RSR Research, June 2013

35%

19% 19%

5%

24%

49%

26%

2% 4%

19%

38% 28%

7% 10% 17%

Significantly more profitable than single channel

customers

Slightly more profitable than single channel

customers

Equally profitable Less profitable than single channel

customers

Don't know / Can't tell

Multi-Channel Customers Are:

2014 2013 2012

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The fear of showrooming also seems to have been overblown. While direct-to-consumer e-retailers may have their place, they have a hard time duplicating stores’ greatest value to consumers: shopping is fundamentally a social activity. E-retailers depend on “landed” retailers doing such a poor job blending their digital and physical offerings into one seamless experience that consumers will be turned off by their traditional stores. But over-performing retailers are well on their way to combatting that strategy with a harmonized brand experience of their own.

This year’s study seeks to uncover how over-performers – Retail Winners – are “settling in” to the new reality of a harmonized digital/physical selling environment.

Why Winners Win RSR’s research always focuses on a category of retailers we call “Retail Winners”. Our definition of Retail Winners is straightforward. We judge retailers by year-over-year comparable store/channel sales improvements. Assuming industry average comparable store/channel sales growth of 3.5 percent, we define those with sales above this hurdle as “Winners,” those at this sales growth rate as “average,” and those below this sales growth rate as “laggards." It is consistent throughout much of RSR’s research findings that Winners don’t merely do the same things better, they tend to do different things. They think differently. They plan differently. They respond differently.

As it has always been, a retailer’s job is to exchange goods and services for money with consumers. But to do that in the context of consumers’ digitally enabled shopping behaviors requires a behavioral shift. Winners know they need to guide consumers through the total shopping process to the fulfillment point of their choice. The fact remains that consumers’ top choice is still “the store”. Winners are responding by designing the digital experience with store fulfillment in mind (Figure 2).

Figure 2: Sel l – Wherever, Whenever


5%

10%

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10%

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0%

9%

11%

11%

31%

37%

To help consumers educate themselves about categories and products while shopping in a store

To help consumers educate themselves about categories and products before they come into stores

To create brand awareness

To educate consumers about lifestyle elements related to our brand

To drive traffic to stores

To transact – to sell products

What Is The PRIMARY Role Of Digital Selling Channels In Your Company's Overall Strategy?

Winners Laggards

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Responses to this year’s study reveal another interesting difference between Winners and laggards. In the years since RSR began asking retailers about their multi/cross/omni-channel strategies, the need to build brand awareness has hidden just behind the desire to transact more business and drive more traffic to stores as top opportunities. But in this year’s study, laggards’ concern about their brand image has spiked considerably (30%, compared to 11% of Winners in 2014, and compared to 15% and 12% overall in our 2013 and 2012 studies respectively). The reason for that growing concern reveals itself in the answer to the question, “What percent of your offline/store sales are influenced by digital channels?” (Figure 3)

Figure 3: Winners Seize On Digital ’s Inf luence


Clearly, laggards dramatically underperform compared to their more successful counterparts. So the rule holds true: Winners don’t just do the same things better, they do different things. And just as clearly, consumers are rewarding them.

RSR’s BOOT Methodology RSR uses its own model, called “The “BOOT Methodology” © to analyze Retail Industry issues. We build this model with our survey instruments. Appendix A contains a full explanation of the methodology.

In our surveys, we continue to find differences in the thought processes, actions, and decisions made by retailers who outperform their competitors and the industry at large – Retail Winners. The BOOT model helps us better understand the behavioral and technological differences that drive sustainable sales improvements and successful execution of brand vision.

50%

10%

10%

10%

10%

10%

17%

17%

23%

26%

11%

6%

0% - 5%

5% - 10%

10% - 25%

25% - 50%

50% - 75%

Greater than 75%

What Percent Of Your Offline/Store Sales Are Influenced By Digital Channels?

Winners Laggards

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Survey Respondent Characteristics RSR conducted an online survey from April – July 2014 and received answers from 83 qualified retail respondents. Respondent demographics are as follows:

• Job Title: Executive/Senior Management (C-Level or VP) 19% Middle Management (VP / Director / Manager) 36% Individual Contributor 41% Other 4%

• 2013 Revenue ($ Equivalent): Less than $50 million 6% $51 million - $249 million 18% $250 million - $499 million 19% $500 million - $999 million 13% $1Billion to $5 Billion 17%

Over $5 Billion 27%

• Year-Over-Year Comparable Overall Sales Growth Rates (assume average growth of

3%): Worse than average (laggards) 24% Average 35% Above average (Winners) 41%

• Headquarters/ Retail Presence: USA 43% 51% Canada 1% 27% Latin America 1% 16% UK 16% 29% Europe 11% 27% Middle East 0% 15% Africa 15% 17% Asia/Pacific 13% 30%

