6 Ways Retailers Can Hold Their Own in the Microbrand Revolution

The holiday shopping season is kicking off! It is only a matter of time before carols and bright lights greet us in malls and shopping centers. One popular item on many of this year's wish lists is the Velvet Lip Kit . To fulfill this particular wish, givers can skip the crowds and the checkout lines. They can skip the retail stores all together, at least for this one item, by ordering it through Kylie Jenner's direct-to-consumer (DTC) online channel.

Jenner, the 21-year old half-sister of Kim Kardashian, is now worth more than US$900 million . While a celebrity in her own right, most of her riches were accumulated through the explosive growth of Kylie Cosmetics, a company she launched three years ago.

The Microbrand Trend

How did she do it? By cobbling together a number of digital technologies in a completely asset-free mode. She used Shopify to set up her online store; social media channels (Instagram, Snapchat and Twitter) for marketing; and Seed Beauty, a private label manufacturer, for producing and packaging the products.

Her secret sauce is her star power and her 118 million followers on Instagram alone. While her company is a drop in the $532 billion beauty market bucket, it exemplifies a growing trend of success with microbrand DTC channels supported by social media star power. Kylie Cosmetics is no longer considered a microbrand, but it helped fuel that trend.

The notion of microbrands has been catching on quickly in the last few years. The term refers to brands such as Jenner's, which have been testing out new product ideas on social media channels in order to bring products to market more quickly.

They use contract manufacturers and leverage influencers to promote their brands. Many use Shopify to build their DTC e-commerce presence, which allows them to completely bypass the traditional brick-and-mortar channels.

While there are other platforms available for third-party sellers, many are geared more toward the consumer than the merchant, and they tend to keep customer data beyond merchants' reach. Shopify has become the choice platform for many startups and microbrands, because it aims to serve them as its core customers. With a combination of free and paid applications on its platform, it aims to lower market barriers to entry, offering a fully functional retail operating system that is integrated with social media marketing tools.

Microbrands also have the advantage of lean supply chains. They work with offshore contract manufacturers who produce small batch sizes with exclusive packaging. This approach helps microbrands manage their supply chains with little to no inventory.

By setting customer expectations for longer lead times for their initial batch of orders, these companies can test product launch ideas rather quickly, fail fast if necessary, learn from their experiences, and iterate through the process until they score a home run. When microbrands combine efficient supply chains with hyperpersonalized marketing, they have an advantage over traditional retailers.

Retailers Fight Back

Why should retailers care? It is easy to see how microbrands could threaten big brand manufacturers, especially as digital natives and cohorts of Kylie Jenner come of age. For millennials and Generation Z, ordering products and services through apps comes naturally.

Smartphones with massive amounts of storage allow them to download hundreds of apps, several of which support microbrands, and toggle between them with relative ease. While some big brands already have gotten in on the action, as demonstrated by Unilever's recent billion-dollar acquisition of Dollar Shave Club, the majority of big brands are at risk of falling behind.

With 2018 holiday retail sales projected to be $1.1 trillion , microbrands have become very motivated to expand their DTC models. Any bypassing of traditional channels will impact the sales of conventional retailers.

However, compared to the microbrands, traditional retailers have the distinct advantage of physical presence and geographic proximity to provide customers with quick deliveries and returns. By combining technologies that emphasize personalized customer service and efficient supply chains, they will be better equipped to face off against the microbrands. Here are some specific recommendations:

1. Embrace the Platform Revolution

Front-office investments and customer-facing apps will help retailers understand their customers better, and enable them to provide personalized offers when and where their customers want them. This will be pivotal for large retailers to compete with the microbrands, and social media marketing will be key to reaching the digital natives.

Customers are no longer stuck at the receiving end of the supply chain. Instead, they are the center of a supply network that is eager to serve them. Retailers will need to borrow from the microbrand playbook of customer-centricity and provide a unified commerce experience to customers across channels of engagement.

Using their own private label as a differentiator and getting into exclusive partnerships with microbrands are tactics that need to be incorporated in retailer strategies. Rapid experimentation will be paramount for retail innovation.

It is quite possible for traditional retailers to have a microbrand-like pulse on the market and duplicate its supply chain agility. Zara, the fast fashion retailer, offers a classic case study of combining a keen sense of fashion trends with a lean and fast-moving supply chain.

