Global Power 2015


Closing the digital divide: IoT in retail’s transformative potential

The Internet of Things in the retail industry

The Internet of Things is poised to transform the retail industry, virtually eliminating the choice/customization trade-off and redefining sources of competitive advantage. And the return on investment on IoT may be more compelling than some retailers appreciate.

Nearly two decades have passed since the Internet began to fundamentally reshape the retail landscape. From the earliest dot-com vendors to the rise of e-commerce giants, retailers old and new have grappled with the ever-evolving ways consumers find and purchase goods. Today, at last, many businesses are coming to terms with Internet-enabled retail, adopting Omni channel models that provide seamless shopping with greater choices and lower prices across online, in-store, and mobile platforms.

From strategy to innovation: The rise of Internet-enabled retail

Competitive position in retail, like in any industry, is based on embracing trade-offs. A company can offer a full-featured product that allows it to command premium prices, hopefully securing higher margins but at lower volume since fewer customers can afford the good. Or it might provide a bare-bones offering at a correspondingly lower price, relying on unit quantity to compensate for lower margins through high inventory turnover.

For most of retailing’s history, one important trade-off was driven by the costs and benefits of carrying inventory. Customers made purchases by selecting from the goods available on store shelves or in on-site stockrooms. Because retailers had few ways to accurately gauge who would want what when, the only way to provide customers with what “they” wanted was to physically carry the goods. Providing that higher level of choice necessarily meant increased inventory-related costs from sourcing, moving, and holding a larger variety of products. Alternatively, a retailer could provide fewer choices and enjoy lower overall inventory costs, which it could pass along to consumers in the form of lower prices or keep for itself with higher margins. A company’s strategy was determined, in part, by how it chose to address this trade-off.

As the Internet has become nearly ubiquitous over the last two decades, the competitive advantage derived from either a cost- or choice-driven strategy has been steadily eroded. The Internet effectively broke the cost-choice limitation in the supply chain, contributing to the rise of omnichannel models, and even more fundamentally, blurring the line between digital and traditional retail. No longer is the customer limited to the stock on-hand; with the option to browse online, pick-up in store, or arrange delivery, every store effectively carries the products of the entire network. Now retailers can offer cheap with choice: the broadest range of products offered at the lowest possible price—a true innovation.

The Internet fundamentally reshaped how retailers operate. As the long-standing trade-off between inventory-related costs and customer choice weakened, old sources of differentiation disappeared and new competitors emerged. Today, with the near-ubiquity of digital influences on customers’ retail experiences, “e-commerce” has become simply “commerce,” with customers increasingly expecting a seamless interface between their online and in-store experiences. As retailers have grappled with this challenge, some have sought to maximize the choices available to consumers, while others have brought a more tailored approach to giving customers what they want.

Our own thinking on the Internet of Things in retail continues to evolve, and we expect to share additional perspectives in the coming months. But one thing seems clear: Companies able to address the thorny problems the IoT poses around data management, privacy, analytics, and other areas will likely be well-positioned to separate themselves from competitors. To truly build value from IoT investments, retailers should be expansive in their thinking, considering innovative applications and the use of supporting technologies, such as augmented intelligence.

Closing the digital divide: IoT in retail’s transformative potential
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