• Functional Responsibility: Executive team 5% Merchandising 10% Marketing 9% Store Operations 32% eCommerce/Direct Operations 4% Supply Chain 17% Finance 5% IT 19%

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Business Challenges

Mobile-izing RSR’s 2013 cross-channel study revealed two overriding challenges: first that customers demanded relevance in their shopping experience (the right products at the right time at the right price, anytime and anywhere 24x7), and secondly that retailers were struggling to meet those demands. While retailers were doing whatever it takes to satisfy their customers, they knew they were leaving money on the table. But the changes in the retail industry triggered by the massive consumer adoption of “smart mobile” technologies are happening fast, and retailers have moved aggressively to shore up their abilities to interact with shoppers they way they want – on their mobile devices. Clearly, the effort in the last two years has been to optimize the E-commerce site for mobile technologies, and the biggest planned efforts going forward relate to mobile applications (Figure 4).

Figure 4: Work- in-Progress


All of this effort on the consumer-facing side of retail begs even bigger questions, specifically how retailers are modifying their operational systems and processes to efficiently support anytime/anywhere shopping. We will discuss the state of retailers’ internal processes and systems to support a harmonized digital and physical shopping experience in the Opportunities section of this report. In any case, it is clear retailers have been pushed to catch up with consumer expectations for a consistent experience across all touch points, with an eye towards

77% 62%

51% 31% 26% 19% 19% 18% 17%

6% 15%

12%

23% 10%

36% 27% 21%

42%

4% 2%

5% 12%

9%

16% 22% 29%

10%

13% 21% 33% 34%

55%

29% 32% 32% 31%

Commerce Touchpoints Length of Operation

Implemented > 2 Yrs Less than 2 years Planned No commerce / Not applicable

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the dual objectives of transacting more sales in the digital space and driving more business to the stores.

How Is That Working For You? As one would expect, over-performing Retail Winners have been much more successful driving sales through online and digital channels (Figure 5). Using recent U.S. Department of Commerce estimates that “Internet sales” represent about 6% of total retail sales as a measure, most Retail Winners tend to perform well above the average. Fully 57% of over-performing retailers say that 5% or more of their revenue comes from the digital environment, and 17% indicate that 20% or more of their total revenue is generated by the digital domain, while the majority of laggards tend to perform below the government average (55% say that “digital” represents 5% or less of their total revenue).

Figure 5: Pushing Digital


The business challenge for laggards is that for the majority of them, digital channels are not sufficiently influencing their offline/store sales (Figure 3), let alone generating new revenue. But they know that Winners are in fact achieving both of those objectives.

Winners’ Relentless Focus Throughout all of our research, we’ve consistently noted that a key difference between Retail Winners and others is that in addition to focusing on efficiency and process effectiveness, Winners invariably look outward – towards consumers, the competition, and partners – to stay one step ahead. Laggards, on the other hand, tend to look inward, fretting about inefficiencies. But the under-performer’s dilemma is really a variation on the old adage, “you can’t cost-cut your way to success.” And so it is the case when it comes to business challenges related to a cross-

10%

17%

35%

20%

10%

6%

25%

14%

15%

26%

5%

17%

Laggards Winners

What Percent Of Sales Comes Directly From Your Online Or Digital Channels?

0% - 1% 1% - 3% 3% - 5% 5% - 10% 10% - 20% Greater than 20%

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channel strategy; while laggards bemoan “new competition”, lack of integration of their cross-channel capabilities with the store and the fact that consumers seem to know more about their offering than their own employees do also rate as top challenges (Figure 6).

Figure 6: Looking Out vs . Looking In


But integration of processes and employee enablement through better training and technology are solvable if retailers are willing to spend to get it done, i.e. those should be tactical issues, not strategic ones. Winners worry about “new competition” too, but their primary concerns relate to the customer experience. They worry that consumers are moving faster than they are able to respond, and this is a continuing top concern: 56% of both Winners and laggards identified this as a top challenge in 2013. Curiously, laggards express less concern about the challenge this year – undoubtedly because their internal struggles have become strategic disadvantages that command their attention.

Variations On a Theme Even if retailers are somewhat confident that they are catching up to consumers when it comes to a mobile-ized facade to their selling environment, they do not feel sanguine about their ability to sustain any gains that they have achieved so far. Looking at the top three business challenges by

40%

40%

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45%

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38%

41%

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47%

Consumers know more about products and prices than our employees do

We struggle to effectively integrate new processes driven by cross-channel strategies into the store

We need to control labor costs while integrating new processes driven by cross-channel strategies

into our operations - especially the store

We are not doing enough to leverage our assets (digital, inventory, or otherwise) across channels

Digital channels are exposing our company to new sources of competition

A good customer experience in one channel is not enough to maintain customer loyalty

Consumer expectations outpace our ability to deliver cross-channel experiences

Please Identify The Top Three (3) Business Challenges You Face Around Your Cross-channel Strategy

Winners Laggards

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industry vertical, we see some interesting differences in priorities, but retailers all share one thing in common: they know that there is more to do (Figure 7).

