Urban Outfitters looks creative destruction in the eye

Hip retailer Urban Outfitters Inc. looks 'creative destruction' in the eye and responds with a new online strategy.

CIOs and business executives can hardly make a move these days without getting an earful on creative destruction. The term creative destruction (or disruption) describes what's happening when an upstart business -- in many cases propelled by new technology --topples a status-quo business model. Coined by an Austrian economist and popularized by Harvard Business School’s Clay Christensen, "creative destruction" has become part of the business lexicon and a meal ticket for business consultant types -- as in, "It could happen to you."

Matthew Kaness doesn't have to listen to the lectures. As chief strategy officer at Philadelphia, Penn.-based fashion retailer Urban Outfitters Inc., he's experienced creative destruction or disruption firsthand, as e-commerce giants redefine the shopping experience.

"I am personally obsessed with Christensen's notion of creative disruption. Retail is dealing with this every day and will deal with it for decades," said Kaness, speaking at a gathering of chief strategy officers in New York.

Until recently, the hip retailer regarded e-commerce competition as the "commodity part of the market," Kaness said. In addition to its namesake business, Urban owns and operates four other brands: Anthropologie, Free People, Terrain and BHLDN. Its 450-plus retail locations -- far from being a liability -- have been a big part of its brand appeal. The store brands know their customers, and customers return the compliment by "paying full price," he said. "We have hard-coded customer profiles that everyone stays focused on."

Even on the e-commerce stage, Urban has done quite well, thank you, with its catalog and online business accounting for 20% of sales, which places it third among fashion retailers, behind Saks and J. Crew.

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But the brick-and-mortar-based company, which is publicly traded and does $3 billion in annual revenue, is undergoing an attitude change, according to Kaness. "Folks like us in the full-price game are only now starting to feel competition from e-commerce pure plays."

The latest creative disruptive force? That would be the fairly recent decision by Amazon honcho Jeff Bezos to compete in the fashion business, Kaness said.

Pivoting to online

When Amazon picks a category -- books, electronics and now fashion -- initially everyone wins. "The entire sector's penetration in e-commerce goes up," Kaness said. But the halo effect doesn't last long. "If you can't differentiate and you compete head-on with Amazon, you typically lose."

As a result, in 2012, Urban Outfitters made a "strategic pivot," Kaness said. "We are no longer a $3 billion company with 20%-plus penetration of e-commerce. We are a $600 million e-commerce company that has 500 highly differentiated, productive stores in great locations around the world."

In other words, the company is first and foremost an online retailer that happens to have 500 brick-and-mortar locations that pull in a lot of sales. The challenge is how to grow its new core online business.

For starters, the company plans to use all of the tactics its pure-play e-commerce competitors use "to acquire customers and retain and steal market share," Kaness said. It's determined to be a "fast-follower" of Amazon, taking a page from the online retail giant on everything from assortment to fulfillment to convenience to speed. Rather than thinking about inventory in terms of store square footage, Urban's merchants are recalibrating their buying strategies to accommodate "the unlimited square footage" the Web provides.

"We believe half our business will be online in the next five years," Kaness said.

Personalization in a brave new shopping world

That journey might not be so easy, according to Forrester Research analyst Mike Gualtieri, who covers the software technology, platforms and applications that help companies better understand their customers.

"The trend for companies, in general, when it comes to customers is personalization," Gualtieri said. In a world, however, where virtual lives and our "real" lives are converging, delivering personalized customer experience -- knowing the customer at that level -- is still a huge challenge for all but a handful of companies, notably Internet giants Amazon and Google.

It's really easy to collect information, but it's hard to pull our insights and even harder to act on insights.
Matthew Kaness, chief strategy officer, Urban Outfitters Inc.

The 360-plus-degree view of the customer, on which so many companies pride themselves, has focused primarily on the customer's geographical location and interactions with the company. That, however, is a very company-centric and transaction-based view of the customer, Gualtieri said. 

"To make it personal, you have to know even more about those customers: their aspirations, their mood at any particular time and even what they are doing with adjacent companies and even with competitors," Gualtieri said. And to know a customer at that level requires lots of data of the "big" variety, and lots of analytics.

Kaness, in fact, can attest to the technology challenges related to the "pivot," as he calls it. Three years ago, in order to better understand the online habits of its customers, Urban invested in a sophisticated marketing database, but the technology has been more blood, sweat and tears than magic wand, he said.

"Honestly, from a technology solution perspective, this was a Rolls Royce, and we were still using training wheels and trying to understand the data," Kaness said. "It's taken us three years to get to a point where we feel good about the data we're collecting, which includes offline."

The commitment to being an online retailer is a steep learning curve -- "It's a different set of competition," he said. In the offline world, retailers locate a store with good foot traffic. In the online world, brand awareness is the key to driving customer traffic, "but brands get crowded out by Facebook, Google and social sites," Kaness said. Thus, the onus is on the company to figure out how to drive online awareness. But that's easier said than done, even with great technology.

"It's really easy to collect information, but it's hard to pull our insights and even harder to act on insights," he said.

Let us know what you think about the story; email Linda Tucci, Executive Editor.

This was first published in April 2013

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