Selling the extraordinary

“Everything has become more experiential”

– Dante D’Angelo, brand and consumer development director at Valentino

It is an odd state of affairs indeed for the retail sector at the moment. On the one hand, consumers are flocking to digital devices like never before, particularly for their shopping. Conversely, this means that the physical experience of shopping becomes rarer, creating more opportunities for specialism. An article in the Financial Times a few weeks ago read as if a commercial plague had swept through the UK high street over the past few years. With 4,000 stores affected, 2012 was, according to data from the Centre for Retail Research, the “worst year since the start of the credit crisis in 2008”. Names of erstwhile stalwarts like Woolworth’s, Jessop’s, Peacocks and Clinton Cards have all fallen under the knife. As we wrote at the beginning of last month, what little salvation there is lies in embracing digital technologies.

The luxury sector however has its own special, gilt-edged cards to play. In St. Tropez, the Christian Dior boutique’s ample courtyard has recently been made use of with an all-day restaurant. Louis Vuitton have a cinema screening classic Italian films in their Rome boutique. It’s no wonder such brands have also branched into the hospitality sector, the former working with the St. Regis to develop branded rooms, the latter into full-scale hotel management. Ferragamo have been involved in the hotel sector for years. Two recent examples show how companies can extend the experience for visitors, and help drive revenue at the same time.

The auction house Sotheby’s will tomorrow auction a rather large collection of surrealist art. One of the few things that definitively puts it ahead of Christie’s is that it has its own cafe, which, last week and this week, is pushing the surrealism theme into its catering (see above menu). It’s a simple, creative idea that creates a cohesive brand, celebrates a big event, and ultimately hopes to drive revenue from peripheral streams around the auction. The RA’s current Manet exhibition is taking a leaf from this tactic, opening later but charging double the usual rates for a special experience, including a drink and a guide. The other interesting news of note was a new tactic being employed by the fashion company Valentino. Not content merely with having a major exhibition at London’s Somerset House, the label is also tinkering in an innovative way with its event structure. As detailed last week in Bloomberg Businessweek, Valentino is opening a new boutique in New York later this year, during which the typical glitterati will be in attendance. However, the new idea comes in the form of the company inviting prized customers to the opening for the chance to rub shoulders with said VIPs, for a steep price. Similarly, Gucci is offering its non-VIP customers tours of its Florence workshops for the first time.

Something that Zeitgeist has been noticing for a couple of years now, recently echoed by Boston Consulting Group (BCG) senior partner Jean-Marc Bellaiche, is the importance, particularly for those in their 20s – like Zeitgeist – that people place in defining themselves by what they’ve done rather than what they own: “In an era of over-consumption, people are realizing that there is more than just buying products… Buying experiences provides more pleasure and satisfaction”. On a macro level there is significant bifurcation in the retail market; not everyone will be able to afford in creating extraordinary experiences for their customers. A recent BCG report helps illustrate this, noting that while the apparel sector as a whole saw shareholder returns fall by 1.3% for the period 2007-2011, the top ten players produced a weighted average annual total shareholder return of 19%. Expect then for retailers – those that can – to increasingly provide exclusive experiences to their customers, beyond the celebrity, whether it be early product releases, tours, or events. Just don’t expect it to come without a pricetag.

HMV: If you don’t fix it, you’ll end up broke…

The name Margaret Anne Lake might not ring too many bells. But if you were in the UK towards the end of the twentieth century, you’ll be familiar with her alter-ego Mystic Meg.

Having made her name as an astrologer in The Sun, Meg was catapulted into the national consciousness when she was given a slot on the fledgling prime time National Lottery draw programme.

In an attempt to build excitement and pad out an event that took two minutes to complete, Meg was brought in to ‘predict’ the winners.

Her predictions were suitably vague.

The norm was something generally along the lines of “the winner would live in a house with a 3 in the number, in a town beginning with L or M and have bought their tickets from a woman.” with a sprinkling of astrological terminology for extra authenticity.

