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Amidst all the breathless pronouncements about the inexorable decline of brick and mortar retail emerges an interesting phenomenon: some of the fastest growing and most exciting internet-only brands are opening stores.
Recently, Bonobos raised $55MM largely to accelerate its foray into “Guideshops.” Other e-commerce innovators such as Warby Parker, Trunk Club, Nasty Gal and Bauble Bar are all expanding into physical store fronts. Expect more announcements soon, not only from earlier stage companies, but from larger direct-to-consumer brands as well. This seemingly counter-intuitive trend reflects a few realities.
First, most of these venture capital funded darlings have thrived in their first few years by exploiting a highly specific customer niche and leveraging the heck out of the advantages of a direct-to-consumer model. Alas, the number of customers who are willing to buy product sight unseen, without working directly with a sales person and lacking the instant gratification that physical stores provide, is comparatively small when it comes to product categories where fit, material quality and fabrication are important. For these brands to continue to grow–and have a chance for material profitability–physical locations aren’t a nice-to-do, they are a necessity.
Second, brick and mortar retail is different, not dead. In most product categories, for many, many years to come, the overwhelming majority of sales and profits will continue to come from, or be influenced directly by, physical locations. Regardless of whether a brand started as an actual store or as a virtual entity, the ones that will ultimately win will offer a tightly integrated experience across their various channels and touch-points. They will eschew traditional mass, one-size fits all strategies and embrace more personalized missions. There remains plenty of business to be done in brick and mortar locations–if you have something remarkable and meaningfully customer relevant.
Finally, when we think about the market or the customer we inevitably get it wrong. Global pronouncements about industry dynamics or the “typical” consumer are rarely particularly illuminating and almost never sufficiently actionable. The brands that are winning–the ones that are stealing share from you–go beyond the averages and the mega-trends. They understand how to apply technology to create frictionless commerce. They delve into data and apply customer insights that inform stronger acquisition, growth and retention tactics. They are committed to experimentation. They treat different customers differently. And on and on. None of this is fundamentally rooted in how a brand started or whether trends tend to favor its success.
Of course it’s far from certain that these previously web-only brands will successfully transition to an omni-channel world. Some will stumble mightily. A few will fail completely. Others will see their growth stall at only a handful of profitable locations.
The one thing for certain is that for quite a lot of customers, the benefits of physical shopping are here to stay. For traditional players the rush to close and down-size their store base may have some merit. But it’s equally likely the problem isn’t just the real estate portfolio.
You can fixate on the decline of brick & mortar retail all you want, but for the foreseeable future–in the vast majority of product categories–more than 90% of sales are still going to be done in physical stores.
You can make a big deal of the hyper growth in your digital channels, but don’t forget that many of those customer relationships started in a store. And many of the sales you ring up as a web order originated through exploration done in a physical location.
Sure, there are a handful of web companies where expansion into brick & mortar sites is secondary and mainly serves as a way to address the shortcomings of a purely digital experience. But for the overwhelming majority of brands, the physical store will be the dominant driver of sales, whether that revenue is actually booked in a store or not.
The other often neglected fact is that for many retailers their most profitable customers purchase regularly in both brick & mortar and e-commerce channels. If the physical store experience wanes, you can expect overall sales and profits to suffer.
As industry analysts and the press hyper-focus on a company’s e-commerce performance, the danger is that physical locations get short-changed. We are already seeing many retailers disinvest in their stores. These brands should tread very carefully.
As there is a continued rush to “right-size” store counts, many retailers will discover that closing stores will dramatically affect their e-commerce growth in the vacated trade areas. If your store closing analysis doesn’t include the impact on your web sales you are making a huge mistake. Too many stores were opened pre-recession. Too many stores will be closed in the next few years. Tread carefully here as well.
Without question you should be investing mightily in digital capabilities and just about anything mobile. But physical retail is likely to remain the heart of omni-channel for most brands for a long time.
You can go on and on about omni-channel this and omni-channel that, but screw up the store experience and you will be paying the price for years to come.
“Reports of my death have been greatly exaggerated.”
- Mark Twain*
Media reports highlight the dramatic shift of spending from traditional stores to e-commerce. Industry analysts and pundits predict the demise of brands with substantial investments in retail real estate. We live in an increasingly virtual world, they say, and those with deep roots in the physical realm are starting to look more and more like dinosaurs.
The transformation of shopping fueled by all things digital is profound with no signs of deceleration. The crazy little thing called the internet is changing virtually (pun intended) everything. But anyone who thinks that brick and mortar stores are going away has it wrong. Here’s why.
Brick and mortar retail can enhance the value proposition. Physical retail offers many important advantages–the ability to see and try on products, instant gratification, face-to-face customer service, social interaction and so on–that digital selling cannot readily replicate.
