The grocery market is not Amazon’s true target

Amazon’s acquisition of Whole Foods is not about stores.  Or even about grocery.

Most commentators have portrayed Amazon’s acquisition of Whole Foods as a drawing of the battle lines in the grocery market.  Amazon, it is assumed, wants to become Walmart before Walmart can become Amazon.

Grocery retailers comfort themselves with the indication that if Amazon wants stores, their assets must still have value.  The route to survival, it appears, is to add multichannel capabilities faster than Amazon can add stores.

To think this way misinterprets what Amazon’s goal is, and importantly what it is not. Amazon does not want to become a 21st-century Walmart.

It does not even consider itself to be a retailer. It is a bundle.

It is a cluster of product, services, content and convenience which aims to be the go-to place for everything.

The central flywheel is Prime, now with 115 million global members, which draws people to switch more and more of their attention and consumption to Amazon.  Prime members spend at twice the level of non-members. In this bundle, it doesn’t matter where the profit is made, or what subsidises what.

Platforms for profit

On the back of the infrastructure for this bundle, Amazon has its platforms: for vendors selling through Marketplace and providing their logistics through Fulfilled by Amazon; for brands seeking marketing solutions through Amazon Media Group; and for start-ups hosted on Amazon Web Services.

All of these services are significantly more profitable than retail.

In this vision, Amazon’s relevant competitors are not traditional retailers, but the other ecosystem players – Google, Facebook, Tencent and Alibaba. Its biggest strategic concern is becoming dependent for distribution on Apple or Google Android’s devices: hence its launch of Alexa and Echo.

The attraction of grocery

Where does grocery fit into Amazon’s bundle? Like many of its verticals, it is not a particularly profitable market in its own right. But grocery has three big attractions for Amazon.

First, frequency. The once or twice a week purchase frequency of groceries provides the perfect hook for Amazon’s general merchandise and other services, and increases traffic for its marketplace sellers. Perhaps most enticingly, regularly replenished groceries are the Trojan horse to put Echo at the centre of the kitchen table.

“Grocery offers the depth and breadth of customer information to improve Amazon’s ability to personalise offers and predict needs”

Second, last mile logistics. In the US, alongside Amazon’s 100 fulfilment centres, Whole Foods brings it some 400 local inventory, consolidation and pick-up points. Grocery builds order value and drop density, lowering logistics costs.

Together with health and beauty, food has already proven to be the most demanded category in Amazon’s one-to-two-hour Prime Now offer. But with only 9 Whole Foods stores in the UK, watch for some alternative future solution here.

And most importantly, data. Unlike any other category except possibly banking, grocery offers the depth and breadth of customer information to improve Amazon’s ability to personalise offers and predict needs.

Expect this to start in private label. In the UK, Amazon is using Morrisons’ lines to test what works, but will rapidly collate huge data on customer shopping preferences and searches, and then likely use this to develop focused private label.

Before long, grocery data will provide insight into households, which will begin to accelerate all the other spokes of the flywheel.

Think of Whole Foods like Amazon Prime Movies. At significant initial outlay but break-even marginal economics, Amazon has added more traffic, improved the value and stickiness of Prime, supported the ability to cross-sell its services and deepened the scale economics of its platform.

That is why grocery retailers should be alarmed. Amazon is not trying to make money in your market. Simply, it might wreak collateral damage on the march towards its bigger goal.

This article appears in Retail Week, 11th August 2017

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The fiction of friction

Current wisdom has it that retailers must smooth away ‘friction’ from the shopping journey. Time is the ultimate scarce resource, we are told, and customers will reward us for giving it back to them. Decluttering, quick check-outs and electronic payments help remove micro-hurdles and speed the customer to the exit.

But perhaps retailers have lost sight of what really matters. Easing pain points can avoid frustration, but only adding pleasure points can build loyalty. In the race to be the ultimate vending machine, there’s only one winner.  The customer who just wants stuff is going to turn to Amazon and will probably have it within the hour. Every other retailer needs to find a way to do something different.

When clients first started asking us about e-commerce 20 years ago, we advised them to distinguish between “low-touch” and “high-touch” categories. Books and music would go online first; clothing and fresh food much more slowly.  And so it proved for a while.  But it turned out that hardly any categories are high touch all of the time.  Online sales of cars and furniture are growing fast, meanwhile sales of e-books have stalled.

