What is merchandising 3.0?

Customer-centricity may be the hot buzz word in the retail world, but savvy, forward-thinking retailers have been familiar with the term for a while now. Rich sources of customer data and advances in technology are allowing for deep insights and stronger customer engagement. Astute retailers are differentiating themselves from competitors by weaving these gleaned customer insights into their decision-making processes, creating a true customer-centric experience by building a mature merchandising model.

We can call it “the four Rs”: putting the right product, in the right place, at the right time, at the right price. Merchandising – when done correctly – is a masterful blend of artistry and science. Traditionally, the buyer, or “artist,” applies intuition and experience to select the right products. The planner is the analytical “scientist” responsible for profitably placing the right inventory, in the right place, at the right time.

But retailers can no longer solely rely on the intuition and experience of their buyers or the analytical prowess of their planners; they must drive every merchandising decision based on the behaviours of their most important customers, especially Millennials and Gen Z consumers who don’t distinguish between physical and digital. Think of it in terms of Merchandising 1.0, 2.0, and 3.0.

At the 1.0 maturity level, a retailer functions in a product-centric system. Merchandise plans are based on product categories and pricing is based on historical data. At level 2.0, a retailer has moved to a cross-channel process, where plans are channel-driven and the online and physical stores do not really collaborate. Often a company’s siloed organisational structure – keeping online and physical separated – stands in the way of aligning their business around the shared priority of satisfying customer needs.

Merchandising 3.0 is the holy grail of the maturity model. Localised and personalised assortments are based on micro customer segments – from both online and the store. Reaching this customer-centric level of maturity is vital to retailers’ remaining competitive and profitable.

It’s a long road to maturity, though. Retailers are facing significant challenges in their efforts to advance through these levels. Foremost are a lack of customer focus, disconnects created by functional boundaries, and a lack of meaningful analysis of all the data that’s available to retailers through current technology.

So, how can retailers advance to Merchandising 3.0? By changing their focus from product-centricity to customer-centricity. Many are already on their way. Retailers are already redefining their organisational structures to reflect today’s customer-centric environment. It’s no secret that the retail industry has experienced greater change in the last five years than in the preceding fifty. Advancements in technology and the rise of omni-channel selling have been the primary force for those changes.

But just who are the consumers compelling these changes?

Millennials – roughly those born between 1985 and 2000 – are clearly today’s driving force in retail. But we are also witnessing the rise of the next wave, Generation Z, as a major influencer in retail practices. Both sets of digital natives spend significant portions of their lives interacting and engaging with society via social media.

For previous generations, the customer buying cycle began in the physical store. Short-term purchasing decisions and long-term loyalty were based on shoppers’ experiences. As digital storefronts emerged, the practice of shopping in a store was often based on the concept of “showrooming” — visiting a physical store in order to research, touch, and feel a product, then price-shopping online and buying from a digital retailer. Contrast that to today’s digitally-connected shopper. Millennials and Gen Z consumers were born and raised in the age of digital retail. For them, there is little distinction between a retailer’s digital and physical store presence.

This “techno-social” lifestyle has given these young consumers a sense of unity and community, which means they put a higher premium on the value and benevolence of a corporate brand. If a brand represents something positive in their world they will be loyal to, and inclined to purchase from, that brand.

Today’s technologically empowered consumer expects a personalised, differentiated offer no matter where or how he or she is shopping, and will go elsewhere in a matter of seconds if these expectations are not met. But it’s not just a matter of catering to the whims of a demanding consumer. It’s a matter of re-imagining retail at its core.

For decades, retailers have built their businesses on an organisational structure and culture that was optimised for a product-centric reality. Becoming customer-centric will not be easy, nor will it happen overnight. But’s it’s a Millennial and Gen Z retail world. To stay relevant, retailers must be successful at creating a seamless interaction between digital brand awareness and physical store experiences.

Jim Prewitt, vice president of retail industry strategy at JDA Software

Read the March 2017 issue of Business Review Europe magazine. 

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