Excerpt
Table of Contents
1. Introduction
1.1 Development of the Internet Penetration
1.2 Digital Convergence
1.3 Media Convergence
1.4 Media and Device Usage
2. The Digital Consumer
2.1 Purchase Behavior
2.2 Different Types of Device Users
2.3 The Digital Living Room
2.4 Six Major Digital Consumer Trends
2.4.1 Device Shift – from PCs to Mobile/ Touch Devices
2.4.2. Communications Shift – from Voice to Data and Video
2.4.3 Content Shift – from Bundled to Fragmented
2.4.4 Social Shift – from Growth to Monetization
2.4.5 Video shift – from programmed to user-driven
2.4.6 Retail Shift – from Channel to Experience
3. Consequences for Traditional Retail
3.1 Success stories of Online Pureplayers and Retailers that fail
3.2 Shopper Experience and Value Creation
4. Implications for traditional Retail
4.1 Think and operate with multichannel in mind
4.2 Employ data analytics to move through the marketing and sales cycle with consumers
4.3. Embrace the small screens and the mobile consumers so attached to them
4.4 Recognize that “winning the digital consumer” is an enterprise responsibility
5. Blue-chip Companies teared away by Digitalization
6. Correlation between impact of Digitalization and different Market Sectors
6.1 Be ambitious
6.2 Acquire capabilities
6.3 Defend and cultivate talent
6.4 Challenge each and everything
6.5 Be fast and data driven
6.6 Follow the money
6.7 Be obsessed with the customer
7.Current status of digital transition in small and midsize companies
7.1 Topline results of Survey
7.2 Data analysis on Dependencies/ Correlations between different variables/questions
Hypothesis 1:
Hypothesis 2:
Hypothesis 3:
Additional Analysis/ recoding of groups
Additional analysis
8. Hypothesis and the Principal Agent Theory
8.1 Hypothesis
8.2 The Principal Agent Theory
8.3 The Principal Agent Theory and E-Commerce/ Purchasing Behavior
8.3.1 Big Data and e-commerce
8.3.2 Cyber crime and e-commerce
8.3.3 Social Impact of Internet Usage and e-commerce
8.3.4 Aggressive Marketing tools
8.4 Adverse information – online search and „analog“ sources
8.4.1 Advantages of Online Search
8.4.2 Big Data and Adverse Information
8.4.3 Cyber crime and Adverse Selection
8.4.4 Social Isolation and the impact on the Adverse Information problem
8.4.5 Summary of Trends influencing the Adverse Information Problem
8.5 Consumer decision making and Moral Hazard
8.5.1 User reviews and branded Content
8.5.2 Price Points
8.5.3 Social Word
8.5.4 Purchase behavior depends on product categories
8.5.5 The impact of Big Data on the Moral Hazard Problem
8.5.6 The impact of Cyber Crime on the Moral Hazard Problem
8.5.7 Social Isolation and the impact on the Moral Hazard Problem
8.5.8 Summary of Trends influencing the Moral Hazard Problem
9. Conclusion Principal Agent Theory and Hypothesis
9.1 The Multichannel model as Future trade model
9.2 The changing role of the store
9.3 Transition from Maturation to Post-Modern market
9.4 Achieving Multichannel Excellence
9.5 Multichannel Management
10. Digital Guide to Small and Midsize retailers from the BtoC area
10.1 Reinventing the business model
10.2 Reduce and reconfigure the real-estate portfolio
10.3 Get serious about using data and analytics for decision making
10.4 Rethink assortments and product offerings
10.5 Managing the strategic challenges: Six big decisions
10.5.1 Decision 1: Buy new or sell existing businesses?
10.5.2 Decision 2: Lead your customer or follow him?
10.5.3 Decision 3: Cooperate or compete with new market entrants?
10.5.4 Decision 4: Diversify or focus on digital initiatives?
10.5.5 Decision 5: Keep digital businesses separate or integrate them with current “analogue” business?
10.5.6 Decision 6: Outsource or own digital knowledge?
10.6 The new consumer Journey
10.7 Conclusion
Bibliography
List of Illustrations
Abstract
Dissertation
Title: Digitalization: The consumer in the digital age, e-commerce and asymmetric information, chances and risks for small and midsize companies in the BtoC retail business
Comenius University in Bratislava, Faculty of Management
Supervisor: Prof. Michal Gregus, PhD.
The present work explores the impact of the global megatrend of digitalization on the business model of small and midsize companies, especially on retail. Fundamentally, the revolutionized search and purchasing behavior of consumers is in the center of the analysis. Businesses around the world need to adapt to the digital consumer, otherwise they will simply be consolidated. The core question this work tries to answer, is the further development of online purchase behavior, precisely the hypothesis, that only online purchase will stagnate or even slow down for certain product categories. In order to have a better understanding of the current situation among small and midsize companies on the knowledge about digitalization, an online survey with more than 100 participating leaders from retail companies has been executed. The main part for discussing the hypothesis is based on the model of asymmetric information between buyers and seller, the Principal Agent Theory by Georg Akerlof. Information asymmetry is the key to understand different aspects that impact on e-commerce. Key leavers (selected) to influence information search and purchase are big data, social isolation, cyber crime and aggressive marketing. One of the conclusions is, that The Principal Agent Theory, developed quite a long time before digitalization began, is still valid and there are different pros and cons in “the old” and the digital world, in regard to asymmetric information. Truly digitalization is unstoppable, but for certain products and industries, online purchase behavior will stagnate or decrease. The model of asymmetric information permits clear recommendations and guidance for small and midsize companies to evaluate urgency to adapt digital consumer purchase behavior.
Key words: digitalization,e-commerce, digital convergence, information asymmetry, Principal Agent Theory, digital consumer, omni-channel retail
Preface
Digitalization is all around and the buzz word in the business world.
I have been inspired to write about this topic in the context of its business impact for 3 reasons.
First, the company I work for spend a lot of effort in the past 2-3 years on adapting the business model to digital requirements, so I witnessed this very interesting transformation process.
Secondly, digitalization has a great impact on the entire Marketing Mix, for me as a marketing leader, it is interesting to see how the entire communication landscape is changing tremendously fast and frequently new formats pop up and others quickly disappear.In the marketing practice it is fundamental to understand the underlying dynamics.
