The word "local" conjures up several images including the traditional mom-and-pop shop. For a national chain retailer, the localization of stores was about getting the assortment tailored toward the right demographic, such as weather-related gear or apparel for the right geographic location. But in 2015, local, or "hyper-local," as it's sometimes referred to, is taking on a new connotation, one associated with digital technology and the in-store experience.
The changing definition of local
Mike Moriarty, a senior partner at A.T. Kearney, notes that local today is very different than 20 years ago. Back then, retailers focused on the three-digit zip code, and 10 years ago it was the five-digit zip code. Today retailers are interested in what's happening within 500 meters of their stores.
Looking at retail as hyper-local warrants dividing the trend into three different frameworks, according to Moriarty: sourcing, service and shopping. On the sourcing side, it's about restaurants getting food from local farms and suppliers. Or in the case of an apparel retailer, it could mean opening a store near a factory or warehouse to reduce the costs to make products and ship them. "Since logistics are such a problem, this solution is an attractive one and a huge opportunity," he said.
The second hyper-local framework looks at service, such as offering consumers same-day delivery or same-day pickup in-store, or even opening a smaller-format store in an urban setting to get locals popping in on their way home from work. But Moriarty is a bit skeptical of the rapid spread among retailers of these types of services.
"These are not working," he said. "They are not creating the profitability that they want." While the trend seems to be growing, Moriarty does not see this express model as a successful mode for building sales.
However, for many retailers, these new programs are still attractive options because they serve as low-hanging fruit, creating a seamless omnichannel experience while driving traffic into the physical store. Plus, it can solve fulfillment issues, such as shipping from warehouses across the country. Especially in the era of free shipping, retailers get a better margin on sales when they get a customer to pick up the product in-store rather than send it for free.
"We've already seen examples of retailers thinking about physical stores as multipurpose spaces so we are increasingly seeing in retail spaces a smaller sales floor footprint and more storage footprint as we move toward a localized fulfillment model," said Breton Birkhofer, head data scientist at Euclid.
Finally, Moriarty's third framework around today's hyper-local concept is the digital push to brick-and-mortar, ranging from pushing out electronic coupons to installing beacons in stores.
Who and what are driving localization?
Hyper-local is a buzzword being uttered at every retail conference in 2015 because retailers are discovering that using technology in-store may be the answer to reviving the downward trend in physical stores. If brick-and-mortar wants to maintain its stronghold over online sales—90 percent of all transactions are still done in the physical store—physical locations will need to start taking advantage of technology as an in-store traffic driver.
And though the trend is primarily being driven by technology and a need to reshape the retail store, it's also being influenced by the mom-and-pop model. Dan Goldman, senior manager at Kurt Salmon's retail private equity and strategy practice, points out that mom-and-pop shops have always been the leaders in the local category because of how well they capture the passion of the consumer. For instance, a local bike shop may employ riding enthusiasts and host riding clubs to bring those in the community together. These special events, clubs, gatherings and offerings, while available at some major chains, have been going on for years at smaller mom-and-pops.
"It's less about the pure buying and more about the experience, the community and the opportunity to seek advice, do activities together," Goldman said. This uniqueness of local product, combined with the experience and expert subject matter are a winning combination for a physical store to compete in the growing e-commerce world.
And we can't forget the shopper's role in this migration to local. From a consumer perspective, Euclid reports a growing trend in consumers with detailed information about products constantly at their fingertips. So by providing shoppers with this information on digital touchpoints, a retailer can ultimately get the shopper into the physical store and give him or her that customized experience. And better experiences lead to more shopping visits. In other words, more frequency impacts the life value of the shopper.
"I think retailers are starting to realize that hyper-local targeting can be a big traffic driver to physical stores," Birkhofer said. "Not only does it get traffic into the store, but it has the ability to connect with a customer, in an omnichannel way and at a point when the consumer is most attentive."
According to Byron Carlock, PwC's U.S. real estate practice leader, there is definitely a consumer trend for goods that are produced and sold locally, especially in the food and crafts categories.
His colleague, Steve Barr, PwC U.S. retail and consumer leader, sees the localization trend as twofold: First is the growing consumer desire to buy goods that are made locally, because it appeals to personal values and strengthens the shopper's sense of community. And two, there is a group of shoppers that choose to buy locally in search of a better quality.