Often the real barrier is not touching it, but knowing that you want it. Amazon is tremendous at fulfilling known demand. Just tell Alexa that you need more toothpaste and she will make it so. But tell her that you fancy an interesting book to read on holiday and she might struggle.

The role of every other retailer should be about creating demand: to show you something you didn’t know you wanted. At their best, physical stores can do this well: the beauty hall of a great department store, or the lively stalls of a covered market. They haven’t automated and streamlined the journey. They understand customers are social animals who like to be pampered, surprised and entertained. Friction becomes engagement. Some online retailers are doing this too:  Pinterest with its catalogue of ideas or Etsy through its community marketplace.

But generally, demand creation remains the most important, unsolved challenge for retailers, whether online or multichannel. Amazon and Google aim to tackle it through machine learning, using big data to predict your needs before you even know they exist.  But maybe the social enjoyment of retailing is more than just a bunch of regression analyses at very large scale.  Facebook owns the online social domain and already creates demand for content, but lacks the logistics infrastructure to do the same for product.

That leaves high engagement shopping up for grabs. Department stores could do it. So could supermarkets, or awesome independents, or anyone who finds the solution to aggregating boutiques.  It’ll take a combination of inspiring retailing environment, engaging human interaction, and intelligent personalisation to answer the question “go on, surprise me”.

The battle to serve known demand frictionlessly may already be settled. The danger is that by continuing to chase that goal, retailers steer away from the area where they still have a chance to win.

This article appeared in Retail Week, 26 May 2017

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Volatility killed the strategic plan

Strategic planning in retail used to be so simple, didn’t it? For the decade up to 2009, more than three quarters of total value creation in the UK retail sector resulted from just three drivers: store roll out enabled by the exit of independents, like-for-like sales growth supported by credit extension, and margin expansion from the shift to Far East sourcing. Once a good formula was established, most retailers profitably maintained a plan of steady incrementalism.

Now, none of these factors endures. Not only is the outlook tougher, but it is structurally more volatile and ambiguous.

Many chief executives are whistling uneasily in the fog of consumer behaviour changes, technology innovation, industry disruption, political shocks, and even the potential for a reversal of globalisation. The traditional annual planning process – linear, incremental and numbers-based – feels futile. Forecasting and analysis seem incapable of predicting the next earthquake.

In response, wise CEOs are insisting on greater preservation of flexibility. Typically, lease lengths are being managed down, supply chains are shortening, sourcing is being diversified, and systems development is more agile. But minimising risk on its own is not enough. Hanging loose is no substitute for strategy.

In this new world, it is useful to think about strategy over two broad timeframes: the vision and the here-and-now.

The vision may need to be rethought. The classic advantages of competitive position are being challenged.

If your vision includes words like ‘leader’, ‘scale’ or ‘global’, these may no longer be strengths in a world which is unstable and unpredictable. ‘Learning’, ‘customer-focused’, and ‘fast’ are more relevant. However as Jeff Bezos points out, while much thought is applied to what might change, at least as important is what’s not going to change. Lower prices and faster fulfilment are unlikely to be unpopular with customers, so effort in these areas will still be paying off well into the future.

The here-and-now is about validating and prioritising actions, monitoring strategy execution, and being ready to course-correct. It is a continuous process, not an annual one. It’s about resetting objectives and deciding what should be stopped. It’s about self-cannibalising before others do. It’s about tolerating uncertainty and failure.

Key to this is an area badly neglected by most multi-channel retailers: experimentation. Generating, simulating, testing and exploiting innovation is critical to effective strategy development. Retailers have the advantage over many industries that prototyping is generally fast and cheap, particularly in the digital environment. But innovation should not just be about new products or services: it should be about processes, organisation and business models.

Retailers are reconciling themselves to a capricious and mercurial world. There will be some who embrace this not as a threat, but as an opportunity to upturn the established order and seize an edge. Doing so will not come from cranking the handle on a planning process which is no longer fit for purpose.

