retail s reinvention: technology s impact on today s ......dominance, and showrooming become...

Retail’s reinvention: technology’s impact on today’s supply chain

Bud Albers

a mobile report

Retail’s reinvention: technology’s impact on today’s supply chain06/25/2013

TABLE OF CONTENTS

1. EXECUTIVE SUMMARY

2. INTRODUCTION: THE ERA OF THE INFORMED CONSUMER

3. A FUNDAMENTAL SHIFT

4. FINDING THE NEW LEADER

5. THE NEXT MOVE

6. GOING DEEPER INTO THE SUPPLY CHAIN

7. FLEXIBLE LOW-COST ROBOTICS

8. THE OPPORTUNITY FOR 3D PRINTING

9. SUMMARY AND KEY TAKEAWAYS

10. ABOUT BUD ALBERS

11. ABOUT GIGAOM RESEARCH

12. COPYRIGHT

Retail’s reinvention: technology’s impact on today’s supply chainThis PDF prepared for: david152 ([email protected])

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Today online sales only make up a small fraction of the overall retail space. Their growth, however, is inevitable. Driven by the deflationary realities of price transparency, the face and shape of retail will continue to change. This fundamental shift will affect more than just the retailers. Indeed, it will encompass all aspects of the retail supply chain, from the shop floor to where that shop floor is located.

This report examines the long-term strategic impacts of this shift, highlighting the changes in the environment, the potential competitive responses, and a new generation of technologies that could accelerate these changes. Strategists and technologists in the retail sector as well as distributors and manufacturers must drive or adapt to the following:

Retailers’ capital allocation models must continue to shift from brick and mortar into a broader product assortment. They must also increase investments in technology that support both build- and buy-based strategies.

Competitive pressure will force change and optimization in the supply chain, including shorter product lead times and more customization in order to provide differentiation. This will lead to the reshoring of some manufacturing.

Robotics and 3D printing are currently the two emerging technologies that hold the greatest promise for manufacturers and suppliers.

New players in the robotics field will provide the opportunity to automate more tasks for smaller organizations with an easy-to-use, safe, simple program model with a price point of under $25,000.

3D printing’s ability to print directly from designs yields the same copyright-theft issues inherent to any digital product. Also, a potentially significant threat exists from open-source designs. Manufacturing will face the same type of challenge here that the media industry has faced with Napster and YouTube.


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Introduction: the era of the informed consumer

Over the past decade technology has driven an undeniable and profound change in the retail environment. We have seen weaker chains close up shop, onetime icons threatened with extinction, Amazon rise to dominance, and showrooming become commonplace. Despite the massive amount of change retail has already undergone, the truth is, the cycle is only just beginning.

According to the latest release from the U.S. Department of Commerce, online retail sales for the first quarter of 2013 actually accounted for just 5.5 percent of sales. With the online share of sales growing at more than five times the rate of overall retail sales, it’s clear retail will continue to morph but that over time it will eventually take its entire supply chain with it.

The retail experience has always been a simple, formulaic balance of price, selection, and convenience. Initially, shopping on the web brought a new level of transparency to pricing that hadn’t been possible before. Now the mobile revolution is bringing this transparency directly into the stores themselves. Competitively, the other aspects of the retail formula, selection and convenience, often negated the importance of price. Branding or the location of the store itself tended to matter more, for example. In an always-on, often impersonal world, however, these elements are lost or subverted, and critical pressure lands squarely on price. It is always there, fully quantifiable and publicly exposed.

The reality is that shopping today, particularly for considered purchases, often starts long before the consumer enters the store. Google’s Jim Lecinski’s ebook ZMoT: Winning the Zero Moment of Truth is perhaps the most detailed treatise on the subject. The book highlights an important extension to the traditional three-step mental purchasing model for retail, originally hypothesized by Procter & Gamble: After “stimulus” (aka an advertisement), the best brands win two very distinct “moments of truth” with their customers. The “first moment of truth,” or FMoT, is in the store, at the shelf when consumers select one brand over another. The second occurs at home when consumers are hopefully delighted by the product they have selected.