2. Understand and Sense the Demand

While connecting with and using hyperpersonal marketing through social media allows retailers to know their customers intimately, they will need to sharpen their broader mass market focus through the ability to sense the demand.

Many retailers' forecasting and replenishment practices are hard-wired to look only at what was sold in the past. However, it is absolutely critical for retailers in the new world to bring into demand planning such external factors as social sentiment, employment levels, GDP and interest rates, along with insights from customer segmentation.

Algorithmic intelligence is evolving rapidly from traditional statistical techniques to newer technologies in the artificial intelligence (AI) and machine learning (ML) arenas, so the causes can be studied and understood. These tools enable retailers to drive significant improvements in forecast accuracy.

3. Ensure a Resilient Supply Chain Network

Unlike Kylie Jenner, who has just seven full-time and five part-time employees, and no assets to manage other than her brand presence and relations with suppliers, traditional retailers must manage physical assets such as warehouses, stores and private fleets.

As same-day delivery becomes an expectation in most densely populated cities and suburbs, retailers in those locations are best positioned to deliver that experience. However, they will need to design their network to meet customer expectations without incurring excessive costs.

Several leading retailers already use their stores as fulfillment centers to support Buy Online Pickup in Store (BOPIS) and Buy Online Return In Store (BORIS), which provide their customers with ease of purchasing and making returns.

The private fleet and warehouse space can be used more efficiently through "uberization" platforms in a shared model. Retailers should be open to such opportunities to flex their networks.

4. Drive Decisions Based on Total Landed Cost

In order to effectively compete with microbrands, resiliency is not enough. Retailers also need to dynamically review policies (inventory, fulfillment, sourcing, etc.) and make decisions from a total landed cost perspective.

The total landed cost, in this case, refers to the total cost to deliver a product or shipment to a buyer's doorstep. A major home furnishings retailer empowered its buyer team with the right tools and technology to drive decisions based on total landed cost.

The buyers now don't just review cost or volume breakpoints in isolation in their buying decisions. They also take into consideration service levels, tariffs and other factors. This allows them to assess factors such as the lead time vs. inventory carrying cost tradeoff by modeling the fixed, variable and stepwise costs involved to make the most informed decisions.

A laser focus on costs is critical when competing against lean, microbrand DTC machines. Intelligent network design and optimized policies that can be reviewed and adjusted dynamically will protect profitability in omnichannel fulfillment, preserving margins and saving dollars on each order.

5. Enable Postponement Strategies for Efficiency Gains

Many retailers still optimize their inventories on a node-by-node basis. Reviewing inventory policies holistically across the network and accounting for demand and supply side variabilities is paramount to reducing working capital without adversely impacting service levels and on-shelf availability.

However, such inventory policy decisioning will need to be done in conjunction with holistic network design and transportation routes to and from the distribution nodes, so retailers can postpone inventory deployment, risk pool inventories, and avoid non-value-added inter-store or inter-DC shipments. These postponement principles can extend to personalization of the products, such as last-minute printing of logos or custom packaging, which offers a superior experience from traditional retailers, compared to microbrands' DTC model.

6. Bring In Intelligent Automation

Cashier-less stores are a great example of reimagining the retail experience, rather than automating the existing experience. With auto-filled smart shopping lists through machine learning, voice-activated navigation, augmented reality and sensors, these stores are turning out to be innovation labs for the retail giants.

Most retailers will lack the technical knowhow for such a major undertaking until the technology goes mainstream, but that should not deter them from exploring automation. Embracing advances in analytics can help retailers take proven approaches to strike the right mix of labor and automation.

Instead of attempting to take the human associates completely out of the retail experience, it may be more pragmatic to think of how they can best unleash the creativity of their store associates, in order to bring the best experience possible to their shoppers and consumers and thus gain an edge over microbrands' DTC model.

There will be 5 percent overall growth in holiday spending with 20 percent growth in online spending, according to Deloitte's projections, which leaves traditional retailers little choice but to adapt.

Underneath the holiday season's cheer is a brewing war between traditional retail and microbrand DTC models, but through a combination of front-office innovations and superior supply chain design, retailers can maintain their edge.

Madhav Durbhais group vice president, industry strategy, at LLamasoft .