Figure 7: Different Strokes


RSR believes the digital environment presents different value opportunities for different verticals. For example, fast moving consumer goods (FMCG) companies such as grocers tend to view mobile/digital as an in-store shopping assistant both for consumers themselves or for employees working on the sales floor, while high-end fashion retailers view digital in all its forms as an opportunity to build the brand and extend it far beyond the retailer’s physical boundaries.

Retailers' reported business challenges seem to bear this out. Fashion/Seasonal retailers demonstrate a slightly heightened concern about their customers' digitally enabled shopping activities and how they create the threat of new sources of competition. Basics/grocery merchants, with their brutally tight expense ratios, want to offer assisted selling and digital order fulfillment in the store without adding labor costs. Durable/Consumer Electronics retailers, who

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34%

38%

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47%

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31%

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22%

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44%

33%

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39%

39%

Consumer concerns over privacy have forced us to re-evaluate our strategy

We need to control labor costs while integrating new processes driven by cross-channel strategies

into our operations - especially the store

Consumers know more about products and prices than our employees do

We struggle to effectively integrate new processes driven by cross-channel strategies into

the store

A good customer experience in one channel is not enough to maintain customer loyalty

Digital channels are exposing our company to new sources of competition

Consumer expectations outpace our ability to deliver cross-channel experiences

We are not doing enough to leverage our assets (digital, inventory, or otherwise) across channels

The way consumers use different channels to make purchase decisions is unpredictable, but

important to understand

Please Identify The Top Three (3) Business Challenges You Face Around Your Cross-channel Strategy

Durables & CE Basics/Groceries Fashion/Seasonal

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had an early lead when it came to digital commerce, are now concerned about how to successfully integrate those strategies into the store.

Regrettably, retailers apparently aren’t too worried about consumer privacy concerns. This may be a case of retailers sticking their collective heads in the sand. The outcry in the popular press about consumer privacy could put a real damper on efforts to take advantage of all the things that mobile could do to help retailers bridge the gap between the digital and the physical shopping experiences.

In an odd twist of fate, retailers have at their disposal a variety of tools that can help them understand what consumers are doing in the digital space, but once those consumers walk out of the digital domain into the physical one (the store), retailers lose the thread of the conversation, i.e. retailers can’t bridge consumers’ searches and social media activity to what they actually look at and purchase in a store. Technology firms are hard at work trying to find the way to bridge that gap, but it requires some kind of tracking (enabled in part by the beaconing signals that mobile devices emit). We expect this to be a big opportunity and a challenge in the coming two years.

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Opportunities

Fulfillment Moves To Top Of The To-Do List With all of the focus in the last few years on the “front end” of the digital shopping experience, it was only a matter of time before retailers would turn their attention to what that front-end is connected to. We saw in the Business Challenges section of this report that retailers are growing concerned about the inefficiencies created by attaching a digital selling environment to an operational model that was built with one physical selling environment – the store – in mind. Given that retailers clearly identify “to transact – to sell products” as a primary role of digital selling channels (Figure 2 above), it follows that enabling consumers to purchase, take delivery, or return a product via any channel should be a top opportunity, and it is (Figure 8).

Figure 8: The “What” And The “How”


31%

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53%

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Use the digital channels to build a sense of “community” around our Brand

Leverage product knowledge and information assets across channels

Use the digital channels to provide rich content about our products and services

Leverage customer knowledge and information assets across channels

Use the digital channels to drive traffic to stores

Create a single brand identity across channels

Allow inventory allocated for one channel to be used for another channel's fulfillment

Improve operational execution across all channels

Allow the customer to purchase, take delivery, or return a product through the channels of their

choice

Rate The Level Of Opportunity Your Company Expects From The Following Cross-channel Investments

Significant opportunity Some opportunity

A survival requirement with little opportunity Little to no opportunity or need

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Consistent with our 2013 cross-channel report, retailers identify enabling customers to go through the shopping process in the channel(s) of their choice, and to operationally support that journey efficiently as top opportunities. However, retailers now identify a practical to-do as the third top opportunity (demoting the important but somewhat vague “create a single brand identity across all channels”): allow inventory allocated for one channel to be used for another channel’s fulfillment.

The weight that retailers assign to this opportunity inevitably leads to a question about inventory visibility across the enterprise – since without at least that capability, retailers risk either fulfilling orders from high-cost locations, or (even worse) not fulfilling at all. But in RSR’s most recent study on supply chain execution, we saw a big gap between the importance that retailers put on visibility and their actual capabilities.2

Figure 9: Inventory Vis ib i l i ty – St i l l Cloudy

Source: RSR Research, December 2013

In this study, we found the overwhelming majority of Winners connect cross-channel fulfillment with inventory visibility, while most laggards apparently miss that relationship (Figure 10). It’s a fascinating disconnect; what is the purpose of enabling inventory visibility across all channels if not to support cross-channel fulfillment? Regardless of the answer, both performance groups have far to go: only 26% of Winners report having fully synchronized order fulfillment across channels, and even fewer laggards (17%) are fully synchronized.