Third, the discussion about the impact of digitalization alongside the Principal Agent Theory and specifically the asymmetric information problem is very versatile and multifaceted, especially for Digitalization those two aspects changed to even more versatility and manifold. The Principal Agent Theory describes a problem that exists since good are interchanged. The learning is, that still today in a digital world the theory is as valid as in the past. So the combination of all 3 aspects made this work an exciting study and I definitely achieved a lot more knowledge about the mega trend of digitalization than I had in my working environment. The acquisition of this knowledge will be very beneficial for my current and future work as Marketing leader.
Thanks to the great research base of McKinsey and Company, but also to the very specific consumer insight research of Price Waterhouse Coopers and Nielsen, digging into the topic of digitalization and getting an overview went quite fast. While approaching the topic, it is clear that not the mobile technology, convergence of media and channels etc., but the digital consumer pushed digitalization. In the year 2000, when the first digital hype occurred, the consumer didn´t use the technologies because they were bad, but because the consumer was not ready.
Most interesting to see from the undertaken survey, that companies and different levels of management do not have a different knowledge on digitalization, there is no correlation between age, rank or company size. So the hypothesis that smaller companies do have less knowledge and therefore need to be more cautious is not valid.
The hypothesis to prove in this paper is, that online purchase (at least for certain categories) will stabilize or even decline. The basis to discuss this hypothesis is the Principal Agent Theory, precisely the aspects of social isolation, cyber crime, big data and aggressive Marketing tools. One learning is, that the model of asymmetric information is still valid today, but the mix of online and offline information sources offers different advantages and disadvantages for the Principal and the Agent than in a purely analogue world.
The final conclusion is, that the future trade model will be an omnichannel model, means the combination of shop floor and digital touchpoints. This supposed to be the ideal constellation in terms of the asymmetric information problem for both, principal and agent.
The hypothesis that online purchase will decline is true for certain product categories, specified by the risk of purchase (high price, complexity of product) and that are especially affected by the aspects of social isolation, cyber crime, big data and aggressive Marketing tools.
This paper closes with a recommendation to small and midsize companies on how to deal with digitalization, how to analyze the properly the digital impact, which measures to take and how to allocate resources.
At this point I want to thank especially my PhD advisor Professor RNDr. Michal Gregus and Dr. VieraBenarova for their great support formulating the final hypothesis and designing the framework of this paper.
1. Introduction
In the course of the last 20 years the World Wide Web has developed from a tool for few to the technology for everyone and has changed the business models of many companies. There is nearly no company today that does not use the Internet. Partly companies business environments have changed dramatically. The structural change has found a new lever.[1] “The internet is the largest experiment involving anarchy in history. Hundreds of millions of people are, each time, each minute, creating and consuming an untold amount of digital content in an online world that is not truly bound to terrestrial law”.[2] The Internet penetration increased dramatically over the past few years and built the success of digitalization (see figure 1).[3]
Figure 1: Internet penetration % of population 2000/2014
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Depending on the category, up to 70% of consumer search online and the same amount buys online (category of computer/ hardware/ software). These numbers are frightening classical retailers and especially for the small and midsize companies that possibly do not dispose of huge corporate strategy and intelligence staff. The adoption to this development is vital, not only for small/ midsize companies, but also for multinational companies.(seefigure 2).[5]
Figure2: Research online purchase online by categories
illustration not visible in this excerpt[6]
If we only go 10 years back into the past, Internet availability was not given to a wide range of people, so the number 1 source of information was the retailer, when it came to search but also when it came to purchase and even to service.[7] So the power of retailers was quite big and many industrial companies 100% relied on the trade. Just 10 years later the rules of the game have completely changed (see figure 3 below).[8] In the first decade of the twenty first century, the number of people connected to the internet increased dramatically from 350 millions to more than 2 billion users. The same accounts for mobile penetration.[9] Digital is fundamentally shifting the competitive landscape in many sectors. It allows new entrants to come from unexpected areas. We’re seeing banks getting into the travel business in some countries. We’re seeing travel agents getting into the insurance business. We’re seeing retailers going into the media business. So the competitive landscape is not what it used to be.[10]
Figure 3: Change of purchase funnel due to “new” digital touchpoints
Abbildung in dieser Leseprobe nicht enthalten[11]
„Consumers are using digital channels to make more informed decisions and making purchases through multiple channels. Their experiences with Amazon, Google and iTunes have increased their expectations.”[12] Companies willuse the gigabytes of personal data to create and deliver targeted offers. Frankly, today’s digital consumers are confused by, if not frustrated with, fragmented cross-channel efforts and irrelevant offers and campaigns. So the challenge for companies is not only to adapt the classical purchase funnel, but to be relevant to find the right mix of multiple digital touchpoints (see figure 4).
Figure 4: Digital Path to Purchase
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„The classical retail is required to reposition and reinvent himself, this necessity clearly shows the success story of Amazon: The granddaddy of direct- to-consumer Web-based commerce expands its presence.”[14]
As Amazon’s outstanding growth shows, consumers are in love with online commerce. Once the go-to site for books and CDs, the categories Amazon offers now seem to multiply annually. The numberstell a remarkable e-commercesuccessstory:
- Some analysts project that Amazonwill rack up more than $160 billion in annual sales by 2016, representing a 23 % compound annual growth rate, a momentum almost unmatched by any other retailer.[15]
- Amazon has diversified quickly from its core book business, as its 2010 acquisition of Diapers.com shows.
- The company boasts a 23 % sales conversion rate for visitors, compared to the 3 % industry average.For those keeping track, the industry average continues to decline while Amazon’s conversion rate continues to grow“[16]
In the following the focus is on the impact of the Internet on existing business models and the corresponding consumer behavior and not on the technology of the Internet itself. For many industries and sectors, but also for the classical trade, the new purchasing behavior of consumers have severe consequences and open huge action fields for companies.[17]
1.1 Development of the InternetPenetration
Whereas just before the year 2000 there were nearly no private Internet connections existing, the penetration today in the western world is around 90% (see figure 5)[18].
Figure 5: Internet Penetration and Internet sales for technical consumer goods
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So millions of users worldwide have access to all kind of information, but in the beginning of the Internet, the quality of the information, the offering of rich media content, interactivity and depth of information was completely different in 2000 than today and not at all comparable. With the exponential growth of user-ship only some years ago, also the quality, variety and forms of content have significantly increased.
