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May 2010, IDC Retail Insights #GRRS52S

IDC Retail Insights: Retail Store, Channel, and Consumer Strategies: Perspective

How to Achieve Profitable Mult ichannelRetail

P E R S P E C T I V E # G R R S 5 2 S

Ivano Ort is

I N THI S PERSPECTI VE

On May 19, 2010, IDC Retail Insights joined a panel discussion hostedat SAP Sapphire 2010 in Frankfurt. The theme of the discussion washow to enable profitable multichannel retail operations. DanielleTuarze, CSC, Darryl Owen, SAP, and Ivano Ortis, IDC Retail Insights

were the panelists. This document provides a summary of the debate.

M u l t i c h a n n e l p r o f i t a b i l i t y W h y N o w ?

In recently completed research, we found that improving multichannelprofitability is among the top 3 priorities out of a list of 16 items forretail enterprises that are also selling online. As noted by DanielleTuarze, a key measure of multichannel activity was traditionally newcustomer acquisition and sales growth. Now a truly multichannelmindset is required to make it a profitable growth journey for retailers.Key implications root back into supply chain integration, promotion,

pricing, assortment and organizational strategies.

Some key facts to consider:

eCommerce is becoming a sizeable market and keeps growingrapidly. In Europe, 37% of the total population shopped online in2009, up from 32% in 2008, with the U.K. and Germany leadingthe group. Globally, we expect online sales to grow by over 20%in 2010, and by nearly 50% in 20102013. The other half of theequation, as noted by Darryl Owen, is that 20%, maximum 30% ofthe multichannel retail community is making any money at all onthe Internet. This is caused by top-line issues price discounts

and promotion intensity that are shrinking margins and by back-end and supply chain fragmentation issues across channels causingoverstocks, non-optimized procurement, and higher logistics costs.Many retailers even run ecommerce as a separate legal entity,which results in unnecessary redundancy, multiple supply chains,and thus much higher operational costs from an overall group

perspective.

Online purchasing patterns are evolving: In a consumer surveysponsored by Akamai which we completed last month, IDC RetailInsights found that online sales of clothes, accessories, and

footwear have actually overtaken both media and travel/eventtickets as the top goods category purchased online by Western

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Page 2 #GRRS52S 2010 IDC Retail Insights

European consumers. While this does not reflect the valuehierarchy of goods sold online with travel, media, andconsumer electronics constituting a larger share of total B2Cecommerce spending it nonetheless signals the increasingmaturity of online commerce. One interesting example comes from

the automotive sector less than a year ago, an Italian car dealerlaunched a Web site okusato.com which is now generating asubstantial share of the company's total revenues.

Store sales influenced by online research are three to five timeslarger than total ecommerce sales. To illustrate my point, TerryLundgren, chairman, president, and CEO of Macy's, said Macy's3.0, the latest rendition of the company's ecommerce platform,

provides a 360 degree view of the customer and is responsible for$1 billion in sales this year and a $5+ billion influence on in-storesales improvement. Interestingly, Macy's CMO is now responsiblefor marketing across channels. Another example comes from

consumer electronics retailers, where 10% to 15% of store TVsales come from online promotions.

Young, trend-setting consumers and high spenders will be thefirst groups to move en masse to the mobile channel.Interestingly, searching for store locations, opening hours, and

product availability is the second most sought after reason forshoppers to use their mobile phone, while receiving alerts about

promotions that are offered by stores nearby the shopper locationrank third (the fist is checking order status). For example, Googlelaunched its mobile goggles app for Android, with which a user

can simply frame a shop or location and receive contextualmessages about the store, offers, user reviews, and the like. Similarapplications are available on iPhone and Windows mobile devicesto retrieve product information, compare prices and read usercomments via barcode scanning, image, and voice recognition.

One of the most common, traditional measures of a retailer's health aresame-store sales. The focus now shifts to "same shopper" sales using loyalty or payment identifiers to calculate how shoppers are

patronizing the brand across stores and channels. For brick and mortarretailers, much of their secondary channel (catalog, Web, mobile)commerce is with consumers who are familiar with the brand and have

likely shopped in their physical stores. Expansion will come fromattracting customers not familiar with the brand or not in proximity tothe stores to those secondary channels and by improving multichannelmprofitability.

