Act Vertical or Be Vertical: Gaining the Competitive Edge in Retailing

According to a recent study by Kurt Salmon Associates, those retailers who “act vertical” are in a greater position to weather the recession because of their ability to offer unique product, demand higher prices, react more quickly to consumer trends, and replenish hot sellers more quickly.

"The recession is forcing retailers to radically rethink their businesses, and many are in survival mode," said Cari Bunch, a retail strategist at Kurt Salmon Associates. "However, in our view, the economic downturn has created much greater clarity about what retailers must do to be successful over the next decade."

“Act Vertical retailers have learned to collaborate internally (by breaking down the barriers between functions), externally with manufacturers and suppliers (without owning production) and externally with consumers by redefining customer research as a continuous conversation rather than a one-off event.”

Although this study recommends that retailers act vertically not actually become vertically integrated, the success of American Apparel, which boasts that its products are “Made in Downtown LA,” has used vertical integration not just for competitive advantage but also as a basis for cause marketing, mostly by calling for immigration reform among several other causes it supports.

As the above quote shows, as well as comments on the American Apparel website indicate, collaboration with manufacturers and customers is central to catching the curl on the new wave of retailing. SA VA, a semi-vertical women’s apparel company that will launch in Philadelphia and online in September, has recognized that true collaboration with customer necessitates her involvement with design as well as the company’s ability to react quickly her needs. To do that, SA VA will develop regional, domestic Garment Centers that will localize production and, in the process, work toward reducing the large carbon footprint affixed to most clothes, most especially the least expensive, as well as creating local jobs.

Collaboration, Open Business Practices: Counter-Intuitive to Most Traditional Retailers

In traditional department and specialty stores, boutiques and catalogs, the business mantra has always been to capture “share of wallet” or customers and their loyalty by offering some type of competitive advantage—unique product, great location, fabulous surroundings, convenience, unbeatable customer service, better pricing, exclusives on designers and products, close-outs or discounts, and the like. Negotiating with vendors for carrying certain fabrics or colors, designers or collections, even for picking up out-of-season merchandise could be fierce. The Macy’s/Gimbel’s rivalry has become the stuff of legend and has defined the retail business even before the rise of the great department stores.

Collaborative organizations, open business practices, and other new methods of building businesses are, in fact, anathema to most retailers. These methods as outlined by Wikinomics, What Would Google Do?, and a host of other books appearing in book outlets are for most retailers counter-intuitive. Why risk sharing anything that might give you a competitive advantage with anyone, let alone a direct competitor?

Finding a competitive edge for retailers has always been a challenge. In a world of instant verbal and visual communications via internet and digital photography, the prospect has become daunting. Even couturiers can hardly keep a collection together during a season. Just hours after a collection debuts on the runway, manufacturers have already copied the best, which might even appear in a store in just over a week. The result: the consumer gets the “look” at a fraction of the price, and the retailers offering it cashes in before a more traditional retailer can even receive the product in store. The “look” is almost immediately passé. Adding more pain to the process, the imitators have become so good at knocking off originals that many consumers don’t even seem to care if they have the genuine article or not.

With an increasing number of outlets for product—also due to the internet, which has a comparatively low barrier to entry—companies can quickly react to new products and, in the case of low-cost copiers or rip-off artists, can undercut and under price new, hoped-for best sellers. Of course, copying best sellers is nothing new, but the speed with which it’s occurring is startling. Add in a lingering recession of a magnitude unseen since the Great Depression and price becomes even more of a determining factor in choosing product, as we have seen more and more retailers scurrying to lower pricing even on the better floors.

In-store retailers have always been slow in adapting to new technology. Take most retailers’ failure to embrace CRM and database marketing as a means of communicating with and offering better targeted products to their customers as an example. But attempting to push an outworn 19th century business model into the 21st century will for most retailers simply be a prescription for bankruptcy.

Collaboration: The New Wave of Retailing

Internal, collaborative teams and external collaboration with customers will become one of the hallmarks of the New Wave of Retailing. Collaborative organizations, which are different from team-based organizations because they implement the collaborative process systemically, allow for greater adaptability in implementing and reacting to change, greater flexibility in product development, and greater empowerment among all members of the organization in the decision-making process.

At SA VA, collaboration is being embraced from the outset and is affecting everything from Design to corporate culture and organization. The SA VA Design Teams, for example, work with customer input and consist of members from technical and creative, sewing and tailoring, sourcing, marketing, and customer service. As a customer-centric organization, where information from customer input, the customer database, market research, and analytics, the Customer Experience Group receives data from, responds to, and feeds all aspects of the organization. It occupies a central, through not necessarily an authoritative position within the company.

As horizontal, collaborative systems replace vertical, rigid, command-and-control organizations as the preferred method of business organization, it will become increasingly necessary to find individuals who are comfortable working and learning in non-hierarchical groups. The acid test will be if past experience on the part of retail management can flourish in this new wave of retailing.

(Women's Wear Daily just published an article on retailers struggling to meet new consumer needs. Here is the link: WWD. Unfortunately, WWD subscribes to a paid subscription format, which seems out of place in the world of open communication.)