1.2 Digital Convergence
Digital convergence means the fusion of different industries to a whole; informationtechnology, consumer electronics, entertainment etc. The term "digital convergence"additionally means the ability to view the same multimedia content from different types devices and thanks to the digitization of content (movies, pictures, music, voice, text) and the development of connections methods. Reading emails on your TV via a connected smartphone, watch a streaming movie on the home theater connected to the Internet[20] "the flow of content across multiple media platforms, the cooperation between multiple media industries, and the migratingbehavior of media audiences."[21] The Dotcom bulb in the year 2000 has been the consequence of an early technology euphoria with high expectations of ROI as well as the speculation of rocket skying stock values. Digital convergence at the time of the Dotcom bulb had its focus on the technological fusion, the maturity had been limited and therefore the break through ended in a collapse. Not before the convergence of technology and media a wide range of users could be reached, with the introduction of the iPhone a sustainable digital hype started.
1.3 Media Convergence
Convergence of media, a phenomenon that delivers the connection of information and communication technology, of computer netwoks and media content.It joins the “three C’s”: computing, communication and content”[22] and the direct consequence of the digitalization of media contents and the popularization of the Internet .Media convergence transforms established industries, service and operating models and makes the development of completely new forms of contents possible.It dilutes long time established industries and their „content silos“, it leads more and more to the upload of contents from personal devices by the users, which leads to completely new challenges for public regulations and information policies.The five major elements of media convergence are: technological, industrial, social, textual and political nature (…).[23]
Today´s importance of the Internet is surely due to the fact, that there is mature and sufficiently high number of Internet users globally, that content depths and range of rich media is available and that capabilities of mobile applications and devices is supporting 24 h online availability.
1.4 Media and Device Usage
Today, the consumer is more connected than ever, with a deep access and influence on contents, brands, opinion leaders, accelerated though to a continuous and fast development of always better and higher performing devices and platforms. Contents that so far have been accessible for a few number of consumers via classical and separated delivery methods and channels (as print, radio or TV), are now easy to search and order and finally can be used by only one device/ user interface, apart contents are easy to share.This isthe basis of the media revolution and dilutes traditional media definitions.[24]
To make it clear: today´s consumer has different digital devices. The majority of the US households owns a HDTV, PC with Internet access, Smartphone(s) and spends 60 hours a week with the consumption of contents on different devices (multiple screen). Especially the ownership of mobile devices influences the consumer shopping experience. Increasingly, consumers rely and use online search and price comparison on their mobile devices.[25]
Accenture’s research shows, that consumers want the newest and most innovative devices, even if they already have a staple of consumer electronics. Not only do consumers plan to fill gaps and replace current products, to a large extent they will add more of the same (see Figure).
Figure 6: Purchase Intentions
illustration not visible in this excerpt[26]
Building on strong growth over the past years, smartphones rank as the second most owned piecesof digital consumer technology among 14 categories in the survey ranging from computers and tablets to televisions and gaming systems. Nearly three-fourths of respondents own a laptop computer, 69 % own a smartphone, 57 % own a HDTV, 37 % own a tablet, and 37 % own a home gaming system. Yet owning a smartphone does not preclude consumers from owning other connected devices. More than a quarterof all consumers surveyed own the combined set of a smartphone, laptop and tablet, a significant percentage relevant across age groups.[27]
Looking forward 12 months, multi-function devices continue to dominate purchase plans as smartphones, HDTVs and tablets top the list of devices that consumers plan to buy. Of greater interest is that an overwhelming majority of respondents planning to purchase newdevices in the next 12 months already own the device. For example, among the 52 % of consumers planning to purchase a smartphone in the next 12 months, only 4 % don’t currently own one. Twenty-nine percent plan to purchase a replacement for their current smartphone and 19 % will buy one in addition to the one they currently own.
Yet tools and standards are changing faster than companies can react. Customers will soon be able to search for products by image, voice, and gesture; automatically participate in others’ transactions; and find new opportunities via devices that augment their reality (think Google Glass). How companies engage customers in these digital channels matters profoundly, not just because of the immediate opportunities to convert interest to sales but because two-thirds of the decisions customers make are informed by the quality of their experiences all along their journey, according to the research of the Accenture study. To keep up with rapid technology cycles and improve their multiplatform marketing efforts, companies need to take a different approach to managing the consumer decision journey,one that embraces the speed that digitalization brings and focuses on capabilities. In a world where physical and virtual environments are rapidly converging, companies need to meet customer needs anytime, anywhere.[28]
2. The Digital Consumer
2.1 Purchase Behavior
For most American consumers, their everyday lives and their digital lives are now wholly merged. So much, that in 2013, the Oxford Dictionary officially codified the term digital detox, “a period of time during which a person refrains from using electronic devices such as smartphones or computers...”[29],by adding it and the definition to its online version (which, ironically, is accessible only via a digital device.)
