Omni-channel’s migration dilemma: Holiday edition

Last year I wrote a post about what I called retail’s “omni-channel migration dilemma” wherein I observed that while the deployment of so-called omni-channel strategies–i.e. making it easier for consumers to shop anytime, anywhere, anyway–improves the customer experience immensely, the outcomes for most retailers were, thus far, not quite so wonderful.

At the heart of this argument were three core points:

  • With few exceptions, omni-channel retailers’ total revenues remain essentially flat, meaning that robust growth online is mostly cannabilizing brick & mortar sales;
  • In many cases, the profitability of e-commerce is actually worse than a physical store sale. This is particularly true for lower transaction value players like Walmart and Target.
  • In their quest to become “all things omni-channel”, retailers are investing enormous sums–and in some cases–getting distracted from arguably higher value-added activities.

You don’t have to be a math whiz to understand that spending a lot of money to end up–if you’re lucky–with basically the same total revenue at a lower margin is not exactly a genius strategy. But this is where we find Macy’s and many other retailers right now.

The omni-channel frenzy around the holiday shopping season only shines a harsher light on the issue. By launching sales earlier and earlier, by pushing deep discount events like Cyber Monday and by offering free shipping pretty much throughout the season, the tilt toward online sales is exacerbated and margins continue to shrink. Consumers win through great deals. And retailers lose, as overall sales are likely to go absolutely nowhere.

Now some have argued that omni-channel is ruining retail. They are wrong. They’re wrong not only because it is pointless to fight reality, but also because efforts that are fundamentally rooted in the desire to improve the customer experience are rarely misguided. The key is not to confuse necessary with sufficient, nor “the what” with “the how.”

So we should not get distracted by analysts who try to extrapolate one or two days of sales as part of some trend.

And we should bear in mind that online sales for most omni-channel retailers remain far less than 10% of their total business. So even healthy e-commerce growth is not likely to offset seemingly small declines in physical stores sales. You don’t have to trust me on this. Do the math.

But mostly we should remember that the story is not about all things omni-channel, nor what happens on Black Friday, Cyber Monday or the few weeks that comprise the holiday shopping season.

It IS about which retailers are breaking through the sea of sameness with remarkable product AND a remarkable experience. It is about which retailers are eliminating friction for the consumers that matter the most in the places that matter most. It is about which retailers are eschewing one-size-fits-all strategies in favor of a “treat different customers differently” philosophy. It is about retailers that know where to focus and how to properly sequence their omni-channel initiatives, not blindly chase everything some consultant has pitched them.

Clearly, the future of omni-channel will not be evenly distributed.

Don’t be blinded by the hype.

The fault in our stores

As more and more retailers report strong growth online while their brick & mortar sales wane, it’s easy to conclude that physical retail is going the way of the horse-drawn carriage. In fact, plenty of pundits bang that particular drum every day.

But let’s not lose perspective.

Actual stores still account for about 94% of all retail sales. While this will continue to shrink, revenues from physical locations will garner the majority share for most retail categories for many years to come. Lest we forget, actual stores provide tangible customer value that is all but impossible to duplicate digitally. And plenty of research supports the notion that most consumers still prefer to shop in a physical store including…wait for it…Millennials. It shouldn’t surprise us that many of the fastest growing, most successful retail brands are investing in stores, not closing them.

Yet, there is plenty of fault in our stores.

Too many stores are drowning in a sea of sameness–in product, presentation and experience.

Too many stores still operate as independent entities, rather than an integral piece of a one brand, many channels customer strategy.

Too many stores remain laden with friction throughout the shopping experience.

Too many stores take a one-size-fits-all approach, rather than striving to treat different customers differently.

Too many stores are seen as liabilities to be optimized, leaving them as boring warehouses of only the best-selling, most average product.

Yes, there will be fewer stores in the future. Yes, the vast majority of stores will be smaller. Yes, it’s hard to paint any sort of growth scenario for all but a handful of retailers. But the reflexive answer cannot be to throw up our hands and automatically decide to disinvest in physical retail.

