The new rules of retail: competing in the world's toughest marketplace. (2024)

CHAPTER 5

WAVE IV

THE TRANSFORMATION

Consumers Still Driving It All

Lest we forget, consumers, now global and more empowered, enhancedand enabled by technology than ever before, are still controlling anddriving every aspect of commerce and its transformation. Therefore, itis imperative for consumer-facing industries to understand the emerginglifestyle trends and demographic shifts that will impact theimplementation of the New Rules of Retail in transforming strategies andbusiness models to succeed in Wave TV.

Macro-Demographic Shifts

While the following major demographic shifts relate primarily tothe American marketplace, similar shifts may be occurring in the moredeveloped parts of emerging countries as well. All will be discussed inmore detail in future chapters.

Income Polarization

Beginning late in Wave III, polarization of the retail market beganto intensify, with luxury brands and retailers thriving on one end anddiscounters and dollar stores, warehouse clubs, off-pricers and outletstores gaining share on the other. Although this trend was interruptedand modified during the Great Recession, when sales of luxury brandsplunged, it has continued into Wave IV. One of the drivers of this trendis the increasing power and influence of the top income groups. Thisshift has also led to what many are calling income inequality--awidening gap between the richest and poorest Americans. Increasingimmigration, a winner-take-all marketplace, a bigger education gap (withgreater numbers of highly educated on the one hand and undereducated atthe other), the wealth effect of rising stock-market values, whichdirectly affects a disproportionately small number of upper-incomeconsumers, and a decrease in manufacturing, middle-management and othertypically middle-income jobs as companies replace people with technologyand increasingly outsource functions to developing nations--all theseare related to the trend of the rich getting richer and the reststagnating or getting poorer. Since income and net worth are two of theprimary variables affecting spending, this trend will have a huge impacton the attitudes and behavior of consumers going forward and willpresent numerous challenges and opportunities to the brands andretailers that cater to them.

Urban Migration

Almost 80 percent of the US population lives in cities, a numberthat is expected to continue growing as young people tend to prefer andgravitate toward the urban lifestyle. This will accelerate thedeployment of physically smaller store strategies across all sectors,providing retailers and consumers quicker and easier access to oneanother. Examples include Walmart Neighborhood Market and Expressstores, City-Target, Petco Unleashed, dollar stores such as FamilyDollar and Dollar General and others.

Population Shift

The population is growing older. The segment that has been labeled"millennial," defined by Pew Research as the generation thatfirst reached adulthood around the year 2000, with a population of about80 million, will be replacing the 75 million-member baby-boomergeneration, born during the postwar baby-boom years between 1946 and1964, as the dominant retail consumer group, estimated to account for 30percent of all retail sales by the year 2020. Both shifts will drivemajor strategic and structural changes throughout all consumer-facingindustries.

The emergence of millennials as the new generation of globaluber-consumers will have the greatest impact on the transformation.Already, early in Wave TV, their influence is accelerating. Because theyare totally tech savvy--literally born into it--they are demanding moreelevated, contemporary and technology-driven experiences than oldercohorts. They are forcing retailers to offer more high-tech andhigh-touch engagement, greater personalization, more accessible qualityand more value-driven luxury. They are demanding more frequentintroduction of new high-quality products and services and are applyingtheir lifestyle values in all parts of their fives. Social networking,community involvement, cause-based retailing and the pursuit ofsustainability are present in everything that this growing and powerfulgroup does.

Another important demographic trend is the blurring of genderfines. Men are making more decisions in everyday shopping matters, andwomen are gaining power educationally (they now make up the majority ofstudents pursuing masters and PhD degrees in the United States),financially, politically and in business. These trends will no doubtaccelerate as millennials get older.

Racial and Ethnic Diversification

The United States is becoming more racially and ethnically diverse.The non-Hispanic white population is projected to decline from 63percent to 44 percent of the total by 2050. Blacks will increase from 12percent to 13 percent, Asians from 4 percent to 9 percent and Hispanicsfrom 12 percent to 29 percent.

These shifts will also drive major changes in products, services,brands and how these groups are engaged by all consumer-facingindustries.

Lifestyle Trends and Shifts

With instantaneous and unlimited access to virtually anything theymight be dreaming of, Wave IV consumers are capitalizing on theirnewfound power with full force. They are defining value for themselvesdifferently.

As the United States outsourced much of its production across allindustries to underdeveloped and emerging countries during the earlypart of Wave III, many economists declared that the ceding of the USproduction base transformed the economy from one of value creation toone of value consumption, further adding to consumer power. Consumptionas a percentage of GDP (gross domestic product) rose from 62 percentduring Wave II to more than 70 percent in Wave IH, resulting in afundamental shift in how consumers sought and defined happiness andsatisfaction. Judging from numerous studies that have found there is nocorrelation between the accumulation of material things and greaterhappiness, one can conclude that consumers started to become sated with,and perhaps even turned off to, "stuff."

The same holds true in other developed countries. In Japan, forexample, between the early 1960s and late 1980s there was a fivefoldincrease in real income and no increase in average self-reported"happiness." And in the United States, according to a 2002study by Ed Diener and Robert Biswas-Diener, once household incomereaches $50,000 in current dollars, happiness levels plateau, even whencompared to households with an income of over $90,000.

Therefore, while increased wealth may lead to increased purchasing,it does not buy happiness or satisfaction. In fact, as another recentstudy reveals, additional material possessions rarely create any lastingjoy for individuals. "Individuals adapt to material goods, and ...material goods yield little joy for most individuals .... material goodshave little effect on well being above a certain level of consumption... people's aspirations adapt to their possibilities and theincome that people say they need to get along rises with income."