Today’s consumer is more connected than ever, with more access to and deeper engagement with content and brands, thanks to the proliferation of digital devices and platforms.[30]
Digital consumers differ significantly from their traditional predecessors. Gadgets such as computers, mobile phones, handhelds and PDA´s have become the chosen medium for almost every transaction, from social networking and sharing information to shopping and entertainment. Demographically digital consumers embrace every generationand each and every userseeking learning, utility or entertainment. “These days it is hard to image a life without mobile devices”.[31] Digital consumers are also changing the traditional consumer mindset in their approach to decision making. These consumers rely on Internet search, friends and online peer reviews as opposed to „sponsored communication”, to make their decisions. A recent study shows that aamazing 78% of consumers trust peer recommendations and only 14% believe advertisements.[32]
The following example shows very much in detail, how the digital consumers information search and purchasing behavior looks like:
„Imagine that a couple has just bought its first home and is now looking to purchase a washer and a dryer. Mike and Linda start their journey by visiting several big-box retailers’ websites. At one store’s site, they identify three models they are interested in and save them to a “wish list.” Because space in their starter home is limited and because it is a relatively big purchase in their eyes, they decide they need to see the items in person. Under an optimized cross-channel experience, the couple could find the nearest physical outlet on the retailer’s website, get directions using Google Maps, and drive over to view the desired products. Even before they walk through the doors, a transmitter mounted at the retailer’s entrance identifies Mike and Linda and sends a push alert to their cell phones welcoming them and providing them with personalized offers and recommendations based on their history with the store. In this case, they receive quick links to the wish list they created, as well as updated specs and prices for the washers and dryers that they had shown interest in (captured in their click trails on the store’s website). Additionally, they receive notification of a sale, “15 % off selected brand appliances, today only”, that applies to two of the items they had added to their wish list. When they tap on the wish list, the app provides a store map directing Mike and Linda to the appliances section and a “call button” to speak with an expert. They meet with the salesperson, ask some questions, take some measurements, and close in on a particular model and brand of washer and dryer. Because the store employs sophisticated tagging technologies, information about the washer and dryer has automatically been synced with other applications on the couple’s mobile phones, they can scan reviews using their Consumer Reports app, text their parents for advice, ask Facebook friends to weigh in on the purchase, and compare the retailer’s prices against others. Mike and Linda can also take advantage of a “virtual designer” function on the retailer’s mobile app that, with the entry of just a few key pieces of information about room size and decor, allows them to preview how the washer and dryer might look in their home. All the input is favorable, so the couple decides to take advantage of the 15 % offer and buy the appliances. They use Mike’s “smartwatch” to authenticate payment. They walk out of the store with a date and time for delivery; a week later, on the designated day, they receive confirmation that a truck is in their area and that they will be texted within a half hour of arrival time—no need to cancel other plans just to wait for the washer and dryer to arrive. Three weeks after that, the couple gets a message from the retailer with offers for other appliances and home-improvement services tailored toward first-year home owners. And the cycle begins again.“[33]
This example shows that consumers use a large diversity of digital touchpoints, even including the classical POS/ sales person. But not all consumers behave the same way. For years, touch points have been understood through the metaphor of a “funnel”- consumers start with a number of potential brands in mind (the wide end of the funnel), marketing is then directed at them as they methodically reduce the number of choices and move through the funnel, and at the end they emerge with the one brand they chose to purchase (see figure 7).
Figure 7: The traditional purchase funnel
illustration not visible in this excerpt[34]
But today, the funnel concept fails to take into account all the touch points and key buying factors resulting from the explosion of product choices and digital channels, connected with the emergence of an increasingly demanding, well-informed consumer. A more sophisticated approach is required to help marketers navigate this environment, which is less linear and more complicated than the traditional funnel suggests(see figure8).
Figure 8: Consumer decision journey
illustration not visible in this excerpt[35]
McKinsey´s qualitative and quantitative research in the automobile, skin care, insurance, consumer electronics and mobile- telecom industries show, that something quite different is happening now. Actually, the decision-making process is a more circular journey, with four primary phases representing potential battlegrounds, where marketers can win or lose: initial consideration; active evaluation, or the process of researching potential purchases; closure, when consumers buy brands and post-purchase, when consumers experience them.[36]
2.2 Different Types of Device Users
Not only that consumers have more devices to choose from, but they own more devices than ever. In 2013, americans on average own four digital devices and ownership of many digital, mobile and connected devices has reached critical mass. When looking at the average american household, HDTVs (83%), Internet -connected computers (80%) and smartphones (65%) are in a majority of households, with a near majority for digital video recorders (49%) and gaming consoles (46%).
As a result of the explosion in digital and mobile device ownership, american consumers are connected with screens throughout the day and engage with media content for more than 60 hours per week. TV remains at the center of consumer media consumption. However, increases in time-shifted viewing and streaming video through a PC or smartphone show, that consumers are increasingly comfortable accessing content whenever and wherever they want.[37]
To put it simply, today’s consumer have a lot of digital devices. A majority of U.S. house-holds now own high-definition televisions (HDTVs), Internet, connected computers and smartphones, and they spend an average of 60 hours a week consuming content across multiple screens. In addition to more devices, consumers now have more choices for how and when they access content, such as broadband-only delivery of programming and DVR´s for time-shifted viewing.
In particular, the ownership of mobile devices is revolutionizing the consumer shopping experience: „Mobile is the game changer: going from 2 % of our transactions three years ago to 20 % today“.[38] Increasingly, consumers are relying on mobile devices to research potential purchases and compare prices for goods and services.Figure 9 below shows the enormous growth in mobile devices:
Figure 9: Global Unit shipments of desktops, PC´s, Smartphones, Tablets
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U.S. consumers continue to take advantage of the convenience of anytime, anywhere browsing and shopping via their smartphones and tablets.[40]
Just looking back for a moment: before the increasing Internet penetration and media convergence IBM developed the first Smartphone „Simon“ and finally it was Nokia, that launched the first commercial smartphone in 2002. With the introduction of the iPhone, the real take off of mobile devices started.[41]
illustration not visible in this excerpt[42]
Mobile behavior and mobile devices changed dramatically since the introduction of the iPhone. Before, consumer research was very much based on socio-demographic data, behavioral factors were not in the focus. Today there is a very diversified user universe and it is each time more difficult to find sufficiently big consumer clusters, that can be targeted and even worse: the consumer clusters change quickly over time. This is a snapshot in 2012 from the McKinsey iConsumer survey (see figurebelow).
Figure 10: One connected World, with many iConsumerSegements
illustration not visible in this excerpt[43]
In the following we will go a little bit deeper into the user behavior of different digital devices, their dramatic change of behavior in search and purchase processes and will also see how multiple devices are used at the same time.
2.3 The Digital Living Room
The rapid adoption of a second screen has transformed the traditional TV viewing experience. Consumers are using smartphones and tablets in ways that are natural extensions of the programs they watch, like looking up information about the characters and plot lines, or researching and purchasing products and services advertised just minutes before. Using social media to engage with other viewers has also transformed the live viewing experience for millions of consumers.
Consumers today spend less time engaging with live content via traditional TV, compared with the same time a year ago. However, consumption of TV content has increased thanks to a significant increase in hours watching time-shifted TV. When looking at quarter 2 of 2013 compared with the same quarter five years prior, computer-based video consumption is up 157 %, mobile users are spending 59 % more time watching video on their mobile devices. Indicating that consumers are welcoming opportunities to engage with content when and where they want (see figure below).[44]
Figure 11 : How consumers spend media time each month
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Connected devices such as smartphones and tablets have become constant companions to consumers on the go and at home. 48% of smartphone and tablet owners say they use their devices as second-screens while watching TV at the same time. When using connected devices simultaneously, opportunities exist to deepen consumer engagement with content on the primary screen.