2 Supply Chain Execution 2014: Making Omni-channel Profitable, Benchmark Report, RSR Research, December 2013

8%

45%

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86%

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93%

Visibility into vendor dropship inventory

Inbound to DC inventory or orders

Inbound to store inventory or orders

Online/Direct channel available inventory

Store on-shelf inventory levels

Store inventory levels

DC available inventory

System-wide inventory visibility

Value vs. Capability: Inventory Visibility

A lot of value A lot of visibility

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Figure 10: Winners Connect the Opportunit ies


Another Winning Differentiator To achieve a sustainable level of success going forward, RSR believes that several key information “dimensions” must be available across the entire enterprise with near real-time currency. Those dimensions are: Product, Inventory, Customer, and Order. The majority of retailers “get” the need for inventory visibility, and most also agree that customer order visibility across the enterprise is important.

Beyond order and inventory, most retailers also agree that “using digital channels to provide rich content about products and services” is important, and about 40% overall feel that its a “significant” opportunity for their businesses (Figure 11), with Winners rating it slightly more.

Figure 11: High Points for Value


61%

28%

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Inventory visibility across all channels

Fulfillment

Rating The Value Of Related Capabilities ("Very Important")

Winners Laggards

11%

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56%

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57%

Leverage product knowledge and information assets across channels

Use the digital channels to provide rich content about our products and services

Leverage customer knowledge and information assets across channels

Customer Order visibility across all channels

Level Of Opportunity For Cross-channel Investments (Rated "Significant")

Winners Laggards

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The next logical question to ask is “which information dimensions?” and once again we see a winning differentiator. Winners seek to leverage the information they have about customers and products across all the channels, whereas laggards aren’t so sure.

All these factors point to important differences of opinion as to the opportunities that harmonization of the digital and physical retail environments create. Winners seem to be thinking beyond the notion of distinct selling channels and moving towards a unified or “holistic” approach, whereas laggards seem to be more interested in enabling access to information between distinct channels, but also maintaining the separation of channel operations.

That turns out to be an important distinction: “unified” vs. “separate but equal” goes back to the question of how best to design a consistent brand experience, no matter which or how many touch points a customer uses to make a single purchase decision.

A Long Way To Go The central opportunity for retailers remains to create a consistent brand experience across all channels, and this study shows that three quarters of all retailers agree this is “very important”. How that should be accomplished is being debated, but some things are clearly in focus: fulfillment and its attendant inventory visibility and customer order visibility, loyalty management, integration to store operations, and consistent pricing strategies, among other capabilities. However, generally speaking, the more important that retailers think a capability is to a successful omni-channel strategy, the more work there is to be done (Figure 12, below). If nothing else, that underlines the enormity of the changes required to operational processes and systems.

Figure 12: The Sum Of The Parts


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Overall organization structure

Demand Forecasting

Investing in omni-channel platform technologies

Customer call center

Procurement/Assortment

Digital marketing (E-commerce, Mobile, Social

Customer Order visibility across all channels

Pricing strategies

Store Operations

Loyalty management

Inventory visibility across all channels

Fulfillment

Consistent customer experience across all

State of Synchronization of Omni-Channel Processes

Very Important Synchronization Complete or In-Progress

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We’ll see in the next sections of this report what stands in the way of retailers’ successful transition to new ways of operating, and what technologies they are pursuing to accomplish their objectives. But it’s still early days for retailers as they try to respond to “shopping, redefined”.

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Organizational Inhibitors

Two Horses, Mid-Stream As we've seen so far, retailers are beginning to shift their omni-channel focus from customer centricity to matters of the supply chain – from making promises to keeping them. Their customer work is by no means done, but as they make more promises to customers, it soon becomes clear that they will not be able to keep those promises consistently without rapidly achieving new and different efficiencies. It's no longer enough to have a lean and efficient supply chain. It must become flexible, and much, much faster.

To play on the old saying about not changing horses mid-stream, retailers aren't trying to change from one horse to another. They now find themselves trying to ride two horses at the same time.

This difficult task is reflected in the organizational inhibitors that retailers report as they take on omni-channel challenges (Figure 13).