It seems, then, that American psychologist Abraham Maslow'sbroadly defined term "self-actualization" now holds the key toconsumers' happiness and well-being. This strongly suggests thatonce their basic needs are met, consumers are increasingly apt to spendmore of their wealth on experiences rather than on things.

Metrics in support of this major shift in consumer behavior fromstuff to services (which includes experiences) and"self-actualization" can be seen on the accompanying chart. Asconsumers sought higher states of well-being, there were six majorconsumer lifestyle value shifts from Wave II to Wave IV, many of whichwere driven by the millennial cohort:

1. From Needing Stuff to Demanding Experiences--the "thrill ofthe hunt" offered to brand-savvy bargain hunters at T.J. Maxx andMarshalls, and the Apple Store turning electronics shopping on its head

2. From Conformity to Customization--specialized, personalized andlocalized niche brands like Nike ID and Keurig single-serve coffeemachines begin to gain share from large megabrands, the continued growthof special sizes in apparel and footwear and the rapid growth of 3-Dprinting

3. From Plutocracy to Democracy--accessible luxury for all: Missoniat Target, Vera Wang and Rock & Republic at Kohl's, KarlLagerfeld at Macy's, Isabel and Ruben Toledo at Lane Bryant and theexplosive growth of Michael Kors' "affordable luxury"

4. From Wanting New to Demanding New and Now--what's new todayis cloned tomorrow, favoring fast-fashion brands like Zara and Forever21 that create two new fines every week, the convenience of e-commerce,free delivery and neighborhood stores

5. From Self to Community--proliferation of social media, socialshopping, community interests such as sustainability, global initiativeslike human rights and safety; all are trends, no longer simplycommercial promotional gimmicks

6. From Technology for Work to Technology for Life--technologyenabling the blurring of fines between "fife" and"work," people are working during their "off" hoursand playing during their "work" hours, getting what they needto get done whenever and however they can, using technology to save timeand money, enhance entertainment

From Needing Stuff to Demanding Experiences

With so many closets, kitchens and garages full of stuff, theappetite to keep buying more was falling dramatically. Yet a study atCornell University measured the comparative satisfaction of materialversus experiential purchases over time, and the results were startling.The level of satisfaction dropped dramatically for material purchasesand increased for experiential purchases.

Research overwhelmingly suggests that consumers in pursuit ofhappiness will be acquiring more experiences, even if they involveproducts. Examples are everywhere. A woman who wouldn't dream ofplunking down even a hundred dollars on beauty products will bum throughmany times that amount while undergoing a makeover at the Cie de Peaucounter at Neiman Marcus. Most ten-year-old girls would give anythingfor a trip to an American Girl store, not only so they can buy newclothes and accessories for their dolls, but also so they can have theirdoll's hair done in the store's opulent salon and then sit andhave "tea" with her in the store's cafe. Besides beingmore enjoyable, experiences are co-created by provider and consumer,making their perceived value much higher than their price. The NorthFace provides the environment of an energetic, outdoor-lifestyleshopping experience. Lululemon became a cult favorite because it offeredmotivating yoga classes and other customer-centric events. The consumer,at the moment she is in the environment, is reacting and shaping thatexperience to herself, to make it complete. There's a buy-in, anemotional investment. The conceptual, personal and temporal (a one-timehappening) uniqueness of the co-created experience elevates its value.Moreover, it compels the consumer to return more often because he or sheanticipates the experience will be unique each time.

Conversely, every day consumers can look at their stuff and wonderwhether the car sitting in the driveway or the pair of jeans now hangingin the back of the closet was really the best purchase they could havemade.

Moreover, because of the temporal and individual nature ofexperience, the evaluation is also fleeting. It is almost impossible tosystematically assess and compare whether the purchase of one experiencewas better than other options, particularly when the experience ispredominantly part of the consumer's memory. Therefore, whileproducts can be evaluated on the basis of physical and common criteria,co-created, unique experiences cannot, making the pursuit of them moreanticipatory and exciting. Finally, and more significantly, consumerswill pay more for an experience than they will for a material thing.

Yet another perspective on too much stuff comes from BarrySchwartz's book The Paradox of Choice: Why More Is Less. He pointsout that "piles of stuff" in a store, while attempting tocreate the positive impression that there are plenty of options,actually have the opposite effect. Rather than making consumers happierwith an abundance of choice, it frustrates and exhausts them before theyeven begin to shop. So not only is it an unpleasant experience,it's actually a turnoff. Well-edited retail brands, on the otherhand, which know their consumers' likes and dislikes, provide theemotionally connecting experience in which less is more. A good examplewould be Trader Joe's, offering a more limited selection of eachcategory than in traditional grocery stores, yet consistently surpassingits consumers' expectations. An oft-heard remark is "TraderJoe's knows what I want!" Another example is Lane Bryant, asportswear brand that caters to plus-size women. According to DavidJaffee, CEO of Lane Bryant's parent company, Ascena Retail Group,the store's customers are fierce loyalists who feel that thecompany knows exactly what they want and advocates for them.