However it would seem that back in the mid-to-late 1990s Meg wasn’t the only one struggling to see what the future held. Far away from the glamour of TV, a number of well-paid businessmen were busy making decisions that would see their organisations squander their dominant positions.

And a couple of weeks ago, after struggling along for years, both HMV and Blockbuster UK, once leaders in their categories, hit the buffers and called in the administrators.

Bad Advice

The wisdom ‘If it ain’t broke, don’t fix it‘ is relatively modern – it dates from 1977 – and was attributed to businessman Bert Lance in the May issue of the magazine Nation’s Business.

The phrase caught on, partly because it made a point in a catchy way. But like many wisdoms, it doesn’t tell the whole story.

Just because something works now, doesn’t mean it always will. And those in position of responsibility have an obligation to future proof their organisation.

Back when Mystic Meg was in her pomp, the digital revolution that helped bring about the demise of both retailers was in its infancy. But signs of its potential were there, particularly for HMV.

The first was how people acquired their music.

Software that ripped files from physical storage, coupled with faster web connections, gave birth to peer-to-peer sharing. Programmes like Napster, Kazaa and Limewire removed the need for physical reproduction and distribution.

The whole entertainment industry never really came to terms with illegal downloads, opting to use legal threats and emotional blackmail, rather than adapting their businesses to meet the demand.

In reality, not all pirated content would ever  have been bought legally. Peer-to-peer applications offered users the freedom to sample new artists they would never have paid for and get digital versions of music they already owned physically, easily and without it costing them money.

One of the reasons people wanted their music digitally is the second reason the digital revolution helped bring about the demise of the likes of HMV – the way people consumed and stored music.

The emergence of the digital music player, culminating in the release of the iPod in 2001 meant that people also wanted their music in a new format. They could now store their entire collection on one machine.

When people had upgraded their vinyl to cassette, and then their cassettes to CDs, HMV had been in pole position and reaped the profits. However a digital format didn’t require physical stores and HMV didn’t react. Their model was suddenly ‘broke’, but they didn’t realise in time to fix it.

Avoiding failure

Can such demises be avoided? The future is notoriously hard to predict, but there are some guidelines that can help companies avoid suffering a similar fate to HMV.

1. Be alert to new and niche competitors

Back in the 1980s and 1990s, HMV may have considered their competition to be the likes of Tower Records, Virgin and Woolworths. When they all disappeared, it might have seemed that HMV had won the battle. In reality they were all killed by the same bullet. The game changed as companies diversified.

Back in 1981, following a dispute with Apple Corps, Apple Computing agreed not to enter the music business. Now, iTunes offers over 28,000,000 songs.

Just because someone isn’t a direct competitor now, doesn’t mean they never will be.

2. Keep an eye on the Path to Purchase

HMV didn’t suffer because people suddenly stopped wanting to buy new music or watch films. What changed was how people acquired their material.

Online downloads provided a new way to access digital music. For those who wanted physical media, Amazon et al provided an alternative way to buy CDs and DVDs. Now that nearly 80% of UK households have broadband connections, consumers can stream films at the press of a button or watch a dedicated Movies channel.

Sometimes people will still want physical media immediately, but just not often enough to sustain a business as big as HMV.

3. Understand the next generation

Many years ago, I worked in Woolworths. A large proportion of the music we sold was to youngsters spending their pocket money on their latest idol. While online might have been niche in the mid-to-late-90s, the youngsters of today have grown up with it. As a result, consumers under 35 won’t have had the opportunity to develop an engrained habit of buying their music in physical stores like HMV. Buying entertainment online is no longer an alternative, but the norm.

4. Play to your strengths

While online retailers can offer lower prices and a wider catalogue, physical retailers offer immediacy and have the opportunity to provide enhanced in-store engagement.

Shoppers want convenience, value and experience.

Browsing for and buying music, film and computer games ought to be a fun, pleasurable act. Online shopping will continue to grow across pretty much every category. Physical retailers need to understand their role in fulfilling shoppers’ needs. Sometimes it will be about delivering the product quickly and easily, but sometimes it will be making the act of shopping an enjoyable experience that merits a slight price premium.