Figure 13: Taking a Pr ior i ty Shift in Str ide


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E-commerce systems are too difficult to change & adapt to an omni-channel strategy

Mismatched metrics & incentives slow cultural acceptance

Our IT systems were not designed to incorporate customer insights into processes

IT personnel are too constrained to take on more projects

Store systems are too difficult to change & adapt to an omni-channel strategy

Merchandising strategy is too store-oriented

Budgetary constraints prevent us from moving forward with cross-channel strategies

We don't have a single view of the customer across channels

Inventory & Order management are not integrated across channels

Top 3 Omni-Channel Organizational Inhibitors

2014 2013 2012

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For a long time, even beyond the previous two years we highlight here, retailers reported that not having a single view of their customers was the biggest barrier to making omni-channel improvements. This is no longer the case – the customer challenge has been edged out by a lack of inventory and order integration across channels.

In that context, the sudden doubling in priority of IT personnel constraints from 2013 to 2014 is not because that department is suddenly constrained. It's because the needed workload has effectively doubled. Before retailers are finished integrating their view of the customer (which, as we found in our last Marketing benchmark, is a seemingly never-ending task due to constant addition of new digital touch points that continually fracture that idyllic single view), they must now add on tackling major supply chain issues, focused primarily on fulfillment and last-mile.3

Concurrent with the leap in frustration with IT is the rise of budgetary concerns. Again, this concern arises not because retailers suddenly have less money to spend, but because the scope of omni-channel change has rapidly doubled.

This is borne out by looking at inhibitors by performance:

• It is Retail Winners who drive Inventory & Order management as the top inhibitor, with 49% rating it as a top-3 inhibitor vs. 39% of laggards

• Winners also significantly drive the concern over constrained IT personnel – 46% rate it as a top-3 concern, vs. only 25% of average performers and a mere 11% of laggards

• However, Winners do not drive the concerns about budgetary constraints. Fully 50% of laggards rate that a top-3 inhibitor vs. only 29% of Winners

Winners definitely appear to be moving on from customer to inventory, with the advantages of money to spend even if they don't have all the IT help they feel they need. However, despite these inhibitors, Winners do convey relative confidence in their store systems' and eCommerce platform's ability to support them going forward. We'll explore that confidence further in the Technology Enablers section.

Looking at inhibitors by retailer size, the largest retailers have made the greatest shift towards supply chain, even prioritizing inhibitors related to expanding merchandising strategies beyond just stores over a single view of the customer. In general, the largest and smallest retailers recognize that inventory is the next critical omni-channel differentiator, though their strategies for capitalizing on that differentiator may be vastly different – the largest retailers focusing on endless aisle and buy anywhere/get anywhere, and the smallest retailers focusing on curated assortments that tell important brand stories.

Mid-size and Tier-2 retailers ($250 million - $1 billion and $1 - 5 billion, respectively) struggle with moving on from customer to supply chain. Their customer projects aren't done, and they just don't have the budget to add a whole other section of the business (Supply Chain) to the omni-channel to-do list.

The Shifting Winds of Change What retailers perceive as the greatest opportunities to overcome their inhibitors reflect this two horse race to omni-channel – despite placing inventory and order concerns at the top of the list of inhibitors, retailers say that what they need most to overcome their inhibitors is consolidated customer data across channels (Figure 14).

3 Retail Marketing 2013: Organizational Drift, Benchmark Report, RSR Research, August 2013

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Figure 14: Conf l ict ing Signals


On the one hand, while retailers are most challenged organizationally by a lack of integrated order and inventory information, on the other hand, they still feel the need for customer data consolidation and even store systems replacement. As we found in RSR's last marketing benchmark, retailers are beginning to realize that creating one view of the customer is a never-ending battle.4 As new digital touch points are added, they don't come pre-integrated into the retailer's view of the customer, and so create more fragmentation that then needs to be consolidated again.

Retail Winners are more likely to recognize this never-ending battle than peers, which is why they give top priority to all three: consolidating customer data, integrating inventory and order management across channels, and replacing store systems. No wonder they're feeling constrained by IT personnel.

However, the two biggest shifts from 2013 to 2014 are not just a story of the shift from consumer to supply chain. They also reflect an evolution in retailers’ thinking as they try to improve their in-store visibility.

4 Retail Marketing 2013: Organizational Drift, Benchmark Report, RSR Research, August 2013

20%

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34%

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54%

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43%

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Replace eCommerce systems with modern technology

Improved integration tools

Implementation partners to ease the IT personnel burden

Gaining better insight into cross-channel influences on our business, in order to build a stronger

business case

Gaining better insight into cross-channel customer behavior, in order to prioritize opportunities

Changing organizational structures to be brand-, rather than channel-specific

Integrate inventory & order management across channels

Replace store systems with modern technology

Consolidate our customer data across channels

Top 3 Ways to Overcome Omni-Channel Inhibitors

2014 2013

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As we noted in Figure 9, above, only 25% of retailers reported visibility into on-shelf inventory availability, while 55% of respondents have up-to-date store inventory at the aggregated level, and 74% report visibility into DC available inventory.

