Industry Insights

Digital marks the end of a retail era

This last week has brought a couple of significant events in the world of retail and FMCG brands.  One digital, one not.

A passing of the baton in UK food and drink

Firstly, on a sad note, there is the passing of Jeffrey Hyman.  Jeffrey was the founder and chairman of the Food & Drink Innovation Network in the UK.  I will remember him as an insightful, warm individual, who has left an indelible stamp on food manufacturing and retailing in the UK and much, much wider.  He has many claims to fame.  I’ll just mention two: he founded Pret A Manger, and was Director of Innovation for RHM Group (now Premier Foods and you may know or love the brands he worked on such as Sharwoods, Mr Kipling and Bisto).

NRF 2017 goes digital – more than just retailer retailing

Secondly, we had NRF.  Due to unforeseen circumstances I couldn’t attend, but watch remotely via social media and colleagues on the ground.  My take on it – this year we saw the start of a significant blurring of lines between the retailer mission and that of the manufacturers.  Three areas in particular struck me:

Experience retailing by retailers and FMCG companies is becoming a big thing. Pop-up formats, technology to provide ad hoc retailing experiences and data capture for brands were everywhere.  I particularly note the importance attached to VR/AR, automation, robotics and “artificial intelligence” to allow FMCG companies to extend the brand experience into retailing (see what some other commentators said about   Pepper and other innovative technologies on display) and to make the in-store experience more immersive.

Increased focus on aligning the shopping experience with the wider brand proposition from manufacturers.  An example of this would be Thrive Market.  This is a membership community that aggregates buying power to bring organic products to consumers at wholesale prices.  Their customers are aligned with the brand values of the manufacturers they source from i.e. high quality, healthy and socially aware (e.g. Thrive Market sponsor free memberships for low-income American families).

Digital making it easier for retailers to design and make, and for FMCG companies to market and sell.  NRF2017 has many, many examples of digital being used across the entire journey – sometimes it is difficult to know exactly which segment a company is playing in.  For example, the Long Tall Sally 3D printed mannequin (aka “Harriet”, made by UK-based creative manufacturing company Studio 43) is a great example of using digital data to perform an activity more commonly associated with manufacturing i.e. rapid prototyping.  We at IBM showcased how IBM Watson is able to take unstructured “dark data” and make it usable in channel collaboration e.g. blending FMCG marketing data, retailer online and store engagement, and supply chain fulfillment metrics to get a unified view.

 

An over-arching theme I offer from afar, is that the physical store is not dead by a long stretch.  For example IBM GM Steve Laughlin (recently voted one of the Top 10 Industry Transformers by WWD ) shared our latest finding on Generation Z which shows that 98% still shop in physical stores and that despite being digitally native in most other aspects of their lives).  You can download the report here.

The (digital) future and the past

Did you miss my colleague Nikos Kourtis presenting on digital transformation at NRF?  Well, if you did, this is your chance to read the transcript of the speech!  It is titled “Strange How the Future Might Look the Past!

In 1824 a new retail shop opened in Birmingham in the UK.  It sold tea, coffee and drinking chocolate.  It was owned by a man called John Cadbury.  What we think of as a global manufacturer of confectionery, now owned by Mondelez, actually started as a retailer and the first factory only came along 7 years after the company was founded.  For many years Cadbury was both a manufacturer and a retailer and this for me, is a business model that digital is breathing new life into for many.

Take a different example: Eduard Meier, a company you may not be familiar with.  Founded in 1596, this shoemaking company produced what we would call hyper-personalized and super-premium shoes, originally for Saxon royalty.  The shoes could be ordered by mail order and many wealthy customers paid a subscription.  The company still exists today and will, if asked, still offer direct to consumer delivery by horse-drawn carriage! Oh, and they are a retailer too today.

A final historical note or two.  The Cadbury business almost didn’t take off.  It really only became successful when they embraced a new cocoa press technology from the Netherlands – think of this as the 3D printer of its time – that allowed them to dramatically increase local production, near to demand.  This new production facility was also characterised by what we would call social entrepreneurship based on the family’s Quaker principles.

The Cadburys also took advantage an intimate knowledge of their consumers (whom they met in their shop).  For example, they profited from the free-from movement of the time – a middle class obsession with the chemicals in their food.  They were early adopters of the new media of the time and ran innovative ad campaigns based on the slogan ‘Absolutely Pure. Therefore Best’.