This article appeared in Retail Week, 24 February 2017

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Stores are far from a waste of space

Space is big, as The Hitchhiker’s Guide to the Galaxy accurately noted. And with 22 per cent of non-food sales having moved online and the typical store experiencing negative like-for-likes of two to three per cent each year, the retail industry is realising how vastly, hugely, mind-bogglingly big it is.

But for many retailers, there has never been a better time to open space.

First let’s first take the “legacy” retailer, that laid down most of its estate before 2009. It typically finds itself locked into leases up to 25 years, on upwards-only rent reviews.  It may have a tail of stores in declining locations such as bulky goods retail parks, in-town shopping centres or secondary high streets. It has probably taken a write-down to exit some, but continues to be dogged by the longest, most costly leases.

Much of this space should be converted to alternatives uses such as leisure or residential development, but planning regulation and property financing rarely permit it. These are the “neutron leases”, where the occupant is destroyed but the building is left standing.

By contrast, a retailer who has grown since 2009 typically enjoys a cheaper rental base, with shorter and more flexible leases in a mix of locations suiting today’s shopper.

Of course, the demise of Woolworths or BHS owed much to their failure to reflect the needs of a changing customer. But compared to B&M, Home Bargains, The Range, Flying Tiger Copenhagen or Primark, the old dinosaurs suffered the considerable handicap of uncompetitive property costs.  Evolution has produced a new generation of better operators who also benefit from lower rents and shorter leases.

How should established retailers manage their estate? Ironically some of the weakest can use administration or Company Voluntary Arrangements to leap free in one bound. But for most there is no easy route.  They should be ruthless in exiting tail stores, taking a realistic view of the prospect for continued footfall decline.

However retailers should avoid over-shrinking their store portfolio and ending up an inferior Amazon. With perhaps a quarter of store sales being web-enabled (pre-browsed or checked online) and a third of web sales being store-enabled (showroomed or clicked and collected), stores are still multichannel retailers’ best advantage.

But as well as shrinking, established retailers should consider expanding into new locations. The space might be 20 to 40 per cent cheaper. There is the opportunity to follow the customer into areas such as leisure parks. The lease might be as short as ten years. So although like-for-like sales will still decline, the returns on capital can be much more attractive than the current store base. Furthermore, expanding will narrow the disadvantage to newer, cheaper competitors.

The board and shareholders might need to be convinced about adding space in an industry which is over-spaced. But Holland and Barrett, Next, DFS, Pets at Home, Cardfactory, Snappy Snaps and others are doing exactly this. As the Hitchhiker’s Guide would say, ‘Don’t panic’.

This article first appeared in Retail Week, 4th November 2016

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Brexit shows the danger of trusting averages

How did we (including politicians, pollsters, betting markets and pundits) misread the mood of the nation so spectacularly when it came to Brexit? Whether you’re in the half of the population suffering from post-traumatic ballot disorder, or the other half celebrating in scarcely-concealed wonderment, we all have to confront the question of “how did so many call it so wrong?”

Simplistic analysis since of “why we voted for Brexit” or a “divided nation” gets no nearer to the truth. Old segmentations of right/left or rich/poor have not just been replaced with a new split of leave/remain.  Britain is fast becoming a much more complex, fragmented and diverse place.  Not just those leading a political campaign, but anyone running a national brand or proposition must apply greater scepticism towards aggregated data and demand more precision from their customer insight.

I’ll give just a few examples of the way in which fragmentation and polarisation are occurring, making averages obsolete. First, regional distribution.  Overall, GDP per head is now above its 2007 levels.  However this holds in only two regions – London and the Southeast.  In all other regions, GDP per head still lies below its pre-crisis peak: in Northern Ireland 11% below and in Yorkshire and Humberside, 6% below.

Second, age. Aggregate household wealth has grown by £3 trillion since 2007, but 100% of these gains have been enjoyed by those over the age of 45, and two-thirds by those over the age of 65.  By contrast, those aged 16-34 have seen their wealth decline by 10%.  Inevitably perceptions of satisfaction and confidence differ radically according to age.

Third, housing tenure. Since 2007, home owners have seen their median net income grow three times faster than that of renters.  Almost a quarter of 21-34 year olds now live with their parents, up from 20% in 2007.

