Interview with Michael Tsifidaris, Founder and Chairman KPS AG

Major online marketplaces like Amazon or Ebay have put physical retailers on the defensive. The best counterattack, says Michael Tsifidaris, Chairman and Managing Partner at KPS AG, is an act of liberation: completely revamp your retail platform.

Mr. Tsifidaris, how precarious is the situation for traditional bricks-and-mortar retailers?

Tsifidaris: We’re all aware of what we’re dealing with: brand new market players, so-called digital pure players, are mounting an attack on the traditional physical retail segment. We are seeing sales migrate to online channels, at times to devastating effect. And at the same time, e-tailers are finding completely novel ways to drive brand loyalty and communicate with customers. Retailers unable to keep pace with these developments will see their ability to reach certain customer markets dwindle – even if their bricks-and-mortar outlets are built to impress.

 

How willing and able are retailers to embrace the innovation they need to keep pace?

Tsifidaris: At this point, the willingness is there – more out of sheer necessity than anything else. But in terms of ability, we’ve only just begun. After all, it’s about more than just a simple product innovation – what we’re talking about here are start-from-scratch, across-the-board service and process innovations. That means initiating a new dialogue with customers, stage-managing the customer touchpoints and boosting brand and customer loyalty. Keeping in mind, of course, that these customers are highly mobile – they bring their smartphones into the shops and engage with both the offline and the online retail space at the same time.

 

How have bricks-and-mortar retailers responded to the attacks from online marketers?

Tsifidaris: Established physical retailers usually respond by reverse engineering the attacker’s innovations in an attempt to keep pace. That is precisely what many retailers have done over the past few years as they scramble to put up a Web presence on par with their online competitors. But innovation keeps moving forward, fueled by an increasing trend towards personalization: Internet players know their customers personally right from the first sale, often even from the first click. These developments – e‑commerce, personalization and the services designed to facilitate them – pose tough new challenges for physical retailers.

 

Unlike the Internet invaders, traditional retailers have a local retail presence, giving them a variety of opportunities to personally engage with the customer. Isn’t that a key strength they need to capitalize on?

Tsifidaris: Absolutely! This is the primary competitive advantage physical retailers have, one that is too often undervalued today. At the moment, the pure players are pursuing a broad range of process innovations to try and build loyalty with their online customers. But in the medium to long term, not having a physical presence near the customer, i.e. not being able to offer them a physical customer service experience, is bound to become problematic. So, the question traditional retailers need to ask is: “How can I best position my most vital asset, my physical store?” Having a local retail presence that companies have built over years and decades is the most powerful weapon in the battle against pure players. The only problem is: that weapon has essentially been locked away in a silo on the periphery of the e‑commerce channel.

 

So, we need to integrate the physical store into the overall system?

Tsifidaris: Exactly. For example, it should be standard practice for customers to browse the Web, buy an item online and then collect or return the item in store. Cross-channel scenarios like this one are still underdeveloped in today’s marketplace. The key thing for retailers is to bring together these three issues – e-commerce, personalization and classic enterprise resource management – and leverage the opportunities that arise as a result.

 

In other words, retailers have to be present on every channel. I’ve heard you talk about “omnichannel capability”, the next phase of “multichannel capability”. What exactly do you mean by that?

Tsifidaris: A lot of today’s retailers have already developed multichannel capabilities and are engaging with customers on a variety of both online and offline channels. These include things like online purchasing and in-store collection or return. “Omnichannel” adds a further dimension: the personalization we spoke about earlier. It is no longer simply about servicing customers across all channels. Now retailers need to know them personally as well, by observing them and providing personalized service in the retail store, on social media, at the call center and at every other customer touchpoint they have created.

 

That sounds pretty complex!

Tsifidaris: Indeed. Retailers have to master integrated resource planning and mobile responsiveness at the interface between personalization and e-commerce. Another key factor is big data, because in future all customer movements will also become data movements. When it comes to data, the systems being used for stock movements are already pretty sophisticated. But now retailers have to synchronize the movements of every customer, every stock item and every order to make sure they are with their customers every step of the way. As soon as they have achieved that, they will have finally arrived in the realm of so-called real-time analytics.

 

A realm where pure players like Amazon are already active?

Tsifidaris: That’s right. But what they are lacking, as we’ve already touched upon, is the massive area of enterprise resource planning for physical stores. Of course retailers like Amazon have physical logistics operations, but thus far we haven’t had the opportunity to experience the Amazon brand first hand in an actual store. Without that, they can’t be classified as omnichannel-capable the way we define it.

 

According to your definition, would a company like Apple be an omnichannel player?