Brick & mortar retail is different, but not dead.

When we adopt an attitude that our stores are problems to be fixed–or eliminated–rather than assets to be leveraged, our fate is already sealed.

When cheap rules

In case you haven’t noticed, the retail apparel market is kind of a hot mess. Sales are going nowhere. Profits are waning. Many store closings have occurred, with more on the horizon. And for two basic reasons.

First, we aren’t buying as many items. It turns out that we actually don’t need so much stuff. It also turns out that, more and more, we are starting to value experiences over things. As Millennials become more important contributors to the market–which, after all, is merely the passage of time–this likely only gets worse.

Second, the average unit price of what customers are buying is declining. Some of this is due to the frenzy of discounting that most retailers can’t seem to break out of. But mostly it’s a substitution effect: people trading down from Neiman Marcus to Nordstrom, or from department stores to off-price stores, or from specialty stores to places like H&M, Zara and Primark.

In many cases, the consumer is saying “no” to excess, unwilling to pay a lot merely for status. Still others are reticent to support a high markup that goes to what they have come to see as needless frills and overhead.

As leaders of brands we are powerless over the first factor. But when it comes to the second we have choices. Many of us are trying to solve for this market shift by cutting expenses and closing stores. Others have launched discount versions of their core brand and are aggressively investing behind this cheaper version of themselves. Some of us are doing a combination of both.

When cheap rules it’s certainly fair game (and simply good management) to look at our cost structure, to consider rebalancing our assortments, to seek ways to become more effective and efficient.

But as leaders–as a matter of strategy–we face the proverbial fork in the road. Do we chase cheap or do we seek reasons other than price for consumers to choose us over the competition? Do we risk entering a race to the bottom or do we choose to become more personal, more relevant, more remarkable? Do we go with the flow (and what Wall St. seems to demand) or do we confidently embrace a stance of “yeah, we’re more expensive, here’s why and we’re worth it.”

Every brand is different, so the right answer must be situation specific. But we shouldn’t lose sight of the fact that it is a choice. We shouldn’t forget that once a brand trades-down there is usually no turning back. And we should always remember that the biggest problem with a race to the bottom is that we might win.

When the music stops

Somehow we seem to forget that in business the good times don’t last forever.

When the economy is strong, most decently run mature businesses thrive. For an earlier stage company, once it starts to gain traction, new customers come relatively easily and competitive forces are minimal.

But there will come a time when the music stops. A time when a booming economy can no longer mask our weaknesses, when emerging competition becomes a serious issue, when what worked so well for so long suddenly doesn’t.

Eventually, we can’t raise prices so easily. Inevitably we have challenges driving traffic or closing sales. The cost of acquiring a new customer (or maintaining frequency with an existing one) begins to rise. The once strong growth rates from new stores or our e-commerce business start to moderate.

The only surprising thing in all of this is that we seem surprised when it happens.

When things are good is precisely the time to invest in the future–a future that is very likely to include the need to drive virtually all growth from stealing market share, not merely riding a rising tide or passing on inflationary price increases.

For many businesses that time is right now or just around the corner. In that world good enough isn’t. Good enough doesn’t get you noticed. Good enough doesn’t cause customers to switch. Good enough rarely leads to loyalty or the ability to charge a premium price.

Stealing market share requires being more intensely relevant, more remarkable and, perhaps, more idiosyncratic than the competition. Unfortunately most organizations don’t worry about this stuff until they have to. And by then it’s usually too late.

Fix the roof when the sun is shining. Or something like that.

When the shift hits the fan

Shift happens. And it’s never been more expansive and dynamic.

The shift from brick & mortar to e-commerce.

The shift from “going online” to living online.

The shift from traditional media consumption to a digital first model.

The shift from silo-ed customer experiences to harmonious ones.

The shift from highly intentional shopping to more spontaneous “micro-moments.”

The shift from isolated customer journeys to those that are deeply connected.