Although fewer retailers report integrating inventory and order management across channels as an opportunity to overcome their inhibitors, it is not because they have abandoned the cause, or even really that they have made enormous progress in achieving inventory visibility. Rather, their focus has shifted from an enterprise view of inventory to a much more granular one – inventory in the store. As retailers manage a greater number of orders that attempt to cross channels, they are rapidly finding that they need not just aggregate store inventory levels, but a much more granular view into where that inventory actually sits in the store.

So while opportunities to overcome inhibitors still do reflect only a partway transition from customer focus to inventory focus, in reality, store systems are becoming much more important to both, and thus their significant uptick in priority from 2013 to 2014.

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Technology Enablers

Real Progress? The most striking results in this year's benchmark report come from technology enabler adoption. While the same retailers don’t necessarily take our surveys year over year, the surveys do reflect important aggregate trends. For technology enablers, the most significant comes from progress in adopting important omni-channel technology enablers (Figure 15).

Figure 15: Moving On Up


In almost every area from call center to enterprise cross-channel analytics, retailers report an uptick in adoption. There are two exceptions: enterprise-wide inventory visibility, and a modern eCommerce platform.

12%

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Clienteling / Assisted Selling

Enterprise cross-channel analytics

A single customer interaction platform that crosses channels

Enterprise-wide customer insights

A mobile commerce platform

Enterprise-wide customer visibility

A more modern eCommerce platform

A more modern POS platform

Enterprise-wide marketing/promotions platform

Enterprise content management

Integration to social network tools and sites

Enterprise-wide inventory visibility

Distributed order management

A Call Center solution

Technology Enablers - Fully Implemented

2014 2013

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The relative lack of progress in getting to enterprise-wide inventory visibility relates to retailers' new view of their supply chains in a greater omni-channel context. Historically, retailers have focused on visibility not to improve execution, but to improve planning. But omni-channel buying patterns have upended that priority, forcing retailers to look more closely at execution, not with an eye towards eliminating supply chain mistakes, but in enabling flexibility to capture cross-channel customer demand, and meet it with any available inventory, no matter where it's located.

For eCommerce platforms, the lack of progress stems in some ways from uncertainty. Retailers want a single customer interaction platform, as we'll explore below, but technology vendors collectively have not provided the kind of ideal future solution those retailers want to invest in. And so retailers are waiting for vendors to catch up to what the market needs, and yes, they are primarily looking to eCommerce vendors to meet those needs.

Looking at the data by performance, Retail Winners drive most of the enterprise-wide technology enablers, beating out their peers in adoption of:

• Distributed order management • Call center • Enterprise-wide marketing platform • Enterprise content management • Enterprise-wide inventory visibility • Enterprise-wide customer visibility • Enterprise-wide cross-channel analytics • Enterprise-wide customer insights

Laggards almost tied Winners in their adoption of enterprise-wide inventory visibility. But their definition, as we learned in our benchmark on Supply Chain Execution, is not broad enough, leaving significant holes in their visibility - to suppliers, to stores, as well as at a level of granularity that doesn't hide a lot of variability.5 Laggards are also ahead in their adoption of a modern POS system, which, as we'll see below, may turn out to be a mistake: rushing in too soon. While most retailers seems to be waiting to see what eCommerce vendors will do, laggards appear to have put a stake in the ground around POS – whether it approaches a single customer interaction platform or not.

Of Money and Mouths When comparing value to current use of various types of omni-channel technology enablers, it becomes clear that while retailers have made progress, they still have a long way to go.

Retailers report that enterprise-wide customer and inventory visibility are the two most valuable enablers, but even with customer visibility, adoption lags significantly (Figure 16, below). However, the biggest gaps between value and use fall on a single customer interaction platform that crosses platforms and enterprise-wide cross-channel analytics.

5 Supply Chain Execution 2014: Making Omni-channel Profitable, Benchmark Report, RSR Research, December 2013

21

Figure 16: Nowhere to Go But Everywhere


The issue of cross-channel analytics is a distressing one. How can retailers measure the success of their omni-channel progress if they have no analytics capable of capturing those metrics? However, to be fair, cross-channel analytics is extremely difficult to achieve, particularly when retailers' biggest black hole of data relates to their biggest generator of transactions: the store. It's not enough to see if online shopping behavior yields an in-store purchase. Until retailers can effectively "see" consumer behavior (and not just transactions) across channels, cross-channel analytics will remain a challenge.

On the other hand, if retailers can't solve this problem, they will forever be wondering where they need to invest next in order to meet customer needs. Without operational measures of success that cross channels, retailers' omni-channel strategies are blind shots in the dark.

44%

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Technology Enablers: Value vs Use

Very Valuable Longer than a Year

22

Getting Off The Merry-Go-Round With the omni-channel analytics challenge as backdrop, retailers' next investment priorities make a kind of sense. Between budgeted investments and plans with no budget, retailers report a focus on a modern POS system, enterprise-wide customer insights, clienteling, and a single customer interaction that crosses channels – all technology investments that are designed in some way to address the in-store portion of cross-channel analytics (Figure 17).

