• December 9, 2015

The Heart and Lungs of Retail I: Process Innovation As a Way Forward

The first businesses in the world were small shops set up to sell local produce, and since then the retail industry has grown to become the economic backbone of many countries. And because of retail’s highly-competitive nature, it has always been one of the first sectors to adopt new technologies, from e-commerce to mobile apps.

E-commerce has risen to enhance the core retail business, and peripheral technologies used in branding and customer experience have moved to evolve retail far beyond its traditional brick-and-mortar model.

Andrew Clarke, VP of Hewlett Packard Enterprise in Asia Pacific and Japan, has seen and analyzed this evolution over his 25-year consulting career. Clarke has led business transformation programs for global blue-chip organizations, focusing primarily on the retail and consumer goods sectors.

We recently had a conversation with Clarke to find out more about the ways in which retail has transformed, what retailers must do to stay ahead, and the ways in which the industry might change in the coming years.

The Heart and Lungs of Retail

Underneath the hype of new mobile apps, social media programs and flashy e-commerce sites, there lies a rigid system of operations in retail that is simple to understand, yet very difficult to manage or to change.

Clarke explains that this is the essence of retail. “At the underlying level, the majority of retailers are actually quite simple businesses. It’s an extraordinarily straightforward operation of choosing the products that you want, procuring them at the best price, physically moving them through a supply chain then ensuring they’re priced and available for the customer. And that’s a very simplistic industry you can draw on one page. But what you find is at scale, the complexity of that becomes very, very hard to manage.” At the heart of retail is a complex system involving millions of products and thousands of processes, each with its own dynamics. Bearing in mind the variables involved, the success or failure of the business tends to depend less on product innovation than on the ability to execute these processes in a smooth and smart way.

Clarke cites the grocery industry as an example, highlighting the extremely high volumes and intricate information involved.

“A grocer like Tesco in the UK is a $30 or $40 billion company with a few thousand stores and a hundred thousand items. The underlying core systems for a retailer like that are the merchandising systems, the system of records for your item list and your price list. All of your data behind that asks questions like, ‘How do you take a simple product like a can of Coke and classify it? How do you carry it in three different locations in three different departments because of the way you want to do your marketing?’ All of those elements have to be coded in the underlying merchandising system, which becomes the core system of records, the heart and lungs of the business.”

Such information systems were put in place 20 or 30 years ago, and are so highly configured that they are both difficult and costly to change – so difficult, in fact, that Clarke believes it can only be done once every ten years or so.

Peripheral Systems and E-Commerce

Although the core retail systems are difficult to change — and therefore retailers are inherently resistant to embracing new technologies — other peripheral systems such as Point-of-Sale (POS) technologies are relatively agile.

In-store hardware such as barcode scanners, self-service kiosks and other customer-facing devices, whilst expensive, can be upgraded fairly easily. Likewise, it is fairly straightforward for retailers to implement new ways to provide better customer service, by equipping both their staff and customers with better technology.

“You can help your customer service people find products around the store, do queue-busting, etc. All these sorts of things have been trialed at various levels. What you’re doing is providing peripheral systems that are customer-facing, that actually could be very innovative and very valuable.”
— Andrew Clarke, VP of Hewlett Packard Enterprise, Asia Pacific and Japan

These peripheral systems include integrating e-commerce into a brick-and-mortar store, which will facilitate customer service as well as simplify supply chain processes. For example, customer service staff can use tablets to search for a product, bring it to a customer to be purchased, and process the payment using these tablets. In doing so, the store automatically triggers a replenishment order which will then be transmitted to supply chain systems. Ultimately, however, the physical product still sits on a shelf in the store.

Compared to other sectors such as banking and telecommunications, retail has exploited such peripheral systems for a long time. For example, apps allowing a consumer to make mobile transactions are new in banking, but are well-established in retail as a whole and have been around for at least 10-15 years. In this respect, the retail industry might even be ahead of its customers.

Clarke comments, “This has been the case since the likes of Amazon emerged. So in that regard, you’d say the retail industry as a whole moved very swiftly. But choose any individual retail customer — traditional retail customer — they’re not that far ahead of the banking customer.”

In the past five years or so, however, the scenario is a little different. Whereas the banking and telco sectors are making huge strides in new technologies such as mobile apps, retail, according to Clarke, seems to be experiencing a standstill.

“I would question whether retail is really advanced and developed. I think the apps might be a little smarter, some have the ability to look up and find products by service, color, size and so forth. But by and large, I think retailers plateaued on a lot of that stuff probably 5 years ago.”

Replacing Salespeople?

Since its advent more than a decade ago, e-commerce has gone through many changes and moved away from being only about utility. Because of its competitive, high-volume nature, retail is constantly trying to find ways to make small changes that give huge results – in this case, by improving customer engagement on e-commerce sites.

In fact this may be absolutely necessary in the modern world of retail. According to a recent IDC report, reputations can be made or broken on the basis of technology-enabled user experience and mobile apps.

“It’s a game of inches. If you can provide a little better suggestion, capture that extra transaction and do so at an economically sensible cost, then you start to gain. And I think the retailers who are building their brand by improving their customer service and by being more relevant to the customer’s decision at the time they expect to make it, those are the ones that will advance.”
— Andrew Clarke, VP of Hewlett Packard Enterprise, Asia Pacific and Japan

According to him, three retailers who have very successfully leveraged on technology to improve customer engagement are Amazon, iTunes and Net-a-Porter, a UK-based fashion company dealing in high-end designer fashion. Although these companies do not have physical stores, they nevertheless retain the essence of retail by getting customers interested in their products through their e-commerce sites, rather than merely making available what the customer is already searching for. This function, he says, has traditionally been the role of good salespeople.

Amazon, in particular, disrupted the traditional retail model by being the first to use simple algorithms to create customized value propositions.

“Amazon, very quickly, worked out that its real value proposition wasn’t ‘I can sell you this book cheaply and ship it to your door in 48 hours.’ Rather, it was ‘You might also be interested in this and this and this, too,’” he says, adding that iTunes has similarly disrupted the music industry.

Find part II of this article here.