Similar fragmentation is evident in other dimensions, including educational attainment and ethnicity.

For those looking at national averages and drawing conclusions about propensity and ability of households to spend, the data can be wholly misleading. In aggregate, a recovery has occurred.  At the micro-level, a sizeable fraction of households have seen no increase in income or wealth.

Media fragmentation isolates us further from reality. For those in London, everybody in your social circle, your news, your Twitter followers, seemed to confirm that “remain” would win comfortably. There’s a danger in only hearing the media which talk to you.

How should you make sure to understand the real picture? Reject any analysis made on “nationally representative samples”, and drill down to the micro segments, regions and demographic cohorts relevant to your business.  Make an effort to widen your media sources and network, including dissonant voices.  Get out more to talk to your communities and ensure that the macro data can be reconciled with personal stories.

And use the reach of your colleagues across the country to feed in different perspectives from the sharp end. He who knows only the armchair statistics knows little of the diversity of the real UK.

This article appeared in Retail Week 29th July 2016

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Why retailers are choosing to own more of the process, not less

For a brief while the capital-light Uber model was touted as the “future of everything”. Retailers, like incumbents in other industries, fretted how their traditional supply chains might be torn apart by “on-demand” services that use mobile technology to allow consumers to summon up grocery deliveries, minicabs, fast food meals, home cleaning or any other instant wish.

Uber-like business models are indeed scaling up fast at some tech companies like Airbnb for short stays, Postmates for courier services and TaskRabbit for errands. These companies facilitate the matching of supply and demand, and in doing so promise to be more convenient, eliminate the cost of unproductive capacity and offer lower prices.

But Uber’s success was, in some ways, unique. In many cities it attacked cartels which were protected by regulation and cared little about customer service or efficiency.

Is retail like that? In most cases, no, which may explain the slowing of growth at US grocery delivery service Instacart.  Delivery charges have recently been raised, and while grocery retailers such as Safeway, Kroger or Whole Foods have contributed fees for the additional business, these have not covered costs.

Meanwhile, Amazon Fresh is going down the “capital-heavy” route of adapting warehouses to store fresh food, and adding fleets of trucks (or even drones) to deliver to door. Amazon risks still being in trial in a handful of cities while Instacart’s lightweight model builds a brand across the US and potentially internationally.  But Amazon is playing the long game, reckoning that end-to-end control of the process coupled with huge scale will ultimately enable them to deliver quickly, cheaply and to customers’ satisfaction.

Elsewhere, other retailers are choosing to invest in owning more of the chain. The last mile is becoming a battleground not only for cost and speed, but also for brand building.  When all other contact happens through an automated interface, a cheery driver who willingly bounds up your flights of stairs can make all the difference. Not just the big grocers and Ocado, but also Argos and Deliveroo, are making a virtue that it is their own employees who maintain that human contact.

At the other end of the chain, upstream vertical integration can lock in unique product, in a world where pretty much everything is instantly available. Inditex’s factories enable it to whisk fashions from catwalk to shelf within a couple of weeks. DFS sources a portion of its sofas from its UK factories, giving consistent quality at short lead times. Amazon now creates its own television content, such as its Jeremy Clarkson show, to build loyalty to its Prime bundle. And Card Factory found no suppliers that could produce the range of low-priced cards that it needed to support its high-volume retail model. Its solution: do it yourself.

Capital-light and vertically-integrated models will continue to battle each other. No single model, whether Uber’s or any other, will dominate competition. What is common to success is the choice of which assets are strategically critical to own, and which are not.

This article appeared in Retail Week, 29th April 2016

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The productivity conundrum

Christmas saw a continued acceleration of online migration: not perhaps an inflection point, as the trends have progressed now for several years, but certainly a quickening of pace.

Each year, the fourth quarter is the one which sees the big step forward in digital behaviour – important because it sets the high water mark for the year to come.  In the fourth quarter of 2015 the British Retail Consortium’s monitor showed non-food online penetration advancing to 20.4%, up two percentage points over 2014.  ONS data also shows a record online surge.

A number of factors stoked this, important among which were growth in click and collect, greater confidence about using that channel closer to Christmas Day, and of course the online growth of Black Friday and Cyber Monday.

