12 Oct 1999  Research & Ideas

Confronting the Challenges that Face
Bricks-and-Mortar Stores

How dramatically have the Internet and other new technologies changed the retail landscape? Do the old fundamentals of the industry no longer apply? Harvard Business Review asked three retail executives and two distinguished academics for their perspectives on technology and retail trade. In this excerpt, Professor Raymond Burke of Indiana University tells how retail executives can prepare for the future while keeping the basics of their business in mind.

 

What does cyberspace mean for physical retail space? Has online shopping changed the fundamentals of retailing? How should managers evaluate new in-store technologies?

Harvard Business Review posed these questions to three retail executives and two distinguished academics. In his essay, Professor Raymond Burke of Indiana University took on the broader question of how to evaluate new retail technologies, uncovering insights in past technological successes and failures. Here, in an excerpt, Burke offers ten lessons retailers should learn to be better prepared for the next generation of technologies.

Lesson 1: Use technology to create an immediate, tangible benefit for the consumer.

If consumers don't see how technology is going to help them, they often assume that it's going to be used against them. When UPC scanners were first introduced, people reacted negatively because they believed that merchandise would no longer carry individual price tags and that shoppers might be overcharged at the register. More recently, customers have expressed concern that electronic shelf labels could be used to raise prices between the time shoppers pick up a product and the time they reach the checkout counter.

Similarly, IBM developed a video camera that could recognize a retailer's best customers as they walked into the store so that salespeople could offer outstanding personalized service. Unfortunately, shoppers felt it was an invasion of privacy. The technology is now used to recognize vegetables at the point of sale, improving the speed and accuracy of the checkout. If the benefit is not immediately apparent, make it obvious through advertising and promotional materials.

Lesson 2: Make the technology easy to use.

Most computer technology is pretty complex. Take Internet shopping, for example. Each site requires consumers to navigate slightly differently; sites organize product categories in different ways, they provide different types of information about products, and they have different procedures for ordering and fulfillment. Our research has found that it takes customers an average of 20 to 30 minutes just to learn how to shop in most text-based Internet grocery-shopping systems. By contrast, it takes them only two to three minutes to learn how to shop in a 3-D virtual store modeled after a familiar bricks-and-mortar shop. The virtual store takes advantage of the shopper's prior knowledge to make virtual shopping more intuitive.

In-store technology can also be difficult to use. I recently watched a string of customers walk up to a "meal solution" kiosk at a supermarket and attempt to print a recipe. After repeatedly pressing the display screen, each customer walked away in frustration. Shoppers thought that they were doing something wrong. They weren't. The kiosk's printer was out of paper, but it had no way of alerting customers.

Lesson 3: Execution matters: prototype, test, and refine.

Many technologies are viable concepts but fail because of poor execution. For example, the Checkout Channel repeated its broadcasts every ten minutes. That was just about the right length of time for consumers, who spend an average of eight minutes waiting in the checkout line. However, it irritated checkout staff, who had to listen to the material all day long and would often shut off the monitors.

When a Boston-area bank first tried out videoconferencing kiosks to sell financial services, customers refused to use them. The systems were located in closed booths that granted privacy but were uninviting. Simply by making the booths more open and their entrances more visible as people walked into a branch, the bank was able to substantially improve consumer acceptance.

Lesson 4: Recognize that customers' response to technology varies.

It is very difficult to create one customer interface that works well for everyone. For example, Burger King tried installing video terminals in one of its restaurants to allow patrons to place their own orders. Younger customers loved them, but older people preferred to talk with human attendants.

I recently tested an on-line banking system and found that heavy users of automated teller machines gave it higher overall ratings than the "branch-wed" non-ATM customers did. However, the reverse was true when videoconferencing was added. It appeared that heavy ATM users actually disliked interacting with humans!

Lesson 5: Build systems that are compatible with the way customers make decisions.

It's sad to say, but many companies developing the next generation of customer interface technologies spend more time interacting with computers than with customers. As a result, the systems are often incompatible with consumers' shopping habits.

For example, an Internet start-up once launched a grocery-shopping system that grouped cold cereals by their main ingredients (rice, corn, or wheat, for example). Many shoppers had trouble finding their favorite brands because they didn't know the ingredients.

Lesson 6: Study the effects of technology on what people buy and on how they shop.

The shopping cart altered the purchasing patters of customers when it was introduced over 60 years ago. Today's technologies can have equally profound effects on consumers' behavior. For example, a Swedish grocery store discovered that by electronically adjusting prices according to the time of day, reducing prices in the evening, it was able to increase evening sales by 40% and double store traffic.

We have also found that consumers are more price sensitive when using text-based home-shopping systems that display lists of brands and prices than when using graphical systems that show realistic images of merchandise. Other researchers have reported that brand names become less important as the amount of detailed information about a product's attributes increases.

In some cases, technology has produced less of an effect on consumers' behavior than managers had feared. For example, a grocery retailer reported that impulse purchases were down by just 5% when customers shopped on-line. About the same amount of perishable products were purchased per order on-line as in the physical store.

Lesson 7: Coordinate all technologies that touch the customer.

When a customer encounters a retailer, it shouldn't matter whether the encounter occurs via the Internet, through a catalog, by telephone, or in the physical store. The customer expects to find the same merchandise, offered at the same prices, with the same knowledgeable and courteous service.

