Sucharita Kodali is VP and Principal Analyst for the retail sector at Forrester Research. She is specialized in retail, digital transformation in large B2C companies as well as startups, and retail experience including store operations, marketing, and merchandising. We sat down with her to chat about where the industry is headed, and the major factors influencing its direction.
1. Sucharita, thank you so much for sitting down with us. You’re a retail analyst; you have been for 14+ years. Why retail? What drives you?
Sucharita: What do I like about retail? I’ve always been fascinated by every aspect of consumer behavior and shopping, whether that be how retailers reach their customers or how shoppers behave once they get to a store. There are always interesting questions to ask, which is what drew me to the retail space in the first place.
2. How would you describe the state of retail today?
Sucharita: Well, it’s changing; it’s evolving; it’s difficult. But that’s the way the space has always been. I think sometimes we forget how much retail has evolved even to get where it is today. Certainly, digital tools have changed things even more. They’ve allowed new players to enter the game—sometimes forcing the exit of the incumbents that weren’t able to evolve with the times.
It all comes back to the fact that the fundamental way that consumers purchase and consume their goods has changed; still, retail will continue to be a trillion dollar global industry. Consumers will always be looking to buy things, but the definition of retail will have to evolve to encompass the changes in consumer practices.
3. What is diversification and why is important for retailers to consider today?
Sucharita: One of the things that has been a marker of retail up until this point is that there is very standard way to sell goods. Brands owned inventory, and people purchased those goods. But what I think retailers are realizing is that what they have is real estate in many cases—both offline and online. They’re aggregators of traffic. With that in mind, they are now seeing that there are many more opportunities to make money beyond just selling goods. Every orthodoxy of retail—whether it’s owning inventory or the forced hire of certain types of employees—is subject to change. How we think about getting goods to consumers is totally changing. And part of the reason that I think digital retailers have done as well as they have is that they rethought that sooner than a lot of traditional retailers.
So where does diversification come in? Diversification comes in when you think about what else you can do with the assets you have to drive revenue, drive sales, and ultimately deliver shareholder value. And that can be simple things like having a restaurant within a store.
I like to give an example outside the retail space. Airlines get a substantial amount of revenue from things like aircraft repairs for other companies and their airline credit cards with millions of users. They get paid by the bank that issues these cards. These are all just different ways to think about how they make money outside traditional ticket sales.
I think that’s an opportunity that more retailers need to pursue. Now, do I think that’s the savior for a retailer that’s really struggling? Probably not. The only thing that would save you in that situation is to basically diversify out of your core business as quickly as possible, but that’s a whole different conversation about mergers and acquisitions or a serious pivot that very few retailers have the ability, or inherent fortitude, to do.
It’s important to pick the pieces of other strategies that you find interesting or that might be potentially valuable. An example that I really like is Game Stop. It’s a really tough example, because who knows if they’ll even be around in a year. But despite the difficulties they’ve faced, I wouldn’t throw out everything in their playbook as a recipe for disaster. On the contrary, they’ve done some really interesting things that I think could work quite well for other retailers. For instance, they have a loyalty program that has a paid tiered level that, at its height, had a significant portion of its members paying for the premium version. As a part of that premium membership, they gave magazine to customers. Sending a magazine to customers is an interesting tactic because they not only are reaching a very highly engaged group of their core constituents who are video game players, but they can sell advertising in that magazine. Retailers don’t often realize what a large media audience they actually have.
Overall, there’s a huge asset there if retailers can think about how to monetize it and how to think creatively about it. Is there something additional that they can give the customers? Is there a way to pay for it in a way that doesn’t actually cost you more money?
I think the challenge with a lot of loyalty centers is that they are cost centers; they’re expensive. I think the trick here is thinking about what you can give that has a low variable cost that still has a high perceived value. That’s what airlines do all the time when they let their airline customers board the plane first. There’s little to no cost to that but it’s a huge benefit for flyers.
4. Let’s talk about D2C in the Amazon age. D2C is changing and growing. What factors have caused this transition? What’s the future of D2C?
Sucharita: I think the popularity of D2C has risen recently because of the low barriers to entry and the low barriers to reach given the internet and social media and low barriers to fantastic looking creatives. A lot of traditional retailers have just been asleep at the wheel because they over complicate these processes. In those organizations, there are often, you know, 25 people that need to be involved in a creative decision or they need to have an RFP. They have all of these burdensome processes that prevent them from moving very rapidly. And some of that is legitimate; they might have stricter legal standards than some of these startups do, but a lot of it is just politics.
So what’s the long term prognosis of these D2C companies and what’s allowed them to be really successful? I think that almost all of them have tapped into a niche, an opportunity that they saw was a gap in the product world. It’s not rocket science to expose these gaps. Anybody doing market research knows what these gaps are. The difference is that these D2C companies have figured out how to address that gap, and in many cases, raised enough venture capital to actually create a really great product that filled that gap.
The pro of D2C is that they have unique products, at least for now, and they are able to easily get the word out there. But there are also cons. One is that other brands catch up really quickly when they see success. The other is that it can be hard to scale success because that success was typically build on a niche and then once you become more broad, you start to run into some of the obstacles that the bigger companies face. I’ll be interested to see how many of these companies actually scale to be billion dollar companies, which isn’t even that big. You’re still not one of the dominant companies in the world at that scale.
Look, it’s hard, and I have so much respect for what these companies have done. Plus, it’s amazing for consumers. They get great quality products and customer service for great prices. It raises the bar of what’s expected for retailers, but it is still really hard to actually be one of those retailers.