Hitwise reports that mobile devices accounted for 49% of total visits to retailers. For non-food, that number was ahead of 50% for the first time.

While e- and m-commerce continue to set new records each year, in some ways it no longer matters. Propositionally and organisationally, smart retailers have moved beyond “digitally enabled” or even “digital first” to “customer first”. They no longer speak channel.  But operationally and economically it matters a lot, both to individual retailers and to the economy as a whole.

For despite the digital revolution, the overall productivity of the retail sector (measured by revenue per labour hour) seems to have stalled since 2009. This is partly because online retailing can actually reduce productivity – especially where retailers are stacking shelves only to pick from them again for customer orders.

Capacity utilisation and capital efficiency of the industry are also falling. In the absence of spending growth (which of course is because we now spend only 30 per cent of our income on goods, the rest is on services), retailers’ offline channels are seeing 2 or 3 per cent annual decline. But space reduction has been modest while discounters are adding it. Meanwhile capacity and capital have ballooned in online channels.

As the economist Robert Solov quipped, “You can see the computer age everywhere but in the productivity statistics”. This is nowhere more true than in retail.

Indeed, there have been few major innovations in retail productivity since the launch of “big box” retailers, the development of the barcode, and the shift from cash to cards. These helped to transform supply chains during the 1980s and 1990s, and to drive the shift away from small-scale retailing.  But by the end of the last millennium, these productivity-enhancing gains were mostly played out.

A new wave of technologies including not only e-commerce but also cloud computing, robotics and artificial intelligence could power a new age of productivity growth, but we have yet to see it. This could be because we are in a transitional phase where traditional retailers have not yet faced into the degree of capacity retirement that will be forced upon them: or it could be that, while the customer enjoys the benefits, the industry’s gains from technology are illusory.

This article appeared in Retail Week, 22nd January 2016

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Multichannel retailers need to play the specialists at their own game

Amidst the frenzy of fast-moving statistics on omnichannel retailing, consider this one.  The five most highly valued retailers in the UK (as measured by p/e ratio) are AO World, Ocado, Asos, Primark and B&M Retail.  All are mono-channel retailers, being either pure-play online or, shall we say, pure-play stores. If their UK valuations were visible you would probably add Amazon, Aldi and Lidl.  Most of these 8 have avowedly declared that they will not diversify beyond their channel of origin.

Investors seem to believe that the advantages of growth, and ability to convert that growth to profit, lie with monochannel retailers.

Even the more successful multichannel retailers, such as Next, Dixons Carphone, or Argos, are not rewarded with the same valuations.  Do the markets have it wrong?  Or should we beware false omnichannel prophets?

Of course, these 8 highly-valued monochannel retailers are all, to some degree, insurgents.  Not for them the worry of defending large incumbent market shares from capacity addition or price disruption, nor the cost of overhauling legacy infrastructures to match new levels of range, service and value.  They’re enjoying the positive side of operational gearing, rather than worrying about how cannibalisation is eroding it.

But a more important point lies here for all retailers, whether new or old, multi or monochannel. Most customer experience is formed by performance within a single channel. In nearly all categories, a majority of customer journeys are still either exclusively offline or exclusively online.  Even for customers shopping across channels, such as checking in-store availability online or ordering click-and-collect, the quality of the journey is no better than its weakest link. And the loyalty of an omnichannel customer has to be won in a single channel first – why would they even go online if the store experience is unenticing?

This presents a challenge for multichannel retailers.  Each channel has to beat the focused monochannel specialists. And the attributes sought by consumers differ: engineering reliable online fulfilment demands divergent skills to motivating engaged store staff.  The prize from joining up the channels is certainly huge — no retailer has yet realised this ambition – but has to be won by getting each channel right first.

We find our multichannel clients struggling across multiple fronts.  Keeping the legacy business moving forward, often in the face of declining volumes, is essential to satisfy traditional customers and to generate cash. Building effective new channels demands unfamiliar capabilities and heavy investment.  And joining them up is the path to realising the omnichannel vision.  All three need to be done: but the hype should not distract retailers from focusing on the basics first.