Interaction channels to the consumer are converging it is no longera mult ichannel retailing approach that retailers should pursue, butrather all sales channels that run in parallel should effectivelyconverge in a seamless and consistent manner. Thus, we identify inomnichannel retailing as the next wave of customer facing retailingstrategies, in which the term omni suggests a fully integrated, "all at

once" retail sales channels approach.

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2010 IDC Retail Insights #GRRS52S Page 3

Why is this relevant for retailers? Because multichannel shoppersspend, on average, 15%30% more with a retailer than someone whouses only one channel. IDC Retail Insights estimates that omnichannelshoppers will spend over 20% more than multichannel consumers, willexhibit strong loyalty, and will influence others to patronize the

retailer.

F i v e S t e p s t o E n a b l e P r o f i t a b l e

M u l t i c h a n n e l R e t a i l

Retailers are required by their current and potential customers tosupport full technology and process integration between all of theirselling channels meaning a single, logical view of the shopper, theorder, and the inventory regardless of the channel. Retail ecommercetechnology capable of supporting this requirement will need to blendthe unique business-to-consumer (B2C) usability functions with tightintegration to advanced retail transactional systems and all theappropriate consumer, pro mot ion , and inven tor y opt imizat iontechnologies.

We recommend retailers consider the following five steps to improvemultichannel profitability:

1. Consolidate cross-channel supply chain management bothplanning and execution allowing for total inventory visibility,order management and fulfillment across all channels. Consolidateassortment planning across channels. Use inventory optimizationtools and analytics to balance stock-levels and purchasing

requirements regardless of channel. This means driving back-endmodernization and integration for supporting multiple saleschannels in a transparent fashion for the entire organization.

2. The fun and surprise in shopping needs to be restored so thatshoppers are less compelled by the lowest advertised prices andmore by the emotion attached to a brand and the shoppingexperience. Retailers that deliver relevant personalized offers inreal time to consumers regardless of channel coupled with accurateavailability, shipment, and product data are heading in the rightdirection.

3. Enable real-time business decision support capabilities, improvedloyalty management and especially cross-channel loyalty. Onlineconsumers themselves are making this evident, indicating that the

possibility of using the same loyalty program both online andoffline is their second favorite feature for an ecommerce Websiteto develop. In profit margin improvement terms for the retailer, wefind that cross channel loyalty integration can drive 10% increasesin loyal customers' profitability. An important achievement if youconsider that loyal clients are typically a high share of totalcustomers in selected segments for example food, with typicallyover 75% of customers holding a loyalty card, and consumer

electronics, where for example Mediamarket in Italy have amillion loyal clients that generate 70% of their total online sales.

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Harrods noted in the Q&A session of the panel discussion thatretailers have the fear of seeing online loyalty as a way forcustomers to redeem points without generating the multiplicationeffect and impulse buying of new store visits. Thus retailers arelooking into new ways of combining online loyalty with store

visits, for example by offering online coupons that can beredeemed at the store. Mobile represents perhaps the best way tocreate the required continuum between online and store.

4. Online customer support is a key consumer expectation that canalso result in 75% cost savings when moving from call center toWeb-based support. For example, we had an interestingconversation with Home Shopping Europe at Sapphire 2010 itnoted a direct correlation between customer service enhancementsand increases in average revenue per user. As a result, CRM andcustomer service investments can pay off.

5. Use social networking tools to empower customer group analytics,enable targeted promotions, assortment, and new productdevelopments. Customers' feedback can also be gatheredflawlessly via social networks. For example, Point-7, awindsurfing sail manufacturer, is doubling visitor traffic to itsecommerce Web site each day it runs a targeted ad campaign onFacebook. From the enabling technology angle, SAP developedtools that integrate social network front-ends with CRM platforms.Using in-memory technologies, retailers can now enable one-to-one relations and contextually-relevant real-time interactions withcustomers, while at the same time tracking shoppers' patterns and

customer feedback, and so monitoring business KPIs in a moretimely and accurate manner. And this again benefits the bottom-line, thanks to top-line growth, lower stock levels, and betterdesigned assortments that fit shoppers' expectations. Customersdemand personalization, and the retailers that deliver on thisrequirement will achieve a tangible and sustainable competitiveadvantage over time.