As shown on the following figure, consumers are more likely to reach for a tablet than a mobile phone as the second screen, with the exception of email / texting friends about the program (see figure below).[46]
Figure 12: Connected device owners usage while watching TV
illustration not visible in this excerpt[47]
Another aspect which accelerates the rapid increase of usage of mobiles devices are apps: the “appification” is everywhere! Apps increasingly offer the functionality that previously required a device purchase, consumer interest in apps of all forms rises. Every app the survey asked about is currently used or planned to be used by more than 50 % of consumers: Cameras, GPS driving, gaming, e-reading, voice or music recorder, radio, and TV. Thus, despite the large number of product categories owned by respondents, a lot of the functionality they need is being added and more often used via apps on their multifunctional devices (see figure below). That means, there will be many very known companies like for example TomTom´s mobile GPS devices, that will probably no longer sell their hardware but the software (maps).[48]
Figure 13: Interest in apps
illustration not visible in this excerpt[49]
The “Internet of things” is rapidly becoming a reality and consumers are racing toward a complete digital lifestyle.[50]
In regard to the target group of digital mobile shoppers, classical target group assumptions got to an end. As the figure below shows, there is no difference anymore in regard to gender, age or income. Additionally in terms of topics most of them equally look for reviews or search for store locators(see figure).[51]
Figure 14: What characterizes the mobile shopper among digital consumers
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McKinsey identified in its “iConsumer research“, that there are four kinds of mobile phone users in Europe, that have differentbehavioral patterns. The analysis observed, that market’sare underlying a value-creation potential. Consumers werecalled who largely use voice, even with their smartphones, traditionalists in our study. Data-practicalsuse very little voice but lots of data. Data entertainers also use little voice but are heavy users of video, music, and games. Mobile omnivores are super-users of bothroughly the same monthly service fees that the other two groups do (see figure below).[53]
Figure 15: Segmentation of Mobile Phone Users
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So the iConsumer Study shows different mobile phone use characters, nevertheless this is just a snapshot and the analyzed and defined groups might not be existing in this shape and value in a couple of months.
2.4 Six Major Digital Consumer Trends
In the same McKinsey research,six major consumer trends have been identified (see figure below). The research tracks the cross-platform and cross-device behaviors of tens of thousands of consumers each year, in both developed and emerging markets around the globe.
Figure 16: Six significant iConsumer trends
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What do these six trends mean and which implications do they have to explain the digital consumer behavior and to understand which impact this could have on retails business models will be discussed in the following 6 chapters.
2.4.1 Device Shift – from PCs to Mobile/ Touch Devices.
Smart phones are fast becoming omnipresent, with a penetration of about 60% in the US. Just over 30% of US Internet equipped households now have a tablet as well, and the rest of the developed world is close behind. Mobile phones and tablets now represent up to about 44% of all personal computing time, having nearly doubled from 2008. The implications of this shift are already felt by many device manufacturers and their major retail partners. The fast dispersion of mobile devices is driving digitalization, even though the growth of apps is accelerating this trend considerably. For the prediction of the future development of online search and purchase the device shift plays a major role.
2.4.2. Communications Shift – from Voice to Data and Video.
Email and telephonic voice have fallen from over 80% to about 60% of our “communications portfolio”, while time spent on social networks has doubled to take over a quarter of all our communications time. And when we use our phones, only about 20% of the time is for talking (down from over 60% just 5 years ago), with the majority used for more data-centric activities such as streaming music, browsing websites and playing games.[56] The consequence: mobile carriers in particular face challenges in re-orienting their business models to focus on data rather than voice minutes. The US market has many lessons for the rest of the world in this area. The question is, what drove the digital behavior first: devices or communication? Possibly it was the devices, that slightly before the app and content hype exploded, kicked off the outstanding development. Anyway, the communication behavior is today driving the device development and is therefore another important aspect for later trying to answer the question, if online search and purchase behavior will further increase or not.
2.4.3 Content Shift – from Bundled to Fragmented
In large part thanks to powerful search tools, the ‘long tail’ of media and content (whether that be text, video, classified listings, products for sale, or otherwise) is accessible to anyone. Thus some of the value in traditional “bundles” (whether newspapers, network TV stations, or big-box retailers) has been diluted. The way we use our mobile phones shows this very well. The number of apps (typically for specific single-purposes) installed has doubled to over 30 from 2008 to 2012. Our spending on these apps is highly fragmented, however, and the growth potential still highly uncertain. Challenges are obvious for both, content owners and marketers to reach and engage audiences that access such versatile, fragmented media.
illustration not visible in this excerpt[57]
2.4.4 Social Shift – from Growth to Monetization.
Social networking represents almost a quarter of all Internet time (up 10 points since 2008) and reaches over 75% of all Internet users. Yet, for the first time we have seen small declines in both total audience and levels of engagement in developed economies. This is a remarkably fast climb to maturity, given that major players like Facebook, LinkedIn and Twitter have yet to celebrate their 10th birthdays. Facebook and LinkedIn now face the quarterly earning pressures of the public markets as well. At the same time, businesses of all shapes and sizes are now actively trying to use social media as part of their marketing efforts. Achieving real and measurable returns on these efforts will be a continuing challenge for players across the industry. From a consumers perspective, social media offers great possibilities to consult “neutral” friends and family before buying a complex, unknown product on the web. As we will see later, consumer ratings are much more important for a purchase decision than test institutes and manufacturer advice. In the analog world test institutes have had an enormous impact and even could destroy companies with bad test results. Today, the most trustful opinion available is the digital peer group.
2.4.5 Video shift – from programmed to user-driven
Linear television remains relatively flat on an absolute basis, but has slipped on a relative basis, and now represents just 65% of all video viewing for US consumers on their television screen, and 52% across all screens. Time-shifted DVR content, watching video on PCs and over-the-top Internet video services such as Netflix, make up much of the balance. The increase in all varieties of time-, place- and device-shifting video options will continue to pressure traditional advertising-supported business models for distributors, advertisers, and content owners in the value chain.[58] This development is also paying into the fact, that the consumer is in the center of everything since a global transparency and connectivity is empowering him to decide whether a product is successful or not. This has also occurred in the past, but not at all merciless and determined.
