Retail Horizons

RETAIL HORIZONS

Five phenomena that will change retail in the years to come: the store’s scale up; cosmopolite retail vs. local retail; the post-industrial (and post-commercial) retail; the hybrid retail; the “retail of uniqueness”. All of them are not temporary trends, indeed, they represent structural changes originating either from new needs in society or from new technology. As such, they are here to remain. Hence, retailers must be able to shape their present retail-mix accordingly, or they will be blown away from a new generation of disruptive retailers. In order to do that, new architecture and new marketing skills will be necessary.

By Professor Davide Reina, SDA Bocconi School of Management

CASEJUNE 2012

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As for the store’s scale up, that is to say the shift from store to building and from spaces drawn un-der a purely efficiency-driven perspective to spaces conceived in order to be memorable and beautiful, it just mirrors another shift.

From periphery to centre, from countryside to cit-ies, with the emergence of globalized megalopolises, the first 600 cities in population nowadays account for 60% of the planet’s GNP, which means 60% of retail business and, probably, way more in terms

of branding and image. Certainly, to be noticed by customers in a crowded and competitive environment like that is not easy.

One-way is store’s scale up, which can be accom-plished via excellence along two dimensions: size and beauty. To do that, great architecture is key. Today’s megalopolises are the globe’s nervous sys-tem. Places in which information, technology, com-munication, and education, are maximized. These are places originating new symbols, new trends and

CASE RETAIL HORIZONS 2

STORE’S SCALE UP

new behaviors - to succeed there, a retailer must be excellent and unmistakable, or he will fail.

In a way, what we see now is a new Renaissance of the high-end, great “retail –architecture” that cre-ated department stores at the end of XIX century. It is the same tension towards excellence and the same attempt to stupefy people. Meanwhile, there is a decline of the architecture (i.e. Victor Gruen’s architecture) that created shopping malls in the US countryside in the ‘50’s: big “boxes”, air-conditioned and with big parking lots, purposely conceived to exploit the growing purchasing power of masses who had won their leave-pass to welfare.

Why are shopping malls in deep crisis in the West? Because welfare in society is dead, consumption boosted by debt is dead, and the middle-class is go-ing back to low class. At the antipodes, the Gucci’s building in Ginza, the Prada’s building in Tokyo, the LVMH building in Paris, are contemporary profane temples celebrating the opulence of the global social class of high-net worth individuals, all over the world.

The ultimate goal of the store’s scale up is to build up extraordinary concept stores able to spark off the brand’s image and to detonate its awareness. Those concept stores are not there to sell. They

are there to amaze. They are “theatres of dreams”, that every retailer who wants to compete under a global perspective and on great scale, must be able to set up, and great architects are the wizards of such a magic world.

To quote Daniel Herman: “The Next Big Thing is the recurring promise of a new typology that will deliver greater profits and higher customer satisfaction. Shopping experts believe that the right architec-ture can make a difference in optimizing the retail environment”1.

COSMOPOLITE RETAILvs. LOCAL RETAILNespresso is selling coffee to everybody in the world, mainly because its store is infused with a “nowhere-everywhere” atmosphere. That is a perfect example of cosmopolite retailer.

It all starts with the store: when the place is an astute fusion of styles, lines, colors, design, so that it leaves you with the feeling that you are “nowhere-everywhere”. Although, you also have got the feeling that this “nowhere-everywhere” place is the place where great things happen.

That is to say: cosmopolitan cities. It ends with prod-uct: Nespresso’s coffee has now become “the global coffee” for global citizens (and, also, the “wannabe” global citizens). The mirage of cosmopolitan aspira-tion so powerful that it wins over the evident fact

that an Italian coffee from an anonymous bar, just round the corner, is much better than a Nespresso.

Hence, the creation of a cosmopolite retailer might be a road to success, in a world rewarding global citizens much more than local ones. However, do not think one can just sum up different ethnical styles to create a cosmopolite retailer. That would just be kitsch. Indeed, a hard and brilliant work in terms of design, looking for styles and lines that were “natu-ral born globals”, must be done. Again, this calls for great talent in architecture.