Because of demand shifting toward experiences, the New Rules ofRetail are being written by those who want to blur the distinctionbetween a material purchase and an experiential purchase. For instance,consumers are no longer satisfied with buying pants or jeans, items theydon't need any more of, off a shelf. Levi's has thereforeopened a store in New York City's Meatpacking District where onecan have a pair of personalized, perfectly fitting bespoke jeanscustom-made by a master tailor out of one of the many bolts ofshuttle-loom-woven selvedge denim they have in the store and trimmedwith buttons selected by the customer. Or consider the specialtyretailer Zumiez, where teen boys can hang out and play video games whilehaving a customized skateboard made to their specifications. Consumerswill spend much more time enjoying the experience and will pay much morefor the product than they would have in a traditional store--or, in thebest-case scenario for the retailer, the experience itself might compelthem to buy "just one more." It's the difference betweenbuying lingerie off a rack in a department store and buying theexperience provided by a Victoria's Secret, or between buyingBarbie dolls or teddy bears in a toy store and creating your own,complete with names and birthdays--essentially an entire life story--inthe festive, fun-filled workshops of a Build-A-Bear store. It's themove from plain old sporting-goods stores to Cabela's, which offersfree fly-fishing lessons, two-story mountains, waterfalls, trout pondsand an archery range. It's the difference between buying a can ofMaxwell House coffee and the Starbucks experience.

The online flash sales on e-commerce sites RealReal and One KingsLane and the huge selection and convenience of Zappos set the standardfor a great digital shopping experience. The videos on BobbiBrown's YouTube channel "I Love Makeup" collectivelycreate an immersive world of beauty for fashion-conscious millennials.

Consumers are demanding a compelling experience even when shoppingfor stuff they need, like in the fresh, fun food emporium Whole Foods, asupermarket unlike any other. The future of retailing will be shaped bythe growing propensity among consumers to move away from shopping in bigstores, preferring instead the cozy experience and differentiatedproducts in the growing number of independently owned neighborhoodboutiques, like Junkman's Daughter in Atlanta, Georgia, which sellswigs, vintage apparel and costumes, all in a glittery, offbeat andwildly designed environment.

It's not just in the specialty retail brands or theindependent mom-and-pop stores, though, that consumers expect anelevated experience. They expect every major retailer, from Walmart toNeiman Marcus, from Home Depot to Best Buy, from McDonald's to theOutback Steakhouse, to provide a pleasant experience. Disneyrepositioned all its stores to focus on elevating the shoppingexperience. From games to entertaining events to robust audiovisualpresentations, it's all aimed at creating an emotional connectionwith the customer. Starbucks' highly publicized unraveling a fewyears ago was largely the result of its losing focus on experience,which was the core driver of its exponential growth, for the sake ofcutting costs. It implemented an accelerated global growth strategy withfewer amenities and, realizing its mistake, moved quickly to regain itsposition by reinstating the experiential piece.

More and more traditional retailers are following suit. AboutBloomingdale's store in Dubai, CEO Michael Gould told Women'sWear Daily, "It's all about selling the experience."

It's also important to note that the experiences anticipatedor expected by consumers will vary according to the retailer, brand orservice. For example, it is most likely a utilitarian or rationalexperience that the consumer expects from Walmart or Dunkin'Donuts. Kohl's rapid growth was largely due to its total focus onmaking the shopping experience convenient, easy and quick for thetime-starved mom. Thus the experience is very utilitarian, but inkeeping with consumers' expectations.

Consumers also began to expect some level of emotional experiencefrom wholesale consumer brands and services of all types, simply becausethey could. This is driving brands such as Patagonia, Kate Spade, TommyHilfiger, Apple, Microsoft and others to roll out their own stores sothey can better provide these experiences. They get to their consumersdirectly and more quickly, and because they own and control the point ofsale, they control the presentation and the whole brand experience, fromimaging to music to events--essentially the brand's entire DNA.This is an enormous and sustainable competitive advantage compared tobeing jammed into a departmentalized retail environment, where theretailer will have cherry-picked items from the brand's line andpresented them stuffed on racks and shelves in a hodgepodge of colors,shapes and designs.

The same holds true online. A few years ago Ben Fischman, the CEOof online retailer Rue La La, told attendees of a Macy's/WhartonBusiness School seminar: "The first mistake of e-commerce is thatwe believed it was all about convenience." His goal was to maketheir site fun, engaging, informational, exciting--an experience.

To take that point further, one reason we believe online retailerssuch as Amazon, eBay and others will ultimately open brick-and-mortar,showroom like stores is so that consumers can touch and feel merchandise(such as apparel, for which creating an experience online is verydifficult) before they buy it. Unlike traditional stores, theseshowrooms would be fun and engaging learning centers, and would havescreens next to displayed merchandise to order for home delivery orpickup. Furthermore, such five showrooms would provide the humaninteraction and real-time consumer research not well facilitated online.Finally, thanks to the huge databases of these online retailers, theywould be able to customize and localize their offerings and experiencesaccording to consumer preferences almost by neighborhood.

Finally, from the perspective of associates engaging customers asan integral part of the overall experience, a study conducted by KurtSalmon finds that we have not even scratched the surface of providing ahigher-"touch" environment at retail.

The study discovered that 45 to 60 percent of customers exitedstores without having had any engagement with an associate or product.Among the typical retailers in the study, it was found that no customershad experienced "cross-selling" based on their personalpurchase history and search preferences, and only 8 to 15 percent wereactually offered cross-sell opportunities.

Given the new technological capabilities and myriad shopping andtracking apps, making smartphones and retailers even smarter, theopportunities for "high touch," and even more of it, areendless. As we will explain in the next chapter, some of them weigh inmore on the science or technology side, others more on the creative or"art" side.

