Rethinking Retail | Barbara Kahn

Focusing on the Customer Experience

Dan Loney: Retail has gone through quite a bit of change in the last couple of decades, and now it’s adjusting to the advent of AI. So, where does retail currently stand at the ground level? Pleasure to be joined here in studio by Barbara Kahn, who’s professor of marketing here at the Wharton School. She’s also host of the Marketing Matters podcast and author of the book, The Shopping Revolution: How Retailers Succeed in an Era of Endless Disruption.

When you’re talking about this endless disruption, is it something that retailers need to factor into their bottom line, their operations on a daily basis right now, because things seem to be coming at them left and right?

Barbara Kahn: Oh, absolutely. Ever since COVID, we’ve seen so much disruption in retailing. It’s absolutely changed their strategy. One of the things that we’ve seen, as we now know, is that retail is omnichannel. It’s not physical or online, it’s a seamless integration between the two. The other thing that we’ve seen is that the differences in products and the differences in price aren’t that significant anymore, because a lot of the products that retailers are selling are in the mature stage of the product life cycle.

Product differentiation, while it’s there, it’s kind of flattened out. There’s just so much you can do in differentiating on price. What we’ve seen now is that retailers are focusing on changing the customer experience and winning by the customer experience. And that’s why this omnichannel piece is so important, because you’ve got to think about the customer experience online and in the physical store.

Loney: That was going to be my next question, because seemingly, that has to integrate with how you’re thinking about all these different components you want to use to promote your products, promote your service. But you have to do it in the scope of understanding your customer and how you’re going to reach them in the best manner.

Kahn: Right, and one of the things, as I’ve been trying to come up with a new framework to offer some strategic advice, is to think about it as the time spent with the consumer, and think about that as a differentiating factor. One way to think about customer experience is spend more time with your consumer. Now, that’s not, in and of itself, a good thing. It’s got to be valuable time with the consumer.

Start thinking about customer experiences. How can you provide value? Through entertainment, through learning preferences, you can do more customization, etc. The other way you can offer value through customer experience is by spending less time with the consumer, making it more efficient. That’s, of course, what Amazon learned in spades. That really brought them to the front of retailing, because they made shopping so easy, so frictionless.

How AI Can Help Retail

Loney: Does the addition of AI into retail make it easier or harder to have that customer experience that you want to have?

Kahn: Another disruption that’s coming is this idea of generative AI. And we know consumers, we know students, we know everybody is using ChatGPT for everything. How does that change the shopping experience? We’re just starting to do research on it, but it is fundamentally changing the process.

Loney: From your experience, are there areas of the retail operation that just fit so well, where AI can seamlessly make things so much easier for the operation?

Kahn: From the retailer’s point of view, there’s efficiencies in supply chain management, inventory management that ChatGPT can help. But from the consumer point of view, it’s pretty interesting. One of the things that we used to teach in marketing was that there was a funnel in the way customers make decisions. It was called the decision funnel, the marketing funnel. And the idea was, first you have to be aware of the product, then you have to care about it, form considerations, and evaluate. It was a very linear process.

The first disruption to that process was the mobile phone and digital and digital marketing and things like that, because now the process was no longer linear. Brands could come into the process any which way. We no longer thought of the decision process as a funnel, but more kind of like a subway map in certain ways. You know, the circuitous way where information can come at all different points. That fundamentally changed marketing.

Now, what does generative AI do? It changes the process. You no longer search for yourself. The search process is almost gone. You go to ChatGPT, and it tells you something, and then you respond to that. You’re not even responding to your own memory and your own cues. You’re responding to what ChatGPT is telling you. Some of our consumer behavior researchers are looking at, how does that change customer decision-making when it’s stimulus-based like that, as opposed to memory-based?

Loney: We also have to get to the point where the consumer has the recognition that a lot of this is going on, and not just to buy in at the first suggestion that it gets and continue that search process.

