Step 4: Modernize route-to-market and retail formats
Distribution and retail formats are being reinvented with New Retail.
Let’s begin with distribution. Under the old and painful multilayered network, stores—especially traditional trade—had limited control and transparency; there was a lack of meaningful data, and the costs of distribution were high for limited channel penetration.
Consider the traditional distribution path: A brand sells to multiple levels of wholesalers and distributors at the province, city and county level, which in turn supply local mom - andpop stores. In addition to the many handoffs required, the markups at each stage and the lack of transparency on consumer behavior, any single distributor may have offered only limited SKUs (and mostly local brands) to these small stores. In recent years, this antiquated system started feeling the strains of China’s decelerating growth, with many distributors exiting the business.
Now, leading brands are replacing those old networks with streamlined electronic route-to-market (e-RTM) models that help them reduce costs with fewer levels, expand their coverage, and gain visibility into real-time inventory and sales data while improving point-of-sale and channel relationships (see Figure 11 ).
Offering instant access to point-of-sale data at mom-and-pop stores, these new digital platforms help both brands and retailers. Brands are able to make quick and better-informed decisions based on channel sales activity and consumer needs. These systems also arm them with the data needed to provide value-added services to each outlet. Retailers receive a product mix tailored to the actual sales activity in their stores. Brands have learned a key lesson as they build and adapt to these new digital route-to-market approaches: It is critical to hone brand strategies to gain the most from e - RTM and to select business partners thoughtfully, based on the unique characteristics of their product categories.
We see three different approaches to e - RTM based on a brand’s relationship with traditional distributors (see Figure 12). The most collaborative model involves using the e - RTM system for placing orders but working with existing distributors for inventory control, warehouse management and delivery. In this model, retailers rely on either the existing distributors or brands for in-store execution. A second model requires collaborating with existing distributors but controlling inventory and delivery. A third, more disruptive, model relies on e-RTM for the entire process—spanning order placement, inventory control, warehouse management and delivery—but works with existing distributors or brands for in-store execution.
Bestseller Fashion Group, which operates 8,000 stores in more than 500 Chinese cities, has used its new distribution platform to create a seamless omni - channel experience for consumers (see Figure 13). The company combines its online and ofﬂine loyalty programs to build an in-depth customer proﬁle, merging information from a consumer’s activity on social networks, Taobao, T - mall, its own website and other sites with data generated from the consumer’s visits to physical stores. It uses data from the more than 30 million customer loyalty members to build customized consumer operations and then engages consumers with differentiated content based on their unique behavior. This approach has helped the company synchronize inventory between its online and ofﬂine channels and spur activities that have streamlined logistics costs, such as order online and pick up in store. These moves have helped Bestseller reduce its average delivery time from three days to one-and-a-half days.
These distribution changes are enabling leading brands to introduce retail formats that reduce communication costs while increasing SKU productivity. Consumer data allows them to create more targeted retail outlets for speciﬁc consumer segments, which helps brands optimize their communication costs by relying on tailored messaging for similar stores. These brands also rely on the consumer insights generated from newly available data to optimize the product portfolio within a retail outlet. The stores become centers for collecting consumer data. Brands analyze the data to understand consumer behavior, identify select high-potential SKUs and generate consumer insights to support brand communication.
Step 5: Transform the organization and operating model for digital
Building a framework and operations around customers and data is critical for brands hoping to master New Retail. However, those big moves will not yield sufﬁcient results without redesigning the organization to make full use of New Retail’s power. Many brands entered the era of New Retail not only with limited capabilities for acquiring and analyzing data, but also with organizational structures and operating models that make it difﬁcult to share and act on insights gained from that data. Winners understand the need to focus on organizing for data.
Among the most important considerations: The organizational structure must allow for seamless coordination among functions, which is something that traditional organizations rarely accommodate. Consider that many current models use different key performance indicators for marketing and e-commerce, and that reporting lines do not support the cross-function work on marketing, sales, consumer engagement and data analysis. There is often insufficient coordination between offline channels and e-commerce platforms, resulting in potential trade offs and conflicts. In addition, there’s often little attention paid to coordinating resources across different brands.
As companies adapt their organizations to the changing needs of New Retail, it is critical that the organizational design reﬂect the company’s stage in its digital transformation (see Figure 14).
For example, in a company’s early days—when digital’s major role is that of a new sales channel—the digital team will be most effective if it operates within the sales unit. If digital is primarily used for marketing and consumer engagement, the digital team can operate within the marketing department. Alternatively, if the company is slightly more advanced in its digital transformation, that team can operate independently, with dotted-line reporting to both sales and marketing. This structure provides such beneﬁts as the synergies created by combining digital and traditional advertising. However, for companies much further along, digital should be a standalone business unit that integrates resources across all functions, with a decentralized and Agile operating model that fosters fast decisions. In all situations, all functions should be closely connected to consumers, constantly gathering their input and the information that serves as the lifeblood of New Retail.
While the ultimate goal is to be able to move quickly, brands need to recognize that developing enterprise-wide agility does not happen overnight. A multistage journey typically takes two to three years to complete (see Figure 15). The path begins by setting up technology, tools and other elements of a supporting infrastructure and empowering a few Agile teams in selected areas. The next stage involves expanding those teams in waves to establish Agile operations in complete business units or functions.
All Agile teams operate according to the same manifesto: Teams are cross-functional and empowered, activities are time-boxed around speciﬁc outcomes, work is iterative and incremental, and problems are solved in a modular and adaptive manner. Digital requires many new or upgraded capabilities, so it is critical that brands clearly deﬁne responsibilities (see Figure 16).
Step 6: Invest in new technology development
New technologies give brands the opportunity to boost their operational efﬁciency as they deliver a better customer experience (see Figure 17). Today and tomorrow, companies face many challenges as they develop a game plan for new technology, choosing from the evolving options for improving decisions and connecting business operations. For example, a brand laying plans to upgrade its R&D and supply chain capabilities can look to AI for more accurate demand, production and supply forecasting.
It could rely on the IoT to identify and track the real-time status of cargo or remotely manage equipment. It could deploy augmented reality or virtual reality to conduct sample testing with consumers to upgrade products based on real-time feedback. It could use robots to perform manual factory tasks, or pioneer the use of drones for delivery and pickup. It could use 3-D or 4-D printing to customize products for consumer needs.
Similarly, brands must consider the best approach for adopting a single technology across multiple functions to deliver the most extensive beneﬁts. For example, they can employ AI to obtain forecasts that are more accurate, assist in after-sales service, collect consumer feedback and plan optimal product distribution. As a ﬁrst giant step to move out ahead of rivals in this new world of retailing, brands need to assess their current digitalization status (their “point of departure”), set clear goals for their digital transformation (their “point of arrival”), and spell out a clear implementation plan and roadmap (see Figure 18).
As New Retail takes root, the brands that thrive will acknowledge that the changes they make today—the new capabilities they develop and the operating models they devise—won’t necessarily help them a year from now. New Retail is a work in progress, requiring brands to constantly reﬁne and reinvent themselves for new occasions, new formats and the steady ﬂ ow of new ideas that will deﬁne retailing tomorrow.
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