When the Internet first arrived, retailers were slow to see the threat it posed to their businesses and most failed to recognize the opportunities it offered to reinvent their channel strategies. Ultimately, the Internet proved to be hugely disruptive to retailers because they fundamentally failed to understand the threat and were slow to react. It was with disbelief that retailers watched on as consumer behavior changed and they realized, despite all their instincts, consumers would 'click and buy.' Retailers spent years and billions of dollars trying to catch up, but it was too late; they allowed new entrants like Amazon to get a foothold and begin to steal the market lead.
Is history going to repeat itself with the IoT?
The IoT is the next phase of growth for the Internet and it is argued that it could have a much bigger impact than anything to date, particularly in home improvement and consumer electronics. Analysts are estimating the market to be in the trillions of dollars. The IoT has opened the floodgates to innovation with every manufacturer racing to exploit connectivity, to reinvent their products and business models. In the home, everything from the faucet to the toothbrush is going “smart.”
Device manufacturers were quick to see opportunity and built connectivity into their products. Many saw that data from their devices could be turned into services; services that can add value, generate new revenues and improve consumer engagement. Some of the early business models were questionable, and the days of charging $20 a month to simply open and close the front door with an app were short lived. Others like Nest showed how they could reinvent a traditional product like a thermostat to steal market share from historic market leaders like Honeywell.
These developments in the IoT should really worry retailers.
Access to data from connected devices will redefine the consumer relationship, change industry dynamics, and have a fundamental impact on the way consumers make their buying decisions. For example, retailers run loyalty programs in an effort to scrape data from their customers. However, in the world of connected things, a retailer will know exactly who their customer is, where they live and how the use their products. This will provide deeper insights into consumer behavior and open the way to deploy new, value added services that can be used to increase brand loyalty and generate new revenues. Retailers will be able to reach out to customers in their homes and interact with them through the apps and services on a daily basis. In short, data from devices will completely change the way retailers engage with their consumers.
There is good news for retailers in the way the market is starting to grow.
Today's consumer market is defined by singular smart devices such as Nest, August, and Ring, but consumers are moving away from wanting smart devices towards wanting smart homes. This has driven the development of the type of curated ecosystems offered by AT&T, TWC, Comcast and others. Each focus on key consumer needs for safer, more energy efficient and easier to manage homes.
As the market continues to grow, consumers will want more choices. They will want to choose different products from a variety of manufacturers and have them all work together through a single, simple UX to make the home 'smart.' Retailers, particularly home improvement and consumer electronic stores, are uniquely placed to deliver this vision to consumers as they sell all the various devices that go into homes. They could put themselves firmly in the new value chain and control data if they provided the UX and offered to bundle the services.
To fill the role of service provider, retailers need to be bold and take the lead in the consumer IoT market by developing their own cloud platforms to support the products they sell. In an early market it may seem like a risky move, but it would help defend the retailer’s position in the market in the short term and could, if the market develops as speculated, be the springboard for future growth. Growth that would see retailers reinvent the way they engage with the consumers, deploy new services and position their brand.
Retailers will inevitably face real challenges adapting to the IoT and moving from product sales into services.
Many retailers may feel they already have a strategy because they offer connected devices. Nonetheless, that is the ‘business as usual’ approach; simply selling product for margin and ignoring the opportunities and threats posed by the availability of data. Some are cynical and talk about how the IoT market is being hyped because there are no huge success stories in what is still an early market. That was the view that prevailed when the Internet first arrived, and history confirms that smart people can be wrong. What retailers should be asking is why Google bought Nest for $3B, why Amazon has invested so heavily in Echo and what happens if all their suppliers use data from their devices to cross-sell and upsell directly to consumers?
In short, retailers need to think strategically and look at how they could exploit the IoT to reinvent their business models and defend their positions in the market. This will be challenging because they need to think, act and behave differently. Exploiting the IoT requires broader strategic thinking and organizational change to deliver success. More importantly, it requires a change in mindset. If retailers simply stick to the traditional role of merchant with the focus on pushing volume for margin, they will leave a huge gap in the market for someone to exploit the data from devices to deliver services that will attract and engage consumers. A gap that Amazon, Google and Apple are already working to position themselves to fill.