April 20, 2016

Why Is Allowing The Customer To Shop However The Customer Likes Terrible Advice?

I received a comment from a reader named "Claire" ... here is the comment, a comment that deserves a standalone blog post:

  • Can you expand on your comment? Doesn't "omnichannel" allow customers to shop however they like? What was the terrible advice?


Here, then, is my reply.


On the surface, it sounds like the best advice one could ever receive. It sounds like simple common sense.

You probably know about the history of the term "omnichannel", right?  It goes back to Forrester Research, back in the 2009-2010 timeframe. A researcher wrote a blog post saying that "multi-channel was dead". The author said that the advent of digital channels would change how customers shopped, requiring retailers to expand the multi-channel thesis from online/stores/catalogs to include all digital channels. The author recommended that the retail organization be everywhere, because the customer is everywhere. There would be no such thing, in the eyes of the customer, as a store or website or mobile experience or social ... there was the brand, and there was the customer. Period.

That was the genesis of the movement. It wasn't a movement created by actual retail brands. It was a movement astroturfed by a research brand. If you are a Forrester subscriber, go find the article from the 2009-2010 timeframe.

The thesis was carried forward, then, by vendors. Not by retailers, mind you. Vendors. Vendors who figured out they could make money off of an omnichannel thesis. Database providers profited by linking data across all channels. Retargeters, search vendors, affiliates, social vendors, email vendors, mobile advocates, they all benefit by telling a story that the customer is doing "everything". So they told the story. Over and over and over again, until retailers believed the story. They used highly misleading tactics like suggesting that an omnichannel buyer was nine times more valuable than a single-channel buyer, and therefore, all retailers will get rich by building a database full of omnichannel buyers. The queries were highly biased and highly inaccurate (segment five year buyers by number of channels purchased from and then count number of purchases ... well, to get to nine purchases, you by default will touch six channels ... this does not mean that omnichannel caused the customer to be more valuable ... instead, the customer is simply valuable and therefore touches all channels. Our industry simply cannot understand the bias in the query, and therefore, made terrible decisions based on a bad query and a misunderstanding of customer behavior).

Macy's was the first to publicly embrace the story ... going so far as to call themselves "America's Omnichannel Store" three years ago ... they claimed the title in their 10-K annual report. Nordstrom, while far more humble, followed elements of the playbook as well.

By 2013-2014, many retailers were looking for growth opportunities, so the thesis that allowing customers to shop however they like sounded very seductive. Customer wants to shop online? Great! Customer wants to browse online then buy in a store? Fantastic! Item is sold out in a store so the store ships the item to the customer? Wow! Customer touches Facebook and various websites where retargeting tactics are applied and then searches on Google and receives email marketing campaigns and visits an affiliate for a discount? Perfect - pay everybody for the right to earn that order, everybody wins!

One problem.

What is the customer going to purchase when the customer shops however they like?

Let's compare Macy's / Nordstrom to, say, Zara.

At a time when traditional retailers followed the omnichannel playbook, focusing on product shipping operational tactics and marketing tactics, Zara focused on Merchandise. A  brand like Nordstrom might turn inventory 6-20 times a year, which is quite good. Zara might turn inventory 40-100 times a year. Nordstrom is largely beholden to merchandise vendors with traditional merchandise lead times. Zara knocks off what is popular today, and gets it in front of the customer in three weeks ... and sells through the merchandise in a couple of days. This causes the Zara customer to interact with the brand multiple times a week, to see what is new. This causes the Zara customer to have to ACT NOW because the merchandise may never be available again. The customer is literally competing with other customers to obtain scarce resources. What is scarce about buying branded merchandise at Nordstrom or Macy's?

In other words, a Nordstrom or Macy's focused on the thesis that the merchandise strategy was good enough, and it was simply the availability of the merchandise across channels that was the problem.

A Zara or H&M or Forever 21 focused on the fact that the merchandise is never good enough, and instead of investing in omnichannel theory ... these brands invested in merchandise brilliance.

So over a half-decade, the investment in merchandise brilliance defeated the investment in making sure that the existing merchandise assortment is made available across all channels so that the existing customer could shop however the existing customer liked.

We learned that New Merchandise Brilliance trumps Omnichannel Brilliance. I mean, you can almost make the argument that retailers using the word "omnichannel" in their Wall Street reporting experience negative comp store sales (not quite, but we're getting closer).

The byproduct of the failure of the omnichannel thesis occurs in new customer acquisition. Because the 24 year old shopper preferred Zara's new merchandise assortment (twice a week, mind you), the 24 year old abandoned Nordstrom / Macy's in favor of Zara / H&M / Forever 21 and others. This put pressure on Nordstrom / Macy's to find new customers ... and we all know that the reason that most businesses thrive over time is because of customer acquisition brilliance.

How did Nordstrom / Macy's address the new customer acquisition problem? Nordstrom leveraged Nordstrom Rack, acquiring lower-price consumers that can ultimately be up-sold into the full-line store channel. Macy's is going to copy this thesis. So kudos to Nordstrom for having a card to play here ... but it is a "different" card. Zara, which calls advertising a "pointless distraction", finds stuff that the customer finds "cute" at a low price and built a supply chain to respond immediately. Nordstrom / Macy's apply a "low price channel" strategy. It's a fundamentally different approach than the fast fashion folks use, and we will find out which strategy wins over time.

In other words, traditional retailers took their eye off of what matters when traditional retailers decided to focus on allowing the customer to shop however they like. Traditional retailers missed the trend that younger customers didn't want to shop however they like. Instead, younger customers wanted to buy something cute right NOW!! As a consequence, merchandise productivity suffered at traditional retailers, and today, customer acquisition among younger customers is suffering. The proof is in the comp sales metrics that Macy's publish and that Nordstrom could publish if they separated out online sales and Rack sales from published totals - undoubtedly, Full-Line sales would not be great, right?

In conclusion, the omnichannel thesis, an astroturfed concept coined by a research brand, led traditional retailers down the wrong path. While focusing on how to sell existing merchandise however the existing customer wanted, younger customers chose to shop however they wanted ... at Zara or H&M or Forever 21 ... buying cute stuff at low prices, cute stuff that can be turned 40-100 times per year.  Traditional Retailers choose omnichannel.

That's why allowing customers to shop however they like is such a bad idea. The thesis allowed traditional retailers to focus on omnichannel technology instead of supply chain  / merchandise reinvention based on scarcity of cute product. We learned, the hard way, that what the customer wants is cute merchandise. We learned, the hard way, that retailers need to offer cute merchandise in order to acquire customers in order to be successful in the long-term. Channel alignment with existing customers and existing merchandise strategies did not win.

Thanks,
Kevin

Update 4/22:  A reader tells me that the phrase "omnichannel" was coined by Leslie Hand of IDC. No links were provided to verify this is true, but I thought you should at least know that a reader believes differently. If you conduct a search, you will find at least a half-dozen different originators of the term. Which tells you something.