This is perhaps a bold statement in the face of fast growing on-line sales, behemoths like Amazon taking market share from traditional retailers, and a growing number of store closures by the old stalwarts of retail. However, after nearly 15 years of strong online sales, brick and mortar still represents 94% of total retail sales in the US (http://retailnext.net/blog/brick-and-mortar-vs-online-retail/).
This is not to say that retailers who do not evolve and make ecommerce a significant portion of their sales will not continue to file for bankruptcy or close completely. To truly succeed in this new world, retailers must have both an online and a physical presence. The winners will be the ones who not only have a robust online business, but also have the most efficient stores.
Fear and Loathing
In traditional retail, there is an underlying fear of being left behind and a loathing of the technology that will put an end to “the good old days.” Lessons from the music industry still reverberate today. Major retail chains selling CDs and records, along with the major music companies, either refused to acknowledge or did not comprehend the imminent tidal wave of the internet. They were happy spending their capital and leveraging their assets on store expansion and inventory while the wave crept ever closer.
The downfall of these retailers happened incredibly fast. Within 10 years, file sharing and music download sites (Napster founded 1999, iTunes introduced 2001) became the proverbial nail in the coffin of traditional powerhouses like Tower Records (liquidated in the US in 2006) and Virgin Megastores (closed in the US in 2009).
Today, sellers of clothes, shoes, pots, pans and other wares are frantically spending a fortune on their websites and online back of house. This is for good reason. Online retail sales are growing at a 17% increase per year and are expected to exceed $400 billion in 2018. And, there is a perception that today’s consumer can, and does, handle all of life’s business from a mobile device. But does this fear and loathing of technology and being left behind lead to bad decisions? Despite spending an enormous amount of money, energy and time on omnichannel capabilities, only 16% of retail companies claim to be able to fulfill omnichannel demand profitably (PwC for JDA Software). This high cost of fulfilling orders is eroding retailers’ margins exponentially as this channel grows.
Big news on Wall Street – Amazon is finally profitable
Actually, they’ve turned a profit over the last 4 consecutive quarters. Finally, proof that if you just bear down, have patience and continue to grow the online channel, profitability will follow.
However, that is not the lesson to be learned.
In their latest filing for Q1 2016, Amazon had to spend 44% more in shipping costs to deliver 31% more in sales (http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsother). So, in light of this, how did they suddenly become so profitable?
Amazon Web Services (AWS) hosts companies' online content and apps in Amazon's giant data centers. It has big-name customers, including Netflix, Airbnb, Yelp, Expedia, Major League Baseball and Slack. Launched in 2006, AWS already represents 9% of total company sales or $2.6B, grew 63% last quarter and is largely responsible for bringing Amazon to profitability. This part of their business, predicts Jeff Bezos, will eventually become larger than their retail business.
But I Don’t Have a Web Hosting Service
Maybe not, but there are other potential offsets and profit sources that are being overlooked. In my retail career, I’ve been taught to look for the offset; to find the plus over normal in my business and exploit it. If a part of my business is unprofitable (or less profitable than the total) but represents a portion of my sales that is too big to lose, then I must find/grow/develop a margin offset. If the calendar shows I’m up against a spike in sales resulting from a style or department from last year that I did not anniversary, I must plan my inventories and promotions to support another style or department that will perform even better this year.
To make shopping in store more enjoyable and, therefore, encourage more people to visit and buy, retailers are trying all kinds of tricks. They serve coffee, create lounges, update fitting rooms and install televisions. They add lights, install price check stations and continually rearrange their sales floors.
More recently, beacons have become popular. Beacons are in-store Bluetooth devices that, once a customer opts in to the service, allow retailers to track your movement throughout the store or send you coupons. As a person who once made merchandising, pricing, purchasing and planning decisions as a career, I have trouble seeing how knowing where people walk would help me drive sales and reduce markdowns.
Do I move the best departments into the most trafficked areas?
Do I move best sellers from their current location (where they are performing as best sellers) into a new location?
I suspect this may be just a cool technology that tells me where the people who opt into my app walk in my store and confirms what I already know or can find out by simply asking a store associate.
My Stores are Beautiful… Why Don’t People Like Them??
The answer is simple: Too much inventory that your customers don’t want. Markdowns are taken on these goods and, despite our best efforts at hiding the mess, they represent over 50% of sales. Sometimes more!
Buyers are eternal optimists and never buy an item that won’t sell (guilty as charged). Then, to move the needle on the total business, the planner will buy enough of these items to make a difference (also guilty as charged). Unfortunately, even the best buyers are wrong half the time.
This vicious cycle isn’t a malicious plot to drive down margins and drive customers out of the stores. It’s simply because the smart, experienced and creative people you ask to be an expert on their customer don’t have the right tools to do it.
Ecomm is a part of the business that’s too important to lose. And, it may never actually be profitable. But 72% of young customers research online before going to a store. 30% of customers prefer shopping in store to be able to see and feel the item or ask for advice. 3 of 4 shoppers who found online information useful are more likely to visit stores. 2 of 3 customers webroom (do research online, then purchase in a store).
Amazon has done an amazing job of exploiting their assets. They’ve rented out space in their giant data centers and are turning a profit. Traditional retailers need to not only recognize that their stores must be this asset, but also that the people they employ – experts in all aspects of brick and mortar retailing – can deliver sustained profitability in those stores given the resources.
Merchandise decision makers need to have tools available that tell them what ALL their customers want, not just the ones who opt in. Yes, we need to know the rate of sale, weeks of supply and inventory levels of the items that ARE selling. But we also MUST know what is happening to the other half of the inventory that is NOT selling. In other words, how do we get the same metrics for our stores that we have online? The metrics we need include total traffic to our site (store), page views on an item (customer interest regardless of sales) and conversion by style in store.
There are solutions out there, some new and some have been around for a while. Traffic counters to know how well your window display is driving all people into your stores (not just opt-ins); fitting rooms that recognize RFID tags and can determine sales conversion on items every customer tried on (not just opt-ins); Bluetooth Low-Energy tags on shoes that can show how many times a shoe was picked up and for how long by every customer (not just opt-ins) whether it eventually sold or not.
This kind of data allows those smart, experienced and creative people you employ to make smart decisions about an item’s styling, pricing and floor location, which takes the guesswork out of trying to understand the customer and what she wants from you. Invest here and integrate this into the culture of your company and turn your stores into a profit offset for that unprofitable e-commerce business.