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.
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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.
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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.
Other industry giants have proved more nimble. Adjusting to competitive pressures, Walmart opened an e-commerce innovation lab in Silicon Valley last year, while Framingham Mass.-based Staples is making a similar move on the East Coast. This spring, the office products chain will debut its innovation lab in Cambridge, Mass., home to Harvard and MIT, near a cluster of high-tech offices that includes Amazon, Google, and Microsoft.
Apple, meanwhile, has emerged as a major influence on the sector. "You cannot have a discussion about this without talking about Apple," emphasizes Kilcourse. "We hear all the time when we talk to retailers that they want to have an Apple-like experience in their stores," he says. The industry marvels at Apple's retail prowess and creative use of technology in its stores "to fundamentally change the consumer interaction." Apple stores feature lots of iPads: Sales staff use them to assist customers with purchases and the tablets are mounted next to display items to dispense product details to shoppers. "Genius Bars" staffed with technicians have been heralded as an ingenious way to provide accessible tech support. Seeking to interject some of Apple's flair, Lowe's recently distributed 42,000 iPhones to sales associates and 1,725 iPads to store managers nationwide.
New faces in the boardroom tell a similar story. JC Penney's selection of its newest CEO, Ron Johnson, who took the helm in November, says a lot about retail's direction. While Johnson has extensive experience as a former top executive at Target, he spent the last 11 years as a senior executive at Apple. He's now applying Apple's zeal for bold ideas and unconventional thinking to the struggling 110-year-old chain with plans for a dramatic overhaul that could include live demos and specialty boutiques in its stores, according to news reports.
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In fact, high-tech executives routinely get snapped up by leading big-box chains these days. Among the many examples: The co-heads of @Walmart Labs, the retailer's new research center, were previously with Amazon, while Home Depot Chief Information Officer Matt Carey formerly served as chief technology officer at eBay.
As retail chains rush to embrace e-commerce, they run the risk of neglecting their brick-and-mortar stores, which could leave them vulnerable to a new competitive threat. Underscoring the adage that the best defense is a strong offense, Internet powerhouse Amazon is reportedly contemplating a business move long considered unthinkable: It may open its first "real" store later this year in Seattle.
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