Regardless, it's important to note that another result of allthe technology-enabling tools is their enhancement of the shoppingexperience. Great experiences in Wave IV can be had in many new waysbeyond just the tactical, sensory Wave III experiences such as theAbercrombie & Fitch "nightclubby environment" or BestBuy's adrenaline-rushing assault on the senses. As Blake Nordstrom,CEO of Nordstrom, pointed out, "For one consumer sitting at home atmidnight shopping online, looking at the latest brands, well curatedwith personal suggestions and having everything delivered in the morningis a truly great experience. For others it is the store associatehelping them in the store with personal attention and no obvious visibleuse of technology."

As exemplified by Apple through the vision of Steve Jobs, anequally important component of the art, and therefore of the ultimateretail, experience, is the shopping environment itself. This aspect ofretailing doesn't necessarily have anything to do with technologyor science per se. For example, the less-is-more clean, crisp and coolarchitectural design of the Apple Stores, along with the rectangularrecessed lighting, the cantilevered shelving and the particularmaterials used in the decor (including a rare blue-gray marble used forthe tile floors available only from a particularly quarry in themountains north of Florence, Italy), are all imperative for providingthe experience. In fact, Apple was able to trademark the distinctivestore layout and design.

So the scramble among many retailers to randomly selecttechnological gizmos and gadgets just for the sake of doing so, inattempting to elevate the consumer experience, will end up being aone-off at best. As Jobs showed, there must be a strategic convergenceof all elements of the business that ultimately benefits and delightsthe consumer.

And perhaps the strongest glue for fusing the art and science ofthe experience is the human touch offered by store associates or brandadvocates. The Apple art/science convergence could not exist without itsincredibly well-trained, eager, energetic and knowledgeable salespeople,whose job is not to sell, but to delight and find solutions forcustomers.

From Conformity to Customization

Consumers have moved away from desiring mass-marketed megabrands,meant to be a shared identity with fellow consumers. During Waves I andII, when there were fewer brands to select from, these national brandswere considered cool and fashionable. Consumers felt they were part ofthe "in" crowd if they wore the same logo as their friends andpeer groups. Consumers still want what's cool, but cool has takenon a more individual meaning according to one's own definition.Today, as new brands proliferate on a daily basis, targeting specificconsumer niches, consumers are shunning the need to be included and areinstead pursuing exclusivity and individuality. Another catalyst forthis shift, of course, is easy access to information and knowledge aboutall products and services. Consumers now want something special, evencustomized, for their own particular desires, real or perceived.

In fact, brands like the Gap and Starbucks that initially grew veryquickly in response to seemingly limitless markets discovered thatubiquity (a store on every corner) was a major factor in their declineand that they needed to reposition themselves to reduce overexposure. Asconsumers seek exclusivity, the brand that's available to anybodycan quickly become uncool to everybody, which partly explains the rapidgrowth of e-commerce: small niche players can avoid the initial expenseof opening brick-and-mortar stores but still appeal to a small,specialized group of customers across a wide geographic swath. Leadingfashion-trend forecaster David Wolfe of the Doneger Group describes thenew consumer landscape this way: "It's bye-bye mainstream andhello to thousands of tiny consumer tribes."

These tiny niche tribes, in pursuit of special, exclusive value,are driving major changes in all consumer-facing businesses. Thestructure of the marketplace will be redefined as an infinite number offinite market segments ("communities") being served by aninfinite number of-finite brands, micromarketed through mediums thatspecifically target those niches.

Many branded-apparel specialty retailers understand this consumershift. Accordingly, they are spinning off segmented niche brands,growing their original brand by extending it into other product andconsumer markets. Examples include J. Crew, the men's andwomen's casual-wear retailer, opening Crewcuts children's-wearstores and Madewell casual-apparel shops. Urban Outfitters, Free Peopleand Anthropologie are all retail brands of Urban Outfitters, Inc. Eachtargets a different consumer segment, providing an eclectic mix ofapparel and selected hard goods. Ascena Retail Group has five brandedsportswear chains for different demographic niches: Catherine's andLane Bryant for full-figured and plus-size women; Maurice's andDress Bam for value-conscious working women; and Justice, the largesttween specialty chain in the United States. Chico's, thecasual-wear chain for boomer women, acquired the White House I BlackMarket casual- and dress-wear stores for a younger consumer, andlaunched Soma, an intimate-apparel retail brand for fashion-consciousbaby boomers. Home-furnishings master Pottery Bam acquired West Elm toappeal to a younger, more contemporary customer. Polo Ralph Laurenbought Club Monaco, a specialty-apparel affordable luxury brand with amodern sensibility appealing to a younger, more fashion-consciousconsumer.

The shift toward exclusive niches also favors lifestyle brands suchas Ralph Lauren, which is not linked to a single product orclassification of products, or to one consumer gender segment. The brandcan therefore launch into any consumer or product segment that iscompatible with its brand positioning as an upscale, elegant andsophisticated style of living. The brands that were launched and heavilymarketed as single-product megabrands, such as Nine West shoes, havefound it extremely difficult, if not impossible, to launch their namesin other product or consumer markets. Furthermore, consumers, with theirclosets overstuffed with all kinds of brands, will tend to try a brandthat isn't being worn by everybody else, rather than choosing yetanother one of the ubiquitous megabrands, which explains why there arenow eight hundred brands of jeans.