2.4.6 Retail Shift – from Channel to Experience.
Despite its tremendous growth and transformation of the retail landscape, e-commerce holds only about 5% of all retail sales. As connected mobile devices proliferate, their potential to transform the shopping experience (both in store and online) is the next opportunity. About half of all smart phone owners now use their devices for retail research, and though small today, we will soon see significantly more consumers using smartphones and tablets to complete their transaction as well. The combination of mobile retail and true multi-channel integration will have a transformative effect on the retail experience, and begin the era of Retail 3.0. This is actually leading to the hypothesis of this work: what will be the future of online search and purchase and which factors do contribute to a positive, negative or neutral development.
3. Consequences for Traditional Retail
There is no doubt that social and mobile technologies are profoundly changing consumers shopping habits and expectations, and the pace of this change is alarming. Even in theslowUS economy, online shopping in 2011 grew 15% over the previous year. Retail giant Amazon sold $1 billion through its m-commerce site and mobile applications in 2010, and that figure was forecast to double in 2011.
Currently, 35% of Americans own web-enabled smartphones, a number that is expected to explode in the coming years. On Christmas day 2011 alone, 6.8 million iOS and Android devices were activated. Interestingly, from this rather large sample, half of smartphone owners say they have made some form of purchase using their mobile phone, highlighting the power of the mobile device in today’s retail landscape.
This purchasing behavior represents a change that empowers not only consumers, but online retailers, who enjoy numerous economic and logistical advantages over mall stores or corner shop. Lower overhead costs and tax advantages enable online merchants to offer sometimes significantly reduced prices on everything from apparel to appliances. Because of this, it's no wonder people are beginning to ask if retail stores can survive in this increasingly tech-powered environment.[59]
Retailers must catch up with multi-channel consumers. The PWC study shows consumers are leading and shaping the move to online, with retailers running behind. PWC found that the majority of consumersbehavior is consistent across regions and demographics, as well as between developed and developing countries and markets.
The global consumer is becoming increasingly sophisticated and retailers cannot adapt their operating models at the same pace. Closing the gap requires a significant increase in agility and flexibility by retailers, driven by a better understanding of their customers. This means changing the way they track and measure consumer behavior, market their products, run their stores, and manage their supply chains.
The winners will be those, who have recognized these trends and are building agile organizations capable of delivering a consistent profitable proposition in a multi-channel way.[60]
A long time before the tremendous development of the Internet and digital convergence, Jeff Besos founded the first online bookstore „Amazon“ in 1994.[61]
With the digital convergence (in reality starting with the introduction of the iPhone) the search and purchase behavior drastically changed and as the greek philosopher Heraklit said „Nothing is more constant than change“ which is as true today as in the past.[62]
The change of the global consumer, the retail landscape and the especially technology in the last decade threaten to provoke a chaos for established business models and marketing approaches. For those able to adapt and anticipate these changes, there are great possibilitiesand chances ahead.[63]
The business world often speaks about disruption. Traditional businesses being shaken to their cores by factors like technology, being forced to rethink their businesses, approaches, or products. Perhaps this is nowhere truer than in the retail industry, more precisely brick and mortar retail. While business diviners have been saying “retail is dead” for years, with no true apocalypse to fulfill their forecasting, they might be on the edge of advocacy. After earnings dropped by 19 %, Radio Shack, which has one of the largest footprints of any American retailer with more than 5,200 stores in the U.S., announced it will close up to 1,100 stores. Staples will close 225 of its 1,846 stores in North America by the end of 2015. And it appears to be only the tip of the iceberg: consumer perceptions of traditional retail are declining as well. Is there any solution to the fact, that brick and mortar stores keep declining and consolidating? Imagining that a store is a mechanism to deliver goods from buyer to seller and allows great brands to use the physical space to create a journey into the brand’s universe, retailers who understand the power of the shopping experience, are actually on the right track and did understand what consumers want. Apple is probably a good example: The stores are a space for customers to interact with the brand. Dedicating an entire wall of a high street store to a free service in the Genius Bar was seemingly inefficient and overly costly, but revolutionized the way that Apple engaged with its customer.[64] Apple Stores, which have annual sales averaging $40 million per store in a category that in 2000 everyone said would move entirely to the Internet. Today the Apple Stores are the highest performing stores in the history of retailing. “Physical stores are still the primary way people acquire merchandise, and I think that will be true 50 years from now. Today the Apple Stores are the highest performing stores in the history of retailing. Physical stores are still the primary way people acquire merchandise, and I think that will be true 50 years from now.”[65]
So in this period of disruption, while many proclaim the death of retail, some clever retailers, who know that the experience they deliver in-store is something that Amazon can’t (not yet!) deliver to your door, are thriving. “So is retail dead? Perhaps, yes, for those who don’t see the true power of the medium. For those that know better, a resurrection is underway.”[66]
3.1 Success stories of Online Pureplayers and Retailers that fail
„You could argue that Amazon on the e-commerce front and the Apple Store with the customer experience are the major influences in the industry from 2000 to the present“.[67] Amazon started 20 years ago building up the first bookstore online. It took Amazon quite a long time to get profitable, and even more time to become as dominant as today. It is one of Americas greatest success stories and Amazon shows a fantastic performance: a market capitalisation of 132 billion USD and revenues of 61 billion USD. So on the trade side Amazon is probably the success story for ecommerce.[68] From a german perspective the example of the MediaSaturn Group is quite interesting as well, as MediaSaturn has been the dominating electrical retailer not only in Germany, but in Europe. The business model is focused on large electrical superstores with nearly no service, but always offering the best price.MediaSaturnhas been in crisis for some years and is constantly loosing market share. The reason is, that MediaSaturn has so far not been capable to adapt to the new digital consumer. The group is under pressure because of running huge surfaces with huge fix costs, where the number of shoppers is dramatically declining. With the advertising slogan „GeizistGeil“MediaSaturn has educated, through massive media pressure, that the most important thing for consumers is the best price.Today this is the major problem of the company: there are better prices online all over the place and without offering any additional argument, any shopping experience etc, their superstores become “super showrooms”. So once growing by proclaiming “best price is everything”, today „the revolution eats his own children.“[69] The business model is no longer working as now the Internet retailer took over „the best price” (see figure).