Purchase events matter. There is a reason that e-commerce penetration in many product categories remains low. Where the risk of buying online is perceived as high (apparel, many big ticket items), direct-to-consumer shares remain in the single digits. Brands like Zappo’s have innovated in customer service to overcome some of e-commerce’s limitations, but long-term growth potential is modest. In fact, e-commerce darlings like Bonobos, Nasty Gal and Warby Parker have begun to broaden their reach–and address flattening growth–by opening physical stores. Plenty of products–particularly perishables and low-priced items–also have underlying economic reasons why direct selling volume will remain constrained.
Consumer segments matter. Great customer intimate brands embrace the notion of treating different customers differently. When you do this, you understand the different needs, wants and behaviors of varied customer types. Depending on the product and the particular consumer, the purchase journey may begin and end at a physical store. For others, they will never set foot in a brick & mortar location. Others will research online and buy in store. You get the idea. Your mission is to understand the role your physical locations play in being intensely relevant and remarkable for the customers you need to attract, retain and grow. Then build out and customize the experience accordingly.
The blended channel is the only channel. Stop thinking channels and start thinking about a consistent, integrated customer experience for your brand. Other than products and experiences that can be delivered completely digitally, the majority of retail purchases are influenced by both the digital and physical realms. More and more data is emerging to confirm this. Your mileage will vary, but silo-ed thinking, organizations, incentives and metrics confuse, rather than illuminate.
Frictionless commerce is essential. Let’s be blunt: there’s more heat than light in the discussion of omni-channel capabilities. Strategically, the key is to hone in on how to be differentiated, relevant and remarkable for the customers you wish to serve. And then you must root out the sources of friction in your customer experience. With more consumers going back and forth between digital and physical channels in their decision journey, if you don’t make it easy to do business with you chances are there is a competitor who is ready to pounce.
Mobile adds value to physical retail. When e-commerce was either sitting at your home or office surfing the web, the distinction between digital and brick & mortar really meant something. Now with consumers untethered and having increasingly powerful devices with them 24/7, mobile becomes the great integrator–and makes the distinction between e-commerce and brick & mortar less relevant all the time.
Seismic changes ARE impacting retail. With the exception of companies in the early stages of maturity, most retailers need fewer stores and many of the stores they have will need to be smaller. But assuming that physical retail is going away any time soon is just plain wrong. The tendency to isolate e-commerce and brick & mortar performance is equally misguided.
Amazon and a handful of best-in-class e-commerce companies will continue to thrive. And new pure play digital models will undoubtedly emerge to captivate consumers and gobble up share.
But there is plenty of business to be done in physical stores. Less, but still plenty. And most of the growth in what is counted as e-commerce is not a shift to online-only brands, but rather to brands that have cohesive omni-channel strategies. Think Nordstrom and Macy’s so far. For them, stores are assets, not liabilities. But the way brick and mortar retail drives consumer engagement and loyalty is morphing quickly.
These emerging winners follow a simple but compelling formula:
See you in the blur.
* This isn’t, apparently, the actual quotation, but one that has become part of his folklore.
As a former Sears senior executive I’ve followed the once mighty brand’s journey from mediocrity to bad to just plain sad. What a long strange trip it’s been.
When I left in late 2003 we were gaining traction in our core full-line department store business and piloting several important growth initiatives. To be fair, whether we could pull off the necessary transformation was highly questionable. But one thing is now certain. The subsequent actions taken under a decade of Eddie Lampert’s leadership have assured the retailer’s demise.
For some time now, I’ve been referring to Sears as the world’s slowest liquidation sale. After yesterday’s annual shareholder meeting, it is time to stop the charade and embrace the inevitable. Here are the 5 reasons Sears needs to throw in the towel:
- No value proposition. No reason for being. After all this time Lampert has still failed to articulate a vision of why and how Sears will fight and win in the intensively competitive mid-market sector. In fact, just about every action that has been taken over the last 10 years has weakened Sears competitive position. And the horrific results make this plain for all to see. The world does not need a place to buy a wrench and a blouse and a toaster oven.
- The competitive gap continues to widen. In every major product category Sears has lost relevance (and market share) while key competitors continue to improve. In hard goods, Sears is fundamentally disadvantaged by their real estate and as a practical matter there is not enough time nor capital to fix this core issue. In soft lines, they have been given a great gift by the recent foibles of JC Penney and Kohl’s and yet still woefully under-performed. Both competitors have key advantages relative to Sears. As they start to execute better they will win back the share they lost.