Tsifidaris: I don’t see Apple as a retailer in the classic sense, even though they act as retailer for their own products. Apple is an outstanding consumer products manufacturer that has built its own physical retail landscape with its flagship outlets, but also markets its products through established retail chains and its own online store: from that perspective, of course they do have an omnichannel-capable landscape! So, Apple is one example; another is Nespresso. Go to any major city today and you’ll find physical stores and retail spaces where the company curates the brand experience and establishes customer relationships that they can then cultivate online.

What are the strategies traditional retailers are using to confront these challenges?

Tsifidaris: Basically we are seeing two response patterns and two different coping strategies. The first involves a series of knee-jerk reactions to the pure players’ attacks. First reaction: “We have to get our own online store up quick!” Second reaction: “We have to get on Facebook.” Third reaction: “We also need to enable customers to buy online and collect in store.” The problem with this strategy is that it just makes an already complicated process and system landscape even more complicated. The second strategy opts for an entirely different approach: the retailer builds and migrates to a completely new, omnichannel-capable retail platform. That way, they avoid the complexities of their legacy platforms.

 

Which brings us to the solution KPS is proposing. While a lot of retailers tend to tackle one issue at a time and prefer a piecemeal approach, you’re advocating for a radically different solution – building a new retail platform from scratch and migrating the entire operation from the legacy system to the new one. Why?

Tsifidaris: With the classic approach, companies break the solution down into segments, create individual projects and start to solve them one by one. That makes the transformation process more manageable and keeps the cost of each investment relatively low. This system will take you in the right direction, but only up to a certain point: today’s retailers all have a website; they all operate customer loyalty programs; they are present on at least one of the social networks and they are beginning to create their first multichannel capabilities. The problem is: omnichannel is much, much more than that! It requires retailers, as we’ve mentioned, to completely synchronize all of their product and customer movements – and do it in real time.

This is where the cracks start to show in the classic approach of expanding existing systems and integrating additional new features. The solutions keep getting more and more complex – and it gets more and more expensive to maintain the status quo. That’s why we advise our clients to build a new omnichannel platform from scratch before it’s too late.

 

So, instead of renovating the existing systems landscape and adding new features as you go along, you recommend essentially building a brand new facility on a greenfield site?

Tsifidaris: Exactly. That way, we can integrate all of the tools – foremost among them a state-of-the-art IT infrastructure – that today’s pure players are already using, because they don’t have to grapple with an already established system. The point is this: the functionality available in today’s standard software packages is so sophisticated that we can build 80 to 90 percent of the new platform using out-of-the-box solutions. We’re advocating for building new architecture instead of trying to renovate old buildings – don’t keep throwing money at enhancements for a legacy system, invest it all in achieving a quick turnaround with a brand new build!

 

That seems extreme! You’re saying retailers should just throw away years of investments in e‑commerce, social media and other multichannel initiatives?

Tsifidaris: Moving house is never entirely pain-free. But the decisive thing is: all of that expertise the retail company has built over the years won’t just disappear. On the contrary: that expertise has a far better chance of driving success with this new, more radical approach. Any retailer that has already built a website has all the skills they need. And if they are addressing personalization, mobile and big data, they’ve already assembled the players they need to move into their “new house”.

 

How does that work in your projects? Do you build the new structure alongside the old one and then move house?

Tsifidaris: That’s right. For the past 15 years, KPS’ transformation architects have been promoting the basic idea of working in parallel on strategy development, process design and systems implementation wherever possible. That enables us to significantly accelerate turnaround times, even for the most complex transformation projects. We don’t have to spend time creating the as-is baseline; we can direct our focus right to our client’s vision for the new omnichannel house – and how to best position their existing strengths, above all the logistics operations and physical retail outlets.

 

How do the time and cost benefits of these transformation projects compare with the classic approach?

Tsifidaris: It’s tough to get precise data on this: the types of projects we are dealing with are as diverse as the retailers on the marketplace. If I had to give a rough estimate, I would say that our approach can offer a 30 to 40 percent advantage in turnaround times, scalability and therefore cost benefits compared to traditional transformations. Depending on the scale of the transformation project, we can map all of a retailer’s processes into a prototype within six to twelve months at most. After a total of twelve to 18 months, 24 months at most, we can start making the move. We find that the rapid turnarounds are more decisive for our clients than the cost advantages – what counts is being completely omnichannel-capable within two to three years.

 

Let’s hazard some predictions for the future. What will the retail landscape look like in three to five years?

Tsifidaris: I see three major developments for the future. First, traditional physical retailers will become completely omnichannel-capable in three to five years – that is the benchmark customers expect. Second, I think the balance is going to shift within the sector. The most innovative retailers will lead from the front, not least thanks to their physical store presence. I also see pure players like Amazon or Ebay trying to keep pace by opening their own physical storefronts. And third, I think we are likely to see more successful consumer products manufacturers building their own branded retail presence.