There's Retail Magic in Silicon Dust

The industry’s axis is shifting to Silicon Valley, where fresh ideas come from edgy start-ups.

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For decades, retailers looked to the Big Apple, the international capital of fashion and advertising, for inspiration.

How times have changed.

Nowadays, the industry's axis is shifting west, to Silicon Valley, where the fresh ideas come from edgy start-ups and tech icons such as Apple and Facebook.

The four companies selected by U.S. News as America's "Most Connected" retailers—Walmart, Nordstrom, Lowe's, and Starbucks—embody this westward tilt. In recent years, all four have increased their high-tech investments, scooped up West Coast-based ventures, and made e-commerce or mobile solutions central to their business models.

[See America's Most Connected Companies.]

Walmart is dramatically expanding its operations in Silicon Valley and Bangalore, while Lowe's has outfitted sales staff and managers with Apple devices to improve customer engagement. Nordstrom will spend more than $140 million this year on e-commerce—the most in its 111-year history. Seattle-based Starbucks, which straddles the retail and consumer products categories, is a leader in the deployment of mobile payment technology that enables customers to make in-store purchases with smartphones.

The growth of online retail and wider use of smartphones as shopping tools are among the drivers forcing brick-and-mortar stores to revamp their businesses, experts say. In today's topsy-turvy retail world, sites such as Amazon and eBay now compete directly with Walmart, Macy's, and other industry stalwarts. Mobile apps, online marketing, and social media are as essential to sales strategies as print ads, direct mail, and in-store sales.

"Retail is facing a paradigm-shift moment the likes of which it hasn't seen since scanning reached mass adoption [in the mid-80s]", observes Brian Kilcourse, managing partner at the Miami-based Retail Systems Research. Consumers now routinely use multiple channels—the Web, mobile, social media, and stores—to conduct transactions, he explains. "The big challenge for retail in the next year or two is going to be how to blend the digital and the physical selling experiences into one harmonious experience for the consumer," he says.

Today's shoppers have options never imagined a generation ago. They can browse from home, mine Facebook and Twitter for recommendations, and use smart phones to compare prices. They're also fickle: As store chains rush to offer more products online, shoppers want the convenience of retrieving Internet purchases in stores. Nordstrom wins plaudits for recognizing that consumers expect this flexibility—and seamlessly offering it to them.

[See The 10 Youngest Billionaires in the World.]

Retailers have traditionally dismissed technology investments as a low priority, but that view is rapidly changing. The market intelligence firm IDC forecasts that tech-related spending on hardware, software, and services by U.S. retailers will grow from $31.6 billion in 2011 to $32.8 billion in 2012, an increase of nearly 4 percent. Worldwide, the industry's tech-related spending will reach $85 billion, an increase of 4.4 percent over 2011, with the sharpest growth involving software investments that could jump almost 6 percent, IDC predicts.

Retailers know that if they can't accommodate this new brand of empowered, discriminating shopper, competitors are a click away. As Advertising Age notes in its March cover story on the "Retail Revolution" that began in 1962 with the launch of Kmart, Kohl's, Target, and Walmart, the industry has entered a new phase in which "discounters in particular must adapt to changing consumer preferences or risk becoming insignificant."

Take, for example, "showrooming" and "scan 'n scram"—industry slang for the growing trend of consumers visiting stores to examine and test drive products that they buy elsewhere (or online) at lower prices. This behavior has hit Best Buy hard, contributing to its March 29 announcement of a retrenchment that involves closing 50 big-box stores.


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