Traditional department stores are also being forced to meet theexpectations of the exclusivity-seeking consumer. They are forgingexclusivity agreements with designers and national wholesale brands andaccelerating their private branding programs. In a recent study, NPD,the leading retail industry source for consumer purchasing information,found that in 1975,25 percent of all apparel consisted of private orexclusive brands. That number reached close to 50 percent in 2005. NPDpredicts it will eventually reach 80 percent. Macy's hasexclusivity agreements with Tommy Hilfiger, Martha Stewart and others,as well as private brands INC, Alfani and more. It also has alocalization program called "My Macy's," whichdistributes different line mixes to different stores based ongeographically variant consumer preferences. Best Buy has a similarlocalization program. It's estimated that private and exclusivebrands make up more than 50 percent of JCPenney's revenues, andthat five of its private brands, including Arizona, Stafford and St.John's Bay, each provide more than a billion dollars in revenue peryear. JCPenney's exclusives include Liz Claiborne, Sephora, MNG byMango, Nicole Miller, Joe Fresh and many more. Moreover, Kohl's,Target and even Walmart continue to accelerate their private andexclusive branding strategies.

In grocery stores across the United States, the penetration ofprivate brands has reached 19 percent of total sales, according to thePrivate Label Manufacturers Association (PLMA), and is continuing toaccelerate. Recent studies found that close to 80 percent of consumersacross all income strata said that store brands are as good, if notbetter, than national brands. Such consumer preferences will continue todrive the growth of private branding. A good example is Whole Foods,where growth of private brands was four times the rate of nationalbrands during the recession, and even now continues at more than threetimes faster. There is still a big gap on this front between the UnitedStates and Europe, where 60 percent of grocery-store brands are private.But consumer choices will close the gap in the United States.

The huge growth of small, independently owned retail boutiques canlargely be attributed to consumers' pursuit of special products andservices. The National Retail Federation recently conducted a study thatfound the fastest-growing retail sector across all consumer segments andprice points is small stores.

Finally, there are many brands and retailers, both online andthrough catalogs and stores, that can provide actual custom-madeproducts. One example is the Nike/Hurley/Converse combo stores, aptlynamed Salvation, that offer in-store product customization. Eachconsumer can select from a series of designs and color schemes topersonalize shirts or shoes. While shoppers wait for their customizedproducts, the store offers an experience: an environment where peoplecan listen to music, lounge about with friends and just hang out. Vansprovides a similar customization service online.

Another factor favoring smaller, segmented niche brands is that inslow-growing markets, brands reach maturity more quickly than inunderserved, fast-growing markets such as in Wave n. Their life cyclesare much shorter. They cannot grow infinitely; they must steal a limitedshare of market with one brand. Paradoxically, the more niche brandsthere are, the more they benefit, because they're all taking sharefrom the megabrands. And consumers will make sure that this axiomcontinues indefinitely as their quest for "something special forme" continues to gain momentum.

From Plutocracy to Democracy

Armed with their newfound wealth and on their search for happiness,consumers have shifted from accepting the notion that only the wealthydeserve luxury to demanding "democracy"--affordable luxury forall classes. The run-up in the stock market in the past few years hasresulted in a resurgence of the wealth effect, not only for the top 1percent of traditional luxury customers, but also for a younger group ofupwardly mobile consumers in tech and other professions. The creation ofa new consumer segment, "luxury aspirants," drove the launchof many brands to cater to the up-market "yuppie" core of thatsegment. Brands such as Coach, Lacoste, Bloomingdale's, Cusp (aNeiman Marcus spin-off), Dooney & Bourke, Michael Kors, Tumi, ToryBurch, Bonobos and others have successfully captured the contemporary,young, almost-upscale consumer, called HENRY ("having enough, notrich yet"). Restoration Hardware, recently renamed RH so as not tolimit its mission to just home decor, has disrupted the home-designmarket with its strategy of delivering high-end items like salvaged-woodfarmhouse tables and aerodynamically designed chairs to the masses, andhas been one of the most successful turnaround stories in retail in thepast few years.

Further down-market, the democratization of luxury is being cateredto by an explosion of designers creating brands for mainstreamretailers, including Michael Graves, Jean Paul Gaultier and others atTarget; Norma Kamali at Walmart; Nicole Miller at JCPenney; Marc Jacobsat Macy's; Stella McCartney at GapKids; and Monique Lhulier atDavid's Bridal. This revolution is the result of the same marketforces driving the other shifts. Luxury-level designers and brands foundit increasingly difficult to achieve adequate and profitable growth inovercompeted, slow-growing markets. Therefore, diffusion, in the form ofsub-brands like those mentioned above, continues in all channels ofdistribution. Nowhere is this more obvious than in the explosion ofgrowth in outlet stores and off-pricers, both of which are used toliquidate overstocks and excess inventory, allowing full-price stores tobetter preserve their pricing strategies.

Concurrently, on the demand side, consumers' expectationscontinue to rise to the level of the selection they are given, therebyperpetually raising the bar for the supply side. And this in turn willperpetuate the democratization of the marketplace.

Finally, as consumers have become more knowledgeable through accessto greater amounts of information, they are better able to understandthe true value of the products and services they are shopping for.Mobile electronic devices or online searches can compare prices in amatter of seconds. Therefore, consumers are much more closelyscrutinizing price/value relationships. Consumers' blind acceptanceof any price tag on a luxury item, just to be able to flaunt the nameamong their wealthy peer groups, is giving way to their demand for realvalue. This reassessment of value has led to selective quality trumpingquantity and "bling." As Burt Tansky, former CEO of NeimanMarcus, said: "Our wealthy customers used to buy a designer bagwithout even looking at the price tag. Today, they are comparing the bagto the price, and there is nobody who understands value better than ourcustomers."