In conclusion, and as noted by Darryl Owen, two beating hearts areemerging for retail IT application landscapes: core merchandisingsystems and customer-centric tools. The latter will incrementallyenable business diversification strategies think of food retailers

selling a bit of everything today, from insurance, to travel packages,professional services and more. A fully integrated and transparentback-office system that is capable of transferring orders, vouchers,stock, and transactions across channels will ensure that the two beatinghearts will work in synergy to maximize multichannel profitability.

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2010 IDC Retail Insights #GRRS52S Page 5

LEARN MORE

R e l a t e d R e s e a r c h

Technology Selection: Mobile Solutions and IP Telephony

Strategies in European Retail Stores (IDC Retail Insights#GRRS02S, May 2010)

Improving Product Quality The Top Retail Supply ChainInitiative of 2010 (IDC Retail Insights #GRI223409, May 2010)

EMEA Retail Industry Update, 1Q10 (IDC Retail Insights#GIPW52S, April 2010)

The IT Productivity Challenge in the Coming Decade in the RetailIndustry (IDC Retail Insights #GRI223204, April 2010)

Retail BI: Strategic Approach Versus Application Fragmentation(IDC Retail Insights #GRRS51S, March 2010)

Best Practices: Around the Retail World in Just 60 Days Abercrombie & Fi tch Case Study (IDC Retail Insights#GRRS04R9, February 2010)

Western European Retail IT Spending Guide, Top 5 Countries2009, Update (IDC Retail Insights #GIPW51S, February 2010)

Business Strategy: Social Commerce Opportunities, Strategies,and Risks for Retailers Globally (IDC Retail Insights #GRRS01S,

January 2010)

Worldwide Retail Industry 2010 Top 10 Predictions (IDC RetailInsights #GRI221481, January 2010)

Technology Selection: IDC Retail Insights Guide to EnablingImmersive Shopping Experiences (IDC Retail Insights#GRRS03R9, December 2009)

Worldwide Retail IT Spending Guide, Version 1, 2009 (IDC RetailInsights #GRI220913, November 2009)

Business Strategy: Retail Industry and IT Trends in MEA, CEE,and Russia (IDC Retail Insights #GIPW05R9, November 2009)

Best Practices: Retail 2010 IT Budget Benchmark Report (IDCRetail Insights #GRI220369, October 2009)

Satisfying the Omnichannel Consumers Whenever and WhereverThey Shop (IDC Retail Insights #GRI220046, September 2009)

An Executive's Guide to Retail Demand Intelligence VendorMaturity (IDC Retail Insights #GRI220047, September 2009)

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Page 6 #GRRS52S 2010 IDC Retail Insights

Technology Selection: ICT Budget Dynamics and IT VendorSelection in Western European Retail (IDC Retail Insights#GIPW04R9, July 2009)

Vendor Assessment: Retail Demand Intelligence Vendor Maturity

(IDC Retail Insights #GRRS02R9, July 2009)

Technology Selection: EU Retail, Industry-Specific ApplicationsInvestments Trends (IDC Retail Insights #GIPW03R9, June 2009)

Technology Selection: Retail Enterprise IT Solutions InvestmentsDirections, 2009 European Survey (IDC Retail Insights#GIPW02R9, May 2009)

Best Practices: European Retail Apparel IT Directions (IDC RetailInsights #GIPW01R9, April 2009)

EMEA Retail Industry Update, 1Q09 (IDC Retail Insights#GIPW53R9, April 2009)

Business Strategy: eCommerce and Omnichannel RetailingDirections (IDC Retail Insights #GRRS01R9, March 2009)

C o p y r i g h t N o t i c e

Copyright 2010 IDC Retail Insights. Reproduction without writtenpermission is completely forbidden. External Publication of IDCRetail Insights Information and Data: Any IDC Retail Insightsinformation that is to be used in advertising, press releases, or

promotional materials requires prior written approval from theappropriate IDC Retail Insights Vice President. A draft of the

proposed document should accompany any such request. IDC RetailInsights reserves the right to deny approval of external usage for anyreason.