According to Lecinski, and consistent with my own experience, there is a common interceding moment now between the time consumers are initially introduced to a product and the time they see it on store shelves. This new “zero moment” is online research. This research takes much of the discovery out of in-store shopping. It means a more-informed consumer at the point of sale. This technology-enabled shift has also formed the basis for the showrooming phenomenon that has been so hard on traditional retailers like Best Buy.

With fully informed consumers, retailers only stand to lose trust if they are not transparent with regard to price. Trust is impossible if at this critical moment of truth, the retailer’s price is 20 percent more than another name-brand competitor. And since the consumer has fully researched a specific product or set of products prior to ever entering the store, the ability to substitute or swap in other manufacturers’ brands or even store brands at the first moment of truth is greatly diminished.


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http://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf

http://www.zeromomentoftruth.com/

http://www.zeromomentoftruth.com/


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A fundamental shift

For selection, the second element in the retail equation, retailers have long relied on smaller assortments and similar stock-keeping units (SKUs) within their established product offerings. These smaller assortments have high inventory turn rates fueled by highly optimized supply chains, and they have been staples of the last generation of profitable retailers. Online shopping’s nearly unlimited inventory is a different reality.

Traditionally distribution was king and the environment was very much push-based. Retailers listened to customers, but the realities of the supply chain, shelf space, and throughput ruled the day. Online shopping brings boundless choice for the consumer and endless competition for the retailer. As a result the whole model is tectonically shifting from the traditional push model to one that is totally consumer-driven pull. The consumer is now completely in control, redefining the last variable in the retail equation, convenience.

Keeping pace in terms of selection poses another real investment problem for the traditional retailer. Traditionally retailers focused on a select few SKUs in each product area and then highly optimized the inventory turns on those products to support the bottom line. Expanding your assortment to keep pace means you are putting more product, slower-moving product, into the supply chain, thereby suboptimizing it and tying up even more of your working capital. The combination of margin pressure and the reality of inherently lower inventory turn levels will morph the traditional retail space into one where natural selection rules.

To meet this challenge, retailers are increasingly offering web-only products as part of a larger omni-channel strategy. Best Buy openly states on its website that it “can offer a broader selection online, because we ship these items directly from our distribution centers.” Going even further, Target recently announced several entire brands that are web-only. Though not always an ideal shopping experience, this does come closer to striking a balance between the traditional push model and the new pull mantra. While their capabilities continue to improve, most traditional retailers have not yet fully integrated their virtual and physical channels into true, pure omni-channels with a real-time, universal customer-identification scheme that bridges from the zero moment of truth to the first one at the store shelf.

Carrying this additional inventory will not come with an associated price premium. Rather, it will be subject to the same price pressure as all the other products. To combat this and all the other challenges, wherever possible, the major players will continue to move deeper into the realm of loyalty programs.


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http://www.internetretailer.com/2013/01/18/target-rolls-out-web-only-brands

http://www.internetretailer.com/2013/01/18/target-rolls-out-web-only-brands

Finding the new leader

From any perspective, gaining this larger share of consumers’ wallets will require strategies heavily reliant on technology. Overall the retail sector, which traditionally spends less than 1 percent of its gross revenues on information technology, is now chasing an advanced technology R&D engine — one both capable of inventing technology (witness Amazon Web Services and the Kindle lines) as well as using it effectively throughout its own internal organization for strategic advantage.

As difficult as it is fiscally, investing so much in technology may be even tougher culturally. Integrating an effective technology culture at a peer level within companies whose often-dominant culture grew out of in-store merchandising isn’t easy. This is the reason for so many false starts within the traditional brick-and-mortar community.