Unfortunately, it's often the case that a retailer's operations are not well integrated across media. As a consequence, a frequent shopper may be given first-class treatment in the physical store but receive marginal service on the telephone or via the Internet. Retailers need to tap into the same product, customer, and transaction databases with all their communications media. For example, Harrah's Entertainment has built a system that recognizes high rollers whether they are on-line, on the telephone, or in any of its casinos.

Lesson 8: Revisit technologies that failed in the past.

Over the years, various technologies have been introduced with much media fanfare. Then, if the actual performance failed to met expectations, people wrote them off and shifted their attention to the next innovation. Examples include multimedia kiosks, voice recognition, artificial intelligence, virtual reality, and video telephones. However, technology continue to evolve. Performance improves and prices drop. Today, artificial intelligence is used in the selection of retail sites and to facilitate one-to-one marketing programs; voice recognition routes callers to specific store departments; virtual reality is used to test new store layouts and shelf displays; and videoconferencing assists on-line shoppers. Retailers need to revisit past technologies periodically to consider whether there are new opportunities to create value for customers.

Lesson 9: Use technology to tailor marketing programs to individual customers' requirements.

Most conventional retailers design their stores, product offerings, promotions, and services for the masses. They treat all shoppers alike even though customers' needs and wants differ and so do the volume and profitability of their purchases. Treating all customers alike puts retailers at a distinct disadvantage relative to those electronic retailers that adjust their marketing programs instantly to match the needs of individual shoppers.

Advances in information technology can give conventional retailers the opportunity to overcome those problems. By setting up frequent-shopper programs and by linking customer profiles to UPC scanner data, for example, retailers can track the shopping patterns, sales volume, and profitability of their patrons. They can then mail out customer-specific fliers and promotions. When shoppers enter the store and swipe their frequent-shopper cards through a reader, a computer can print out customized shopping lists complete with recipes, coupons, and suggestions for replenishment purchases. Retailers can tailor their services in any number of ways using the available technology--if they focus on how it can help them help their customers.

Lesson 10: Build systems that leverage existing competitive advantages.

For many years, people have said that a store's location was a key for its success. Now the buzz is that, in the world of electronic retailing, location doesn't matter. A consumer can do business with a merchant located across the country as easily as with one located across the street. In fact, the argument goes, having a physical store may prove to be a liability, burdening the conventional retailer with unnecessary overhead.

In theory, that may be true. But in practice, it's false. The constraints of time and space still exist. Consumers can't wait for many types of products to be shipped across the country or from a different country. Some products can't be shipped at all. Customers may be reluctant to purchase on-line because the computer display is limited in its ability to convey important product information. They might prefer to shop at a local retailer because they know its reputation, location, store layout, product selection, and return policies.

Retailers can use technology to magnify rather than minimize the benefits of physical location. For example, imagine an Internet interface where customers access stores geographically rather than by URLs. A shopper views a map that shows the retail topography of the local town, highlighting stores that sell products of particular interest. He or she then selects a view showing specific brands, prices, store specials, and inventory information. A second view would highlight stores that will be open for the next hour. Such technology is already being built into the navigation systems of the next generation of American automobiles. It's one of several approaches to bringing together the best features of electronic and conventional retailing.

It's easy to be dazzled by new technologies and conclude that they represent the future of retailing. However, that conclusion would be wrong. Technology is just a platform for change. How we use the technology to create value for customers is what will determine the future—and that's the opportunity we must address.

Other Perspectives

"The Internet hasn't changed priorities. It has simply added another layer of urgency to an already established agenda. Our products and our service are all we've got to build our businesses on. What on-line shopping has done is force our managers to examine their priorities in newly creative ways. And that in itself opens up a whole new realm of possibility."

Sir Richard Greenbury, Chairman of Marks and Spencer, based in London

"Too many retailers still downplay the potential impact of e-commerce. The fact is, naysayers' reactions to the Net are similar to those we heard 15 or 20 years ago from the United States when direct mail catalogs started becoming more prominent. One common preconception about direct mail was that it would work only with certain products. Another was that it was unreliable, that buying through the mail was too risky for consumers. Still another assumption was that if a retailer engaged in direct mail, catalog sales would cannabalize store sales. Do those reactions sound familiar? Well, all three proved to be myths, and—as they relate to e-commerce—all three will again, given time."

John Quelch, Dean of the London Business School

"I think most executives know that e-commerce means different things to different retailers. And I think many have a pretty good idea about whether or how their particular businesses are suited to the Web. But the advent and proliferation of on-line shopping should serve as a wake-up call to any retailer that hasn't spent time considering what brings customers to its stores, catalogs, or Web sites, and what encourages them to spend money there. The priorities for retailers remain the same as they have always been: to meet and exceed their customers' expectations."

Robert A. Smith, CEO of the Neiman Marcus Group, based in Chestnut Hill, Massachusetts

".... if you are not in a position to go on-line, concentrate on identifying and improving those qualities of your business that differentiate you from the on-line experience. Think about e-commerce just as you would a new mail-order competitor. Consider you customer base even more closely than before. Are your customers more likely to prefer a competitor? If so, how can you persuade them not to switch? If you suspect that they will move to the competition, is there some way you can jumpstart your Internet activities? If not, is it time to reconsider you niche and your target customers?"

Ragnar Nilsson, Chief Informatoin Officer of Karstadt, Europe's biggest department store chain, with headquarters in Essen, Germany

Excerpted with permission from "Retailing: Confronting the Challenges that Face Bricks-and-Mortar Stores," Harvard Business Review, Vol. 77, No. 4, July-August 1999.

[ Order the full article ]