Retailers’ Mobile and Social Commerce Strategies Will Yield Minimal Revenue

Predicts 2013: Retailers’ Mobile and Social Commerce Strategies Will Yield Minimal Revenue

30 November 2012 ID:G00231876

Analyst(s): Miriam Burt, Gale Daikoku, John Davison, Robert Hetu

VIEW SUMMARY

Tier 1 multichannel retailers will not gain significant benefits from mobile and social commerce strategies if they fail to understand how mobile and social customer interaction points can enhance and optimize cross-channel, customer shopping processes.

VIEW SUMMARY

Overview

Key Findings

• Retailers will struggle to move significant numbers of consumers from cash and cards to Near Field Communication (NFC)-based mobile payments.
  
• Retailers’ efforts to pursue location-based personalization offers will yield a very small rate of redemption.
  
• Retailers will face a new threat to their profit margins and revenue-sharing models from emerging social shopping retailers.
  

Recommendations

For CIOs:

• Ensure that you provide your customers with functionality on their mobile phones that they prefer to use, such as finding a store location or looking up stock availability, rather than NFC-based mobile payments.
  
• Invest in multichannel analytical resources to help you increase revenue by defining more relevant coupon offers for all customers, while delivering personalized offers to a carefully chosen selection of customers.
  
• Map your existing product catalog to the key demographics for social media to take advantage of the current low cost of entry to use the Facebook commerce (F-commerce) as a testing ground for social selling.
  

Analysis

What You Need to Know

Tier 1 multichannel retailers are still struggling to provide the everyday “business as usual” multichannel experience that their customers desire. Organizational and technology silos continue to hamper the delivery of a consistent and contiguous cross-channel customer shopping experience. Moreover, this is exacerbated by retailers investing in hyped-up mobile and social commerce solutions, rather than focusing on delivering the customer basics. For example, in store, some of the key customer basics are stock availability, an informed and available staff, and fast check-out.

Gartner predicts that retailers will struggle to move significant numbers of consumers from cash and cards, especially if they implement market-hyped, NFC-based, mobile wallet payment solutions. Our research confirms that customers’ preferences to use their mobile phones to find a store location, compare prices, look up stock availability and receive promotions are far ahead of their preferences to use their mobile phones to order and pay.

We predict retailers’ efforts to pursue context-aware personalized offers, such as location-based offers through mobile phones, will yield a very small rate of redemption. Our research shows that consumers favor paper coupons. In the near term, paper coupons will remain the dominant form of retail offer over electronic coupon redemption.

We predict that retailers will face a new threat to their profit margins and revenue-sharing models from emerging social shopping retailers. Our research shows that, with 93% share in the U.S., Facebook could become a virtual retailer by connecting manufacturers and distributors of consumer goods directly to the consumer (see Note 1). This shift could dramatically alter the profit margin and revenue-sharing models within the retailer and supplier networks, making it even more difficult for retailers to remain competitive.

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Strategic Planning Assumptions

Strategic Planning Assumption: By 2014, less than 2% of consumers globally will adopt NFC-based mobile payments.

Analysis by: Miriam Burt and John Davison

Key Findings:

A Gartner consumer survey in 3Q11 in 10 countries showed that, on average:

• Almost two-thirds of the consumers (62%) surveyed indicated that they did not use their mobile phones to conduct any type of financial transaction using mobile payment services.
  
• Sixty percent of consumers indicated that concerns about the security of personal and payment data were the biggest barriers to using their mobile phones to make mobile payments. This is a 7% increase from the equivalent survey in 2010 (53%).
  
• Seventy-nine percent of consumers indicated that the store is the main channel through which they were willing to make a purchase when conducting a cross-channel shopping event.
  

