Business Concepts with Legs:Participatory Retail & Transparent Supply Chains
When a business pitches customers just out of their teens with jargon usually heard in MBA programs, you know something special is going on. American Apparel, a tee-shirt manufacturer that caters to the hip 18-25 year old set is equally renowned for the soft-core porn aesthetic of their ads and for being a "sweatshop free" enterprise. How is this feet accomplished? "Vertically integrated manufacturing," they assure the cool young things who buy their clothes.
Businesses are recognizing that their customers are interested in the chain of events that bring products to the shelf and they've found some ways to assuage their concerns -- various third-party certifications, a section of the annual report devoted to the environment, purchasing carbon offsets, or adding words like "earth friendly" or "sweatshop free" to packaging.
As more companies adopt tokens of transparency, crises like the recent toy and pet food recalls further undermine the trust of consumers, who opt for products they feel are demonstrably safe, healthy, and in line with the values they hold dear. The balance is shifting from disclosure, where corporations mollify their customers with a narrow marketing message, to transparency and participation, where business throws open the door and invites customers in to see for themselves because their trade and manufacturing practices are attractive features of the brand.
Participatory retail and transparent supply chains are two related, often overlapping strategies forward-thinking companies are using to improve their offerings and intensify brand loyalty. The transparent supply chain enables consumers to directly verify a product's claims about health, environmental impact, or social justice. Participatory retail describes products that allow the consumer to engage with and shape some significant aspect of the production process. As you'll see in the account that follows, participation and transparency have novelty and virtue to their credit, but above all they are good business.
Mass Customization - This year at it's annual "investor days" meeting, Nike announced a new global marketing theme -- "the customer decides." CEO Mark Parker described the move this way:
We've spent the last, or in our case, 20 or 30 years trying to bundle things, adding value to a purchase or a relationship. And now, it's almost in reverse, because you have to unbundle everything if it's going to become customizable.
Nike's most avid customers feel themselves to be unique and demand products tailored to their specifications. The strategy is to cater to their needs with a customizable product experience and convert them into champions of the brand rather than plain old customers. The flagship product of the new theme is Nike Plus, shoes with a sensor that transfers performance data to a runner's iPod, allowing the user to track performance, map routes, set goals, and participate in a community of Nike Plus users.
Scion, a youth-oriented division of Toyota launched in 2003, is designed to be a customized experience over the life of the car. Buyers who visit a Toyota dealership go to a separate Scion space inside where they are guided through the process of choosing colors, wheels, stereo, and a host of aftermarket items like a ground effects kit or an illuminated cup holder. Alternately, buyers can build the car and get an accurate price tag online before they set foot in the dealership. Scion car clubs are active across the country and the trade in accessories likely to be installed after the sale is growing precipitously. According to Toyota, about 80 percent of people who buy a Scion are new to the Toyota brand and, when they trade their car in, 8 of the 10 cars they choose next are Scions or Toyotas.
On the production side, Rapid Manufacturing (RM), a new additive manufacturing technique that produces fully functional parts directly from 3D CAD models without the use of any tooling, offers imminent possibilities for product personalization. Prostheses, motorcycle seats, helmets, and backpacks formed to the bodies of individual users are all projects being explored by Custom-Fit, the European consortium developing the technology. The implication for customization is that RM will allow a manufacturer to make a one-off, on-demand product without the costs of retooling.
Paradoxically, mass customization, a response to consumers' desire for a unique product, works best when marketed to a community. The products above have been developed in the context of user communities, online or in the real world, where sharing individuality is a core value, which brings us to the next trend.
Retail Communities - Brands have long catered to consumers' desire to belong, but have done so only in abstract terms -- belonging to a brand community is an increasingly literal proposition.
At Threadless, users participate in the production process by submitting their own tee-shirt designs and/or voting on the best design submitted. Designers upload their T-shirt designs to the website where they are rated by users. On average, around 700 designs will compete to be selected in any given week. The process creates a virtuous circle in which everybody benefits -- ambitious designers become superstars in the Threadless community (and potentially beyond), users get the products they voted into existence, and the folks who run the company sell to an engaged, self-selected community. Nike and Microsoft's Xbox division are both experimenting with developing products on the community model.
Trends toward transparency and participation have the most urgency for business in the LOHAS (Lifestyles of Health and Sustainability) market segment, which captures consumers who need to know and participate in the supply chain for ethical and even spiritual reasons. For this reason, Zaadz, an online social networking site recently acquired by the biggest player in the LOHAS market, Giaim, is at the vanguard of the new retail communities. Members are what might be called the "lead users" of the LOHAS market segment -- the yoga instructors, the reiki masters, the meditation gurus. Paging through the member profiles, it's clear that the majority have a product or service to sell. In short, they are the tastemakers and the early adopters.
