The rules of retailing have changed dramatically and merchants must understand what drives today’s consumer if they hope to succeed.

This story first appeared in the November 16, 2011 issue of WWD. Subscribe Today.

To help companies navigate these uncharted waters, Michael Dart, principal and head of private equity and strategy at Kurt Salmon Associates, co-authored a book titled “The New Rules of Retail: Competing in the World’s Marketplace” with Robin Lewis. The book details three waves of retail, starting around 1850 and running until today. From 1850 to 1950, most of the U.S. population lived in rural communities and there were two dominant retail models: the general merchandise or regional department store, and the catalogue. This was the height of the industrial revolution and the “era of producer power,” he said. However, it was also a time when there was a large amount of unfulfilled consumer need because production could not keep up with demand.

From 1950 to around 1980, Dart added, the climate was marked by enormous investment in infrastructure, triggering explosive growth in retail stores of all types. Retail was dominated by Sears Roebuck, Wal-Mart launched, and specialty retailers such as Gap entered the picture. With all these choices, it was the era of marketing power, he said, when brands realized they needed to not only produce goods, but also advertise and market them in order to stand out from the competition.

The third wave, from 1980 to 2011, saw the advent of big-box retailers and the expansion and explosion of retailers of all types. New technology also had a vast impact on the business. Dart said this is the era of consumer power, where “great product and marketing is the price of entry,” and to win, retailers need something more. It’s also the era of retail saturation, with more than 42 square feet per capita in the U.S. “The consumer has enormous choice,” he said.

At the same time, the cost of producing merchandise has decreased and there’s quicker and easier access to product than ever before. Couple that with the “information overload” that has swept through our society, and it’s easy to see how consumers have the upper hand. “There’s a big shift from needing stuff to demanding experiences,” he said.

There are also moves from conformity to customization, from plutocracy to democracy, from new to new and now, and from self to community, Dart said.

This has resulted in three new rules governing retail today. The first is “neurological connectivity,” he said, which means brands must reach consumers through all five of their traditional senses as well as through their sixth sense — the mind. This requires retailers to create excitement and anticipation through such strategies as flash sales and limited edition product.

The second rule is preemptive distribution, Dart said, which means retailers must work to reach customers first — before their competitors — and in whatever way consumers desire. He used the example of Kohl’s trying to siphon off customers by building a store between a community of time-starved working moms and a J.C. Penney.

The final rule of retail is the battle for the control of the value chain of design, sourcing, manufacturing, logistics and distribution.

Dart said the practical implications of these rules is that 50 percent of all brands in existence today will disappear, wholesale brands will accelerate the opening of their own stores, traditional retailers will increase their percentage of exclusive and private brands, department stores will roll out specialty chains and pop-up stores will continue to make strides as a “strategic weapon” for brands.

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