The business models of many retail businesses have been unsustainable for years and all it took was the pandemic to make that undeniably clear.
Pandemic and post-pandemic complications have caused many businesses to experience “inefficiencies, stress and fatigue,” making it “impossible to ignore” fundamental issues of viability, said chef and restaurateur Vivian Howard in “Foodie Fever Dreams Can’t Keep Restaurants Afloat” published last week in The New York Times.
Ms. Howard will reopen her Chef & the Farmer Restaurant with a brand-new operating model, offerings and services designed to address all stakeholders — customers, staff, suppliers, as well as the bottom line.
The restaurant will be open for dine-in service only four days a week, with chefs serving food cafeteria-style to remove service costs. The restaurant will also sell a new line of in-house signature takeaway meals and kits, which will contribute to margin while satisfying consumers’ needs. Ms. Howard hopes this will give her customers more options, her team a better salary, quality of life and career paths, and sustainable profits for her business.
Growth in retail has traditionally been generated by expanding store networks, channels and offerings.
Home centers, office supply chains and, most recently, Walmart have entered new market segments through B2B service divisions.
High-touch experiences like a “chatter checkout” line and coffee corner for seniors at the Dutch chain, Jumbo Supermarkets, can help brands stand out from the crowd.
With the exception of digital ad revenue from retail media networks, which may have the ability to transform industry economics, other initiatives create incremental growth but do not change the underlying financial realities.
Retailers, brands and restaurants have operated for years using the same business model. It’s time to ensure that offerings, services and experience meet consumers’ needs and aspirations and are balanced with expense, pricing and operating models that deliver sustainable margins and profits.
- Foodie Fever Dreams Can’t Keep Restaurants Afloat – The New York Times
- Walmart using a well-proven formula to attract B2B customers – RetailWire
- Can grocery shopping make people less lonely? – RetailWire
- Best Buy’s virtual store pilot earns high customer satisfaction scores – RetailWire
- Will H-E-B’s self-checkout pilot take off? – RetailWire
DISCUSSION QUESTIONS: Is there strategic value in retailers and restaurants reassessing their business models on an ongoing basis? What retailers over the past 25 years have done the best job of redefining themselves from the vantage points of their customers?
Neil Saunders, Managing Director, GlobalData
Business models should be continually tested and reassessed simply because nothing in the world ever stands still. However not all business models are dangerously broken: the majority of traditional retailers have reasonably sound models that work fine and just need to be tweaked to remain relevant. The biggest current issues are really in online and DTC retail where costs outstrip revenue or margins are extremely thin. On that front some major reassessment is needed which is why we are starting to see movement in areas like delivery charges, returns charges, adding incremental revenue streams through retail media, and so forth.
Dion Kenney, COO, Mondofora
Technology is changing at a breakneck pace. Consumer behavior and expectations has changed dramatically since before the pandemic. And new competitors have entered the market — offline and online — with new products, new service models, and new market propositions. It would be remarkable if a business model designed 10 years ago could still be relevant. Even the most highly curated, high-end product businesses should re-evaluate how they can provide a better customer experience.
Gene Detroyer, Professor, International Business, Guizhou University of Finance & Economics and University of Sanya, China.
Overall, I am not sure the current business model of most retailers is relevant today.
Especially low-margin retailers and DTC organizations!
Mark Self, President and CEO, Mpro5 Inc.
The Apple stores “redefined” retail in a unique way by eliminating traditional POS. When retailers and restaurants assess their business models two things typically drive that: Cost (the original self checkout ROI was based on one clerk when there once was four) and consumer behavior and preferences (When Panera Bread introduced free Wi-Fi, it differentiated them and proved a draw to customers. Now almost everyone has free Wi-Fi).
Because of the scale of large retail operations it is hard to reassess and revolutionize quickly. I believe the organizations that “stay close” to their customers and integrate that view with a view to improving the experience and/or lowering the cost will lead the way here.
Retailers need to retool their businesses to match the way consumers actually think, shop, and return today. And once they catch up to today, it’s time to figure out tomorrow and beyond. It’s now more important than ever to be flexible and willing to adapt.
BOPIS, curbside, bracketing, drones, Just Walk Out. Nothing in this list fits with the traditional model of retail logistics or traditional shopping habits. Retailers need to step back, figure out what their brand means to their customers, and then rethink how everything in their business should be rearranged to make that work — and maybe even turn a profit!
Dick Seesel, Principal, Retailing In Focus LLC
Even before the pandemic caused sweeping changes in consumer behavior — some long-lasting, others less sustainable — every retailer should have had its business practices under a microscope. Changes in the workforce, the growth of omnichannel, and demographics are only a few areas that should trigger self-reflection by retailers. Any customer-facing business needs to be nimble, even if its current practices appear to be working.
