Stage 3 of Retail Began 29 Days Ago: Here's What Will Separate the Winners from the Losers

In mid-2015, we accurately predicted that retail was about to undergo a long-term, multi-stage transformation. This hypothesis was based on the industry reaching a tipping point of disruptive technologies and trends as well as the reckoning of past industry practices that focused almost exclusively on near-term gains. Ours was not a widely held view at the time, so we created Shoptalk to lead a new conversation and community with a mission to be a catalyst for the evolution of the retail and ecommerce ecosystem.

In this piece, we introduce Shoptalk’s Framework for Retail which presents our perspective on how the retail industry is changing. We will update this framework each year as we see retail continuing to evolve.

From the outset, we expected the industry to evolve through the following three major stages:

We also anticipated that the sentiment in retail would shift from a state of comfortable during the Legacy Normal to uncomfortable in the period of Disruptive Change, and then to a state of comfortable with the uncomfortable during the New Normal.

Our thesis, which was published by Deborah Weinswig last June in Fung Global Retail & Technology, was modeled on a similar progression that started four years earlier in the disruption of consumer payments and banking--a sector now widely referred to as fintech that we helped lead from the beginning with the creation of an event similar to Shoptalk.

Consumers and Competition Changed Faster than Retailers, Sending the Industry into a Period of Disruptive Change

The retail industry’s Legacy Normal stage ended in 2015, kicking off a period of Disruptive Change that encompassed all of 2016 and 2017. It was during this period that retailers began to realize they had not sufficiently prepared for the sea change in consumer behavior, preferences and expectations--especially when it came to younger generations. The Legacy Normal years leading up to the time of Disruptive Change had seen (1) the meteoric adoption of mobile by shoppers around the globe, (2) the rise of social media and interest in shareable experiences, (3) the continued migration of young, educated consumers to urban areas, and (4) the growing preference for socially conscious, healthier and more transparent products and a focus on wellness. Additionally, with Amazon revenues increasing and Prime memberships rising rapidly, culminating in an estimated 80 million households in 2017, not only had it become evident to the industry that shoppers were gravitating to Amazon, but the majority of US households had also gained access to two-day ecommerce delivery.

Retailers and brands were in no way oblivious to these trends: they’d built mobile sites and apps, established social media strategies, started to remove harmful or undesirable ingredients from their products and offered faster delivery options. However, the industry changes were far more profound when they collectively reached the tipping point than most retailers realized or could address through their limited initiatives, especially given the crippling debt that plagued many retailers after private equity buyouts. Two years of Disruptive Change therefore brought to light the out-of-date nature of retail offerings.

The Period of Disruptive Change Lit a Fire Under Retailers

During the period of Disruptive Change, outdated industry practices and legacy methods of operating were first exposed as unsustainable and started to be addressed. The result was a seismic shift in traditional retailers’ business models, a series of groundbreaking acquisitions of venture capital-backed tech and direct-to-consumer startups, and dramatically increased exploration and implementation of new trends and technologies. Both the US and Europe experienced Disruptive Change, with large retailers in some parts of Europe still working through this phase.

Change within established retailers and brands during this time was important, but also largely reactive and corrective of previous shortcomings. Innovators who championed new ways of doing things were the exception within their organizations, and initially faced internal and industry resistance based on deeply entrenched thinking and practices. We referred to these innovators as ‘Heretics’ at Shoptalk in 2017.