From Wanting New to Demanding New and Now

New no longer tramps all. Consumers still want new, but they alsoexpect to have it right here, right now. Innovation itself is not enoughto win in a 24/7 world, where what's created today is clonedtomorrow. It's now necessary to create knockoffs of yourself everyday of the week. The reasons we desire new, fresh and frequent productsand experiences everywhere are rooted, once again, in our desire forhappiness. Recent studies have shown that when consumers go shopping anddiscover something new, the brain releases dopamine and serotonin(chemicals associated with feelings of well-being, happiness, andaddiction). As Dr. David Lewis, the director of Mindlab International,has said: "Shopping experiences trigger brain activity that createsthese 'euphoric moments.' But what is most interesting is thatthese 'euphoric moments' can be created by the frequency ofnew items in the stores and the expectation of finding somethingunexpected." A Wall Street Journal article reported on a study ofrats that found that "when a rat explored a new place, dopaminesurged in its brain's reward center." This would certainly bethe equivalent of a consumer discovering a new store, mall, brand oreven a new store assortment and layout.

Additionally, a research team from Emory University found thatdripping Kool-Aid into the mouths of volunteers on a regular basis hadlittle increase in brain activity, while those who were given random"dripping" had a heightened level of activity. This indicatesthat the anticipation of the reward, whether it is Kool-Aid or a newdress, is what gets consumers' dopamine pumping. Retailers arestarting to use these neuroscientific insights to gain share byproviding "new and now" value (along with experiences, ofcourse).

A good example of the shift to new and now is Zara, the Spain-basedapparel chain with more than two thousand stores around the world. Zarahas proven that supply-chain innovation trumps product innovation, bydelivering two new lines every week to each of its stores, meaning theline mix may be different for two different stores just a few blocksapart, based on the consumer preferences of each. Zara's averagecore consumer's annual visitation rate is seventeen, compared to aretail industry average of about four, simply because Zara fans arecompelled to see the twice-weekly new lines. They are also compelled tobuy something if they like it, knowing it might not be there thefollowing week. H&M and Forever 21 are also a part of the "fastfashion" club, and others are racing to adopt this model.

Urban Outfitters, which operates the Anthropologie brand of home,lifestyle products and apparel, and Five Below, the hot new tween andteen dollar store (everything costs five dollars or less), are twospecialty retailers that have adjusted their strategy to accommodateconsumers' desire for new and now. Both ship new merchandise totheir stores every few weeks, encouraging customers to visit morefrequently, seeking the dopamine surge that will accompany the discoveryof fun new products.

The drive to new and now has also affected expectations aboutdelivery for all channels. Amazon Prime made free and two-day shippingstandard for the industry, causing the launch of eBay Now same-daydelivery, Instacart and other services.

From Self to Community

Finally, one of the more positive results of accessible abundanceis that many consumers are now able to achieve the pinnacle ofMaslow's hierarchy of needs: self-actualization. Their materialdesires are being satisfied and they are able to move toward maximizingtheir human potential: to seek knowledge, peace and aestheticexperiences, and to realize their true identity. Interestingly, sincereaching this stage means that one's basic needs have been met,this shift includes heightened interest in community over self. Onemajor manifestation of this shift, as well as one of its ongoingenablers, is the phenomenal growth of electronic social networks. Whilethese rapidly populating worldwide communities are the commercialtargets of many retailers and consumer product companies, they arefinding that traditional marketing pushes fail. They must be givenpermission to enter these communities, and they are not allowed to sellin the classic way. Businesses must shift from talking to, or talkingat, to conversing with the consumer. So much has been written, discussedand lectured about social commerce, or seeking a commercial path throughsocial media, that one's head spins trying to identify andunderstand the myriad ways in which this new science, so to speak, canconverge with the art of retailing.

Retailers and brands are still seeking "social"acceptance, trying to figure out how to commercially engage theirvarious "communities" without being scorned as hawkingpariahs. But there is not even a sliver of doubt that if brands andretailers do not learn how to become cherished members of these socialgroups, they will be taking one big step toward oblivion. Conversely,for those who do converge social media with their art, or products andservices, there will be tremendous growth. One major reason for this isthat the most powerful medium for influencing purchasing decisions isword of mouth.

Finally, on social media, while its influence on purchasingbehavior is beyond dispute, Facebook's attempts at expanding intoan e-commerce marketplace (or "F-commerce," as it's beencalled) have so far been a struggle. Its first foray with1-800-flowers.com in 2009 was a flop, after which several otherretailers, including Gap, JCPenney and Nordstrom, pulled their Facebookprograms. About social commerce, which saw itself as another Amazon-typeretailing channel, Forrester Research's Sucharita Mulpuru said,"It was like trying to sell stuff to people while they'rehanging out with their friends at the bar." So, though s-commerce,or social commerce, will likely not be the dominant engine goingforward, mobile commerce will be.

Online retail clubs One Kings Fane, The Real-Real and Net-A-Porter,as well as blogs like Cupcakes and Cashmere, Refinery29, Hypebeast andmany others are communities within themselves, attracting millions ofdevoted followers. There are also plenty of ways to create a communityenvironment offline and add brand authenticity, such as what many healthand fitness stores (Gap's Athleta brand, for example) are doing:offering classes and links to trainers and local events, all of whichmakes members feel part of a broader community. Photo-sharing sites suchas Instagram and Pinterest are at the forefront of a new wave of socialnetworks that drive "social shopping" by showcasing beautifulimages uploaded by designers, brands and consumers, thus spreading styleideas across the globe in a way that is unfettered by linguisticboundaries. Topshop, Burberry, Home Depot, Nordstrom, T.J. Maxx and manyothers have encouraged customers to post photos of their favoriteproducts, winning new customers in the process. Teen brand Hollister (adivision of Abercrombie & Fitch) realized very early on that teensare so connected that paid advertising is less effective than it waseven as recently as a few years ago. The brand uses social commerce toconnect with and engage customers, and to communicate new products,promotions and other events. It has ten million fans on Facebook andmore than half a million followers on Twitter.