Figure 17: Best price communication from MediaMarkt
illustration not visible in this excerpt[70]
So how can you win the game in the digital world being a retailer? Which are the big strategic questions you need to ask:
- How do I built up a successful business in online channels
- How do I better understand my customers
- How do I integrate social channels into my business model
- How to run a multichannel business without “loosing” traditional retailers[71]
Surely, online sales will somehow stabilize on a certain level or even decline again, depending on the category. In the US online retail/ e-commerce is now around 6 %of the entire turnover.[72] In England one third oft the population is using constantly only grocery shops.[73] The same accounts for clothing in Germany,in Chinaonline retail hastrippled in the 3 years.
If the traditional retail wants to survive, a cooperation with big pure players like Amazon or by himself become a multichannel player is mandatory.Setting up an own online shop is not really cheap and it takes a lot of effort to maintain but even much more effort to bring clients there and make them shop. So for many the economics of launching a branded e-commerce site will prove unfavorable.[74] Alternatively a cooperation with the “big ones” makes more sense.
A good example for how to turn around an antiquated business model is Otto in Germany: being a classical goods dispatcher based on a printed catalogue, today Otto managed to be a relevant competitor to Amazon and ranks as the second most biggest online retailer in Germany, behind Amazon.[75] Amazon truly is probably the biggest success story driven by digitalization and the new digital purchase behavior. But Amazon did not simply ride on the digital wave to become the by far largest Internet retailer, there is a very clear and stringent strategy behind, followed by tough leading principles.[76]
Figure 18: Top 10 Online Shops by quantity of Facebook likes
illustration not visible in this excerpt[77]
3.2 Shopper Experience and Value Creation
For traditional stores to compete, they need to use technology to improve aspects of the in-store shopping experience that consumers care about, like:
- Quality ofcustomerservice
- What the store looks and feels like
- Howproductsaredisplayed
- The experience of trying and buying a product[78]
Seemingly, online retailers have an unfair advantage when it comes to using technology to improve their businesses. They are powered by sophisticated analytics and tracking tools that provide deep and useful insights into online behaviors and patterns. For example, online retailers know, in near real-time, know how many people have visited their store and how many have been there before. They know specifically which sections of the site have been visited and what products and brands are of interest. Additionally, online retailers know how long consumers shopped, when they visited, how frequently they visited, and whether or not certain deals or ads attracted them to the store. In exchange, the consumer gets lower prices, greater selection, and a more convenient shopping experience that can be endlessly improved.
In comparison, offline retailers simply haven’t had the analytical tools at their disposal to understand customer journey at this level to deliver a tailored, personal shopping experience. And delivering this first-class, physical experience is key to retail success in the future.
This physical experience cannot be duplicated on the web (no matter how social it gets) and is only possible through visiting the store. If we empower physical retailers with tools to better to understand their customers, I believe they will respond with innovations that delight consumers and distinguish the real world shopping experience from the online world.
By implementing a very simple technology to monitor shopping behavior via Wifi, smartphone signals, physical retailers can successfully bridge the gap between the online and offline world. By utilizing mobile phone technology, retailers have the ability to view anonymous, aggregated shopper traffic data that will help them make data-driven business decisions to better serve their customers. The sustainable advantage of a retailer or a digital-commerce business is data. What data can do, is to allow you to connect this exploding inventory, exploding selection that we’re all seeing, down to be a highly relevant experience for a consumer.[79]
With this data, retailers can:
- Measurecustomerloyalty;
- Improvein-store layouts;
- Make better HR/ staffing decisions;
- Reduce wait times in checkout lines;
- Create more attractive window displays;
- Adjust store hours based on actual foot patterns; and
- Make the merchandise people are looking for more accessible.
The smartphones and portable devices many of us carry around act as small radio transmitters sparking signals into the air. By using in-store sensors that recognize nearby wifi signals, retailers can order foot traffic characteristics through the physical space. Unlike some analytics tools used by online retailers, the key in malls and physical retail environments is to develop a solution that never collects any personally identifiable information. As shoppers walk by, and then through a store, retailers don’t know who they are, rather where they are in the store.[80]
Building engaging experiences across channels is incredibly important. Many retailers have spent their entire lives thinking about how to build an engaging experience in one channel, which is the store. But now, understanding how to connect with your core customers across every way they want to connect, not the way you want them to connect, but the way they want to connect with you is a different skill.
It requires design and product management. It requires understanding how to market in a digital world. There are still many instances where it is old-school marketing. It’s still about major TV campaigns, getting people into the stores. That’s still important, and that’s not going to go away.
But understanding how to engage in a world of exploding social networks, how to use search, how to use catalog, how to optimize, and how to engage –are very different skills. That is going to become a core part of the toolbox for retailers and merchants of all sizes around the world.[81]
To position themselves for success in a multichannel world, retailers would do well to take a disciplined approach that begins with a reappraisal of the role of the physical store. McKinsey recommends a five step approach forthis, called STORE:
Figure 19: McKinsey´s five step approach for reinventing the store
illustration not visible in this excerpt[82]
The effects of online migration in the retail industry are evident in every category. But it is not at all the only problem traditional retailers are confronted with: floor space. Apart from this, we are talking about a strong and powerful competitive environment from e-commerce champions like Amazon, lack of shopper experience, lack of multi-channel integration etc.[83]
The traditional retail is suffering especially by the big e-commerce players like Amazon making pressure on prices and margins (see figure below).
Figure 20: Online migration is hurting store economics, and there are no quick fixes.
illustration not visible in this excerpt[84]
Shifting from a store-focused approach to a multichannel mind-set requires retailers to change their traditional frames of reference and ways of working. The brick-and-mortar store is not dead; it just plays a different role now. In fact, in a multichannel world, physical stores can provide a competitive advantage. Some multichannel retailers have seen growth in their online sales and penetration among consumers who live near their stores.
In light of rapidly evolving technology and consumer behavior, McKinsey believes retailers that take a forward-looking view and respect the following five imperatives, can position themselves for multichannel success.
