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TechnologyDec 03, 2010

Align Your Retail Operations with M-Commerce

Jason Davis

“Mobile Commerce is any transaction, involving the transfer of ownership or rights to use goods and services, which is initiated and/or completed by using mobile access to computer-mediated networks with the help of an electronic device.”

That is the definition of mobile commerce (m-commerce) right from Wikipedia and gives us a good working definition that we can take apart and play with on this blog. In this post I wanted to go beyond the glaring technological implications and examine a few operational implications that retailers have been forced to adapt to.

When we think of m-commerce we immediately jump to the gee-whiz components: new mobile applications, services, and gadgets. As with the internet, the gee-whiz fades, “motes of innovation” vanish, and the market figures out how this new channel works. It is the retailer that can adapt their business model and execute that model that thrives in the long term.

The “New Economy Relationship” diagram below nicely illustrates a working assumption broadly accepted in the retail world.

The producer, through a variety of means, is much closer to the consumer. The consumer is more aware of what they want and producers have more insight to consumers’ needs and desires. This new relationship begins to shift the balance of power away from traditional retailers to those who produce and consume. It shouldn’t be viewed as either good or bad for a retailer, it is just the environment we are in and retailers are forced to adapt. M-commerce and the expectation of being able to “get what I want when I want it” are accelerating, and this dynamic is an area where many retailers in the U.S. lag behind our friends across the Pacific. M-commerce has flourished in the Pacific-rim where retailers are aggressively marketing and experimenting with m-commerce models that will define the channel for the industry (that detail is an interesting discussion for later blog posts). In this post I will take a bit deeper dive into a few of the challenges and changes past clients have dealt with while growing into the m-commerce channel.

Why has m-commerce thrived in the Pacific-Rim?

Several years ago during one of my projects with a Korean retailer I learned that approximately 80% of their inventory was sold on consignment. In the U.S. we tend to think of consignment as something a jewelry store or thrift store might do, but to many leading Asian retailers this is a model adapted to everything from seasonal women’s fashion to wall unit air-conditioners. As I spent more time working with retailers in the region (Japan, Korea, Indonesia, etc.), I found many of them heavily emphasized consignment sales as part of their business model. Why was a consignment model so heavily emphasized? As I put that question to my clients two answers kept emerging. The first was that, traditionally at least, most of the large retailers did not have the cash flow and/or credit available to purchase the large inventories they required. Secondly, retailers in the region often had a geographic proximity to manufacturers that permitted close cooperation. Why is this consignment talk relevant you ask? The consignment model used by these large retailers melds nicely into the “New Economy” (m-commerce in particular) that gave these retailers an unanticipated head start. Top tier retailers in the region have been able to leverage existing brand strength and customer base, but there are important organizational issues that have to be addressed.

I want to break down a few of organizational issues commonly discussed with retailers that are currently thriving in the m-commerce channel and that heavily relied on a consignment based operating model.

A new sales channel? Who is going to pay for it?

Like the internet before it, growing into a new sales channel can burden retailers with enormous up front investments. Many retailers who tried to adapt a traditional “retailer does it all” model to the new internet channel dug a financial hole they could never climb out of(see pets.com) Many Asian clients operate a minimally leveraged business via a low cost consignment model. Since manufacturers hold the stock on their books until units are purchased by the consumer, retailers are able to deleverage their business. Less cash is tied up in inventory sitting on the shelves, allowing retailers to redirect capital to other priorities. This is especially important for established small to medium size retailers who want to grow into the m-commerce space but have traditionally lacked the capital to make significant initial investments.

Times are tough, how can I manage risk?

Every inventory purchase is a bet on the future. Given projected demand every retailer is betting that given a certain lead time (sometimes a year or more in advance) the demand will exist when the supply arrives. In a traditional model the retailers assume the lion share of the risk (especially in soft lines) and a few bad bets for the holiday season can ruin a year. A model that moves all or a portion of inventory costs away from the retailer allows them to better weather the storm (In Asia the answer has often been a consignment model). Like cost reduction, protection from the typical seasonal risk allows retailers to more aggressively lobby their boards, investors, and other stake holders to take on the risk of aggressively moving into new channels (m-commerce).

Retailing as a service

Much in the way that corporate IT organizations are moving towards purchasing IT as a service in order to reduce capital expenditures, retailers can move in a similar direction. Given the increasingly close relationship of consumers to producers, retailers can begin viewing what they do as providing services that connect the supply to the demand. Successful retail operations do a few common things well: marketing, merchandising, demand forecasting, customer relations, and pricing. Each one of these functions (and more that I haven’t listed) represents an opportunity that retailers can package as a service to both the consumer and the manufacturer. Thinking of retailing as a service that is provided to consumers and producers gives a great starting point for moving into the m-commerce channel. In the U.S. shopping aggregators such as pricegrabber.com and shopping.com are making great strides in this direction, but these add a layer beyond the retailer instead of bringing consumers closer to producers. M-commerce offerings from established retailers that encapsulate a retailer’s competitive advantage or institutional knowledge can be developed to provide retail services that appeal to suppliers and/or consumers. Many Asian retailers that I have worked with treat their brick and mortar operation in much the same way, and they have leapt at the opportunity to adapt the model to the e-commerce and now m-commerce channels.

In the “New Economy” how do I keep control of my supply chain?

One of the concerns I have heard from retailers is that they are losing control of their supply chain, primarily managing the supply chain in new channels. As retailing moves to a service model, connecting producers to consumers (via a consignment model or any other model), many decision makers fear that too much control is ceded to suppliers. While it’s true that the supplier relationships are fundamentally changing for all but the largest retailers, there are new levers that retailers can take advantage of to manage their business. Solid metrics and data warehousing, while not new, become operational life blood and not just a tool. For example, in a consignment model the most important number to everyone is the consignment rate (i.e. how much does the retailer get for each unit sold). Traditionally this was a fixed universal rate set by the retailer or a rate negotiated with the supplier. There are some wonderfully advanced practices and tools in use by some retailers to create a dynamic consignment rate based on retail metrics (profit margin, inventory turnover, revenue per sq. ft., etc.). These metrics are used to reward or punish (incentivize if you prefer) your partners, but it vastly increases the importance of business intelligence and reporting tools. For example, the consignment rate can be adjusted down as inventory velocity increases and the supplier’s product meets negotiated sales targets. On the opposite end the consignment rate can be increased to ensure the retailer is compensated for services provided for a slower moving product (some retailers will even invoke a flat penalty for poor performance). Building a rule based solution that that directly leverages operational data to drive the bottom line (e.g. adjusting a consignment rate) gives retailers the levers to manage their business in rapidly evolving business models.

Bringing it back to the beginning

Given the “New Economy Relationship”, producers are connecting directly with their consumers via new sales channels (m-commerce and e-commerce). While this does mean embracing and promoting new technology, more importantly it means adapting operational models and managing partner relationships in order for retailers to stay relevant. M-commerce encapsulates the ultimate expression of the “New Economy”, there are virtually no barriers to who can retail and the technology to do so is for sale virtually off the shelf. Retailers are being forced to learn to adapt their entire business model, leveraging a consignment model, enable new finical levers via data mining, and more effectively managing risk in a tough environment. Those that can effectively evolve their business model will thrive no matter what technological disruptions occur due to new sales channels.