5. Be prepared to change

Taking all of the above into account, it might be easier to spot how a business structure that is dominant now might not be so successful in the future. It is often said that defending a title is harder than winning it in the first place.

However, it can be done.

McDonalds have long dominated the fast food industry. Just over a decade ago, their restaurants were tacky red and yellow places with plastic seats.

Yet they saw that their competition was no longer just the likes of Burger King, but also other food outlets and increasingly the likes of Starbucks et al who offered a more pleasant in-store experience.

Now their outlets have all been refurbished with designer furniture and offer free wifi.

They also observed other trends that would impact them. From obesity to ethical sourcing of produce and packaging, they adapted their business to stay one step ahead.

Their menu still offers the old favourites, but also includes lighter options. Their burgers come from British and Irish farms and much of their packaging is made predominantly from recycled materials.

As a result, they are still thriving on the high street.

How imaginary crocodiles could have saved Nokia

Why dominance means nothing if you stop delivering.

Zeitgeist reported recently on the number of high street names issuing profits warnings after an icy December kept shoppers away from their tills.

While these companies hang on hoping that things will improve (they won’t have liked the news this morning), other retailers have already bitten the dust.

The encroachment from online retailers onto traditional bricks and mortar stores is only going to increase as once dominant names slowly diminish into also rans, punished by their failure to adapt to progress.

While such a destiny is unfortunate for a lumbering organisation with a physical and costly infrastructure to maintain, for what should be a cutting edge technology company it is unforgivable.

A mere ten years ago, Finnish communications company Nokia dominated the mobile phone market. This rather quaint BBC story from from a decade ago reports that ‘Nokia has strengthened its grip on the world’s mobile phone handset market’ and that ‘for the first time, Nokia has a market share more than double that of its nearest competitor’.

Back when Nokia dominated everyone

The major competitors back then were Motorola, Ericsson and Siemens and mobile phones were for calling, texting and maybe even playing Snake.

The report concludes with a prediction from Forrester who anticipated that ‘five dominant players would control Europe’s networks by 2015’.

While that prediction may come true, it is questionable whether any of the dominant manufacturers from yesteryear will be among them.

This week’s  ‘leaked’ memo from Nokia’s CEO Stephen Elop claimed that the company was ‘standing on a burning platform’ and surrounded by a ‘blazing fire’.

This is not a pleasant place to be. As mobile phones became smartphones an ever increasing importance was placed upon a phones operating system, both in terms of functionality and usability.

Just as the old high street stores threw up websites that weren’t quite as good as the dedicated online retailers Nokia produced Symbian, an operating system that failed to impress anywhere near as much as the ones you’d find on an Apple, Blackberry or Android phone.

The smartphones of today

Elop’s acknowledgement of the problem has opened the door for a radical change in strategy to try and rescue the problem.

Rumours abound of a partnership with an existing platform.

“It could either be a very bad marriage or a marriage of two players that have not been very effective alone.” commented Magnus Rehle of Greenwich Consulting.

The two likely candidates are Android, which would essentially relegate Nokia to a manufacturer in competition with other Android handset makers, or Microsoft who have also struggled to ship as many copies of their Window Phone 7 operating system as had been hoped.

The former would be a rather bitter pill for a once dominant giant.

The latter, and arguably preferable option, would bring together two massive organisations who have struggled to assert their dominance in the category.

Neither party would comment though it has been reported that Elop had been in discussions with both Microsoft CEO Steve Ballmer and Google CEO Eric Schmidt.

An announcement is imminent, though as Hakim Kriout of Grigsby & Associates points out ‘Very few companies regain their leadership once they’ve lost it.’

Whichever route Nokia go down the lesson is there for brands in every category.

It is infinitely preferable to stay top of the pile than to have to climb back up after a fall.

Regardless of your current dominance, if you fail to keep up with what people want and expect from you, someone else will deliver it and take your crown before you’ve admitted there is a problem. Brands must avoid the complacency that dominance can bring.

Despite their size, Avis demonstrate the challenger attitude with their ‘We try harder’ ethos while Google are ‘always in beta’ .