Making this transition effectively could be either a build or buy proposition. According to a recent Barron’s article, Nordstrom is taking both roads, announcing it will be shifting up to one-third of its capital investment into the online realm over the next five years while also spending significantly to acquire HauteLook and leading a major investment in Bonobos.

Wal-Mart, meanwhile, is driving toward R&D and innovation in a robust way, buying Kosmix in 2011 to form the basis for the @WalmartLabs solution. It has also made at least three other acquisitions in the past 18 months, with much of the focus on building a broader ecommerce merchant marketplace a la Amazon. This has also fueled a steady stream of innovation testing around items such as semantic product search, social data mining, self-checkout, and subscription commerce.

How other retailers make this leap will be key, especially if these significant investments by the major players initiate an arms race of features that alters the perspective of consumers and accelerates the pace of change. To this end, the world of venture-funded startups will continue to play a supporting role here. Retail was one of only 2 of the 17 measured categories of venture investment to see an increased funding level in 2012, with almost a quarter of a billion dollars flowing into the sector during the third quarter of last year alone. As these investments mature, it may make for some interesting shifts in the landscape moving forward.


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http://online.barrons.com/article/SB50001424053111904819604577643662974553378.html

The next move

The next move looks to be Amazon’s, with all signs pointing toward a move to same-day delivery. Having introduced Amazon Prime in parallel with rapidly expanding and steadily improving its own supply chain, Amazon clearly appears poised to take this next step. It acquiesced to the long-standing sales tax battle, and it is once again leading with technology, having acquired the inventory-management robotics innovator Kiva Systems last year for $775 million. This acquisition is a completely counterculture move: Most retailers would have simply used the Kiva technology. Amazon is instead locking it up and taking control of its strategic direction.

The threat of same-day delivery is causing a scramble within the traditional retailers as they implement ship-from-store programs and other measures to compete. It will invariably take Amazon a while to get the right mix of product and delivery options into the local markets, which should provide traditional retailers a window of 12 to 18 months to catch up. While Amazon has been doing local logistics a lot longer, it needs to be careful to solve this problem fully. Overreliance on decentralized manual labor may not be the best option in the long term to drive a cost-effective, consistent customer experience that does not disappoint.

There may be some help on the horizon, however, for those with lesser scale. Although driven by different motivations, several third parties appear poised to enter into the fray around same-day delivery: UPS, FedEx, and the U.S. Postal Service are experimenting with it in various geographies. Several startups, including Shutl, Zipments, Instacart, and Postmates, are offering various types of marketplace, community, mesh network, and personal fulfillment models aimed at leveraging the myriad small independent services against the big guys.

EBay is offering a similar courier-based network approach through its eBay Now offering, and Google Shopping Express aims to give Google a services opportunity from its database of intentions on through to fulfillment. It may also be an excellent complement to its shopping and wallet platforms.

Most of these programs, including those from Google and eBay, are concentrating on one or two major metros for a test market. While it didn’t work for Kozmo.com or Webvan, we’ll see in the next little while if the time is right now.


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Going deeper into the supply chain

Price transparency won’t drive the entire supply chain into a race to zero but rather a medium to long-term cycle of reinvention due to a major change in the customer environment. To support the evolving needs of broader selection, shorter cycles, and better pricing, the supply chain itself will need to lean out, reversing itself from push to pull and driving to new levels of efficiency and automation on par with what is happening at the front edge of consumer retail.

Along those lines, much has been made recently of the potential for manufacturing to return to the U.S. This is likely to happen, not as a nationalistic measure but more as a necessary cyclic shift in response to the long-term structural changes occurring in the economic environment.

Broader assortments, same-day delivery, less ability to substitute products, and, above all else, continued pressure on the price at retail will force suppliers to bring production closer to the point of consumption. Leaving longer, overseas-based shipping models in place and simply putting more finished product in the supply chain is not a sustainable economic response to the level of agility that will be required.