The first question that retailers should ask themselves at the beginning of their store-network transformation journey is, “What role will my brick-and-mortar stores play in a multichannel world?” To answer the question, retailers must find out what their customers truly care about.[85]
Reinvent the in-store shopping experience: Creating the store of the future will mean overhauling the in-store customer journey, in part by using new technology to make the shopping experience as seamless and easy as possible. Some retailers simply copy the in-store moves of multichannel champions such as Apple and Burberry or equip sales staff with iPads to give their stores an updated, high-tech look. But cosmetic changes alone won’t result in sustainable impact. A multichannel mind-set must be embedded in the store design and in employees new way of working.[86]
Strategically, retail leaders should keep a close watch on their performance in the six dimensions of retail excellence: customer focus, merchandising, operations, infrastructure, people and most important: customer proposition (the figure below). Underperformance in any of these dimensions can be deeply problematic, but if a retailer doesn´t have a compelling customer proposition it simply won´t survive.
Figure 21: Retailers should monitor their performance in the six dimensions of retail excellence.
illustration not visible in this excerpt[87]
How do you turn the company around? The experiences of desperate retailers that have successfully turned around their business, either during or since global financial crisis, have shown that a five-stage approach to retail turnarounds can lead to a sustained success.
From McKinsey´s viewpoint, a successful turnaround goes through 5 phases (see figure below).
Figure 22: A successful retail turnaround typically undergoes five stages
illustration not visible in this excerpt[88]
A last aspect in order to transform classical retail into multichannel retailers during restructuring is to understand, which of the existing stores are prepared for the future and which need to be closed down (see figure below).
„A chief restructuring officer should spur a radical rethink of the companies operating model and challenge managers assumptions about what is possible.“[89]
Figure 23: Stores should be categorized by profitability and ease of exit
illustration not visible in this excerpt[90]
With this in place, everyone stands to win; consumers get a better shopping experience and retailers are able to compete with the online world by making their customers happy.
When the video cassette recorder (VCR) became commercially popular in the 1980s, many predicted movie theaters would go out of business. In the end, the film industry was strengthened by the new technology and the demand for films it created. The same could be true for retail stores. Though we cannot know all the ways the technologies we are creating today will change the industry, I believe we will come to appreciate and value the physical shopping experience even more, and retail will thrive.[91]
4. Implications for traditional Retail
„To successfully acquire and retain customers, organizations must recognize these new dynamics, adapt and evolve to become more flexible and responsive.“[92] It is evident, that the emergence of the digital consumer has provoked implications for businesses. The new trends in consumer behavior require organizations to re-look at company processes, product design, quality of experience, pricing configuration, delivery mechanism and medium of marketing.[93]
Companies are faced with opportunities and challenges as tech-smart, on-the-go consumers use a mix of digital channels to move from browse to purchase. eCommerce, eCoupons, social networks and mobile applications provide more opportunities than ever to learn about, engage with and deliver the goods to consumers. Yet, the expanding number of touch points and channels increases the difficulty of finding the right combination to serve them efficiently and consistently.
Consumers are using digital channels to make more informed decisions and making purchases through multiple channels. Their experiences with Amazon, Google and iTunes have increased their expectations that companies will use the gigabytes of personal data acquired to develop and deliver targeted offers.
Which brings us to the question at hand: Given what we know about consumer and how they use digital channels, how should companies prioritize their investments to attract, engage, sell to and retain digital consumers?[94]
4.1 Think and operatewith multichannel in mind
Research shows that consumers use a variety of channels as they move along the path toward purchase, yet many companies do not move to meet them where they are. In part, this is a product of organizational structure, when separate channels are managed by nearly separate teams. But companies need to tear down those silos if they are to serve the multichannel consumer well and completely. They also may need new capabilities to understand how consumers are using each channel so that they can react appropriately and move them along the path to purchase.
When managed independently, single channels, even if executed superbly, have limited impact and provide just a slice of insight into consumer behavior, and this is potentially misleading, given that consumers use a variety of channels. A true multichannel strategy integrates, leverages, measures and optimizes the unique properties and advantages of each channel. Consumer behaviors displayed on websites, social networks, mobile apps, emails and in stores should all be considered in prioritizing multichannel investments.
Consumer good companies are finding, that the best multichannel marketing is one that promotes an ongoing, synchronized dialogue with consumers. But, like all dialogues, it requires companies to pay constant attention to the flow of information received, and be agile enough to adapt to changes so they can deliver relevant, customized messages at the right time and the right place.
4.2 Employ data analytics to move through the marketing and sales cycle with consumers
Companies develop a cross-functional, integrated analytics vision, as well as invest in the technology, processes and top analytic talent needed to identify target consumer segments and tailor marketing and sales strategies and offers. Delivering personalized, performance-based messages has never been easier, given the access that digital channels provide. The companies that use analytics systematically to understand consumers better and acting on that understanding will deliver the rewards of big data.
4.3. Embrace the small screens and the mobile consumers so attached to them
They are everywhere and sometimes in the way: slowly walking while scrolling through texts and emails, walking through store corners as they scan bar codes, or playing with their new mobile payment app to pay for the skinny latte at the coffee shop. In many markets, more than half the population has mobile devices or smartphones, and over 10 % have more than one mobile device.
Figure 24: Global Unit shipments of desktops, PC´s, Smartphones, Tablets
illustration not visible in this excerpt[95]
Mobile is the most intensely personal channel for many consumers, and a successful mobile strategy requires a mindset shift that reflects this sensitivity.
At the beginning of the digital age, many companies set up separate units to manage the “e-commerce” website:separate staff, separate budget, maybe even a separate location. Now, the complexity of executing marketing operations increases significantly as the number of digital touch points and channels multiplied, demanding a new level of integration.
Marketers need cost-effective and efficient integrated technology platforms and services, processes to help manage and consistently evaluate their ever-expanding mix of digital and analog assets, and to ensure that they complement one other effectively to deliver consistently relevant consumer experience.
As channels multiply and companies seekto enter more markets more efficiently, it’s imperative to integrate marketing channels and operations more effectively. Taking such steps not only benefit the consumer by delivering more consistent experiences, they deliver financial and competitive benefits to consumer good companies as well.
[...]
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