How GCC stores can re­spond to the chang­ing face of re­tail KARL NADER

Karl Nader de­tails the re­gion’s shift­ing re­tail land­scape, and how com­pa­nies can ben­e­fit from the lat­est trends

Gulf Business - - CONTENTS -

The re­tail land­scape in the GCC is chang­ing thanks to grow­ing on­line ac­tiv­ity, char­ac­terised by the en­trance of new on­line play­ers. For ex­am­ple, Ama­zon re­cently ac­quired the Mid­dle East on­line re­tailer Souq.com and Mo­hamed Alab­bar’s multi-cat­e­gory re­tailer noon. com is sched­uled to launch later this year.

As on­line re­tail de­vel­ops, tra­di­tional re­tail­ers in the GCC will need to bear in mind the ex­pe­ri­ence of sim­i­lar com­pa­nies in more ma­ture mar­kets such as the US, where the in­ter­net has been a dis­rup­tive force and re­tail has gone through two ma­jor phases of change. GCC re­tail- ers will need to em­pha­sise the cus­tomer ex­pe­ri­ence by in­te­grat­ing sales chan­nels and re­think­ing their re­tail foot­print.

Grow­ing com­pe­ti­tion from elec­tronic out­lets has af­fected many tra­di­tional re­tail­ers. Over a dozen ma­jor US re­tail­ers have de­clared bankruptcy this year, with on­line re­tail a sig­nif­i­cant fac­tor in their weak­en­ing per­for­mance. The im­pact of the in­ter­net is al­ready be­ing felt on some tra­di­tional re­tail out­lets in the GCC. Stores are clos­ing in Dubai’s re­tail con­sumer elec­tron­ics sec­tor be­cause out­lets are strug­gling to com­pete with low prices on­line and the con­ve­nience of in­ter­net shop­ping.

The first stage of change af­fect­ing re­tail is the clo­sure of phys­i­cal out­lets and the integration of sales chan­nels. Some re­tail­ers in de­vel­oped coun­tries have shut­tered old-fash­ioned phys­i­cal out­lets, with large staff num­bers and ex­ten­sive in­ven­to­ries, be­cause they are too ex­pen­sive to main­tain and have low mar­gins.

As the US shows, the re­tail sec­tor in this stage re­sponds to on­line com­pe­ti­tion with so-called om­nichan­nel strate­gies. Th­ese in­volve unit­ing all sales chan­nels into one cus­tomer ex­pe­ri­ence: phys­i­cal out­lets, web­sites, smart phone apps, and telephone or­der­ing. Creat­ing an om­nichan­nel ap­proach re­quires main­tain­ing the full range of re­tail pres­ence and two sup­ply chains — be­tween ware­houses and shops and be­tween ware­houses and cus­tomers’ homes.

In­ter­est­ingly, GCC re­tail­ers are ex­per­i­ment­ing with steps to test some of th­ese re­tail chan­nels. Some re­tail­ers are us­ing so­cial me­dia to en­gage with cus­tomers, oth­ers are con­nect­ing phys­i­cal sales with on­line de­liv­er­ies. Th­ese are ini­tial steps to­ward a fully-fledged om­nichan­nel ap­proach.

The sec­ond stage of re­tail change in­volves sig­nif­i­cantly im­prov­ing the cus­tomer ex­pe­ri­ence by open­ing a new style of phys­i­cal out­let: the show­room. Th­ese carry a smaller stock and a limited range of dis­tinct, high-value goods known as ‘dif­fer­en­ti­ated goods’ — the lat­est branded fash­ion item, for ex­am­ple.

By con­trast, tra­di­tional out­lets carry lots of what are called ‘ com­mon goods’. Th­ese are items that shop­pers know very well, such as work shirts or un­der­wear, and that sell at a steady pace.

Show­rooms are a re­sponse to cus­tomer buy­ing habits in­flu­enced by the in­ter­net. Cus­tomers like to view and try some items, such as dif­fer­en­ti­ated goods, in shops. They then com­pare prices and buy on­line. Show­rooms have the ad­van­tage over tra­di­tional out­lets of be­ing cheaper to op­er­ate and need­ing rel­a­tively few but skilled staff.

Im­por­tantly, show­rooms help re­tail­ers to solve the prob­lem of re­turned goods. On­line sales of dif­fer­en­ti­ated goods tend to have higher rates of re­turns than com­mons goods — and re­turns are costly for re­tail­ers. By let­ting cus­tomers try dif­fer­en­ti­ated goods in per­son, so they know what they ac­tu­ally want to buy rather than rely on the de­scrip­tion on a web­site, show­rooms lead to sig­nif­i­cantly lower rates of re­turn.