Technology innovation and societal norms have reached the point of change at which existing systems and processes are no longer able to produce results that work. In addition, the speed of change and risk of unforeseen events is at a higher level than we’ve experienced in centuries and current business models weren’t built to evolve. The retail industry will need to break down their existing business models and rebuild around a new, headless, fundamentally flexible model that places equal value on employee and customer experience and fuses together all online and offline channels. The next five years are going to be really interesting!
Retail as a concept does not need to start from scratch. Particular retailers that have refused to change how they do business as the needs of their consumers change need to continually be looked at.
Six years ago, Target had zero curbside business. Now it’s one of the fastest growth areas of the business.
Retail will always be about the details, and those details include obsessing about what your particular customer wants, and if your target segment of customers is growing or shrinking.
Susan O’Neal, General Manager, Promo Intel & Insights, Numerator
The role of the retailer has always been about helping the consumer solve their wants and needs efficiently. At the very, very beginning of our industry (the horse-drawn carriage days) the shopkeeper owned the whole “path to purchase” — they were the first to hear about a consumer’s want or need and they had the sole responsibility for satisfying it from recommendation to order delivery. Over time advertising and then influencers started creating demand and retailers shifted focus toward efficiently satisfying that demand — supermarkets, big box, one-stop shop, lower prices, store accessibility, merchandise assortment, all became the primary tools. Today the Internet has collapsed the path to purchase so that a need is satisfied with one click and perhaps a day or two delivery time, ITEM by ITEM. This last piece, that demand is satisfied item by item (rather than trip by trip), is what makes brick-and-mortar stores an element of the economic model to deeply rethink.
Steve Dennis, President, Sageberry Consulting/Senior Forbes Contributor
Not every retailer needs a radical re-think, but many are engaged in timid transformations that amount to building a faster horse, rather than creating something truly remarkable and enduring. The forces to defend the status quo are often powerful and too often struggling brands get trapped in the “innovator’s dilemma.” What’s needed is bolder change and faster change or the innovation gap will only widen.
Jeff Sward, Founding Partner, Merchandising Metrics
It’s always time to be rethinking your business model — always. Positive momentum and LY data can provide a foundation, but they can also be the enemy of change and evolution. Unfortunately, there were a number of years (decades) where LY was a perfectly good blueprint. That hasn’t been the case for several years now. Sustainability demands evolution in both product development and the product itself. Technology demands evolution in every single process in retailing. Legacy business models are quickly becoming antiques. Target provides a lot of valuable lessons. They took a lot of grief for expensive investments made over the years. Now lots of retailers wish they were the same kind of long-term thinkers.
Carol Spieckerman, President, Spieckerman Retail
I’ll say it again — business model diversification and platform monetization are retail’s growth engine of the future, with solutions and services at the top of the list. Services, including healthcare, advertising, marketplace support, fulfillment, and last-mile solutions are a powerful (and profitable) hedge against product-based challenges. The danger is that diversification adds complexity and can distance retailers from customers since many of these capabilities are facilitated by third-party partners.
Every business, regardless of industry, ought to reassess its business model all the time. If it doesn’t it may not be around long, particularly with the speed of technological advancements and ever-changing consumer preferences and interests. Think about what Moore’s Law did to the chip business. Think about yesterday’s article on ChatGPT and the revolution in AI it’s going to stir. And in a few years, think about how commercial applications of quantum computing are going to disrupt the previous 20 years of tech innovations! All of these changes have significant implications on retail and if senior leadership teams aren’t strategizing on how to evolve their current models for the future, they could be the next company on the Chapter 11 chopping block.
Historically, retail has been an industry largely resistant to change. How many retailers do we see today that don’t seem to react to a changing customer? (Why didn’t Sears become a Home Depot?)
Strategic plans should never be locked in a safe, never to be revisited. They should regularly be reviewed to determine those things that are working today that won’t be working tomorrow.
If the retailer fails to think that tomorrow is going to be different, they should look at the rate of change from yesterdays.
Gary Sankary, Retail Industry Strategy, Esri
The only thing that’s a constant in business is change. In the last three years, we have witnessed some of the fastest changes in consumer behavior due to the pandemic that I’ve seen in my rather, um, lengthy career. Best-in-class retailers are nimble. They know that change happens, and it’s happening faster and faster. They have the tools in place to “see” those changes in their business early, interpret their impact on their business, and have the ability to adjust and react quickly. Target, Walmart, Kroger, Ulta, there’s a long list of companies who were able to pivot their business models quickly during the pandemic. Now, as the pendulum swings back to store experiences, they’re working in an environment where channels are more blurred than ever. On top of this, a looming downturn has them making adjustments to address a potential decline in demand. Best-in-class retailers also understand that protecting and maintaining their customer base is critical in this environment. This has led to a winding gap between the “winners” and the “others” in retail.… Read more »
Paula Rosenblum, Co-founder, RSR Research
Yes. If you look at the P&L expected from a single store (to support the chain) you can see that it’s based on a transient, part-time workforce that you don’t have to pay benefits for or give raises to. That P&L yields something called store contribution.
