Apocalypse or Renaissance: what’s next in offline retail?

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Retail is reshaping with blazing speed, and industry leaders are riding the wave of technological power to eat up the market. We’ve interviewed Alexandr Galkin, CEO & co-founder of Competera, a retail price optimization company, about what’s changing and how to make sure that your company is milking every opportunity to grow.

Dozens of media articles have broadcasted the demise of retail titans like Sears and Toys R Us in the United States. Media has reported 57 bankruptcies since 2015, with over half of them linked to the booming growth of online retail and technology. Is offline retail in its final days?

I would not be so pessimistic about brick-and-mortar retail. Top 250 global retailers earned $4.53 trillion in 2018, up from $4.44 trillion the previous year (by Deloitte study). Offline retail accounted for as much as 90% of those earnings. Therefore, I would say that brick-and-mortar businesses are doing very well. It should be acknowledged, though, that several major US retailers were forced to file for bankruptcy and close stores. For example, Toys R Us shut down as many as 735 stores after over 60 years in business. Or, the total of 4,309 stores have been closed across the US since January 2019. However, this happened partially because there was too much store space initially: the number of commercial square meters per customer was higher than shoppers needed in reality. Then, indeed, these major companies missed a technological shift and a growing trend of online commerce: Toys R Us chose Amazon as its only eCommerce channel, never built anything of its own in this area, and eventually lost customers.

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What is the future of offline retail bearing in mind that the retail landscape is changing rapidly?

If you want to see your business up and running in the future, you should focus on personalization. This trend also concerns pricing. Even mature retailers have yet to travel a long way from expert-based pricing to fully personalized offers via customer clubs. The first step would be to learn to collect and manipulate unprecedented amounts of data regarding hundreds of parameters and switch from SKU-based to portfolio-based pricing first for multiple selling channels, then for different regions of operations.

Meanwhile, even mature retailers covering several markets find it difficult to craft balanced pricing strategies since there are too many regional peculiarities to consider, too many customers to tailor to, and too much data to process. When it comes to selling in different markets, companies need to take into account different cultures, languages, assortment, selling prices and costs, currencies, price sensitivity, and customers’ purchasing power. How to optimize their pricing strategies in such a context? Retailers require enhanced managers and technology to collect and analyze unprecedented amounts of various types of data regarding the market, sales, customers, seasonality, and hundreds of other parameters.

When it comes to highly personalized offers, businesses have to learn to collect, structure and process tons of data regarding anything which would help them categorize customers into smaller groups than before. For example, Walmart has already made several steps in this direction after the company realized it had almost let the opportunity slip the fingers. In 2018, the company signed a 5-year deal with Microsoft to run on Microsoft’s cloud and get access to its machine learning, artificial intelligence and data innovation projects. However, personalized offers are only part of a rewarding customer experience, while making a customer journey satisfying is a must.

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Why customer experience is vital and how to make it enticing? What has been changing in terms of customers’ expectations?

Customers are becoming more demanding, as the number of offers they can choose from is growing. Shoppers have gadgets to make purchases via different channels — and they want to buy things seamlessly, quickly and at the right price regardless of the channel they choose. By the way, the price of a product has always been at the core of customer experience: the price is the first thing a customer notices. Also, it is something which influences a buyer’s perception of a retailer even after the purchase is made since shoppers compare the experience they got with the money they paid. Retailers that can provide buyers with an effortless customer experience win. The question is how to make sure that customers are satisfied. It has always been true: people need people. Retailers have realized that it is wiser to let their managers fully focus on interacting with customers and craft customer-centric pricing strategies. Retail first-movers adopt technological solutions to take over time-consuming and repetitive tasks requiring the ability to process enormous amounts of data which are unyielding for humans.

How does technology influence business operations?

Mature retailers still have structural issues which prevent them from breaking the revenue ceiling in the competitive market. At many companies, the same managers or teams are in charge of both buying and selling products. This does not seem feasible, as both areas require full-time attention. What’s more, from my experience, managers deal with outdated and fused KPIs. As a result, overloaded with tasks, managers are unable to deliver on either one. On top of that, as the market is extremely dynamic, very often retail teams engage in price wars and lose as managers do not have time and capacity to analyse the results of their pricing decisions. However, major companies have already separated buying and selling teams. Retailers have identified independent KPIs, and introduced technology to enhance managers in analyzing vast amounts of data and help them build the right price perception. How do retailers craft better price perception? By forecasting demand and sales based on myriads of data points. Therefore, the steps to take would be to get hold of necessary data, leverage the power of technology to make demand and sales predictions, and then use them to switch from SKU-based to portfolio-based pricing and data-driven decisions.

If retailers already have necessary data, then switching to portfolio-based pricing is the next step. What does it entail? Is it beneficial for businesses? Why?

If managers are torn between buying and selling at the best price, they usually try to set optimal prices for a particular product. Such an approach is called SKU-based pricing. In this situation, retail teams cannot know how prices for one product will influence the sales of other products in portfolio and very often unknowingly sink the sales of other items. With portfolio-based pricing, managers use demand and sales predictions to calculate balanced prices and build the right price perception for the whole portfolio, so that some products would boost and not cut sales of other items. From my experience, such a method works best for industries like electronics, FMCG, and apparel. One of Competera’s clients, a European electronics retailer, boosted revenue by 16%, while another retailer from the UK increased sales by 22% thanks to portfolio-based pricing. Meanwhile, managers need to be empowered by technology to be able to make all the necessary calculations quickly enough. Mature retailers have been cooperating with dedicated consulting teams of the Big Four to forecast demand and sales, define the best promotional activities and set optimal prices. However, such analysis is hardly ever real-time, while there already technological solutions which allow retailers to react to the market needs much quicker. Some of the solutions provide demand and sales predictions once a week.  

Could you please elaborate on what kind of technology retailers may use to build the right price perception?

I believe that technological solutions based on the use of machine learning algorithms can be the most convenient and transparent option for retailers. The algorithm processes huge amounts of data to calculate the effect of every pricing decision on the whole portfolio, allows for test-driving various pricing and promotional scenarios, shows the results of every pricing move in real-time, and highlights the best pricing scenarios to boost sales depending on the retailer’s business goals.

What’s next?

Although technology is becoming more accessible to a wider range of companies, such giants as Walmart, Google and Amazon have more financial resources to invest not only in promoting their goods, but also in R&D. It is extremely difficult to compete with them in such a context. Personally, I know a company which is on the verge of bankruptcy after losing 50% of its traffic within three months due to the changes in Google’s search algorithms. So, when it comes to the future, I see such companies either switching to offering exclusive products and services which would be unavailable on Amazon and other commerce giants, or moving to Amazon completely. Another trend may be subscription clubs and prices based on customers’ LTV. Such a method is already being used in the US. Companies which have massive amount of data about their customers will calculate the best personal price for every customer based on their data regarding how much shoppers have already spent and how much they are likely to spend in the future, as well as the retailer’s business goals. Also, such an approach allows for eradicating price discrimination.

*Alexandr Galkin, CEO & Co-founder of Competera, price optimization software for enterprise retailers looking to increase revenue and stay competitive. Forbes contributor, speaker at IRX, eCommerce, RBTE conferences.