Market Implications:

This topic has been very hot in the past 12 months in all the major Tier 1 retail markets, with tremendous hype and publicity regarding solutions from a multitude of vendors of hardware, software, card payment services and, particularly, the NFC-based solutions, including those from Orange and Barclaycard, as well as the NFC-based mobile wallets from Isis and Google. Non-NFC-based solutions, such as the Starbucks mobile phone payment solution via its stored-value loyalty card and mobile bar codes, and PayPal’s mobile payment solution for Home Depot stores, have also been in the headlines.

About one-third of customers are using their mobile phones for financial transactions, although these are largely confined to functionality such as topping up prepaid mobile plans or purchasing digital products, not physical products. Moreover, this pertains to consumer usage of all types of mobile phones, not just to the usage of NFC-based mobile phones.

As part of a cross-channel shopping process, NFC-based mobile payments could address the need for speed of throughput and convenience during check-out in a store. This is important in some retail segments (such as grocery and convenience stores), but less important in other segments (such as luxury fashion).

If payment transaction fees using mobile devices are lower than traditional credit and debit cards, then there are clear savings for the retailer. However, in a 3Q11 retailer survey, Tier 1 retailers indicated that they expect the mobile channel, on average, to generate just under 2% of revenue through 2016, compared to 85% through the store and 12% through e-commerce. Hence, they do not see a robust business case for upgrading point of sale (POS) terminals to accept NFC-based, mobile contactless payments that include factors such as the cost of NFC-based POS terminal readers and the cost of merchant interchange fees.

Moreover, the speed of adoption of mobile payments will be dictated by consumers, so NFC-based payment solutions must demonstrate how they can support a secure, hassle-free, convenient and fast check-out — the latter being a key in-store customer service basic.

Current retailer trials of NFC-based stickers for promotions; the growing use of mobile coupons; the increasing use of mobile bar codes at the POS; and contactless payments using prepaid services for transportation applications, such as ticketing; may speed up the general adoption of NFC technology for mobile devices. For the most part, these are currently done through cards that customers touch on contactless readers, and do not involve NFC-enabled mobile phones in the payment process.

Benefits from NFC-based mobile payment transactions will only be gained if consumers are convinced that NFC mobile payments are secure, convenient and fast. They also need to have a compelling reason to make the switch. For example, retailers could give them incentives to choose this type of payment over others, such as tying loyalty programs into NFC-based mobile payments. In addition, a single set of standards needs to be agreed on by the banks, payment processing companies and retailers for NFC payments to succeed. We have not yet seen this consistency emerge yet.

Recommendations:

For CIOs:

• Don’t let the projected rate of smartphone adoption or the hype around NFC-based contactless mobile payments drive investments in this solution.
  
• Investigate how NFC can be used for nonpayment processes. For example, customers can use NFC stickers to access promotions or as a replacement for quick response (QR) code scanning.
  
• Where appropriate, invest in secure, mobile POS applications in stores to enable store associates to provide the key customer basics of a fast and hassle-free check-out experience.
  
• Ensure that you provide customers with functionality on their mobile phones that they prefer to use, rather than NFC-based mobile payments. This should include the capability to use their mobile phones to find a store location, compare prices, look up stock availability and receive promotions.
  
• Trial mobile payments through lower-risk, stored-value payment solutions, preferably in conjunction with a loyalty solution.
  

Related Research:

“Hype Cycle for Retail Technologies, 2012”

“Distinguish How Consumers Want to Shop on Their Mobile Devices for Best Investment Decisions”

Strategic Planning Assumption: By 2015, less than 1% of all redeemed coupons will be location-aware offers sent by Tier 1 retailers.

Analysis by: Gale Daikoku and Robert Hetu

Key Findings:

• Many Tier 1 retailers are pursuing personalization strategies that include the delivery of real-time offers on a customer’s mobile device while they are shopping in stores.
  
• Paper coupons, including those provided directly to the customer, are the dominant format preferred by consumers.
  