So retailers do have to re-imagine the store so that they can pay their employees a wage they can live with, build a bench of new executives, and generally treat them as actual employees.
Again the challenge is the current store contribution model generally doesn’t lend itself to that, so a lot has to change.
I fear that “radically” changing business models may at times radically affect the goal of the change. Certainly models must change. Consumers demand it as they see the other competitors offer them new and pleasing experiences. So change is truly expected by consumers. The key here is not to imitate, but recreate interaction points that are thoroughly assessed before implementation. That takes time and willingness to admit that further change must be made. Certainly, change ideas should be passed by customers prior to any actions. In other words, analyze customer perceptions before starting. But by all means, START.
Mohamed Amer, PhD, Independent Board Member, Investor and Startup Advisor
The term business model gets bandied about to the point of ambiguity. It precedes strategy and is about the unique combination of internal resources and capabilities and how they are deployed, considering transaction cost economics. The example of Ms. Howard’s Chef & the Farmer Restaurant fits the bill.
The successful ability of any existing business to radically change its business model stretches the limits of possibilities. The usual path of business models that challenge the status quo with its taken-for-granted assumptions is the introduction of new ventures. They start with a clean sheet to design the organization, create unique combinations of resources and capabilities, and deploy novel transaction frameworks for customer value creation.
Constant evaluation of a company’s strategy, capabilities, and value creation are essential. However legacy processes, investments, and signature initiatives tend to throttle attempts at radical change. CEO and c-suite wholesale changes allow for a fresh leadership team start, but the organizational baggage remains.
Examples of companies that successfully challenged an industry’s business model include Ryan Air, IKEA, and Dell.
Lee Peterson, EVP Thought Leadership, Marketing, WD Partners
I think most have, it’s just that execution is the catch. Going from what anyone was 20 years ago to what you have to be now is expensive and painful, to say the least. But if you haven’t re-org’d and at least have a plan for what you need to be to create a modern business model, you’re probably on the ropes right now. Compare Walmart to Kohl’s and you’ll get the picture loud and clear.
David Naumann, Marketing Strategy Lead – Retail, Travel & Distribution, Verizon
Successful retailers are continually reassessing their processes to adapt to rapidly changing customer demands and expectations. As new technologies become available and consumers move to mobile-first shopping journeys, retailer have focused on digital transformation projects. Success will be achieved by those retailers that prioritize digital innovation to build smarter, more efficient, and more agile enterprises.
Patricia Vekich Waldron, Contributing Editor, RetailWire; Founder and CEO, Vision First
It absolutely should be part of a regular strategic review processes, but many retailers have not done this and now are finding themselves squeezed.
David Biernbaum, Founder & President, David Biernbaum & Associates LLC
Not all retailers need radical change but to survive long term, some do. What is critical to know, is which post-pandemic, and which generational trends, are likely to be long-term, vs. which are strictly in the “right now.” Many times, trends that once appeared to be solid, came and went. Others stuck around “forever.” Trends likely to be here for at least a decade or two include the shift to e-commerce, door-delivery of foods and other consumer goods, and big department stores scaling down to smaller stores in strip malls. Private label tends to trend with the economy shifts, however, consumers are becoming better educated about “sameness” with national brands (in most cases, not all) and national brands are losing their edge on innovation, perception of higher quality, and exposure, because advertising is more difficult and complicated than it once was, due to changing trends in television usage, apps, digital, and a great deal more convolution of messaging. Trends tend to bounce back in time. I’m imagining that thirty years from now an indoor mall… Read more »
Brandon Rael, Strategy & Operations Delivery Leader
Considering the relentless rate of changing consumer behaviors, market conditions, competitive forces, economic disruptions, and technological innovations, retailers, consumer products, restaurant, and hospitality businesses have required a critical look at their operating models and go-to-market strategies. There is a clear correlation with the accelerating rate of changes and the paradigm shift retailers have had make to be agile, product-centric and focusing their transformation plans on providing measurable value to the customers an the associates who serve them.
There is a clear connection between the capital investments that Target, Best Buy, Nordstrom, Kroger, Walmart, and others have made to the operating model, along with their investments in capabilities and their relevance/revenue growth. Considering the times we are living in, all retail — consumer products, restaurants and hospitality, have to make significant investments in interactive innovation and transformation plans to keep up with the peace of change. Remaining static with legacy processes and tech debt is a recipe for irrelevance and bankruptcy.
Brad Halverson, Principal, Clearbrand CX
Reassessment of business models should always have a rhythm, whether every few years or sooner. Customers expect more from retailers and are busier than ever. Thanks to technology, customers can plan, evaluate, and shop from home, and they enjoy choices than before. It’s up to the retailers to keep up with technology, the supply chain, product offerings and merchandising.
Some of the retailers who have evolved better than others are Nordstrom, HEB, Central Market, Wegmans, Target, and WaWa.
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