Retail Reaches a Tipping Point—Which
Stores Will Survive?
The new book Retail
Revolution: Will Your Brick and Mortar Store Survive? argues that ecommerce
is about to deal severe blows to many familiar store-based brands—even
including Walmart. Here's how retailers can fight back, according to Rajiv Lal,
José Alvarez, and Dan Greenberg.
Here is an overview of why retail
experts Rajiv Lal, José B. Alvarez, and Dan Greenberg believe retail is at an
inflection point. In Part Two, they
identify effective strategies for retailers caught in these turbulent times.
And in Part Three, the authors look to the future—what will the shopping
experience be like for us, and for retailers, as ecommerce becomes an ever
larger part of the market.
In early February, 93-year-old
retailer RadioShack announced it was filing for bankruptcy. A few days later,
Amazon.com—the online giant seller of everything—was reportedly in
conversations to buy some of those storefronts—possibly its first real
beach-head in the brick-and-mortar world.
As harbingers of the future of
retail, these events certainly caught the attention of Harvard Business School Marketing professors Rajiv Lal and José B. Alvarez, and research associate Dan Greenberg
(Harvard MBA 2012). Their new book Retail Revolution: Will Your
Brick-and-Mortar Store Survive?,
predicts, among many other things, the continuing decline of major brick and
mortar brands including Staples and Barnes & Noble; the acceleration in
closings of shopping malls across the country; Amazon's aggressive expansion of
its Prime service; and tough times ahead even for venerable retailer Walmart.
In short, retail is at an inflection
point, even though ecommerce still makes up a relatively small percentage of
all retail sales. The trends lines are clear: many retail segments are under
assault by cheaper, more convenient retailers selling online.
"The surprising thing is that
despite the success of lots of big businesses in having developed Internet
businesses, despite the fact that they have launched omnichannel strategies,
the health of many of these businesses is still challenged," says Lal, the
Stanley Roth, Sr. Professor of Retailing. "From a profit perspective, from
a growth perspective, and more importantly from a return on investment
perspective."
In addition to providing new
insights into how ecommerce is changing the nature of retail, the book offers
prescriptive advice to store-based retailers caught in the squeeze. "First
off, there is no one size fits all answer," says Alvarez, a senior
lecturer. "Your strategy depends on what type of items you sell, who your
competition is, and whether Amazon can effectively sell the items in your
category—think drywall for example."
For retailers looking for
immediate advice, the book details three courses of action to help them. As the
threats are not identical across all retail segments, step one is to assess
their own strengths and vulnerabilities relative to ecommerce competitors under
a framework the authors term TIPS, for technology, inventory, people, and space
(size, location, and ambiance). These are the four major assets that retailers
must use effectively and efficiently to create a compelling and distinctive
value proposition. Based on the answers, retailers then need to consider one of
three strategies: Enhance the Value of the Box, Shrink and Transform the Format,
or Wind Down.
Sean Silverthorne: Why do you think we are at an inflection point? Ecommerce
has been around for several decades, yet still accounts for just 6 percent of
retail sales in the United States.
Rajiv Lal: Around the turn of the twentieth century, many of the
bricks and mortar players did not have an Internet presence. Now most of them
have an ecommerce strategy and have transformed themselves into omnichannel
businesses. It's an inflection point because despite all of the good work they
have done, many still find themselves in a precarious situation with weak
returns on invested capital.
José Alvarez: There are a few other things that make this an inflection
point. One is the fact that technological development reached a point where
ecommerce is easy and omnipresent. If you think back before smart phones and
tablets, shopping on line was much less convenient. Today online shopping is
omnipresent. Now as we have our discussion, I can use my smartphone to order
tonight's dinner and a necktie for the occasion. Technological developments
allow consumers to shop when they want, where they want for almost anything
they desire. Associated with that, people are much more comfortable with
ecommerce, giving their credit card numbers to Amazon and others, so the
comfort and trust levels are much higher.
Also, the logistics networks that
companies use to deliver have improved significantly in respect to speed,
convenience, and cost. For example, I get Sunday delivery of Amazon through the
post office as part of my Prime membership while Amazon, Instacart, and Google
Express are currently experimenting with same-day delivery.
The other important factor that
leads us to believe that we are at an inflection point is demographics. You
have this new generation of digital natives who are used to operating online.
Their default option for shopping is through a digital interface. These
consumers do not hesitate to place an order for almost any class of goods
including shoes, clothing, and other items that were traditionally considered
safe from ecommerce.
Q:
It also seems that as people have become more comfortable with shopping online,
they are buying a wider array of goods.
Alvarez: I remember having conversations with consumers a few years
ago where they'd say "there is no way I'm going to buy apparel
online". But now over 10 percent of apparel is purchased online. This may
not seem like a lot but this level of penetration for ecommerce is often enough
to destroy the economics of a brick and mortar chain store.
Lal: You used to think that many categories were immune to the
Internet. We thought touch and feel was important in many categories. What we
see today is that that assumption is no longer true. Think of how much jewelry
is sold online—diamonds—it's incredible.
Q:
Does Amazon's growth and market power also add to this feeling of a tipping
point?
Alvarez: We are in a place now where ecommerce has become big enough
in enough categories to make brick and mortar retailers very nervous about
store profitability. Amazon doesn't have to own 50 percent of a category to
wreak havoc on the economics of a store. If ecommerce can get 5 percent of a
category, that starts to create trouble. Amazon already has a significant
percentage of almost every category except groceries and hardware. If ecommerce
gets to 10, 15, or 20 percent of a category, your business is in real, serious
trouble. A number of categories now are in the 20, 30 percent range and
retailers who serve these categories are among the walking dead.