Market Implications:

Retailers see personalization as a competitive necessity for building meaningful relationships that foster loyalty, yet many have work to do to support this level of engagement with customers. Gartner notes that nearly every Tier 1 retailer we speak with has prioritized the ability to gain a single view of its customers as a business priority, as personalization is dependent on good knowledge and segmentation of cross-channel customers. In fact, in the next few years, we expect that just over two-thirds (70%) of leading Tier 1 retailers will have improved the quality or way they develop customer offers. This can be anything from promotions to coupons or personalized offers. However, many retailers will be challenged by their abilities to deliver and execute location-aware offers to customers who are shopping in their stores.

Coupons are the most common form of retail offers. According to industry sources, even though coupon distribution is down overall due to more limited funding by manufacturers, paper coupons, many of which are delivered via free standing inserts (FSIs) that are mailed to a customer’s home, are expected to remain the dominant form of retail offer for some time. Gartner research shows that the vast majority of consumers prefer to use some form of paper coupon — in particular, those sent directly to the customer, delivered as a separate sheet with a sales receipt or from the retailer’s in-store mailer.

Electronic coupon distribution is an alternate, cost-efficient way to reach customers with offers. There are two types of e-coupons that are rated fairly high for potential use: those emailed to customers that can be printed out on paper and coupons that can be saved to loyalty accounts. However, customers are still getting used to these newer forms of couponing, and redemption will remain constrained in the near term, due to process and technology challenges in stores.

As mobile technology improves, customers will get more comfortable with using mobile devices as part of the shopping process. However, for retailers, communicating the perfect multichannel offer at the right moment in the shopping process, although theoretically attractive, is difficult to execute in real time (for example, sending location-based, context-aware, personalized mobile coupons in real time while customers are shopping in their stores).

Apart from customer readiness, there are customer privacy challenges around sending mobile coupons to customers’ personal mobile devices. In Gartner’s consumer survey, 39% of respondents said they had smartphones. However, when asked if they were willing to use a mobile app to receive coupons or rewards in stores, almost one-third (29%) indicated that that were not willing to use a smartphone app. Furthermore, 40% said that they were not willing to register their phones so that they can be tracked to receive offers while they were shopping in the store.

Recommendations:

For CIOs:

• Maintain the capability and processes that support the delivery and redemption of paper coupons in stores.
  
• Invest in the multichannel analytical resources to help you target a small, but lucrative, set of customers who are favorable to receiving personalized mobile offers.
  

Related Research:

“Hype Cycle for Retail Technologies, 2012”

“Consumer Survey Shows What’s Ahead for Retail Coupon Management”

“Personalization and Context-Aware Technology’s Impact on Multichannel Customer Loyalty”

“Marketing Service Provider Capabilities in Retail”

Strategic Planning Assumption: By 2015, a new social shopping retailer will emerge, accounting for 2% of U.S. Tier 1 retail sales.

Analysis by: Robert Hetu

Key Findings:

• U.S. consumers in the 18- to 24-year-old demographic have the highest preference for using social media while shopping (48%), with expected continued growth in this activity as they grow older.
  
• Facebook’s overwhelming share (93%) of social media provides it with an opportunity to generate a direct retail revenue stream via a virtual store approach.
  

Market Implications:

According to a Gartner consumer survey conducted in 3Q11, young adults aged 18- to 24-years-old conduct the highest levels of shopping-related social activity, including the propensity to look for special offers and check product reviews on a social networking site. The depth of personal information willingly supplied on social networks provides unmatched visibility into the lives, interests and personal networks of consumers.

Retailers primarily view the customer through their interactions via shopping activity. As they seek to expand their knowledgebases, they have been experimenting with social media through various partnerships. Most Tier 1 retailers have built a relationship with Facebook as a convenient avenue to access social networks via Facebook commerce (or F-commerce), but have found little revenue.