This shift toward self-actualization has an altruistic element toit as well. The consumption binge of the last quarter century reachedepic proportions and then crashed early in the new millennium. Thisexperience fed into the realization by consumers that self-actualizationshould take the form of "less is more," even among thewealthy. In correlation with the shift from plutocracy to democracydescribed above, ostentation has given way to understatement.

Furthermore, consumers are finding satisfaction in taking upcauses, such as environmental advocacy and charity work. The remarkablestrength of this trend is driving businesses to attach their commercialefforts to these same causes. Walmart is a great example of leadingsustainability initiatives in the retail and consumer productindustries: reducing the toxic emissions of their huge trucking fleet;selling only fluorescent lightbulbs; forcing its vendors to reduce thevolume of their packaging; and much more. Walgreens recently opened whatit believes to be the nation's first net-zero-energy retail storein the Chicago suburb of Evanston, Illinois, designed to produce energyequal to or greater than it consumes, with two wind turbines, nearly 850solar panels and a geothermal HVAC system that reaches 550 feet into theground. If successful, the company hopes to convert more of its eightthousand stores to this technology. Outdoor-gear and apparel retailerPatagonia partnered with two environmental nonprofit organizations todevelop a "Vote for the Environment" campaign in the weeksbefore the 2012 elections. Customers were asked to share on Twitter whatthey loved about the environment. Patagonia then included images oftheir responses on in-store displays and on social media. Not only didthe promotion engage Patagonia's customers, it helped register110,000 new voters. The day after the devastating earthquake in Haiti in2010, the high-end online fashion club Rue La La suspended its dailyonline sale and instead directed its members to the Red Cross website,suggesting they divert their planned Rue La La spending to the Haiticause. The subsequent member accolades and increase in sales wereenormous, which resulted in similar programs when subsequent disasterslike the tsunami in the Philippines and others occurred. TOMS shoes andWarby Parker are two other brands that have become synonymous withgiving back. Both donate a portion of sales in kind to people in need indeveloped and developing countries.

On the other hand, the giant Nestle was blindsided by environmentalactivists using social media to attack them for their purchases of palmoil, which they use in Kit Kat candy bars. Protesters posted a negativevideo on YouTube, deluged Nestle's Facebook page and pepperedTwitter with claims that Nestle is contributing to the destruction ofIndonesia's rain forest, potentially exacerbating global warmingand endangering orangutans. The allegations stem from Nestle'spurchases of palm oil from an Indonesian company that GreenpeaceInternational says has cleared rain forest to establish palmplantations. So, just as those who do the right environmental thing willattract and even convert consumers, those who don't are at greatrisk of losing business or even being publicly shamed, particularly byyounger consumer cohorts. When a video of an Angora rabbit obviously inpain while being plucked for its fur by a company in China that suppliesH&M went viral, the retailer very quickly adjusted its certificationand sourcing strategy to make sure that no animals were harmed ortortured by companies it does business with. Other brands followed suit.The recent tragedies at factories in Bangladesh and elsewhere, born outof the relentless quest to reduce manufacturing costs, had many US andEuropean consumers up in arms and threatening to stop buying goods madein those countries.

The winning businesses of the future will understand and respond tothis major consumer shift. By turning their brands into compellingcommunities that generate ideas, causes and/or other altruisticconcepts, as opposed to just selling stuff, they will succeed.

From Technology for Work to Technology for Life

Technology is enabling the blurring of lines between life and work,resulting in a huge shift in the way people are going about their lives.They are working during their off-hours, staying connected withcolleagues and clients 24/7 and playing during their work hours, assymbolized by Ping-Pong tables in the Silicon Valley offices of techfirms, the basketball court at Under Armour and the dining rooms andtelevision lounges at Google's New York offices. This willultimately do away with the concept of working nine to five. Everyonewill be working, playing, raising kids, doing charity work, runningerrands, relaxing, etc.--at all hours and days of the week. The conceptof working a certain number of hours per week will give way to gettingyour work done--as well as everything else--whenever and however youcan.

Technology is transforming the way we are spending our leisurehours as well. Internet TV and DVRs allow us to watch a show or moviewhen we want to, not when some network executive thinks we should.Stub-Hub and Ticket-Hub let us purchase tickets to concerts and otherevents on a moment's notice and download an electronic ticketrather than go to a box office or ticket agency. Similarly, onlinetravel sites like Priceline, Expedia and Orbitz, where one can navigatethrough thousands of flights, hotels, activities and other options andplan a trip in minutes, have revolutionized the planning andaffordability of both business and leisure travel. Major LeagueBaseball's collaboration with eBay on Beacon, Disney'sMagicBand electronic bracelets for its theme park visitors, electronictrackers for races and other athletic events, athletes at the openingceremonies of the Olympic Games recording the whole event on theirphones, blurring the lines between the stars of the show and theaudience, people paying bills and managing their finances online,following current events on social media, communicating 24/7 witheveryone in your life via text--all are examples of the impact oftechnology on our lives.

Fear of Missing Out (FOMO) and the Retail Experience

Much of the exploding use of technology by consumers, of course, isenabled by people's addiction to smartphones. This has alsoresulted, however, in a chronic condition called Fear of Missing Out, orFOMO, anxiety or worry that one might be missing an opportunity forsocial interaction, a novel experience or some other satisfying event.British psychologist Andrew Przybylski led a study that found that theless people felt autonomy, competence and connectedness in their dailylives, the more they felt FOMO. People high in FOMO were also heavyusers of social networks, which provide constant opportunity to compareone's status with those of others, and to make sure that you arehaving as much fun and excitement as you perceive that others arehaving. Once a chronic ailment only among millennials, FOMO is quicklyspreading to older folks as well. FOMO is so great that, according toreports, the smartphone has replaced the cigarette as the first thingpeople reach for after sex.