These locally grown or produced items tend to not only have a higher margin, but often build more loyalty among shoppers. "For retailers, if they can create an intimate relationship with a consumer around a local product, then they can permanently establish that person as a customer," Barr said. "What we're seeing is that retail today is evolving into an experience and part of that experience is shopping local. It's the intimacy of that transaction or the belief of the quality of that buy."
Carlock builds on that thinking, adding that with all of the extra pressure on specialty retailers today, forming an intimate relationship with customers is one way—beyond delivering innovative products that aren't mass-marketed—to keep them coming back. "Many local offerings are unique and with a good story. That story is instrumental in capturing customers," he said.
Rewards and loyalty
For many retailers, rewards and loyalty programs are a great way to drive foot traffic in stores. According to a recent Colloquy study, the average U.S. consumer is enrolled in 20 loyalty programs and actively engaged in 12. But according to data collected by Fuel Rewards, what consumers actually want is a co-branded rewards card to consolidate everyday expenditures. In fact, programs offering benefits from multiple retailers at once appealed to 73 percent of respondents in a Loyalogy report. That's why Fuel Rewards helps to build coalition programs and reach a wide range of shoppers. In just a few years, the company has far exceeded the redemption rate of most loyalty programs across the country.
"There is tremendous consumer value in the currency, which in turn generates increased engagement with the brands who participate with our program," said Brian Jefferson, VP of business development, Fuel Rewards program.
Much of the focus on localization is directly related to the reliance on smartphones for shopping and redeeming. Using GPS and communication technologies, marketers can use location-specific details to learn about consumer behaviors, such as how often and where they shop. So for example, the newly relaunched Fuel Rewards app helps shoppers find nearby fuel stations and their prices.
For Fuel Rewards, building loyalty is all about offering local benefits. "Retailers who can lure consumers to brick-and-mortar locations benefit by being able to build a rich, immersive brand experience that encourages higher levels of spending, frequent visits and boosts customer satisfaction" Jefferson said. "Customers already shop regularly, and retailers can offer a tangible incentive that rewards customers for their frequent purchases and repeat visits. Brick-and-mortar shoppers become part of a valuable, transactional loop that bakes loyalty, frequency, rewards and increased sales directly into the value proposition for the retailer and the member."
The rapid advancement and implementation in technology is playing a large role in the localization of retail, and the backbone of this technology is analytics and data collection.
"Before you can connect with a customer and know what they want to see... you have to know what's going on in and around the store," said Berkhof, adding that Euclid is seeing retailers beginning to collect and analyze more consumer data to ensure an optimized experience.
Carlock refers to data as "the new oil." "It allows a retailer to capture data on their customers and to deepen that relationship," he said. Retailers are using this data to pinpoint the unique products in demand and bring them to their consumers.
In order to collect data, many retailers are taking their first technological steps by installing WiFi in brick-and-mortar locations. Allowing consumers to get on their mobile phones while in stores allows retailers to collect the most basic information on shopping habits. From there, retailers will be able to create customized digital offers when a customer is most engaged and attentive in the physical store.
Birkhof does warn that with all the data collection and targeting, there is a fine line that retailers need to walk in order to avoid being too invasive in consumers' lives.
"Retailers need to be deliberate and strategic about how they begin to roll out engagement strategies and customize offers," he said. "The downside to getting it wrong is annoying a bunch of people and alienating them and that is a big downside."
Online marketplaces such as Living Social that allow users to buy and share within their community have only just begun to tap into the potential off localization. According to recently named CEO and President Gautam Thakar, local is still a big opportunity. "No one has really cracked it yet," he said.
Living Social has evolved into a consumer brand, with more than 30 million users active on the platform, but according to Thakar it's ripe for innovation and change. While the platform offers great values and deals, there is a need to be more focused, more hyper-local.
More than anything, consumers want convenience and control. "From a consumer standpoint, people want to experience local things around them: entertainment, restaurants, etc.," he said. "Retailers are training people to have high expectations, and consumers should have high expectations."
And meeting those expectations increasingly means going local.