Online is Retail’s New Platform for Organic Growth
For traditional retailers, e-commerce is no longer a peripheral revenue stream. At the same time, no retailer of any origin can ignore the physical storefront as a platform for organic growth. There’s been a flurry of recent cross-channel M&A activity, but the retailers that survive and win in today’s retail climate will be those that get this balance right.
Hypercompetitiveness in the retail landscape has resulted in a massive number of store closures as retailers have battled falling foot traffic and declining sales. Some once-robust chains have announced that they will now focus on building their online capabilities rather than their store fleets, as e-commerce is perceived as crucial for retailers that want to survive. Retail giant Walmart acquired Jet.com and Bonobos to further enhance its omnichannel offerings, while Nordstrom, another retailer with a heritage of brick-and-mortar success, has multiple e-commerce acquisitions under its belt, including Trunk Club and HauteLook.
At the other end of the spectrum, Amazon has made a more aggressive push into grocery with its acquisition of Whole Foods Market last year and its launch of its first cashierless retail outlet in January 2018. Rumors have swirled about Amazon making another acquisition of a major retail player this year. Even e-commerce startups are opening physical stores: online consignment retailer ThredUp has opened two stores in the U.S. and eyewear purveyor Warby Parker has already opened more than 50 shops globally. Glossier and Outdoor Voices are two of the much-buzzed-about retail newcomers targeting millennials that are also expanding into physical formats as a core part of their growth strategies (albeit with single-digit store counts and limited square footage).
With store closures continuing at a rapid pace and given e-commerce businesses’ notoriously poor profitability, what, exactly, is driving these growth strategies? And as retailers of all types race to build out their businesses across channels and touchpoints, which of them will be the big winners? Those with e-commerce roots or those with a brick-and-mortar heritage? Below are the key principles that make each of the models successful.
1. Profitable Growth
As has been widely reported, brick-and-mortar retailers with aging and unprofitable store fleets are closing stores at a rapid pace. However, these chains’ extensive real estate holdings are an advantage in one key area: physical stores can double as click-and-collect hubs for online purchases, thereby providing shoppers with a convenient and cost-effective delivery option.
The key to running a profitable e-commerce business remains elusive, as the cost structure eats into already narrow margins. E-commerce retailers entering the brick-and-mortar space have tended to do so cautiously, carefully selecting the right locations and learning from each store opening in order to improve on the next location. This selective strategy has enabled some digital natives to amass a store portfolio composed primarily of locations that see high sales per square foot. Glossier’s New York store, for example, allegedly generates higher sales per square foot than the average Apple store does.
2. Speed and Technology
Newer can mean more agile, and that is what success will look like in the extremely competitive fast-fashion space. Online fashion retailers such as ASOS, Boohoo.com and Missguided can now move certain items from concept to sale in as little as two weeks, more than twice as fast as Zara’s famous five-week turnaround. They represent a new wave of speed: ultrafast fashion. These online retailers are unhampered by an established supply chain process and therefore have more room for technological innovation. They also don’t have physical locations, which means they can get to market even faster, since they don’t have to deliver product to stores and then put it onto the floor before it can be sold. Unlike brick-and-mortar retailers, which still depend on legacy systems built to support a single-channel business, e-commerce businesses can invest in the latest technologies designed for an omnichannel world.
3. Customer Knowledge/Data
Data and analytics have long been popular buzzwords, but winning businesses know what data to collect, how to collect it accurately and how to turn it into insights for better decision making. Most importantly, retailers need accurate and relevant customer data to design and execute targeted marketing strategies (such as sending customers promotions timed to their needs). Understanding what customers are willing to pay for certain items, what compels them to enter a store, their typical basket size, and when and how often they shop can help retailers ensure that marketing strategies, store layouts and merchandising are tailored to maximize traffic and customer spend. Retailers can use technology to gather rich data about their customers within each channel and across the shopping journey. Different channels can provide different behavioral insights, but each type can be leveraged across channels.
4. Retail Space Innovation
Many retail startups are creating physical stores that double as social spaces. This trend’s wider arrival was perhaps announced by Apple when it said in January 2018 that it was rebranding its stores as “town squares.” Outdoor Voices, for instance, frequently hosts running groups and happy hours at its stores. Similarly, leather goods startup Cuyana organizes regular women’s panels and artisan launch parties within its stores. What can be gleaned from these trends is that physical stores hold a growing role in how retailers market to consumers: stores no longer function merely as places to buy or test products, but as physical spaces that compel customers to buy for the first time or to come back for another visit. Recent trends point to physical stores reaching an equilibrium between generating less revenue and driving more sales to online channels in order to grow.
Retailers need to understand how to strategically leverage their store bases. Best Buy is one of the companies that have mastered this. The company shuttered its Future Shop banner in Canada in 2015 and made a strategic decision to close some of its namesake banner stores across Canada and the US in 2016 and 2017. Its stores mainly carry popular or much-hyped products whose novelty or complexity prompt conversation between customers and staff and encourage customers to shop for a wider selection online.