FOMO manifests itself in many ways. A young professional might beworried he'll miss an important email from the boss and jeopardizehis career. A teen is fretful that another party is better than the oneshe's attending. Millions of people caught up on unwatched seasonsof the television program Breaking Bad during the two weeks leading upto the concluding episode (resulting in record business for Netflix),just so they could experience the series finale in real time withmillions of others.

The successful brands in the next phase of our industry'sevolution will be those that create a compelling and neurologicallyconnecting in-store, online and mobile customer experience. They'lluse our obsession with our mobile devices to pull us into their 24/7omni-channel world. And if those retailers are really smart,they'll capitalize on the FOMO pandemic to engage us, connect us totheir brand and keep us buying their stuff. The brand promise,customized to each of us individually, becomes irresistible in thatcontext.

Fast-fashion giant H&M opened its huge new store in NewYork's Times Square with none other than Lady Gaga cutting theribbon. Thousands of customers lined up for as long as thirty hoursbefore the store was set to open to get a glimpse of the superstar.Twenty customers were randomly selected to earn early access to thestore and to shop with Gaga before the remaining shoppers were let in.The new store was open twenty-four hours on opening day, with a digitalrunway and countdown announcing hourly offers. The opening was blastedall over social media so people who were unable to come to New York forthe event could enjoy it on a virtual basis.

Gaga's appearance did a tremendous amount to burnish brandawareness and cement brand loyalty among core consumers. H&M createdan irresistible customer experience in the form of a one-off event,linked that event to its brand promise and then sat back while itscustomers trumpeted news of it to others.

Major Market Shifts and Growth Issues Driving the New Rules

From a macro perspective, derived out of the foregoing marketplacedynamics of Wave IV, the transformation essentially expanded, elevatedand empowered consumers even further, and created an equivalent yetchallenging empowerment for retailers, brands and all consumer-facingindustries.

Following is a diagram of major market shifts (consumer andstrategic), which in turn have driven the major growth issues listedbelow the diagram. Both provide the driving forces of the New Rules ofRetail, and will transform the retail marketplace into three successfulsectors:

1. Commoditization sector--the low-cost producers, retailers andbrands, selling primarily basic, commodity-like products

2. Omni-Brand to Consumer sector--fastest-growing segment of highlydifferentiated and experiential, optimally controlled value chains, andmost proficient in "omni-channel" direct-to-consumer brandsand retailers, including independents, small or large specialty chains,luxury brands and select multi-branded department stores

3. Liquidation sector--outlet and off-price retailers,opportunistic deals on high-end brands We will expand on this predictionin later chapters. It is important to note here, though, that when wetalk about retailers or brands throughout Wave IV, we are referring toboth brick-and-mortar and digital stores.

Major Growth Issues

* How to gain quicker and easier access to consumers and how toprovide quicker and easier access for consumers--first, faster and moreoften than hundreds of equally compelling competitors in anoversaturated marketplace?

* Once consumers are preemptively engaged, what is thedifferentiated and personalized value offering--including anexperience--that will win the largest share of their wallet and willkeep them coming back?

* How to identify and pursue international growth opportunities?

* How to transform the strategic and structural business modelutilizing current and new technologies to address the three issuesabove?

This Is a New Era

All the new Wave IV technologies--the science and the art--and evensome of the cool gadgets should not be viewed as random, one-off kindsof store enhancers. They should be understood as components of astrategically holistic new business model and an incredible new era inretailing, one in which the winners will converge science and art tocreate an experience so powerful that consumers will be compelled tomake it a must-go destination, both offline and on.

The New Rules of Retail will tell you how to do that. Read on.

Editor's Note

In their book The New Rules of Retail, authors Robin Lewis andMichael Dart describe four waves of change that have transformedretailing, beginning in the late 1800s with the rise of departmentstores and mail-order catalogs in Wave I. After World War II and throughthe late 1970s, Wave II was characterized by the expansion of chaindepartment stores, specialty chains and discount stores across thecountry, and the demise of downtown shopping destinations. Wave III,which began in the early 1980s and lasted until 2010, saw the balance ofpower shift from producers to consumers, and the dominant retailersincluded the big discounters and warehouse clubs as well as dollarstores and such differentiated food retailers as Whole Foods Market andTrader Joe's. This chapter explores the implications of thetechnology that characterizes Wave IV, and sets the stage forwhat's coming next.

Robin Lewis is the founder and chief executive officer of The RobinReport. An author, speaker and consultant for the retail and consumerproducts industries, Lewis was previously a vice president at GoldmanSachs, where he developed and launched a global retail consultingpractice. Before that, he was vice president and executive editor ofWomen's Wear Daily. Earlier in his career he held executivepositions in strategic planning, business development, and brand andmarketing management at DuPont, VF Corp. and Grey Advertising. MichaelDart is a partner with A. T. Kearney's private equity practice andhas more than 20 years of experience leading major strategictransformations and due diligence studies for many of the largestprivate equity funds and global retailers. He also has extensiveexperience leading the development and implementation of businessstrategies and growth efforts. Prior to joining A.T. Kearney, Dart was asenior partner and leader at Kurt Salmon; before that, he spent 14 yearsat Bain & Co., where he was a partner.