Finally, the Cadburys were an artistic family and it could be said they were the first to embrace design thinking for packaging, with Richard Cadbury creating the first chocolate boxes with pictures of his daughter holding a kitten.  These limited editions became collectibles immediately.  The design studio he founded in the 1800s was only closed down in 2012 when the jobs were globalised.

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Embracing disruptive ideas and technology across the brand / retailer divide means that Cadburys live on, and so does Meier, but survival is for others, in truth, optional.

Since 2000 over 50% of the Fortune 500 companies have disappeared in one way or another.  This doesn’t necessarily mean that they went bankrupt, but they may have either shrunk and fallen out of the list or merged with other companies and lost their independence.

To put this into contrast, between the middle of the 1950s in the end of the 1990s just over 80% of companies fell out of the fortune 500 so it is easy to see the pace of change has increased…and this is just as digital technologies are really taking hold.

Just think of what has happened in the last 10 years: we have the rise of Facebook, Twitter and other social networks. We have pervasive mobile devices.  What about the next 10 years?  VR and AR, artificial intelligence, 3D printing and robots are likely to dominate and disrupt further.  What about self-driving cars?

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E-commerce is disruptive too.  In some FMCG categories has already become a powerful, fast -growing force heralding the arrival of companies such as the Honest Company that have grown from nothing to multibillion-dollar capitalization in the space of a few years.  This mission-led FMCG company was founded by actress Jessica Alba in 2011.  She had no prior manufacturing or retailing background, and little capital…the first venture capital input was in 2014. Last year Forbes voted her richest self-made woman in America and her company is now worth over 2 billion dollars, and she continues to disrupt established players with a model that mixes monthly direct to consumer subscriptions with more conventional sales channels.  Just like Eduard Meier in the 16th Century.

She couldn’t have achieved this without the use of digital technologies, so disruption and digital transformation go hand-in-hand…this is the new game in town.

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How do we explain this?  On the left-hand side of this slide is the digital reinvention framework that we use in IBM to explain how companies transform through digital techniques. 

Let me draw your attention to the inner circle and the three areas for transformation. 

Firstly, FMCG companies that are successful in digital transformation seek out a new focus and in particular re-craft their business model to suit the disruptive nature of these technologies and grow faster.  Increasingly this is a model that blurs the lines between retailing, brand stewardship and manufacturing.  Just like Cadbury in the 19th Century.

Secondly, they acquire businesses, cultivate new ecosystem partners and work with channel partners to quickly build digital expertise in key growth areas such as multi-channel commerce, the Internet of Things and the new world of media.  For many FMCG companies this signals a major new stage in the relationship with trade customers as they continue to work with retailer storefronts and technology while engaging consumers through mobiles, pop-ups and other novel forms of experience retailing and direct selling.  You can see all these elements, for example, in the new PMI -iQOS e-cigarette business, the Magnum Pleasure pop-ups and IBMs work with Under Armour…which I will talk more about shortly.

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Regardless of the approach to e-commerce, FMCG companies need to focus on product information quality, engaging content and learning how to optimize shopping outcomes in their favour.

And ultimately the leaders are hard at work getting their basic processes and systems right, while finding new ways to work combining digital technology.  Whether it is a move to simplified processes and S4/HANA or 3D printers for rapid prototyping or new management approaches that exploit digital such as Lean Start-Up, the end goal is to speed up and reduce the operating and capital needs of the businesses. 

During the remainder of this presentation I will dip into each of these three areas and illustrate them with a few examples from IBM and elsewhere.

I’ll start with business models.  Under Armour is a performance apparel brand here in America with whom IBM has been working with to develop a new business model that uniquely exploits digital technology. This is driven not by a desire to save money through the use of digital technology; rather it is a desire to grow. This is a $4 billion company with the ambition to become a $40 billion company.

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Let me start by explaining this chart – this is referred to as a business model canvas and it’s a way of describing how a company works on one page. This page shows how Under Armour has changed compared to five years ago. The blue items are new. 

The consumer segments that Under Armour were most interested in were professional and college athletes and most of the transactions took place in the B2B space, with wholesalers they either owned or had long-standing relationships with. This was a very traditional consumer products model.

Also, the value proposition that the company took to market was primarily around performance and around the technology in the textiles involved in garments, so to deliver those propositions they needed key activities such as design and the ability to manage outsourced manufacture to high quality.