But we live in a two-layers world: on the one side of the street the roar of the crowd running for global-ization, on the other side of the street our individual, inner need as human beings, to look at our roots - and

1 Herman D., “The Next Big Thing”, Harvard Design Book – Guide to Shopping, Taschen, 2001


roots are always local, that is why they are roots. This explains the surfacing and growth of local retail-ers, stressing their local extraction and their being part of a distinctive community. Just think about the success of stores selling Gaelic music or, on a much greater scale, the expansion of restaurants that are part of the “slow food” movement.

The point is that these two trends - the global and the local retail - are interconnected. One person can enjoy the experience of being a global citizen today, and feeling irresistibly the experience of buy-ing something truly local and genuine (like the Tweed jackets from Scotland), tomorrow.

This is just human nature: the desire to cross bound-aries on the one hand, the need to state boundaries on the other hand. What is different than it was in the past, though, is the fading away of boundaries, and this calls for an even greater need for roots and belonging.

That is why global (cosmopolite) brands and retailers probably are in the late development/maturity phase,

and their future growth will be determined by new big cities from the BRICS and MICKS entering the consuming market. Whereas local retailers are in the early development phase, and are boosted by the strong needs of stability and belonging injected from the 2008’s global crisis, further empowered from the present one.


"This is just human nature: the desire to cross bound-aries on the one hand, the need to state boundaries on the other hand"

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THE POSTINDUSTRIAL(AND POST-COMMERCIAL) RETAIL

Consumers are a dying breed. The sunset of the glori-ous industrial and commercial so-ciety, and the decline of its most famous dreams, the hedonistic consumerism and the promise of a never-ending welfare, have taken years before ending. Now they are over in the West. The period of crisis we are crossing has irrefut-ably killed them and with them, the

“you are what you buy” culture has passed away too. Though, after having walked through a storm

caused by the collapse of previ-ous generations’ dreams, younger generations are now envisioning a new dream. A dream of “being, instead of having”. We are at the dawn of a new era: one in which:

“less of higher quality” is better than “more of lower quality”; “us-ing is better than owning”; “using and sharing is even better”.

Those who claim that this is just due to the economic crisis in Western countries do not see

the big picture. Indeed this phe-nomenon, which I call “userism”, is not a temporary one that, should middle class see better times in the future, would fade away. On the contrary it is irrevocable and definitive, as it is caused by three structural factors.

First: human nature. Human beings are not made to buy and to consume indefinitely, driven by a sort of psychological addiction.

We are at the dawn of a new era: one in which- less of higher quality is better than “more of lower quality using is better than owning; using and sharing is even better.


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They are made to look for utility and meaning in what they do and, on top of that, once they have been disappointed by a collective dream that has proven to be a false and empty one, they do not go back to the same silly dream again.

Second: it is now clear that “Consumer Society” is not a sus-tainable and responsible one. It pollutes too much, consumes too much of raw materials and, most-ly, sells lots of useless products. The consequence of this acknowl-edgement is the emergence of the Green Society which is based on the parsimony principle, “to get the maximum out of the minimum”, from an industrial point of view, and on the utility principle (you do not buy a television to contemplate how beautiful it is, you buy it to watch BBC’s news. You don’t buy a refrigerator to admire it, you buy it to keep your food fresh, etc), from the customer’s point of view.

Third: the Web revolution, and the advent of mobile devices, is making it possible for customers to share the use of products when they need them and where they need them. This eventually results in the possibility, for customers, not only to share but also to use without owning. That is to say: collective renting.

Now, these three factors all to-gether determine a retail revolu-tion: a scenario in which there will be many retailers not selling, but just renting. A scenario in which those retailers will represent a network renting products to cus-

tomers, getting back money from customers just for the limited (in time) use of these products, tak-ing those products back to recycle them as ingredients for new pro-duction cycles, once their life-cycle and utility for customers are over.

How long will the product’s use-cycle be?

It mainly depends on the product’s peculiarity, its market, and the customer’s need. Of course, when one thinks about a start-up like Zipcar, then it is pretty clear the product’s life cycle rarely goes above one day. And, definitely, Zipcar is a retailer (parking areas where customers can rent cars being its “stores”), exploiting to a great extent the enablement deriving from smart devices (cus-tomers can look for the closest Zipcar’s parking on their mobile phones and then, they can book for one car also using the mobile phone, as well as paying for it in the same way), and whose key value proposition is “do not buy a car just share it, use it when you need it, and pay accordingly”.