If brands assumed that they were surrounded by crocodiles and stayed alert to change and ready to react, they’d be much more likely to avoid getting trapped by ‘blazing fires’.

White sky in the morning, profits warning!

How will the snow affect the UK retail landscape?

While the news at the time focused on stranded air passengers, a crippled transport network and the need for some inventive parenting to explain why Father Christmas was unable to deliver presents on time, the after-effects of December’s heavy snowfall are now being felt strongly on the UK high streets and shopping centres.

With the tinsel and fairy lights still in full view, it has been a far from Happy New Year for the number of retailers forced to announce that their sales were lower than expected with the consquences ranging from store closures and job losses to profits warnings. Many cited the unwelcome cold snap as compounding difficulties brought about by the economic crisis, changing consumer habits and threats appearing from non-traditional competitors.

First to register concern were HMV, who admitted in an unscheduled trading statement, that like-for-like sales across its UK and Ireland outlets had plunged by 13.6% in December. Having seen other music and entertainment retailers, including Zavvi, Our Price, Tower Records and even Woolworths bite the dust in recent years it isn’t surprising that the entertainment specialist is feeling the heat while the rest of us freeze.

Zeitgeist has already touched on how ‘In some industries, the concept of owning something tangibly has become redundant;‘, with music and film sitting high on that list. More worryingly for HMV as the owner of Waterstones bookshops is Amazon‘s online dominance of the category and the rise of devices like the Kindle and regular smartphones that are likely to eat into book sales in the coming years.

Deeper Problems

While the sub-zero temperatures may have kept shoppers out of their stores the weather can’t take all of the blame. This weekend, this half of Zeitgeist bought a CD as a friends birthday present. A quick look online showed the item retailing on HMV.com at £8.99, however in-store I was obliged to pay £17.99. The Sales Assistant helpfully told me that the difference was because online sales are shipped from Guernsey. I rather suspect that the lower price has more to do with the fact that other online stores such as Amazon.co.uk and Play.com are also selling the item for £8.99 than where the item is shipped from.

It’s not hard to see why the bricks-and-mortar stores are in so much trouble when they have to sell items for nearly double the online price to cover their overheads. In this instance the extra cost doubles as a ‘Failure to Plan‘ tax for me, but increasingly shoppers will go online for their entertainment needs rather than paying a premium for the convenience of getting it immediately on the high street. Alternatively they’ll simply download or stream it and do away with the need for any physical material purchase.

This final option shows how behaviour change can be brought about with the right motivations. For years now, we have been encouraged to reduce unnecessary waste and raw materials to help the environment. However, it is the convenience of having music, film, games and books stored digitally, rather on discs in plastic boxes or paper, that has proved more of a driver than any desire to save the planet.

Others Affected

Another retailer to be affected by how we now spend our leisure time is Games Workshop who issued a profits warning of their own soon after.

Two other retailers who also issued a now on-trend profits warning are greeting cards merchants Clinton Cards and maternity and babyware retailer Mothercare.

For Clintons this is the second such warning in six months and time will tell whether ‘strategic intiatives‘ taken by the board will have the desired effect or whether as a nation, a new generation is growing up to wish ‘Happy Birthdays’ and ‘Merry Chistmases’ via text message or social media sites.

Encroachment on their traditional market by the major multiples hasn’t helped Mothercare and brokers Seymour Pierce have questioned quite how much of their problems are down to the snow.

With the Christmas period so crucial for many retailers there may be more similar statements being prepared in boardrooms up and down the land. The slightly milder weather in early January may help ‘The Sales’ boost some bottom lines, but with a number of retailers choosing to delay exposing shoppers to the increase in VAT the bargain hunters may not spend enough to make up the shortfall, particularly if they are saving for a more expensive 2011. If a handful of retailers do go under it begs the question, ‘Who will take over their retail space and what will the retail landscape look like in a couple of years from now?’.

Such gloomy announcements from household names will do little to help the economy and improve consumer confidence, particularly once the seemingly permanent VAT rise comes into effect everywhere.