Kahn: Yeah, now I don’t know how much the company affects what ChatGPT spews out because from the company point of view, it’s not clear either. We’re just starting to do a lot of research in this area. But one of the things that I’ve seen is that there are biases built into these algorithms. When a customer made their own decisions, they had their own personal biases, right? We did a lot of research. Danny Kahneman won a Nobel Prize for heuristics and biases and all the things that we understood about the way the consumers were making decisions. Now, we have to understand how the algorithms are making decisions, and it’s different from the way the consumers do.

The State of Brick-and-Mortar Stores

Loney: Let me switch to bricks and mortar, because I know that’s a topic we’ve talked a lot about over the years. Where do we stand with the potential strength, or lack thereof, of bricks-and-mortar stores moving forward because of how the e-commerce realm has just come in and dominated?

Kahn: Yeah, but you know, the more things change, the more they stay the same. People have been predicting the end of the physical store even before COVID, and then during COVID, with the acceleration to digital, which is what you’re talking about. People said that’s the end of the physical store. It’s just not true. The physical store is transforming. The malls are transforming. Even Macy’s is transforming. We’ll see what happens with that. It’s not that the physical store isn’t important anymore. It just serves a different purpose. And that’s why I was saying customer experience is really important. Understanding how people spend their time.

As soon as COVID was over and you got out of that digital world, people couldn’t wait to get back into the physical store. T.J. Maxx, which doesn’t have a very big digital footprint for a lot of reasons, when we were done with COVID, there were lines around the block to get back into T.J. Maxx. People like the physical experience of shopping, but things that are more efficient or easier to do online, they’ll continue to do online. We just have to understand what they want to do in the physical store and what they want to do online.

Loney: There is kind of a tipping point for the consumer — and maybe they’re the ones that would know this the best — of what I can just go in quickly, throw into Amazon, get that order in. If you’re a Prime member, you know you’re going to get it delivered the next day. And what types of items you actually want to go out and spend your time and learn more about.

Kahn: Right, so that’s what we have to learn. What do people want to do in physical stores? This idea of retail-tainment, the idea of the social interaction seems to be very important. The idea of building a relationship with the retailer over time. Now, maybe you can do it online, but it’s easier to do it in the social way, where you learn customers’ preferences, you build the trust, and then you build loyalty that way.

Loney: You and I have talked a lot over the years about Amazon versus Walmart, and maybe even Target as well, but Amazon and Walmart being the two titans in this area. For their own strengths, they seem to be able to really connect with the consumer in different ways. Many people who go to Walmart love the going to the store and that experience. Obviously, a lot of people on Amazon are going to go there because they love the online ease and speed at which they can order.

Kahn: I don’t know how many people go to Walmart for the experience. When I think of customer experience, I’m going to think of some of the luxury department stores and things like that. But Walmart is convenient. It’s convenient in a different way. Some people think that it’s more convenient to shop online, pick up in the store, and drive it home than to wait for these deliveries to come to your front door. There’s an inconvenience for some people in that, too. I think both Walmart and Amazon are really featuring a very good price and very easy, and they’re defining what a very good price is differently, and they’re defining what’s easy differently.

Loney: What do you hear then from companies in terms of their footprint with the bricks-and-mortar, of how they are looking at where they want to be within the shopping experience? For the longest time, the industry relied on the massive malls. They are obviously not doing that as much. I guess it would be the B and the C malls that are drawing more attention from retail companies.

Kahn: Yeah, it’s interesting how these different things are changing. One of the things I knew when I started writing my book a long time ago was the U.S. was over-stored. We had too many stores in the first place. That was a given. Now, it’s kind of been obscured by all these other changes. We had too many Gaps, for example. Everybody knows we had too many Gaps, right?

Loney: There’s only so many pairs of jeans you can buy.

Kahn: Yeah, I mean, that doesn’t make sense. The way they would grow is build a new store, and it just didn’t make sense anymore. We had too many stores to start with. That was a given. But to your point, the role of the store is different. One of the things that happened in COVID was this idea of this omnichannel experience, where you’re buying online, pick up in the store. That made those neighborhood centers more useful because you could just drive up to the store, pick up something, and it was very convenient.