Figure 17: The Next Crazy Venture


While many of these investments are more aspirational than actual – a single customer interaction platform particularly stands out in this regard – nonetheless, retailers report the demand is there. They need one view of the customer, and they need to understand the relationship between customer and channels, and the biggest hole in that understanding resides in the store.

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Technology Enablers - Plans

Budgeted Project Planned, Not Budgeted

23

The Promised Land We have referred more than once now to retailers' expectations for who will actually deliver a single customer interaction platform, hopefully more easily enabling retailers to achieve their desired single view of the customer.

This question has created a lot of angst in the past, both for retailers and for solution providers. And while Figure 18, below, indicates a certain amount of convergence around the idea that one solution provider will ultimately provide one single selling platform for all channels, the question is by no means settled.

Figure 18: Coming to Terms?


In fact, even as retailers' conviction that there will be one platform for selling has grown over time, and their confidence that there will still be a few stand-alone requirements in each channel has faded, some retailers have lost faith in the idea that a selling platform can encompass both digital and store. And the retailers who have most given up on the store are, ironically, Retail Winners: 20% believe that only digital channels will converge to a shared platform vs. 0% of laggards.

Digging deeper, when we look specifically at POS, we find that retailers' expectations for both eCommerce vendors and POS vendors as POS provider have grown – but confidence is highest for eCommerce vendors (Figure 19, below).

8%

8%

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Non-store (digital) channels will converge to a shared platform

There will always be stand-alone commerce platforms for each channel

There are some opportunities for convergence to a shared platform, but there will always be a need for some stand-alone capabilities in each

channel

All of our selling platforms will converge to a single platform

Long-Term Selling Channel Strategy

2014 2013 2012

24

Figure 19: Troubled Times for POS


There will always be limitations that constrain the applicability of an eCommerce engine as a store system – the need for speed and integration with a host of peripherals in the checkout lane for grocery, in particular – but for the first time in our benchmark, this year over half of respondents report that they expect a future POS system to come not from their store systems provider, but from their eCommerce platform.

27%

27%

47%

14%

33%

53%

ERP/Merchandise Operations Vendor

POS Vendor

eCommerce Provider

The Future of POS Platform Lies With...

2014 2013

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BOOTstrap Recommendations

The state of retail omni-channel progress can be summed up like this: retailers are making progress, but they still have a long way to go. As is true in so many things in life, the hardest parts are the most important, and also the areas where retailers have made the least progress. Enterprise-wide views of customer and inventory come to mind in this regard. And most interesting, from RSR's point of view, is the fact that while retailers still have work to do in creating a consolidated view of customers across channels, they must now also add supply chain changes to their to-do lists – all with the same amount of IT help, and in some cases, with the same amount of budget.

If retailers thought that the changes they needed to make to become more customer-centric were hard, just wait until they start cracking open the supply chain. How can they possibly add more to their omni-channel workload?

The real answer to that question is “How can they not?” The things that retailers must do in response to cross-channel fulfillment demands are things that will enable them to remain profitable. Here are a few we believe are most important:

Change What You Can, Accept What You Can't It appears that trying to achieve a single view of the customer isn't a one-time project so much as it is a continuous way of life. Consumers will migrate from one digital touch point to the next, and retailers will be forced to follow. As they follow, these new touch points will impact customer data consolidation – creating new sources of customer data that aren't well-incorporated into that idyllic single view of the customer.

Those retailers who treat customer cross-channel consolidation as a one-time project will find themselves unpleasantly surprised when they have to do the same thing all over again in the near future. But those that accept the fragmentation-consolidation cycle as a way of life will find themselves better positioned to take on the next wave of transformational change that omni-channel forces through the enterprise. In RSR's last marketing report we saw hints of Retail Winners starting to understand the perpetual motion involved in achieving one view of the customer, but in this benchmark it became much more sharply defined. Customer insight is a never-ending battle. Once retailers accept this, they will make room for the capacity needed to add other functions to the omni-channel transformation plan. If they don't accept it, they'll always be struggling to catch up.

Measure, Measure, Measure Retailers will make little progress if they don't get a better handle on cross-channel measures. The objective is no longer about understanding consumer cross-channel behavior. It's about ensuring that operational measures are in place to confirm all channels are best meeting consumers' cross-channel needs and wants.

To that end, retailers need to monitor demand as it crosses channels. This will become clear by measuring how frequently they have to pull inventory from one channel's to meet another channel’s demand. They also need to measure basic operational costs. How much does it cost to fulfill from store vs. fulfill from a distribution center? What is the labor opportunity cost when store personnel are pulled to fulfill online demand vs. sell to customers? These are tricky measures to get, but all the more important to have because of their complexity.

26

The old saying holds true here as well: pressing on the car's gas when you're lost only means that while you may be making great time, you're ultimately still going nowhere fast.