Now, if we take this example as a sort of new paradigm to define a

“post-commercial” retail, then one fact is crystal clear: we need a new type of retail. Celebrating the values of using, renting and shar-ing, instead of the values of owning and consuming, and stressing the greater smartness of a frugal (not a poor) approach, versus a pletho-ric and hedonistic one. The pillar of such an apfor new architecture, design, marketing, and communi-

cation. As for the latter, top-down, patronizing, persuasive commu-nication typical of the consumer society will be banned. Bottom-up, humble, transparent information and education will be welcome. Ul-timately, post-commercial retail will call for a completely different management typically, new eras not only see the advent of new species, but also the disappear-ance of the old, dominant ones. Definitely, top-down marketing-mix of present “commercial retail” based on property and consump-tion of products, compared to bottom-up marketing-mix of new

“post-commercial retail” based on renting and using (and sharing) of products, is like a dinosaur to a mammal - an older, slower and less smart species, doomed to succumb.

2 Tae-Wook .C., “Ecology”, Harvard Design School – Guide to Shopping , Taschen, 2001


HYBRIDRETAILHybrid retail is a consequence of the so-called “web of things”. The

“web of things” stands for the inex-tricable fusion between the virtual and the physical world, presently characterizing our life. Behind this phenomenon, lies a formidable em-powerment being generated from technology. More particularly: smart devices like smart-phones and tablets, thanks to these tools, the web is now ubiquitous and fully portable. It comes together with us, in our pockets, when we walk on street, and if necessary we have a whole world of information

and explanation available, in the palm of our hand. Also, thanks to the Q-code, we can interact with physical products and places to get further information about them, right when we need them. When the web walks with us, and we interact with products, then the web and retail are just the same thing. It is a revolution get-ting rid of all kind of intermedi-aries, and merging the web and the retail. The result is “tailing”. It does not matter whether it is

“e-tailing” or “re-tailing”. What re-ally matters is that companies

presently operating as retailers fully grasp the magnitude of this revolution, and maximize potential synergies deriving from this merge. A resolute and brave managerial approach, aggressively implement-ing e-commerce and connecting it with its physical retail network via

“store locator” and CRM programs, would be necessary.

However, many retailers have for the past ten years been work-ing under a risk-averse approach when it comes to making retail


“hybrid” (web + stores). Why has this happened so far? Mainly for two reasons: fear of cannibalizing physical stores’ sales with the e-commerce, and lack of managerial skills with reference to the digital world. As for sales cannibaliza-tion potentially generated from the e-commerce’s development: this is the fear that has paralyzed managers in retail, for years.

This is the reason why so many retailers made the decision to ex-ternalize the e-commerce and to use it only as a special distribution channel for discounted, unsold products. Also, this is the reason why some retailers have just used the Web as a sort of PR leverage and a cheaper way to relate with customers.

Now, this is over. Innumerable analyses and research, along with the evidence of great online busi-ness selling products without dam-aging physical stores’ sales, prove that synergy is much greater than cannibalization. The reason is that the customer journey has become hybrid too.

Typically, a woman who is a fash-ion-victim will use the web to get information and explanation about one product she is very fond of, and then use the store-locator on the company’s web site to single out which store the product is available, and eventually go to the store to buy it. Clearly, the pur-chase act is hybrid and the web has played a substantial role.

Then, who has cannibalized what? The truth is that web and store play together in the same team. Also, there are many customers living too far from a certain brand/

store, to buy by going physically to that store. Instead of doing that, they will buy online. This is what happens for 80% of retail-ers: 80% of their customers live too far from their branded stores and there is no possibility for them to open new stores which are closer to them, because of the fixed costs’ issue: one store needs a certain size, a certain size de-termines a certain amount of fixed costs, and fixed costs must be absorbed by a local customer base guaranteeing a minimum critical amount of sales (otherwise, the store will lose money). But this calls for a city that is big enough.

.That is why no company can af-ford a capillary network of branded stores. It would cost a fortune and many stores would work below the break-even point, as many cities are too small to offer a suf-ficiently big customer base.

That is why retailers must develop e-commerce: there are so many customers living in the country-side, far away from the physical network of stores, to reach via the web, which is much cheaper in terms of contact costs and even more crucial, those potential cus-tomers can only become custom-ers thanks to the e-commerce, or they simply will not buy. Therefore, this is a zero-cannibalization game, and it may add 100% of incre-mental business to the company.

