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3 Ways to Win the Innovation Race

3 Ways Retailers Can Win the Innovation Race

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In the digital era, the race to innovate, or be declared obsolete, is on. While brick-and-mortar retail still accounts for 85% of sales, the e-commerce world has led over 300 retail companies to shutter an estimated 6,800 physical doors in 2018 alone. These findings are particularly perplexing, as younger generations—including millennials, who do much of their pre-purchase browsing and actual shopping via a digital device—still claim they prefer to shop in person—a clear indication that customers expect highly personalized experience whether it’s online or in store.

Ready, steady, innovate

Retailers are scrambling to survive this digital transformation. To meet consumer demands for a personalized shopping experience head on, a shift from product-centric to customer-centric sales is of the essence, and innovation is the name of the game.

Becoming tech-first is retailers’ first weapon of defense.

Technology, especially AI-driven solutions, is what will ultimately enable retailers to obtain a competitive edge. Thanks to its three key elements—data mining, natural language processing (NLP), and machine learning— AI can help brands and retailers sell better by engaging in predictive forecasting, capacity planning and merchandising initiatives. When applied correctly, these innovations can make in-store and online business processes more efficient. Retailers can leverage the data they collect and harness their AI solutions to automate marketing campaigns, optimize the consumer experience and create added value in the form of a highly-personalized hybrid physical-digital retail journey. Namely, they must create an online shopping experience that mimics the personalized in-store experience consumers love, with the added convenience that only the e-commerce world can provide.

However, instead of investing in AI to implement smart logistics processes, recommendation engines, and chatbots, the findings of a PointSource report indicate that “many (retailers) prioritize the sexier side of their industry (UX and design) over architectural and developmental technology needs that create scalable businesses and relationships.”

The report further observed that end users’ “immediate and future needs” were frequently sacrificed in favor of “trendy and/or newsworthy alternatives.” While this may generate short-term buzz, it doesn’t lead to the kind of scalability that retailers should be striving for.

Leaping over tech hurdles

Retailers don’t necessarily need to be the first to use emerging technologies (though they certainly shouldn’t be the last). But they do need to consistently earn and keep their customers’ trust if they wish to thrive, or even survive, while addressing some pretty significant challenges.

Yet, despite many brick-and-mortar retailers’ best interests to fully embrace digital transformation, most are not technology companies at their core. Unlike tech giants like Amazon, these retailers hear key innovation buzzwords—AI, machine learning, and big data, to name a few—but consider them to be confined to the retail e-commerce world.

How can retailers take the leap and become legitimate, innovative industry competitors?

Simply put, to obtain a competitive edge, they must reinvent themselves and become more technology driven.

To this end, retailers are increasingly:

  1. Investing in technology: 60% of all retailers plan to increase their IT budgets year over year. And companies across the globe will spend $3.7 trillion on customer-centric business technology in 2018, according to Gartner.
  2. Opening labs: Many large retailers have established in-house innovation labs, including Walmart, Zappos, Neiman Marcus, Lowe’s, Staples, and Sephora.
  3. Making acquisitions: 32% of tech startup acquisitions were made by non-tech firms in the retail and consumer industry in 2018 (thus far), including Nordstrom’s purchase of two digital retail startups to boost its digital credibility, and Walmart’s acquisition of same-day delivery startup, Parcel, in 2017 and NLP-based reviews startup, Aspectiva, just last month.

Let’s examine each of these vehicles for innovation a little closer.

3 ways retailers can reinvent themselves in the digital era

Adopt it

For many of the e-commerce giants, and certainly those that started out as “technology-first” companies, like eBay, Amazon and Alibaba, the instinct is to build whatever technology is needed, in-house and on their own. However, while these retailers usually have large teams of engineers and attract talent precisely because they are “technology-first” companies, the same cannot be said of the vast majority of retailers. Instead, they must budget for and invest in new, disruptive and externally developed technologies, or integrate technologies into their existing infrastructure, especially AI. The latter is far easier and more economical to implement, as it doesn’t require hiring a team of engineers, replacing existing infrastructure, changing organizational structure or processes, etc.

For example, North American clothing manufacturer American Apparel invested in an Augmented Reality app that enables customers to photograph store products with their smartphones and immediately obtain product information, stock availability, additional sizing and colors, and reviews, without having to track down a sales person for help. Hayneedle, a Walmart company and leading online home furnishings retailer, integrated Twiggle’s AI-powered search enhancement solution into their existing search stack to improve relevance and recall. This allows them to understand customer search queries in their natural language, making their customers feel understood in a way that mimics the in-store experience.

Build it

A “technology-first” company, Amazon prides itself on building a vast variety of technologies in-house. The company spent $23B in R&D in 2017 alone and has already developed most of its prominent innovations around Amazon Prime, including Alexa Shopping, Dash buttons, Fire tablets and more. And, not only does Amazon build its own technology, it sells that technology to other companies as a service. Case in point: A majority of Amazon’s operating profits come from its Amazon Web Services (AWS), a platform with over 1,000,000 end users, 10% of which are enterprises such as Intuit, Hertz, and Time Inc.

But Amazon isn’t the only retail player to emerge as a tech builder. Macy’s, Kohls, Target, and Walmart are just a few of the growing number of retailers who’ve launched their own innovation labs to develop and nurture disruptive technologies, with much promise. Macy’s Lab has already exhibited several winning initiatives, and Kohls has significantly grown sales from both its physical and online stores as a result of digital initiatives such as its mobile app and loyalty programs.

Buy it

A third option for retailers seeking to reinvent themselves as “tech-first” is acquiring innovative startups designed to build AI technologies. Provided retailers have the financial resources to do so, acquiring startups can help prevent stagnation, while driving revenue growth. After all, as Anthony Armstrong, co-head of technology mergers and acquisitions at Morgan Stanley, once said: “It’s better to acquire disruptive technology than to be disrupted by that technology.”

Sometimes the acquired startups are bought for their technology; more often, it’s for their talent. A Bloomberg report found that in 2017, 682 technology companies were bought by a company in a non-tech industry, while 655 were purchased by tech companies. Amazon has acquired 128 companies and counting, including huge successes like Zappos and Evi. eBay scooped up over 30 companies like Expertmaker, Decide.com, and Positronic. Automotive supplier Delphi acquired Boston-based self-driving startup nuTonomy for $450 million. And retail seller of all things pet-related, PetSmart, bought Chewy, an online digital pet supply store, to enhance its digital presence.

But before diving into any acquisition, retailers should first determine if they have the budget, manpower, and organizational agility to successfully adopt their new asset.

Key considerations in choosing the right approach for digital transformation

Before committing the time, effort or resources needed to adopt, build or acquire innovative technologies, here are a couple of questions you should ask yourself. Your response to the points below will help ensure the selected approach is most suited to the brand, its vision and goals:

  • Does this technology resolve existing challenges or meet customer demands?
  • Will this technology enhance the consumer experience or improve the brand-customer relationship?
  • Is there a business case for this technology?
  • Is this my core competency?
  • Is this technology easily supported by my current digital infrastructure?
  • Is outsourcing/developing in-house the fastest, most cost-efficient way to bring the technology in?

Conclusion

Not all retailers are inherently “technology-first,” and many struggle to compete with e-commerce giants like Amazon and position themselves as legitimate competitors in the fast-paced digitally-charged world. Yet, as innovations continue to make the shopping experience better, smoother, faster and cheaper, there are several ways that retailers can reinvent themselves to gain a competitive edge. The race is on, and it is up to each individual retailer to decide which course to take: adopt, build or buy.

This article was originally published on Retail Customer Experience on April 26, 2019.

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