We’re also seeing the malls change. What’s fulfillment in a mall? What’s entertainment? There is a role for physical space. It’s probably less physical space than we had before, and probably these big footprint stores are changing. We’re seeing stores become smaller, more experiential, more carefully designed, how they’re using their internal space.

Where Is Retail Headed?

Loney: Do you think that all the impact that we saw on so many different businesses will end up being a valuable learning experience for retail? And now with technology and all these different components, there are things that companies will learn that will make them better?

Kahn: Yeah, absolutely. People were doing things that made no sense just because they did it. We understand why people put the milk in the back of the store because you wanted people to spend more time in the store to find that milk and buy other things. But from a customer point of view, it was always obvious that’s not convenient. They cannot do that anymore. Now, you’re going to make stores a better customer experience. And that’s an example of something that the data are showing. People don’t like that. If you put the milk in the front of the store, people are happier.

There’s some learnings that we’re getting. One of the other things that you haven’t mentioned, but that is fundamentally changing retail today is the role of price. Low price matters, but people are much more price sensitive. Maybe it’s because of the tariffs. We’ll see how that works out. But speaking of Amazon, what they’ve done is move up shopping to Prime Days in July. That’s kind of an interesting thing, the very, very promotional days that are happening in July, that it’s affecting back to school shopping and Christmas shopping.

Loney: Do they think about how many of those types of events they want to have and where that saturation level kind of goes overboard?

Kahn: I’m not inside the head of Amazon, but that’s got to be. But one of the things that we also see, which is part of the wheel of retail that we’ve seen over time, is Amazon put Prime Day in the middle of July. Everybody saw how effective that was, and then they all copied. Now, part of what you’re seeing happen is that everybody has a Prime Day. It’s not just Amazon anymore. All this promotional shopping has been moved to July. What that’s going to do to the back-to-school season and to the holiday season remains to be seen. But a lot of purchases were made in the middle of the summer.

Loney: What are the areas that you’re most focused on right now in terms of where retail is and where it’s headed?

Kahn: I personally am very interested in this idea of differentiation through customer experience. How do you make the customer experience something that people want to go to your store to see? There have been a lot of experiments that I don’t think have worked as people throw the spaghetti on the wall and try to figure out. Like, there was a lot of these Instagram things in a mall where you just take pictures and all this other stuff. I don’t know how successful, in the long run, some of those Instagram type installations in malls were.

I’ve seen some very interesting ideas in customer experience, like, for example, the Sleep Number, which is a luxury bed. In order to get that, that’s a combination of learning customer’s preferences and using technology, so that you can build a bed that’s so customized for you. And that idea of spending enough time with the customer, either online or in a physical store, to learn those preferences, to really customize the product, that’s an interesting experiment to see how you can translate that to other types of retail.

Loney: It seems companies understand that the way to be able to differentiate themselves is to find where technology can benefit them the most moving forward.

Kahn: Right. This use of technology can either build a relationship with the customer through learning preferences in different ways, or remove friction. What Amazon knew was this idea of one-click shopping and that’s the same thing. I don’t want to go to the back of the store to get the milk. I want it right here. I don’t want to stand in line and pay for my goods. I’m going to abandon my cart. So, let’s make that as efficient as possible. Personally, when I go into a physical store, I can’t tolerate a long line at the cash register, you know? I really expect a salesperson to come up to me with their little pad and get me out of there fast, or self-checkout, or things like that.

Loney: I’ve seen my grocery store and others add at least two extra self-checkout areas just because the consumer wants to get in and get out as fast as they can. Again, that circles back to that component of experience that you talked about.

Kahn: In that case, let’s make it efficient. Don’t make me spend time doing things I don’t want to do. Make my time valuable with respect to the retailer. And that’s just not the way retailing was originally built. Retail, originally, was built to sell products at the right price. They were very product focused. And a lot of marketing, retail included, has moved to this new idea of focusing on what’s important to the customer.