5. How should traditional retailers compete in D2C world?
Sucharita: These new competitors are not winning just because of marketing. They’re winning on these other aspects that the marketer doesn’t control. That’s the challenge for large corporations. It’s a CEO-level decision to figure out how you are going to respond to this new upstart that has a newer, sexier product than you do. It’s not just something you can slap a marketing budget or Instagram post to and be done with it. It involves rethinking customer service, shipping, packaging, operations, product development, etc.
I think the Blue Apron story is probably one of the most telling. It came out of the gate and was the next big thing. Then all these competitors began and they did essentially the same thing. A couple years later, the grocery stores started adopting the same things, and what you end up with is this: the incumbents stay in business. Sure, they’re late. They were scared for a little. But they do eventually catch up. These upstarts then find themselves challenged unless they’re able to continue to innovate or discover some fundamental innovation that can help to support them.
My bigger point is that a lot of these startups capture the imagination for a short period of time, but then unless they have phenomenal fundamentals, they’ll be challenged and the best features of what they’re delivering end up getting copied.
6. Let’s talk tech. Where do you see tech like augmented reality, artificial intelligence, personalization, and machine learning fitting into the future of retail?
Sucharita: I think that a lot of those are futuristic visions. But there are a lot of things coming in the shorter term, like contactless payments. What we’re looking for is the friction points in the transaction process and how we can solve those.
Some of the friction points are around data and insights on the products we’re purchasing. Take grocery stores for instance. When you’re shopping at a grocery store, you can’t actually tell whether the strawberries you’re buying are at the optimal sweetness, if they’ve turned or if there’s a whole bunch of green fuzz on the other side of the berries that you just can’t see.
In the future, I think we’ll give consumers the opportunity to have more insight into what they’re buying, for example, what is the product’s carbon footprint, etc. I think that’s something that digital can deliver whether through augmented reality, digital screens or mobile apps. I don’t know what the UI will ultimately be, but I do think that there is an opportunity to deliver more information, and we need to exploit that.
7. Data privacy: what are the threats and opportunities that retailers are going to face with their marketing techniques?
Sucharita: I think capturing too much unnecessary data is an issue, of course, but I think the biggest threat is just a straight-up breach, and I think it keeps a lot of retailers up at night. The good news is that most retailers don’t actually need a ton of information to do a pretty darn good job marketing. You don’t need to know all kinds of personal information about your shoppers; the most important information is things like: what are they buying? When did they buy? How much did they spend when they purchased?
8. Do think the trend of regulations like GDPR and CCPA is going to spread?
Sucharita: I hope it spreads! I think it’s fundamentally very customer-first. But I don’t know because it looks like there’s a lot of pushback against it. The US is at a point where we’re so anti-regulatory. What that means is that we’re just not going to get to a resolution at a national level. Our best case scenario is that it will happen at a state level, and I think it will happen first with more democratic, progressive states. Then, if there are major data breaches and privacy violations, then you’ll get action taken in other states, as well.
All together, I think that ultimately these regulations will be good for customers, but I definitely don’t see a national law happening.
9. How do you think companies will react to the spread of these regulations in the US?
Sucharita: Well, with regulations like CCPA, companies are going to have to comply, even if they aren’t California companies. In this digital age, regulations like these apply across state lines. It’s not like a physical law that you can enforce in just one state.
So, companies will have to comply, and they’re going to have to completely change their standards. That being said, there was a lot of pushback from tech companies that has essentially resulted in the CCPA that will go into effect in 2020 being essentially toothless. It’s now a pretty vague law and the rules surrounding it are loose. In the U.S., we don’t actually have anything like GDPR yet, and CCPA isn’t going to be it.
10. Why don’t consumers view big tech favorably?
Sucharita: When looking at the American Consumer Satisfaction Index, Big Tech is one of the worst regarded sectors out there. It’s alarming because for years, you’d see these consumers surveys, and the data would lead you to believe that everyone loves Google, everyone loves Facebook. But what I think is happening is that the ugly side of big tech is becoming more apparent. Of course, people know there is good that comes from big tech, but the true colors of a company show not when you’re getting the good, but when you’re having a problem with something bad. And when a company steps up and supports you when something bad happens, a brand can win advocates. But what I think that a lot of big tech companies have done is have bad interactions with consumers, especially in recent years. They haven’t made consumer-friendly efforts to win those advocates. That’s been to their detriment.
11. Retention: it’s been often been overlooked by retailers. How do you see that changing in the next 5 years?
Sucharita: Loyalty programs are the key to retention, and being creative about those awards and gifts is critical.
12. As consumers, we’re ordering things from Amazon left and right, mostly because we’re creatures of convenience. But it’s having a real impact on the environment. How bad is this issue, and how will retailers need to address it over the next few years?
Sucharita: I think one of the negative externalities of us being able to get anything we want on demand is that there is an enormous carbon footprint being left behind. There is a tremendous amount of inefficiency in how products get to us. There’s wear and tear on our roads; there’s pollution; there’s congestion. And this is even more pronounced in dense urban areas.
One issue is that the negative externalities haven’t been measured. They haven’t been taxed or de-incentivized to eliminate them from the system. And a lot of this is an awareness issue, too. I don’t think people recognize the massive carbon footprint associated with someone driving to a restaurant to pick up food, idling their car as the food is prepared then driving to your house to drop it off.
We’ve also had venture capitalists distorting the price of that. So not only do people think they can get things immediately, but they think they can get them for free, too. We have to make sure that people fully recognize that there’s a labor cost associated with these products, but also that there are negative externalities associated with what they’re doing.
I don’t think there’s any city in the U.S. yet that has a congestion tax (with the exception of New York), and that’s something that London and some cities in Asia have put in place and I think we’ll be hearing more cities in the U.S. beginning to talk about it. I think these cities need to have congestion taxes, and that will have an impact on every sector.