From a baseline perspective, rising wages and associated standards of living in China as well as other competitive economies are equalizing a once decided cost advantage. Rising energy costs further reduce the effectiveness of long-haul logistics and simply force up the total landed cost of a finished product. Over the long term in a consumer-based, pull-oriented model with relentless pressure on a transparent retail price, this simply doesn’t sustain. However, changing logistics and mechanisms won’t be an overnight process. Just as it took decades to move from domestic manufacturing to foreign import, this is an evolutionary process that will evolve as its ecosystem allows based on the size, type, and composition of the products in parallel with its retail markets. From a technology perspective, there appear to be new potential enablers emerging: flexible robotics and 3D printing. Both are discussed in more detail in the following sections of this report.


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Flexible low-cost robotics

Long the domain of the largest players, the cost of robotic implementations has come down, though the complexity associated has remained somewhat high. Robotic assembly lines are often fenced off and inaccessible to humans due to the large, autonomous, and environmentally unaware systems. Efficient as they may be, they are not suited for all types of manufacturing and are still sold at a price point that can be prohibitive for small to midsize operations.

Enter Baxter, or, more appropriately, a new, easier-to-operate line of robots that are capable of operating right alongside humans. These robots are simpler to reprogram and are tagged with a cost of a little over $20,000 per unit — less than 10 percent of some robotic lines. This next generation of industrial automation could be instrumental in helping to shift production closer to the point of consumption.

Rethink Robotics produces Baxter. The company was founded by former MIT robotics professor Rodney Brooks, who also founded iRobot, the company that brought us the Roomba robotic vacuum cleaner. The concept certainly has merit, as well as money behind it, having already raised $62 million to enter this race.

Rethink Robotics is not alone. There are several firms pursuing the goal of affordable, flexible, and simple-to-operate robotics.

Redwood Robotics is a joint venture founded by SRI International (the think tank that gave birth to the concept of robotic surgery and most recently brought us Siri) and high-end veteran robotics companies Willow Garage and Meka. Its stated goal is to design, build, and market robot arms that can be easily programmed and cheaply operated and that are safe to work alongside people. The company was formally launched last year.

The space is not just for startups. There will also be ongoing competition from those who control the current market for manufacturing automation. The publicly held Adept Technology makes robotics products that cover a wide range of manufacturing and service industries. There is also Barrett Technology, another spin-off of the MIT robotics lab, and international players like Universal Robots and Kawada Industries. All of these companies could stand to benefit from the down-market opportunities brought by simpler technology at a cheaper price point.


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The opportunity for 3D printing

The other potentially pivotal technology that is finally coming of age is 3D printing. The ability to simply “print” a new product and skip the assembly line entirely seems like a science fiction dream come true. In limited cases, it could be just that simple. It’s more likely, however, that 3D printing will be one piece of the entire puzzle. If successful, it could provide a more rapid and thereby more responsive alternative that would help shorten the supply chain.

3D printing has existed for more than 20 years. It has long been employed in building prototypes in the industrial world, and with the advent of MakerBot, it’s now entering into the realm of the hobbyist. Somewhere in between, however, real manufacturing uses are starting to emerge. Production-ready parts are being generated, and usable consumer products are emerging.

The expectations for 3D printing are seemingly at a fever pitch right now. As with most technologies in this stage, reality, at least initially, will likely fall far short. In the longer term however — and this is a long game — 3D printing or additive manufacturing, as it’s sometimes known, should become a key part of the supply-chain equation. And it will be one with enormous disruptive potential. The ability to produce multiple different items from a single machine without downtime for retooling is just too attractive a notion to pass up. In the nearer term, its success and adoption will be dependent on the size and material mix involved in the product.