Tra­di­tional re­tail­ers in the GCC should learn from th­ese two stages of change by im­ple­ment­ing them si­mul­ta­ne­ously. GCC re­tail­ers, in par­tic­u­lar spe­cialty re­tail­ers, need to in­te­grate sales chan­nels into omni-chan­nels and use show­rooms as part of a re­think of the in store ex­pe­ri­ence and a re­con­sid­er­a­tion of their re­tail foot­print. This will en­hance the con­nec­tion to the cus­tomer by al­low­ing shop­pers to ex­pe­ri­ence the re­tail brand in-per­son. It can also make re­tail­ers more prof­itable by con­cen­trat­ing their phys­i­cal pres­ence and al­low­ing them to get the most out of their in­ven­tory.

In the GCC, this would mean hav­ing a few show­rooms sup­ported by a net­work of cu­rated stores. Re­tail chains would be able to re­duce the num­ber of stores, which are of­ten al­ready ex­pe­ri­enc­ing weaker sales. In­stead they would have show­rooms in a few lo­ca­tions act­ing as flag­ship stores so that cus­tomers can get to know and ex­pe­ri­ence the brand

THE FIRST STAGE OF CHANGE AF­FECT­ING RE­TAIL IS THE CLO­SURE OF PHYS­I­CAL OUT­LETS AND THE INTEGRATION OF SALES CHAN­NELS.

per­son­ally. The re­sult would be a sim­pler sup­ply chain, less re­tail space, fewer but bet­ter trained staff, and smaller piles of items wait­ing to be put on sale.

The im­proved cus­tomer ex­pe­ri­ence is at the heart of th­ese changes. The show­room pro­vides pre­cisely the cus­tomer ex­pe­ri­ence re­quired to sell dif­fer­en­ti­ated goods, whether in per­son or on­line, and so avoid mark­downs. Shop­pers do not know th­ese goods well. Dif­fer­en­ti­ated goods are new, such as the most re­cent fash­ion item. They are also not the same from one out­let to the next — a good ex­am­ple is the lat­est branded footwear.

They may re­quire sales staff to con­vince con­sumers to buy them, such as high-priced jew­ellery or a wire­less data plan. Re­tail­ers need to sell dif­fer­en­ti­ated goods quickly so they do not be­come ei­ther ob­so­lete (such as the lat­est gad­get) or un­fash­ion­able (this sea­son’s most fash­ion­able t-shirt).

Part of the en­hanced cus­tomer ex­pe­ri­ence that dif­fer­en­ti­ated goods de­mand is hav­ing the right goods reach cus­tomers at the right place and at the right time. This is tricky be­cause it is driven by cus­tomers’ whims, which are hard to fore­cast. Of­ten, shop­pers will not ac­tu­ally know they want an item un­til they see it and try it, such as sit­ting on a piece of fur­ni­ture. Al­ter­na­tively, the de­sire for the item may be de­layed un­til they feel that it is the lat­est trend that they just have to be seen wear­ing. Get­ting the sup­ply chain right for this kind of re­tail is ex­tremely dif­fi­cult for tra­di­tional re­tail­ers as it is un­pre­dictable and of­ten re­sults in ex­cess in­ven­tory that is heav­ily marked down.

The ad­van­tage of show­rooms is that they help man­age the in­ven­tory chal­lenge and re­tail foot­print more ef­fi­ciently. Show­rooms only have the stock needed for cus­tomers to choose what they want. Re­tail­ers can keep ad­di­tional in­ven­tory for show­rooms in ware­houses. This gives them the abil­ity to pro­vide same day de­liv­ery to cus­tomers. It avoids mov­ing in­ven­tory from show­room to show­room.

An ex­am­ple of the smaller in­ven­tory and re­tail pres­ence is the US-based men’s ap­parel com­pany Bono­bos, which Wal­mart is ac­quir­ing. Bono­bos op­er­ates a few dozen show­rooms. Th­ese each only need an in­ven­tory of around 220 items to give cus­tomers a full se­lec­tion or styles, fab­ric fin­ishes, and sizes. A tra­di­tional re­tailer sell­ing jeans in the past would have had hun­dreds of out­lets each with an in­ven­tory of more than 3,600 items.

For GCC re­tail­ers, in­te­grat­ing sales chan­nels and im­prov­ing the cus­tomer ex­pe­ri­ence will al­low them to face the ris­ing tide of e-com­merce. Giv­ing shop­pers what they want as part of an im­proved re­tail ex­pe­ri­ence means keep­ing that vi­tal link to cus­tomers by pro­vid­ing them with an op­por­tu­nity to con­nect in per­son with a com­pelling re­tail brand.

Karl Nader is part­ner with Strat­egy& (for­merly Booz & Com­pany), part of the PwC net­work

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