The difference from conventional retail communities like the examples above is that, instead of developing around an existing brand or product, Zaadz has developed around loose set ideals. Given that they are essentially a market segment organized as a community, there are reasons to believe that Giaim will find a more focused audience than others have found at other social networking sites like MySpace. The challenge with this retail community building strategy, as evidenced by rumblings among Zaadz's membership about their relationships being sold, is balancing the goals of the community with those of companies attempting to monetize their investment.
Transparent supply chain - Business has long established the provenance and quality of its product by helping consumers visualize a key part of the production process. Think of the "inspected by" tag included with Fruit of the Loom underwear or commercials featuring mythical Columbian coffee grower Juan Valdez. Among today's wised up consumers, such wan efforts will be seen as little more than marketing hustles.
Consumers from all walks of life and of every political stripe have grown suspicious of traditional guarantors of product safety and quality, like the FDA and the corporations themselves. Consumers increasingly consider themselves the best judge of product health and safety and, instead of taking the company's word for it, will intensify their demands for specific, accurate information.
In 2005, mandatory food chain traceability regulation came into effect across the European Union requiring that "Information on the name, address of producer, nature of products and date of transaction must be systematically registered within each [agricultural business's] traceability system." Though the information is primarily to aid health officials in tracking food-borne illness, the European Union has mandated "farm to fork traceability" for European consumers as well.
In the US, Illinois-based EggFusion etches expiration information and tracking codes on the shells of eggs. You enter the code from your egg on EggFusion's website, and get information including processing plant, product brand, processing date, and retailer.
The increasing prevelance of web-enabled mobile phones is likely to bring the web into conventional brick and mortar retail transactions. Shoppers in Japan already scan items with their phone's camera to access product information on the web. Look for links from products on the shelf to in-depth information on the web in the near future.
Whether or not companies go through the trouble of getting their products Fair Trade certified, more and more are feeling the need to demonstrate that the people who make them are getting what they deserve. In the fashion industry, prime example of supply chain transparency is Made-By, an initiative of Solidaridad, a Dutch development organization. Used by a growing number of luxury garment brands, their "Track&Trace" system allows the purchaser of a garment with the Made-By label to find out where their garment was made and by whom. The back end of the tracing application is Made-By's network of organic cotton farmers and sewing factories that meet ILO labor standards utilized by participating brands. Try out the Track&Trace interface -- it's easy to see how the process of looking up a newly-purchased garment's origins adds value to the product by making it a globe-trotting, educational experience with story value.
Even as the notion of fair trade has gained wide currency, like kissing and telling, keeping mum about costs is considered a retailer's prerogative. The traditional bargain is that the entrepreneur will do what he has to do to get the price right (his business) and if you like the price and features of the product (your business) you will buy. Fair Trade certification and other similar programs simply inform consumers whether or not producers of a given product are getting fair shake -- not how, or to what extent.
The Hoole Intelligence Report predicts that the trend toward more unmediated relationships between consumer and supply chain will move toward it's logical conclusion -- customers will be able to verify the split of the retail price between retailers, distributors, manufacturers, and producers and choose the product they believe represents a fair deal.
Why Bother? The Business Logic of Supply Chain Transparency and Participatory Retail
The Economist, taking Google to task for its intent to do good in the world in a recent article, writes "from the public point of view, the main contribution of all companies to society comes from making profits..." It continues, "Google's 'goodness' stems less from all that guff about corporate altruism than from Adam Smith's invisible hand. It provides a service that others find very useful..."
The bald reality is that "the public" has never held dear old saws of classical economics like the invisible hand, with its naively absolute identification between profit and the common good. On the contrary, today's business environment proves in no uncertain terms that consumers across the political spectrum demand virtue from business and will even reward it by paying a premium.
Transparent supply chains are good marketing and good customer service. Participatory retail, which tends to have more value-neutral applications, works as a business strategy for the same reason -- it makes consumption a vehicle for self improvement and for connecting intimately with the broader world. "Altruism," transparency, participation -- what these notions really describe is a level of customer engagement that goes beyond features and price and investor engagement that compounds the benefit of profit.
Classical economics be damned, the details of sourcing and manufacture are in the headlines every day. The decision for business is whether to proactively leverage a supply chain they're proud of or attempt to stop the bleeding when the next scandal goes down. By abandoning its proprietary stance toward product design, sourcing, and manufacture, business has an unprecedented opportunity to capture a new breed of customer for whom brand loyalty is a matter of principle rather than price.