The future will likely be one in which monochannel and multichannel retailers co-exist. Valuations will converge as multichannel winners emerge and prove they can take on channel specialists at their own game as well as serving customer journeys uniquely available to them.  The good news is that it is certainly not too late, as few do this well. But for the moment investors remain unconvinced.

This article appeared in Retail Week, 11th December 2015

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Get Ready for a Web where Suggestion Trumps Search

If you’ve ever faced the challenge of getting past a protective secretary, just imagine if all your customers had one.

Apple’s latest version of its mobile OS, unveiled in San Francisco earlier this month, included two significant innovations. The first is tools for developers to create content-blocking software in response to users fed up with aggravating ads, pesky pop-ups and repugnant retargeting.

The internet has suffered the tragedy of the commons. The consequence may be a future in which only whitelisted companies will be allowed through the gates, or large companies that can pay ad blockers to lift the barrier. Small brands may be shut out.

The second is an upgraded Siri, Apple’s personal-assistant technology.

Initially underestimated on account of unreliable voice recognition, such assistants (including Google Now, Microsoft’s Cortana, Amazon’s Echo and Facebook’s M) signal a move away from search to suggestion.

Retailers have so far interpreted the multichannel challenge as “be wherever the customer is”. But that implies the customer senses a need, goes online, makes a search or opens an app, and begins a transaction. None of those activities is likely to take place when virtual assistants realise their potential.

Just imagine: “The kids are coming home later and bringing a friend. There’s nothing for tea. Shall I order from Dominos or get Instacart to deliver groceries? You have some coupons.”

Personalised, contextual suggestion requires the virtual assistant to scan your messages and calendar and integrate with different services and with internet-of-things devices.  It awaits further improvements in artificial intelligence, and may face concerns over privacy. But it is likely to happen and when it does the world wide web, in the sense of a place to be searched, will disappear.

The customer will live in a world of continuous suggest and assist. And, of course, the assistant’s true master is not the user, but Apple or Google or Facebook.

So when retailers can neither advertise nor expect customers to reach for them, how can they be sure of maintaining customer relationships?

First, domain expertise will still count. Wiggle’s deep cycling knowledge may be sought out in preference to Google’s ability to assemble advice from many sources.

But retailers will need to widen their role: not just offering products but assisting with customers’ lives.

A supermarket retailer cannot bank on an order being placed, but will need to integrate with the household’s meal planning through recipes, diets, budget help and so on.

Retailers will need to understand context. Depending on time, location and device used, what is likely to interest the customer?

A standalone app will not be enough. Retailers need to think about when their content can be of use, and make it available elsewhere.

And they may need to ‘deep link’ with other services to enable customers to  complete their everyday tasks.

This is a different world. But when the secretary controls access to the boss, you’d better know how to charm and get around them.

This article appeared in Retail Week, 25 September 2015

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Benedict Cumberbatch, Hamlet, and Retailing

To read some of the commentary on Benedict Cumberbatch’s interpretation of Hamlet, currently in previews at the Barbican, would lead one to assume that a failure of epic proportions is unfolding. The “To be, or not to be” soliloquy was moved to the beginning of the production, and then back again to its original position in act three. Some believe the star has overreached himself and a radical idea has been shown to be foolish.

But experimentation is surely what previews are for. Maybe the grand speech will move again before they are over. To prove the pudding before being invited to tuck into the actual dinner deprives the chef of the chance to experiment, innovate and perfect.

Few business plans survive their first contact with the customer. And many of the most successful are incomplete: neither Facebook nor Google had a clear notion of their revenue model at launch. Trial, risk-taking, feedback, and course correction are essential to ultimate success.

Retail has the advantage over many industries that prototyping is generally fast and cheap. If carefully controlled, downsides can be not much more than a couple of nights’ misfires in the theatre.

There is rarely any necessity for the grand launch of a Tesco Fresh & Easy, unveiled fully formed to an indifferent public. Thorough market study was unable to offset costly missteps.

Fat Face seems to be taking a more sequential tack in its US entry, with a dedicated website launched first, followed by a small number of pilot stores in one region.

If lessons are learned and flexibility maintained, this approach stands a better chance of winning the audience’s ultimate acclaim.

This article appeared in Retail Week, 24th August 2015

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