Even in Omni-Channel Supply Chain, It's All About the Customer If a retailer has strong omni-channel processes and measurements in place, supply chain disruption created by buy anywhere/get anywhere fulfillment models suddenly becomes less daunting, mainly because he can do a better job identifying which channel is the demand originator, and which channel is ultimately the demand fulfiller.

Right now retailers are scrambling to enable a dizzying array of cross-channel fulfillment options. Buy online, pickup in store seems straightforward, but begs the question – is that with in-store inventory or with DC-shipped inventory? Should retailers allow consumers to reserve inventory in stores? What will they do with that inventory if the customer never comes in to pick it up? How long should the store hold it?

Retailers are scrambling to provide all these fulfillment options because they don't know how consumers actually want to take delivery of their purchases. It’s better to plan for everything and be ready than be caught unprepared.

Unfortunately, that prepared-for-anything approach is very expensive. And if retailers had better measures about how customers are actually crossing channels, the dizzying array of supply chain options needed to meet consumer demand would collapse into a simple, prioritized list: what do our customers want most from us? What does it take to provide that?

Heads Up, Merchandising is Next Of course, that won't stop retailers from wanting to plan better in order to prevent themselves from making the same mistakes twice. If retailers have allocated the wrong inventory to the wrong channels, and found themselves needing to cross channels in order to meet consumer demand, their next question will be: how do we stop ourselves from doing the same thing again next year?

The answer to that question lies with merchandising. In RSR's merchandising benchmarks, we've been exploring the impact of incorporating the customer dimension into merchandise planning. The biggest impact will most likely be demand planning at the customer level, with the intent of eventually applying that plan to locations where customers are most likely to express their demand. This is a process that turns existing merchandise planning on its head. And if you thought it was tough enough to juggle the continuing efforts to consolidate customer data alongside supply chain redesign, try adding a merchandising process revamp into the mix.

What's next after that? Only time will tell.

a

Appendix A: RSR’s Research Methodology

The BOOT Methodology© is designed to reveal and prioritize the following:

• Business Challenges – Retailers of all shapes and sizes face significant external challenges. These issues provide a business context for the subject being discussed and drive decision-making across the enterprise.

• Opportunities – Every challenge brings with it a set of opportunities, or ways to change and overcome that challenge. The ways retailers turn business challenges into opportunities often define the difference between Winners and “also-rans.” Within the BOOT, we can also identify opportunities missed – and describe leading edge models we believe drive success.

• Organizational Inhibitors – Even as enterprises find opportunities to overcome their external challenges, they may find internal organizational inhibitors that keep them from executing on their vision. Opportunities can be found to overcome these inhibitors as well. Winning retailers understand their organizational inhibitors and find creative, effective ways to overcome them.

• Technology Enablers – If a company can overcome its organizational inhibitors it can use technology as an enabler to take advantage of the opportunities it identifies. Retail Winners are most adept at judiciously and effectively using these enablers, often far earlier than their peers.

A graphical depiction of the BOOT Methodology© follows:

b

Appendix B: About Our Sponsor

hybris software, an SAP Company, helps businesses around the globe sell more goods, services and digital content through every touchpoint, channel and device. hybris delivers OmniCommerce™: state-of-the-art master data management for commerce and unified commerce processes that give a business a single view of its customers, products and orders, and its customers a single view of the business. hybris' omni-channel software is built on a single platform, based on open standards, that is agile to support limitless innovation, efficient to drive the best TCO, and scalable and extensible to be the last commerce platform companies will ever need. Both principal industry analyst firms rank hybris as a “leader” and list its commerce platform among the top two or three in the market. The same software is available on-premise, on-demand and managed hosted, giving merchants of all sizes maximum flexibility. Over 500 companies have chosen hybris, including global B2B sites W.W.Grainger, Rexel, General Electric, Thomson Reuters and 3M as well as consumer brands Toys“R”Us, Metro, Bridgestone, Levi's, Nikon, Galeries Lafayette, Migros, Nespresso and Lufthansa. hybris is the future of commerce™.For more information, visit www.hybris.com

c

Appendix C: About RSR Research

Retail Systems Research (“RSR”) is the only research company run by retailers for the retail industry. RSR provides insight into business and technology challenges facing the extended retail industry, providing thought leadership and advice on navigating these challenges for specific companies and the industry at large. We do this by:

• Identifying information that helps retailers and their trading partners to build more efficient and profitable businesses;

• Identifying industry issues that solutions providers must address to be relevant in the extended retail industry;

• Providing insight and analysis about a broad spectrum of issues and trends in the Extended Retail Industry.

To download this or any other report, as well as sign up for our weekly newsletter, register at http://www.rsrresearch.com/registration/ or follow this QR code:

Copyright© 2014 by Retail Systems Research LLC • All rights reserved.

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