Working with IBM Under Armour has revisited the basics of its business model and is in the process of reinventing self with use of digital. The new value proposition is as a digitally-enabled fitness products and services brand – a personalized consultant, trainer, coach and confidante, providing timely, evidence-based engagement.  The focus is on consumer engagement as much as excellence in B2B activity.

Central to the change are new, differentiated capabilities to enable them to exploit the data from connected devices.  With IBM’s help they now have an Internet of Things platform that allows them to connect directly to consumers 24×7.  160 million of them!

Under Armour use IBM’s Watson cognitive technology to tap into users’ behavioural and performance trends.  Based on Watson Visual Recognition and Watson Discovery technology, the arduous and manual process of food-logging is being replaced with visual recognition of images for faster and easier identification. And Watson’s weather domain knowledge, combined with the Watson News Service API for daily news sources, allows the system to modify fitness program recommendations based on these outside factors.

As you can imagine this new digital platform provides for a completely new set of consumer journeys that cross into areas such as online commerce and hyper-personalized training and wellness advice for consumers.

E-commerce specifically is an area where I see many FMCG companies building new capabilities at speed.  By most estimates e-commerce accounts for less than 10% of all consumer spend in the developed economies (with some categories much higher, but many everyday items lower).  But the expectation is that in Europe e-commerce will represent 50% of all sales transactions by 2050, rising from a figure of around about 7% today.

For brands investing in retail it is also important to appreciate the role of Gen Z and Millennials, two generations whose first moment of truth expectations are set by born digital companies like Uber, amazon and Netflix.  From our own Institute for Business Value research we see how technologically savvy they are and that they instinctively know how to benefit from the convenience and enrichment those digital technologies can bring.  And remember, their purchasing power is growing.

One approach is to enhance channel partner collaboration.  For example, L’Oreal achieved nearly 40% online channel growth in one year by making e-commerce a strategic priority and helping their retail partners to streamline their e-commerce processes (in favour of L’Oreal brands of course!).  This involved understanding how site search works for each retailer, and using tags and metadata (data about data) to get L’Oreal brands at the top of the list.

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Another approach is to copy subscription models perfected by Birchbox and Dollar Shave Club.  Or better still; buy these companies and as they have valuable digital expertise in personalization and segmented supply chains.  This is what Unilever has done with Dollar Shave this year.

In the context of e-commerce, personalized, timely and relevant advertising, promotions and engagement is a critical success factor for brands.  At dmexco this year the world’s biggest advertisers and media owners have united for the first time to form what is described as a ‘coalition for better ads.’  The aim is to leverage consumer insights and cross-industry expertise and implement new global standards for online advertising. 

New business models and new capabilities in commerce and media will only take you so far if the heart of the business is not digital.  This means creating a culture that is dynamic and nimble in pursuit of innovation and market growth, while ensuring that all processes are digitalised to drive operational excellence.  This why so many FMCG CEOs are fascinated by the Lean Startup methodology and the idea of an Exponential Organization.

It is why SAP S4/HANA is viewed as more than just a system upgrade – it is seen as a way to simplify, speed up and exploit all available information in real-time for decision-making. 

Where next?  Fresh digital technologies such as blockchain seem to offer great potential for further disruption in the FMCG value chain.   To date, most of the work around blockchain is centred on finance, but the potential impact is much wider, as you can see with companies such as Everledger who use IBM technology to trace the provenance of luxury goods such as gems. 

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Our CEO wrote an op-ed piece called “How Blockchain Will Change Your Life.”  In an interview with McKinsey, influential thinker Donald Tapscott calls blockchain “a platform for truth and trust.”  Isn’t that what we want for our brands too?

So here we are at NRF, and I started by implying that digital transformation will help more FMCG brands re-discover retailing as part of their DNA. For luxury brands this may not be news, but for those making everyday items a multiple revenue-stream model could be the difference between survival and extinction.

 No giant of the industry has fallen to a digital disrupter yet but, as Ms Alba demonstrated, the rules of the digital world are different and you can build a FMCG brand for nothing on social media, direct to consumer commerce can dis-intermediate the retail old guard, and the last mile of logistics is no longer an issue.

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I know many industry leaders doubt this digital disruption will impact on their businesses as 100 year old brands are barriers to entry.  How confident are you?  Why don’t you take our test to see if you are ready or not?

 

Until next time,

 

 

Trevor

IBM, Distinguished Engineer

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