The shift from brands’ being in control to empowered consumers who are increasingly calling the shots and dictating their requirements.

The shift from one-size-fits-all to highly personalized interactions and marketing. The end of mass, the beginning of us.

Confronted with these profound shifts, the tendency of many organizations is to go on the defensive. Overwhelmed by the shifting tides–and afraid to take risks in a fast-moving and highly uncertain environment–they circle the wagons to fight the changes or develop plans to cope with them. But survival is not enough.

When shift happens our goal has to be to understand it, to accept it and to go through it rather than around it. We must embrace it in a desire to thrive, not simply survive.

And most importantly, we need to get out in front of it well before it hits the fan.

H/T to Seth

No new stores ever!

What if your company could never open another store? I’m not talking about relocations. I mean a truly new unit that adds top-line growth for your brand.

That’s pretty much the case in the US department store sector. Macy’s, JC Penney, Dillard’s and Sears (obviously) are closing far more full-line stores than they will open.

The generally more resilient luxury sector isn’t exactly booming. Nordstrom will open only 3 new stores in the US over the next 3 years. Neiman Marcus will open 2 full-line stores over 4 years. Saks is probably done finding viable new locations. It’s hard to imagine how this current outlook will get better.

Major sectors like office supplies and specialty teen are going through wrenching consolidations and hemorrhaging sites. And for every Dollar General, Charming Charlies and Dick’s Sporting Goods that have decent opportunities for regional expansion and market back-fill, there are far more that have overshot the runway.

“But Steve”, you say, “we’re seeing great growth in our online business. That’s our future.” That may be true, but how much of that is actually incremental growth? For most “omni-channel” retailers–particularly those that aren’t playing catch up in basic capabilities (I’m looking at you JC Penney)–more and more of what gets reported as digital sales is merely channel shift.

In fact, you don’t have to be Einstein to understand what’s going on when brands report strong e-commerce growth, yet overall sales growth is barely positive. For a great discussion of this check out Kevin’s blog post on hiding the numbers.

The fact is we have too many stores and most consumers have too much stuff.

The fact is the retailers that operate the most stores and sell the most stuff are rapidly reaching the point where, for all practical purposes, they will never open a new store.

The fact is very few large retailers are experiencing much incremental growth from e-commerce and, either way, that growth is small relative to their base and beginning to slow substantially.

The fact is, going forward, most brands will only grow the top-line above the rate of inflation by developing strategies that steal market share. And the me-too tactics and one-size-fits all customer strategies that currently account for the bulk of most brands time and money simply won’t cut it.


The shopkeeper at scale

Today marketers talk about personalization as some new Holy Grail. It’s hardly new.

Years ago, one-to-one marketing was a core practice of local shopkeepers everywhere. You know, the butcher, the baker, the candlestick maker. The shopkeepers of yore would uniquely identify their customers, interact with them to understand their wants and desires and then customize their offering to meet those needs. The best customers got the best treatment. The notion of treating different customers differently was common and these shopkeepers enjoyed huge market share.

Fast forward many decades and the shopkeeper model has largely been displaced by national chains that lean heavily on one-size-fits-all business models steeped in efficiency over effectiveness.

Yet as the present reality of slow growth markets becomes clear, as fewer and fewer store openings present themselves, as the easy growth from launching and optimizing e-commerce starts to subside, the tide is turning.

Slowly, we are starting to see brands that understand that the majority of future growth must come from stealing market share. Growing share of wallet in meaningful ways requires a more intensely relevant and remarkable customer experience rooted in a “know me, show me you know me, show me you value me” set of capabilities.

More and more, it’s about understanding how to replicate the old-timey shopkeeper feeling at scale. It’s about using deep customer insight and technology to transcend the self-imposed limitations of the mass industrial model that characterizes so many businesses today.

The good news is that the core technology and other supporting capabilities necessary to become a shopkeeper at scale now exists–and is improving all the time. The bad news is it doesn’t happen unless you make a choice and make a commitment.