Another reason why the e-com-merce should be developed in retail is the fact that it offers the possibility to sell an unlimited product portfolio, as web space is also unlimited and associated to rather low fixed costs. Which is the opposite of what happens in

a physical store, where space is limited and fixed costs are quite relevant. Hence, slow sellers and niches cannot be part of the offer in a physical store

As a consequence, retailers in which e-commerce is well devel-oped are more able to sell niches and specialties (which usually brings in higher margins) than retailers whose e-commerce busi-ness is not well developed. Also, it will have a greater capacity to smooth stocks’ fluctuations, ulti-mately resulting in a lower average cost of stocks. Finally, retailers must go digital because more and more customers want it.

The point is, retailers whose stores are characterized by a full integration with the internet (i.e. interactive windows and touch screens; Q-code; smart applica-tions, etc.) are more attractive to customers, and generate wider cross selling along the customer journey and higher conversion rate. In a few words, hybrid re-tailers are just better than 100% offline (or 100% online) retailers.


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THE RETAIL OF UNIQUENESSThe world is crowded with stores, each one offering its own prod-ucts. That is why retailers whose stores are unique, and whose of-fer is unmistakable, are inesti-mable. Nature loves symmetry and, as the growing number of retailers determines more and more similarities in terms of store formats and products, the importance of uniqueness is sub-sequently growing. The economics of masses and of standardized products is the economics of uniqueness’ best promoter. The retail of uniqueness is the domain of outsiders: one store’s owners and newcomers. It is very rare to see a big retailer developing a unique, revolutionary format. Its inner nature, which is incremental and not disruptive, denies it. It is more likely for somebody starting from scratch to develop a revo-lutionary concept store. All over the world, if we walk the shop-ping streets, these revolutionary concept stores can be singled out. For instance, in Notre-Dame des Sablons Square, in Brussels, there is a store selling chocolate as if it was a jewel, its name is Marcolini. It has been a hugely successful business so far, not only sustained by the product’s inimitable quality, but also from the store’s uniqueness point of view. By offering chocolate as an inestimable thing, in a place whose design and appearance recall a jewelry shop, Marcolini has been able to overcome even the high-

quality Belgian chocolate produc-ers (and retailers) like Neuhaus and Godiva. That is the magic spell of uniqueness and indeed, it really is like an enchanting mes-sage propagating very fast and attracting more and more pas-sionate customers. For sure the internet plays an essential role, as it hugely facilitates the quick and precise propagation of infor-mation. The Web is the retail of uniqueness’ strongest ally and its role is not only related to informa-tion’s dissemination, but also to business’ maximization. In fact, every “unique” retail must face a structural trade-off: you cannot be unique if you have a hundred stores all over the world. It does not matter how unique your con-cept store is. If you start open-ing more and more stores you will commoditize it. The maximum number probably is in between 1 and 10. The guiding principle is scarcity. Scarcity is a neces-sary ingredient of uniqueness as it generates exclusivity. Actually, if we look at this from a logical perspective, retail uniqueness would be fully satisfied when a retailer just has one store. Again, the web is a powerful ally in help-ing you keeping the number of stores as low as possible. The reason is you can use your physi-cal (and unique) store as a sort of masterpiece and primogenitor, on which to detonate awareness and attractiveness, via web, on potential customers. In a nutshell,

one store in Notre-Dame du Sa-blon in Brussels, when put online, is a store talking to the whole world. Then, of course, there will be constraints in terms of e-com-merce capacity, food quality and transportation, etc. But these are just details related to the busi-ness model’s execution not to its founding principles. The point is retail of uniqueness calls for an approach that is the opposite of usual retail, in regard to stores network’s development. Instead of growing it in number and location as fast as possible, you must do it as slowly as possible,

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Harvard Design School, “Guide to shopping”, Taschen, 2001

Anderson C., “The Long Tail”, Wired, 2004

Gladwell M. “The Tipping Point”, Penguin, 2002

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Bughing J., Guggenheim Shenkan A., Sing-er M.,“How poor metrics undermine digital marketing“, The McKinsey Quarterly Review, October 2008

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