While some products may be printed in their entirety, the technology could also become a very useful tool in helping retailers diversify their product mix and create unique, personalized offerings. In limited scope, true mass customization may finally be at hand. The potential is evident in early-stage plays like the partnership between MakerBot and Shapeways, where you can use the Shapeways consumer 3D photo booth to generate and ultimately print a 3D image of yourself on personalized products. Disney has recently launched a similar initiative in its parks, allowing individuals to have their faces 3D printed on Star Wars storm trooper figurines. Microsoft, with its strong retail presence arm, may also be a player to watch in this space, give the recently released Kinect Fusion 3D scanning technology.


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Source: GigaOM

Research

Along more tactical and practical lines, using 3D printing to add the final touches on standard offerings may be the most effective starting point, given the demand for faster response in the supply chain and greater product assortment. Enabling the final assembly and printing nearer the point of consumption will shorten the critical time between order and fulfillment. Strategically moving production closer to R&D over time may also serve as an integral step in shortening innovation cycles.

As almost always is the case with new technologies, threat accompanies promise, and at times, it’s unclear which camp things belong in. Such is the case with 3D printing centers. While noted in the early retail example above, the real business for Shapeways is building a marketplace where anyone can upload their design and gain access to very expensive industrial-grade 3D printers. Basically it is a 3D print manufacturer for hire.

As this technology matures, such a setup could have an impact on the retail sector by moving into a service-and-fulfillment role for various retail product lines. It could also serve to provide a competitive threat, as it has the potential to allow certain brands and manufacturers to go directly to consumers, with an outfit like Shapeways potentially handling local fulfillment directly.

One clear problem that emerges from 3D printing is piracy and copyright theft. The intellectual property behind many traditional products will become exposed through 3D printing. No longer requiring a major investment in plant and tooling for production, a stolen design could be catastrophic. Indeed, manufacturers and brands could face risks similar to those the music industry faced with the arrival of Napster.


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http://pro.gigaom.com/wp-content/uploads/2013/06/Screen-shot-2013-06-25-at-6.57.10-PM.png

Protection schemes that include some form of DRM seem crucial and logical. DRM has historically had a troubled run in the media industry, but it or some type of derivative technology could be integral to the major commercial adoption of 3D printing. While an obvious technology player has yet to emerge, the need must also be obvious to Nathan Myhrvold and Intellectual Ventures, as they recently filed a fairly far-reaching patent for a 3D printing DRM mechanism that looks to control object production rights.

Another interesting industry challenge will come from legal, open-source designs. Given the incredible reach and speed of the web, this phenomenon could become the manufacturing equivalent of YouTube for the media industry. If someone is capable of designing a product and is willing to share it with the world, there is little to stop them. An early example of what might be possible is Thingiverse, a community-based website that is dedicated to users sharing 3D printable designs. If this becomes a widespread practice, select segments could come under substantial pressure from open-source designs over time. Product lines with a single material composition will feel pressure first. Items such as various types of furniture, hand tools, jewelry, and toys will be among the earliest at risk.

For this to all come together, there will be many moving parts. Companies will need to feel secure about their IP, likely keeping production in house until those fears can be allayed. Key players on the actual printer side such as 3D Systems, Stratasys, ExOne, and others will need to continue to perfect their devices and the material science behind them in order for this technology to reach its potential. As Moore’s law grinds away here, the advances at the consumer level could produce real threats.


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http://patft.uspto.gov/netacgi/nph-Parser?Sect1=PTO2&Sect2=HITOFF&p=1&u=/netahtml/PTO/search-bool.html&r=1&f=G&l=50&co1=AND&d=PTXT&s1=8,286,236.PN.&OS=PN/8,286,236&RS=PN/8,286,236

Summary and key takeaways

The effects of ecommerce have already had a devastating effect on the retail industry, but at just over 5 percent penetration, we are clearly just getting started. As global smartphone penetration continues and consumers get ever more comfortable with the tools at their disposal, the wave of change that is being created will continue to wash deeper into the supply chain.

