How GCC stores can respond to the changing face of retail

The retail landscape in the GCC is changing thanks to growing online activity, characterised by the entrance of new online players. For example, Amazon recently acquired the Middle East online retailer Souq.com and Mohamed Alabbar’s multi-category retailer noon.com is scheduled to launch later this year.

As online retail develops, traditional retailers in the GCC will need to bear in mind the experience of similar companies in more mature markets such as the US, where the internet has been a disruptive force and retail has gone through two major phases of change. GCC retailers will need to emphasise the customer experience by integrating sales channels and rethinking their retail footprint.

Growing competition from electronic outlets has affected many traditional retailers. Over a dozen major US retailers have declared bankruptcy this year, with online retail a significant factor in their weakening performance. The impact of the internet is already being felt on some traditional retail outlets in the GCC. Stores are closing in Dubai’s retail consumer electronics sector because outlets are struggling to compete with low prices online and the convenience of internet shopping.

The first stage of change affecting retail is the closure of physical outlets and the integration of sales channels. Some retailers in developed countries have shuttered old-fashioned physical outlets, with large staff numbers and extensive inventories, because they are too expensive to maintain and have low margins.

As the US shows, the retail sector in this stage responds to online competition with so-called omni-channel strategies. These involve uniting all sales channels into one customer experience: physical outlets, websites, smart phone apps, and telephone ordering. Creating an omni-channel approach requires maintaining the full range of retail presence and two supply chains — between warehouses and shops and between warehouses and customers’ homes.

Interestingly, GCC retailers are experimenting with steps to test some of these retail channels. Some retailers are using social media to engage with customers, others are connecting physical sales with online deliveries. These are initial steps toward a fully-fledged omni-channel approach.

The second stage of retail change involves significantly improving the customer experience by opening a new style of physical outlet: the showroom. These carry a smaller stock and a limited range of distinct, high-value goods known as ‘differentiated goods’ — the latest branded fashion item, for example.

By contrast, traditional outlets carry lots of what are called ‘common goods’. These are items that shoppers know very well, such as work shirts or underwear, and that sell at a steady pace.

Showrooms are a response to customer buying habits influenced by the internet. Customers like to view and try some items, such as differentiated goods, in shops. They then compare prices and buy online. Showrooms have the advantage over traditional outlets of being cheaper to operate and needing relatively few but skilled staff.

Importantly, showrooms help retailers to solve the problem of returned goods. Online sales of differentiated goods tend to have higher rates of returns than commons goods — and returns are costly for retailers. By letting customers try differentiated goods in person, so they know what they actually want to buy rather than rely on the description on a website, showrooms lead to significantly lower rates of return.

Traditional retailers in the GCC should learn from these two stages of change by implementing them simultaneously. GCC retailers, in particular specialty retailers, need to integrate sales channels into omni-channels and use showrooms as part of a rethink of the in store experience and a reconsideration of their retail footprint. This will enhance the connection to the customer by allowing shoppers to experience the retail brand in-person. It can also make retailers more profitable by concentrating their physical presence and allowing them to get the most out of their inventory.

In the GCC, this would mean having a few showrooms supported by a network of curated stores. Retail chains would be able to reduce the number of stores, which are often already experiencing weaker sales. Instead they would have showrooms in a few locations acting as flagship stores so that customers can get to know and experience the brand personally. The result would be a simpler supply chain, less retail space, fewer but better trained staff, and smaller piles of items waiting to be put on sale.

The improved customer experience is at the heart of these changes. The showroom provides precisely the customer experience required to sell differentiated goods, whether in person or online, and so avoid markdowns. Shoppers do not know these goods well. Differentiated goods are new, such as the most recent fashion item. They are also not the same from one outlet to the next — a good example is the latest branded footwear.

They may require sales staff to convince consumers to buy them, such as high-priced jewellery or a wireless data plan. Retailers need to sell differentiated goods quickly so they do not become either obsolete (such as the latest gadget) or unfashionable (this season’s most fashionable t-shirt).

Part of the enhanced customer experience that differentiated goods demand is having the right goods reach customers at the right place and at the right time. This is tricky because it is driven by customers’ whims, which are hard to forecast. Often, shoppers will not actually know they want an item until they see it and try it, such as sitting on a piece of furniture. Alternatively, the desire for the item may be delayed until they feel that it is the latest trend that they just have to be seen wearing. Getting the supply chain right for this kind of retail is extremely difficult for traditional retailers as it is unpredictable and often results in excess inventory that is heavily marked down.

The advantage of showrooms is that they help manage the inventory challenge and retail footprint more efficiently. Showrooms only have the stock needed for customers to choose what they want. Retailers can keep additional inventory for showrooms in warehouses. This gives them the ability to provide same day delivery to customers. It avoids moving inventory from showroom to showroom.

An example of the smaller inventory and retail presence is the US-based men’s apparel company Bonobos, which Walmart is acquiring. Bonobos operates a few dozen showrooms. These each only need an inventory of around 220 items to give customers a full selection or styles, fabric finishes, and sizes. A traditional retailer selling jeans in the past would have had hundreds of outlets each with an inventory of more than 3,600 items.

For GCC retailers, integrating sales channels and improving the customer experience will allow them to face the rising tide of e-commerce. Giving shoppers what they want as part of an improved retail experience means keeping that vital link to customers by providing them with an opportunity to connect in person with a compelling retail brand.

Karl Nader is partner with Strategy& (formerly Booz & Company), part of the PwC network