FYI | Apr 20 2017
How Bricks & Mortar retailers are fighting back against online shopping
We have written before about the challenges facing traditional bricks and mortar retailers as more consumers continue to shop online. Embracing the online experience can not merely be an added service provided by traditional bricks and mortar retailers but must be an integral part of their marketing and distribution strategy. In many cases, this digital distribution channel is a retailer’s only real growth engine as consumers are reducing their time in storefronts and comparing, researching and shopping online.
This does not necessarily signal the demise of traditional bricks and mortar retailers, with almost 87% of retail spending in the U.S. still conducted in-store in 2016. However, the percentage of retail sales being conducted online in the U.S. has almost doubled since 2011 and continues to grow in the mid-teens whilst sales of traditional bricks and mortar retailers grew at only 3.3% in 2016 according to research by Digital Commerce 360.
So how have these traditional bricks and mortar retailers responded and how successful have they been to date?
Traditional bricks and mortar retailers have undertaken several strategies to increase their market share and grow their online or digital revenue.
By now, most of the world’s largest traditional bricks and mortar retailers who have a significant existing storefront footprint also have online and mobile presences encompassing customer reach through not only in-person and phone contact but also via messaging, emails and social networks. They are also offering more flexible delivery, store pick-up and return options for their customers, which has greatly improved their user experience and bolstered average sales per customer. For example, Williams-Sonoma (WSM US) believes their multi-channel customers spend 4 to 5 times more than their single-channel customers.
Not only has this allowed traditional bricks and mortar retailers to weather declining sales in their physical stores by driving traffic to these online stores but it has created a small competitive advantage over pure online retailers. While we are increasingly making purchases online, sometimes we also want to be able to look and feel the product before we make that purchase as well as have that instant gratification after purchasing. Being able to pick up the purchased item within 1-2 hours of an online purchase allows that instant gratification to be satisfied. A poll by Merchant Warehouse found that 85% of millennial shoppers researched products online before making a purchase in store.
This is one reason why online giants such as Amazon.com (AMZN US) and Alibaba (BABA US) are now investing in physical storefronts themselves. Amazon.com opened its first physical bookstore in Seattle in late 2015 called Amazon Books and has now expanded to other major U.S. cities. In early 2017. Alibaba announced a US$2.6 billion acquisition of Intime Retail Group (1833 HK), one of China’s largest department store chains.
Offering better in-store experiences
Physical stores are no longer just places to carry inventory. Consumers want engaging and personalised in-store experiences such as personalised shopping, workshops and classes. For example, hardware retailers provide do-it-yourself workshops and athletic apparel brands such as Lululemon (LULU US) and Nike (NKE US) offer yoga and fitness classes to build branding and loyalty.
Traditional retailers have also successfully experimented with pop-up stores as another way to attract customers. Such temporary, short-term retail events not only create a unique and limited experience for consumers but also provides an opportunity for the retailer to test out new revenue streams. In 2016, Amazon.com also announced that it would open 100 pop-up stores in the U.S. to showcase its consumer electronic devices such as the Kindle and Fire.
Incorporating technology into their physical stores is another strategy that has been employed by many traditional retailers. For example, Walmart (WMT US) has issued its employees with handheld devices to monitor in-store inventory so it can give its customers timely feedback. Some retailers created digital kiosks or concierges with iPads, which display personalised content and recommendations to shoppers. Emailing or messaging coupons and offers to customers’ smartphones to entice them in-store has also been an effective strategy in growing sales and collecting customer data.
Increased flexibility with payments
Stores that offer choice and flexibility with payments also have a competitive advantage. Apart from loyalty cards or store-branded cards that can offer discounts and better repayment terms, traditional retailers also offer payment plans or layby to help their customers manage their cashflow. In Australia, an instalment based repayment system managed by a publicly listed company called Afterpay (AFY AU) has gained increasing traction with consumers and retailers alike.
Again, technology will increasingly play a role in payments – already, we are seeing retailers install cloud-based point-of-sales systems, in which transactions can be processed anywhere in-store as opposed to its traditional registers. In response, Amazon.com has recently trialled Amazon Go, its grocery store concept that has no registers. Instead, shoppers scan into the store with their Amazon Go app, shop as normal without needing to scan each item and leave the store with the items billed to their Amazon.com account.
Becoming more online themselves
It sounds obvious, but sometimes the best competitive strategy is to ‘join the club’ and invest heavily online. To date, traditional bricks and mortar retailers have had a mixed record of building digital businesses of significant scale to compete with the likes of Amazon.com. Amazon.com’s online sales of US$124 billion in 2016 dwarf those of even the largest traditional bricks and mortar retailers – Walmart had an estimated US$15 billion in digital sales and Target (TGT US) had digital sales of US$3.1 billion in the same period.
However, retailers like Walmart and Target understand the critical importance of growing this distribution channel and are investing billions of dollars into it. Whilst Target has doubled its online sales between 2013 and 2016, it will continue to invest in e-commerce and supply chain improvements to the tune of about US$2 billion in 2017 alone.
Walmart has stepped up beyond capital expenditure investments. In 2016, it acquired Jet for US$3.3 billion. Jet is an upcoming U.S. online retailer that had achieved US$1 billion on gross merchandise value at the time of the acquisition. It followed this with three smaller acquisitions of niche, online retailers – ShoeBuy for US$70 million; Moosejaw, an outdoor apparel retailer for US$51 million; and ModCloth, a bohemian vintage clothing brand. Walmart also announced it would spend US$900 million in its Mexican subsidiary (with over US$200 million focused on e-commerce and logistics) to compete with Amazon.com and the recent launch of Amazon Prime in the country.
It's an exciting time to be a consumer – technology has not only enabled more convenience and effectiveness in how we shop but is forcing retailers to continually innovate to keep our attention and share of our wallets. Irrespective of whether we choose to buy online or in-store or both, customers are benefitting from both formats.
As for the retailers, the companies that can provide the best customer experience across both channels are set to be the winners. No wonder Amazon is starting physical stores and Target is investing heavily in online shopping. Let the shopping battle continue!
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