Guest Column | November 1, 2017

Retailers' Next Big Challenge: Customer Fragmentation

More Companies Focus On Customer Insights

It’s not only Amazon putting on the pressure. Meeting the changing, segmented needs of tomorrow’s consumers has become vital for retailers’ success.

By Michael Brown, partner in the Consumer Products and Retail Practice, A.T. Kearney

Retailers today are squeezed between big and small. On the big side, the scale of is hard to match. But the small side is equally dangerous: Encouraged by low barriers to starting up an online storefront, niche retailers are focusing on the unique needs of tiny fragments of consumers. Little by little they are stealing market share from the old retail establishment, eroding sales and profitability.

The threat is particularly dangerous because fragmentation of the customer base will explode in coming years. As explained in the A.T. Kearney Consumers@250 Study, America’s Next Commercial Revolution: Influence vs. Affluence, a combination of demographic shifts, changing values, and hyper-connectivity is creating a radical change in consumption patterns.

Swayed by Generation Z — the much talked-out cohort that has never known a world without Google — consumption will move from a mass-market phenomenon to one driven by values and trust-based relationships. Consumers will be motivated less by price and more by an affinity with attitudes and lifestyles. We call this the shift from Affluence (where consumption demonstrates wealth) to Influence (where social networks amplify the power of individuals to enact wider behavioral change).

As a result, where past markets were ruled by companies that could build massive scale across broad swathes of affluence, future markets will be driven by three new principles: influence, personalization, and trust. Can a company find key influencers in a segment, offer unique products and experiences for that niche, and thus build trusting relationships? It must, because there’s no more one-size-fits-all.

The future will be about micro-segmentation: not serving one target market of 20 million people but catering to 10 segments of 2 million people — or you could even think of it as 20 million individual segments. To understand these segments and meet their needs, retailers need a 360-degree view of their customers: not just what they have bought in the past, but their lifestyles and values.

That’s not easy, but the good news is the shift from affluence to influence means success doesn’t require a single, gigantic store or a single, monolithic brand. Success requires meeting the dynamic needs of customers, a task successful retailers have tackled for decades.

Today, segmented intimacy is being best achieved by online startups. But going forward, scale is going to matter. Niche customers will be scattered across the nation or globe and meeting their needs will be expensive. Consumers will certainly demand next- or same-day delivery, aggressive product development, augmented-reality shopping, and a network of stores for product trial and return. Start-ups will find scaling is difficult and needed capital often scarce.

Conversely, what if big retailers learn to “act small?” If they can identify niches and establish intimacy with these many diverse consumer segments, they will already have the tools to deliver on shopping experiences those consumers expect.

Establishing a new brand for an emerging demographic, the retailer will plug the brand into its existing infrastructure — for example, swapping out an underperforming store. And as demand for the new brand fades, the retailer will have a pipeline of newer ideas to replace it. Rather than being organized around a single brand, the retailer will be curating dozens of concepts within an agile infrastructure.

It’s a shift for many retailers: from seeing their value in brands to seeing it in infrastructure and processes. But the shift minimizes risk. Under the old model, when a brand such as Delila’s, Coldwater Creek, or Bombay declined, its company did, too. But if a company can gain the capabilities to bring multiple concepts in and out of its dynamic infrastructure, it can weather the coming fluctuations in fragmented consumer tastes. Brands might turn over but the companies that originate and operate them will thrive.

Some of Walmart’s recent acquisitions demonstrate this approach. In acquiring Modcloth and Bonobos, Walmart is serving new demographic segments but leveraging its scale. In the end, Walmart may gain a dual benefit if these acquisitions not only boost revenues but also help the company develop its internal capabilities to be agile, lean, and innovative.

This “new” model actually has deep, old roots. For example, it’s still all about understanding the customer, only on a deeper level — it’s about not only what she does but who she is. The data to gain these insights abounds. Indeed, consumers expect companies to use data (unobtrusively collected) to enhance interactions.

Yet although all retailers have data, they must also use new models and metrics to convert that data into meaningful micro-segment audience profiles. It’s the difference between knowing a customer occasionally shops at your store shortly after 1:00 p.m. versus realizing she’s on her way back to the office after noontime yoga and would thus appreciate an organic quinoa wrap to eat at her desk.

These capabilities require a culture of speed and agility because it’s not a one-time shift. Consumer cohorts will constantly emerge and decline — and retailers need to be right there with them.

Thus, the human touch remains essential. Trust is fragile, especially for Gen Z, yet it’s also paramount meaning physical presence matters. Today’s brick-and-mortar retailers have that advantage over their virtual competitors, but they need to maintain the advantage through a quality workforce. To succeed at selling products, you need engaged enthusiasts who can connect with customers because they share a common lifestyle.

In other words, the path out of the big-versus-small squeeze involves many revolutions in culture, toward dynamic business models, personalized marketing, digital engagement, and a focus on trust. Yet in the end, these needed transformations essentially mirror the classic challenge of retailing: how to get as close as possible to consumers in order to most effectively meet their needs.

About the Author

Michael Brown is a partner in the Consumer Products and Retail Practice of A.T. Kearney, a global strategy and management consulting firm. He leads the omni-channel and mass, discount, and big box sector teams and can be reached at