Q:
The book outlines three strategies for retailers to consider as responses to
the online threat. What are those strategies?
Alvarez: One strategy is what we call is Enhancing the Value of the
Box. This strategy is for players who aren't yet significantly impacted by ecommerce
and have some runway; Home Depot for example. They use the omnichannel strategy
to help their businesses thrive instead of just survive. Home Depot uses the
Internet synergistically with their brick and mortar business to enhance the
consumer experience and allow them to dream about and complete bigger projects.
Lal: There is the potential to use the Internet to make your
store more valuable, like Home Depot does in letting you plan a project online
and then coming into the store to discuss it with someone. The customer and the
store employee can work together on a project, so it's really about enhancing
the value proposition instead of just defending against the threat of the
Internet.
If you think of the service side of
it, you have businesses like PetSmart where almost a third of their sales are
in services, which can't be sold on the Internet. If you need a vet, you aren't
going to do that over the Internet.
Q:
The second strategy is Shrink and Transform the Format.
Alvarez: The other two strategies we describe—Shrink and Transform
the Format and Wind Down—are really about a decision as to whether you think
that in the long term the category of goods you are selling can be sold
profitably in a brick and mortar store. That's the first decision people need
to make if they are being impacted by ecommerce.
Shrink and transform works if you
have figured out that the categories you sell aren't going away for good—you
aren't Barnes & Noble. What can you do to revitalize your business? You
really have to come up with a new format and likely shrink the space. It's
likely that consumers are not only going to be looking for something different
out of you in terms of value proposition, but you probably don't need all the
space you are currently using for two reasons. One, the assortment you are
going to be carrying is not going to be as broad. And the space you make
available for products is going to support a different value proposition,
whether its service, or it's a showroom for the products of a manufacturer, but
you really need to reimagine what the right customer experience is and what the
right cost base is to make this capital efficient for shareholders.
Best Buy is a good example. Best Buy
has taken most of its commodity TVs and said we are not selling them in the
store anymore. If you want to, you can get them online and Best Buy will sell
them to you in a more efficient way. Their stores are going to be all about the
cool, interesting, new—what I would call the fresh items. This idea of
freshness is to keep the consumer engaged in what you are doing, and also from
a profitability perspective to make sure you are selling items that have good
profit margin. That is critically important.
So it's taking a cold hard look at
your business and asking, are there enough people who are going to continue to
buy your goods in a store over time?
Q:
If the answer is no, that I'm doomed to be disrupted by ecommerce, it sounds as
if the third strategy, "Wind Down," is for me. How does that work?
Lal: If you look at any retail business there will be some
categories that will be in that class. If you think of Barnes & Noble,
almost 100 percent of what they sell is seriously affected by the Internet;
it's all digital goods or digitizable goods. The same is true of media retailers,
games retailers, software retailers.
Alvarez: If you're being digitized or people just aren't buying your
categories anymore, then you just have to wind down that business and make it
into an appropriate cash-flow generator for the shareholders. Basically you are
managing to create an attractive annuity for shareholders.
Lal: It's not just about eliminating the stores, but managing
the business to maximize cash-flow. If done intelligently this can generate a
lot of value.
Q:
One piece of advice you give to brick and mortar retailers is to think of their
business in terms of TIPS: Technology, Inventory, People, Space. What do you
mean?
Lal: Those are the four big assets that retailers must optimize.
If store based retailers cannot figure out how they can put these assets
together efficiently to create a unique and distinctive value proposition for
customers, these assets will not return their cost of capital. The store will
not be attractive to customers and investors will no longer be willing to
invest. To make your store relevant, you have to ask: can I use each of these
assets in a distinctive, effective, and efficient way?
Q:
For decades, Baby Boomers have driven the economy. Now, as you point out,
Millennials are climbing into the driver's seat. From the retailers'
perspective, how does this change the market?
Alvarez: As people get older they buy less stuff and buy more
experiences. As Baby Boomers age, you are hearing this big sucking sound as
consumption goes away from retail and goes much more to cruises and vacations,
grandkids and college. So it's important for retailers to think about how to
keep Baby Boomers engaged and coming into your store. But they also have to
start catering pretty heavily toward the millennials. And millennials may not be
that interested in what you are selling in a store, because their viewpoints
are so different.
For example, they are probably a lot
more frugal. We don't know going forward, but we do know right now they have a
lot less disposable income and they are little bit scarred from the recession.
They have taken the biggest lumps in terms of financial hits, which has led
them to delay getting married, delay having babies, delay purchasing homes,
etc. It is not certain what the long term consequences of the recession will be
for millennials but for the time being this group has a gun-shy nature and they
are pretty frugal.
Lal: Millennials are also attracted to experiences, like Baby
Boomers.
Alvarez. Yes, they are interested in experiences and social
communities. They are driven towards cities and this is driving a reurbaniztion
of America. That has a big impact because you have all these stores that have
been built in the suburbs where fewer people want to live today. Retailers are
going to have to think long and hard about these trends. They need to find
compelling answers to some key questions: How do you create experiences? How do
you create community? How do you make sure consumers feel like they've got a
good deal? And how do you make yourself closer and convenient to a customer who
is now more and more in cities.
by Sean Silverthorne
http://hbswk.hbs.edu/item/7743.html
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