More specifically, during this period of Disruptive Change:

• Retailers questioned their own legacy business models and started to address shortcomings. Retailers first tackled these challenges themselves. For example, many addressed excessive growth in store counts through aggressive downsizing of physical retail locations. Others launched new, smaller store formats to appeal to different types of shoppers and to reach consumers in dense urban areas, while some used bankruptcy proceedings to help manage their reorganizations. Retailers embraced what came to be known as “experiential retail”, adding enhanced offerings like classes, social gatherings, cafes and restaurants to their stores. Some of the most ambitious looked outside their organizations for innovation, acquiring fast-growing startups such as Jet.com, Dollar Shave Club, Chewy, Shipt and TaskRabbit as well as numerous smaller startups with specific technology solutions like Outward, Body Labs and Corrigon. All of these acquisitions helped retailers gain access to new technologies, business models and talent.
• Retailers also began to select and implement better technologies and processes. Rife with legacy systems, retailers also began to take advantage of advances in retail technology. Throughout 2016 and 2017, retailers addressed a wide range of technology shortcomings in order to emerge from the chaos intact. For example, many felt the sting of outdated merchandising practices and technologies. Poor inventory planning had resulted in subpar in-store experiences and reduced foot traffic: shoppers left frustrated when retailers were unable to keep popular merchandise in stock, while at the same time, retailers were saddled with excess unwanted inventory. During the period of Disruptive Change, retailers began to tackle core issues like stockouts and shortages, and invested to better leverage inventory across channels. Retailers also adopted more advanced approaches to customer insights, enabling them to understand and link online and offline shopper behavior. And retailers that had been operating their ecommerce sites on clunky platforms continued to implement newer, more flexible and cost-efficient options that enabled them to react quickly to customer needs.

In the New Normal, Innovation is No Longer Reactive, It’s Proactive

A combination of factors led to a strong 2017 holiday sales season, including a robust US economy, an optimal set of shopping days between Thanksgiving and Christmas, continued growth in ecommerce and improved last-minute delivery and pickup options before the holidays. As we enter 2018, this has given the retail industry some much needed breathing room to work through its ongoing systemic challenges as well as embrace new solutions.

The resulting optimism and confidence has allowed the industry to now move to its New Normal stage, the timing of which was previously the subject of much speculation within Shoptalk. The period of Disruptive Change transformed the retail industry much more, but was somewhat shorter than we experienced in consumer payments and banking (24 months for retail versus 36 months for fintech).

The primary defining characteristic of this New Normal is that disruptive innovation is no longer simply reactive or something that a minority of people advocate. Instead, it is proactively embraced by the mainstream and a key priority throughout the ranks of retailers and brands, increasingly constituting part of the everyday work for a critical mass of the organization. Today, we refer to these individuals as ‘Catalysts’ instead of ‘Heretics’ as we did in 2017. Culturally, this New Normal brings in a new era where innovation, not protection of the status quo, is reflected in company’s hiring and training of new leaders and broader staffing. This is not an issue of breaking down internal “silos”--it is about empowering individuals and teams to be agents of change.

Additionally, the New Normal heralds in a new era of realism where hyperbolic terms like apocalypse and armageddon are no longer used in describing the future of retail. And while pundits grabbed attention over the past two years by questioning whether retail stores and shopping centers even had a future, the demise of physical retail was never a possible outcome of the turmoil.

The New Normal Will Require Constant Improvement in Operations, Experiences, Products and Business Models

The New Normal is an extended period during which innovation is no longer an “if” or “why” but “who, what, when and how,” in order to meet and exceed the needs of customers as they discover, shop and buy physical goods differently in a digital era. Retailers will be in a state of constant improvement as they look to ensure everything from the supply chain to the online and in-store experience is optimized:

• Backend technology improvements will create new efficiencies--and expectations. During the New Normal, advances in backend technologies will have a profound impact on the retail experience. Shortened supply chains will mean faster access to cutting-edge fashion and design. Automated warehouses combined with new pickup and delivery options will reduce fulfillment times, changing consumers’ definition of immediacy. The returns process will be simplified, making it far less painful for retailers and consumers alike. Artificial intelligence and machine learning will be deployed across the entire supply chain, optimizing the most inefficient parts of retail. These changes will happen globally, with countries like China already well ahead of the US and Europe when it comes to logistics and fulfillment innovation.  
• Shoppers will quickly come to expect many of the experiences that are cutting edge today. The backend technology shifts that will take place in the New Normal will be complemented by the adoption of new technologies that will directly impact the customer experience. With greater deployment of AI, for example, search results and customer service responses will increasingly be generated through natural language text and voice, and will nearly flawlessly match the intent and preferences of the shopper; visual search will be widespread. Consumers will expect personalized experiences both online and offline, while serendipitous discovery will become more common as retailers and brands better predict which products and experiences will delight each individual shopper. Technologies that enable shoppers to visualize products on their faces and bodies, and in their homes and gardens, will become the norm in categories like beauty, apparel, furniture, home improvement and more.
• There will be a far closer alignment of startups and traditional businesses. Large retailers and brands will not revert to the previous vacuum largely devoid of influence from early-stage companies. While retailer and brand accelerators and incubators gained momentum in 2016-2017, the New Normal will include partnerships between large organizations and startups that go well beyond these types of programs. As retailers look to differentiate their product offerings, they will turn to direct-to-consumer startups with new, revolutionary products as key suppliers. New business models rolled out by large retailers will be powered by startup partners. And as retailers move beyond talking about omnichannel and instead focus on determining the most optimal balance of digital and physical offerings in their businesses, startups will play a critical role in delivering the capabilities that will enable new shopping experiences.
• A wide range of new consumer products will cross the chasm. Finally, the New Normal has also ushered in an era where mainstream consumers are seeking out smaller brands with unique propositions and benefits. In past years, startup brands were typically supported by a small group of early adopters--today, new brands can rocket into the mainstream in months or years rather than decades. This New Normal means greater competition for established brands that must now be nimble enough to compete against these new rivals--it also means consumers will have more choice than ever as they make purchase decisions. Large brands and retailers will need to speed up new product development processes while also ensuring they cater to shoppers growing accustomed to seemingly infinite choice.

The Divide Between Winners and Losers Will Increase

The New Normal will last much longer than the period of Disruptive Change and result in an overall greater evolution of the industry--more transformation will happen because this stage is premised on hope for the future rather than fear of the present. Like the shakeout during the period of Disruptive Change, change during the New Normal will continue to create a divide between the winners and the losers. Long-term success will be dictated not just by the nature of a retailer’s business or the strategy and technology adopted, but also by the willingness to embrace constant change and a culture of iteration in every aspect of the business. During this period, retailers are also less likely to be punished for investing in the future, with early indications suggesting that investors in larger retailers, including publicly traded companies, may be willing to forego short-term profits in favor of long-term gains.

The Shoptalk-Led Narrative and Community is Now Relevant to the Many, Not Just the Few

If the current relative stabilization of retail is sustained, the New Normal is here to stay--although like all major economic shifts, it’s impossible to know for certain that it’s a ongoing trend rather than a short-term anomaly until it’s proven through time. The role and importance of Shoptalk is at its height during the New Normal: The New Normal is the time when most--not just few--in the industry must educate and inform themselves about retail and ecommerce trends and technologies that are fundamentally altering their businesses.

By focusing relentlessly on the need for a fresh, intellectually honest conversation and community, Shoptalk has established an entirely new standard for events in retail and ecommerce. We maintain complete control over our agenda because it forms the basis of the industry’s narrative, and we have never outsourced content development or engaged in unhealthy practices such as pay-to-play content. We have reconstituted the industry’s digital community from scratch: with no legacy stakeholders, we ensure we bring together everyone that forms the relevant ecosystem--including startups, investors, equity analysts, media and more--many of whom did not previously have such a home. We have also evolved the event sponsorship model to focus more on curated interactions that can help retailers and brands with the changes they now must make.

With our unbiased agenda, the world’s best speaker lineup, networking programs that will curate over 10,000 onsite interactions and more than 400 exhibitors and sponsors, Shoptalk provides unparalleled ideas and insights that can help guide business models, improve sales and drive the bottom line.

We hope to see you in just over 45 days at Shoptalk in Las Vegas.

Anil D. Aggarwal, Founder and CEO

Zia Daniell Wigder, Chief Global Content Officer

Caroline Farley, Head of Growth