In the meantime we’ll have to wait and see what legacy the snow is going to leave in other sectors such as insurance, utilities and travel. Either way, it might be an idea to start saving now for those premiums and gas bills.

The Times, they are a-charging – Rupert plans a paywall

The still controversial theory of evolution doesn’t just apply to living things. In any environment, failure to adapt to new circumstances can lead to extinction in an unsettlingly quick manner. A teenaged Zeitgeist’s former weekend employer Woolworths provides a recent example of how quickly a large organisation can crumble to nothing if they don’t change with the times.

Just as the printing press began a process of democratising knowledge and ultimately power, new digital platforms have upset the established forms of distributing media.

Zeitgeist has previously commented on how the film and music industries have attempted to adapt to new consumption habits, the threat of piracy and distribution.

Another industry that has become old fashioned very quickly is print media. Not so long ago, if you wanted to read a book, magazine or newspaper you had to buy one – and the public had no problem with that model.

The growth of the internet and other digital media has not only moved the goalposts, but also drawn new lines on the pitch and introduced video technology.

Why buy a copy of the news as it was at 3am when you can get up to date news for free? Why buy a month-old magazine when there are many blogs and sites offering free opinion?

The old kingdoms are being forced to do battle in a new arena. Their problem in a nutshell is that as consumers move from print to online, revenues drop and barely cover operational costs – if at all. For many, the huge presses and infrastructures that previously provided an effective barrier to entry now hang around their necks like an albatross-shaped noose.

Newspapers simply need to generate more income from their online offering, as The New Yorker wrote in 2008.

One tactic that has been attempted by certain publications is the introduction of a paywall. In short this means users have to pay in order to be able to access content online. If your content is unique and special, people will pay – Zeitgeist parts with hard cash to access resources such as Mintel and Datamonitor and individuals pay to access Which? and Parkers.

The latest titles to erect a paywall are Rupert Murdoch‘s The Times and Sunday Times, which will charge £1 per day or £2 per week for access from June 1st, with The Sun and News of the World to follow soon.

Catch ’em while you can!

The theory behind paywalls is partly ideological – people should pay to access content – why should it be given away for nothing? Compared to the £1 price for the print edition, £2 for a weeks access looks like a good deal to the subscriber. Unfortunately economic models built on ideal rather than actual behaviour rarely thrive. Disappointingly for Murdoch, consumers, even those who favour The Times, will compare the £2 subscription fee with the free online access provided by the BBC, CNN, The Guardian, The Independent, The Mail, The Mirror et al or alternative news sources such as Twitter, Facebook and Google.

Times assistant editor Tom Whitwell accepts that “drive-by traffic will fall significantly”, adding that “The focus is preparing to serve a small, paying audience.”

Quite how small remains to be seen. The recent experiment by Johnston Press to build a paywall around their regional based content is rumoured to have attracted fewer than ten subscribers. The wall was quickly dismantled and no comments have been forthcoming on the failure of the project.

Recent research in the UK by KPMG doesn’t bode well either – only 10% of the people they spoke to said that they were likely to become paid subscibers to ANY media products in the next year.

Worse still, a PCI/Harris Interactive poll conducted in 2009 found that only 5% of people would pay to read their favourite newspaper online.

Even former PM Gordon Brown spoke out against paywalls stating vaguely, “People have got used to getting content without having to pay. I don’t think you are going to be able to put things behind paywalls in the way that people think.”

Nor is this a British idiosyncrasy, with a US study revealing that only 7% of Americans would continue to visit their favourite news site if they put up a paywall.

None of this has deterred Murdoch, who has enjoyed great success with his SkyTV network in the UK, which introduced Britons to the idea of paying to watch a previously free (licence fee notwithstanding) service. Arguably, the main difference is that Sky has unique content and subscribers are paying for all the channels, not for each channel individually. Replicating the model with online news is going to be very difficult to do.

So, will the future of news content provision echo the scenes of 65 million years ago as smaller agile providers succeed while the old, previously dominant organisations struggle to survive? And will paywalls delay or accelerate the decline? Let’s wait and see, there’s bound to be a free site somewhere that will report the result.