The basic retail formula of price, selection, and convenience is not changing, but the consumers’ perceptions about the elements in the formula are changing and starting to tilt dramatically toward the digital side. This unfortunately means much more change for the traditional retailer, especially since the economics of the model now radically swing toward the digital players. Historically great players like Best Buy and Sears can’t continue to pump billions of dollars into facilities and service employees when Amazon doesn’t and is willing to pass those savings directly to consumers. And those consumers are now fully educated in terms of what they want and what they have to pay for it. That’s a proposition that can’t simply be marketed away. The pressure on the front end will be felt all the way through to the back. Just as retailers are being forced to reinvent as a result of their changing customer dynamic, so will suppliers. The shift from a push- to a pull-based economic model will ripple through all aspects of the supply chain. New technologies are coming, robotics and 3D printing among others, and they promise to help with this reinvention. They won’t come without issue, though, and and regardless of their progress, the needs for a faster, more flexible, more proximate supply chain will not change.

Price transparency brought about by the advent of online and mobile retailing is here to stay and brings with it a long-term deflationary effect that will force changes in all aspects of the retail sector and its related supply chain.

The retail model is switching from a merchandising-based, push-oriented model to a consumer-driven, demand-based pull model. In order to remain competitive, the capital allocation models will need to continue to shift as well. Driving efficiencies will continue to be paramount, but significant capital will also need to continue to come out of brick-and-mortar investments and move into broader product assortment and increased investment in technology, supporting both build- and buy-based strategies.

Significant technology investments and continued focus on innovation from Amazon and major players like Wal-Mart and Nordstrom could trigger a feature arms race that would actually accelerate the pace by changing consumer expectations. This would put tremendous pressure on other retailers, not only in terms of fiscal demands but also their ability to innovate.

Competitive pressure will also force change and optimization into the supply chain as the suppliers’ customer base changes. Essential requirements here will include increased cost efficiencies, shorter product lead times, and the products themselves becoming much more customizable in order to


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provide differentiation. This will inevitably lead to the reshoring of some manufacturing, but based on these requirements this next generation of manufacturing may bear little resemblance to the industry that left.

Manufacturers and suppliers will need to leverage a set of emerging technologies to make all of this possible over the longer term. Namely, significant advances in robotics and 3D printing are the two that hold the greatest promise.

New players in the robotics field will provide the opportunity to automate more tasks for smaller organizations with an easy-to-use, safe, and simple-to-program model with a price point of under $25,000.

3D printing is at the pinnacle of expectation right now. Long term, the promise is enormous, but like any new technology, there are risks and it is unclear how it will unfold. The biggest potential issue is the ability to print directly from designs, which yields the same copyright-theft issues inherent to any digital product. Also, a potentially significant threat exists from open-source designs. Manufacturing will face the same type of challenge here that the media industry had to confront with Napster and YouTube.


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About Bud Albers

Bud Albers is currently the CEO of Interactive Technology Strategies. Formerly he served as Executive Vice President and CTO at Disney Corporate, where he was responsible for Disney’s Connected & Advanced Technology Group that oversaw the companies efforts in online, mobile, social and gaming across all brands including Disney, ESPN, ABC, and ABC News.

Previously he served as the CTO for MediaNet Digital, overseeing product, services, engineering, and operations for a leading SaaS provider developing. He was also the first CTO for Getty Images and responsible for building out the company’s initial platform and consolidating its 39 acquisitions.


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About GigaOM Research

GigaOM Research gives you insider access to expert industry insights on emerging markets. Focused on delivering highly relevant and timely research to the people who need it most, our analysis, reports, and original research come from the most respected voices in the industry. Whether you’re beginning to learn about a new market or are an industry insider, GigaOM Research addresses the need for relevant, illuminating insights into the industry’s most dynamic markets.

Visit us at: pro.gigaom.com.

© Giga Omni Media 2013. "Retail’s reinvention: technology’s impact on today’s supply chain" is a trademark of Giga Omni Media. For permission to reproduce this report, please contact [email protected].


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