As experienced by retailers when they were part of the Amazon platform, the extent of information flowing between partner organizations (for example, sales and inventory data at a SKU level, as well as customer transaction data) can be used by a partner as it builds its own retail strategy. Complicating this further is that the social environment is dominated by a single player that has 93% share in the U.S. As a result, the partnership with Facebook, or with other social players that currently exist or may rise as rivals of Facebook, could provide the competitive content required to quickly enable a virtual social retailer, connecting manufacturers and distributors of consumer goods directly to the consumer. This shift could dramatically alter the profit margin and revenue-sharing models within the retailer and supplier networks, making it even more difficult for retailers to remain competitive.

Amazon grew to be a top U.S. retailer by taking advantage of a specific weakness in the retail environment — namely, the slow adoption of technology-enabled shopping. It is continuing to exploit this weakness with its forays into mobile shopping and social enablement. Amazon now includes the setup of a profile with personal information, including a picture and preferences, with the ability to share previously purchased items with others to help facilitate social shopping. Customers can also create lists of products and purchase guides to support various activities (for example, photography). As a result, Amazon is far ahead of multichannel, Tier 1 retailers in its ability to meet this new threat posed by social networks, such as Facebook.

Recommendations:

For CIOs:

• Map your existing product catalog to the key demographics for social media to take advantage of the low cost of entry to use the F-commerce platform as a testing ground for social selling.
  
• Connect e-commerce and m-commerce sites with Facebook using social plug-ins and custom applications to ensure a consistent flow for the cross-channel customer.
  
• Approach F-commerce with the awareness that Facebook will use this as a revenue-generating model by planning alternative approaches for social commerce when it becomes disadvantageous to engage in F-commerce.
  

Related Research:

“Use Facebook to Test Social Commerce Strategy”

“Information Innovation Powers Customer-Centric Merchandising”

“Hype Cycle for Retail Technologies, 2012”

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A Look Back

In response to your requests, we are taking a look back at some key predictions from previous years. We have intentionally selected predictions from opposite ends of the scale — one where we were wholly or largely on target, as well as one we missed.

On Target: 2012 Prediction — By 2013, the U.K. retail market will be the world’s most advanced multichannel market.

Analysis by: Miriam Burt, Van L. Baker, Gale Daikoku, John Davison, Robert Hetu

Previously Published: “Predicts 2012: Retailers Turn to Personalized Offers Through Mobile and Social but Will Struggle With Multichannel Execution”

In 2Q11 and 3Q11, Gartner surveyed leading retailers in the U.S., Canada, the U.K., France, Germany, Brazil, Russia, India, China and Japan. The survey asked retailers to estimate the percentage of revenue coming from each of their selling channels. In this survey, U.K. retailer estimates for the percentage of e-commerce sales were higher than in any other country surveyed, with 13.22% of sales compared to the 10-country average of 9.22% of sales for this channel. The same finding was made in other channels — mail order and catalog, call center, and mobile — where the U.K. had a higher estimated percentage than the 10-country average.

The corollary of this is that the U.K. retailers surveyed anticipated a smaller percentage of their revenue through 2014 coming from brick-and-mortar stores (79.28%), compared to the 10-country average of anticipated revenue in 2014 (88.56%). Thus, the U.K. is on target to be the world’s most advanced multichannel market through 2013 and beyond.

Missed: 2012 Prediction — By year-end 2012, 90% of Tier 1 and Tier 2 retailers will have an active presence on social media sites.

Analysis by: Miriam Burt, Van L. Baker, Gale Daikoku, John Davison, Robert Hetu

Previously Published: “Predicts 2012: Retailers Turn to Personalized Offers Through Mobile and Social but Will Struggle With Multichannel Execution”

In defining active presence, the intent was to incorporate some commerce activity within the social networking activity. Facebook commerce was, at the time, being pursued by many Tier 1 retailers. Over time, they learned that selling products on social media was not a straightforward process and retreated. Presently, most Tier 1 retailers have a presence on social media. However, they have not successfully monetized through F-commerce or other sales activities. Many even failed to be responsive to customer comments, making it a one-way communication vehicle.

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