- Digging a deeper hole. For Sears to be a successful omni-channel retailer their core physical stores have to be compelling. Sears has under-invested in their brick and mortar stores for years, so not only do they have a lot of catching up to do, they have to develop and roll-out a new store design and related technology support. One need only to look at the capital that successful retailers like Nordstrom and Macy’s are investing to get a sense for the magnitude of what will be required. There is simply no way for Sears to earn an adequate return on this level of investment. More practically, Sears can’t possibly fund this.
- A leader who is either a liar or delusional. The results speak for themselves: Lampert doesn’t know what he is doing. After 28 straight quarters of declining sales–let THAT sink in for a minute–he has the chutzpah to assert, among other things, that Sears is investing in where retail will be in the future (huh?), that the “Shop My Way” member program is some huge differentiator, that having fewer, less convenient locations than the competition is a good thing and that Sears can compete effectively with Amazon. All of these hypotheses would be laughable if the implications were not so tragic. Whether he really believes any of this is, or is merely spinning the story to buy time, remains an open question. But regardless of whether he is being disingenuous or whether he is nuts, you’d be crazy to give him your money.
- Valuable assets get less valuable every day. There are pockets of meaningful value within Sears Holdings. But proprietary brands like Craftsman, Kenmore and Diehard are not sold where the majority of customers wish to buy them. Ultimately the brands are only as good as their distribution channels. Simply stated, as Sears and Kmart continue to weaken, so do the value of these brands. Side deals with hardware stores and Costco barely move the dial. Sears real estate is also cited as a major source of value, yet the real estate portfolio is a very mixed bag: some great properties in A malls, but lots of locations that are mostly liabilities. Regardless of how this all nets out, it is becoming increasingly clear that, on balance, mall-based commercial real estate has lots of supply, but relatively little demand for new tenancy. As retailers continue to prune and down-size their locations it is difficult, if not impossible, to make a case for Sears real estate value increasing over time.
The uncomfortable and sad reality is this: Sears has zero chance of transforming itself into a viable retail entity. Any further investment in this sinking ship is throwing good money after bad. Stripping out the idiosyncratic technical reasons for gyrations in the Sears stock, the underlying true company economic value declines each and every day. There is no plausible scenario where this trajectory will change.
Frankly, it’s been game over for some time now. It’s only Sears legacy equity and Lampert’s ability to pick at the carcass that has propped up the corpse.
Let’s stop the insanity.
It wasn’t very long ago that engaging with most brands meant dealing with their disparate pieces. One 800 number for order status, a different one for delivery. Websites and physical stores that often bore only a passing resemblance to each other. Getting bounced from one department to the next to resolve a customer service issue or get a question answered. And then needing to start over again with each person with whom we spoke.
Then–slowly at first–some companies began to realize that customers didn’t care how we were organized. Customers didn’t want to hear about the limitations of our “legacy systems.” We may talk about channels, but customers don’t even know what that means. And they don’t care.
Upstart brands challenged the incumbents by attacking the friction in consumers’ path to purchase. Companies as diverse as Nordstrom, Amazon, Bonobos and Warby Parker made it their job to integrate the critical pieces of the shopping experience on behalf of the customer. They challenged the traditional verticality in retail and embraced the notion that brands are horizontal.
They assembled great ingredients and then they pushed “blend.”
As retailers we may be organized by the parts and the pieces. We may make decisions on discrete components. We may measure and tweak each variable in the equation.
But at the moment of truth, when the customer decides to enter our store, click on an ad, put another item in their cart or recommend us to a friend, she’s thinking about the whole blended concoction.
There is no shortage of business bestsellers, insightful white-papers and Harvard Business Review articles regaling us with multi-point programs to drive successful growth strategies. Consultants abound–including this guy–pushing clever frameworks to guide your brand to the corporate promised land.
Best demonstrated practices. Core capabilities. Disruptive innovation. Business process re-engineering. We’ve heard it all.
Yet despite an abundance of knowing, there is a paucity of doing. The same companies with the same access to the same information–employing high quality, well-intentioned executives–get widely (and sometimes wildly) different results.
Having spent more than a decade working in omni-channel retail driving customer-centric growth initiatives, I’m often asked which company is the leader in this space. I usually say Nordstrom.
I led strategy and multi-channel marketing at Neiman Marcus during the time Nordstrom began investing in customer-centricity and cross-channel integration. So I can spout chapter and verse about the differences between our approaches and all the opportunities we missed. But with Neiman’s announcement this week of their new customer-centric organization (better late than never!) there are a few key things to point out:
- Neiman’s has a lot of catching up to do
- We knew the same things Nordstrom knew when they aggressively committed to their strategy nearly a decade ago
- Nordstrom acted, we (mostly) watched.
We can quibble about some of the facts and the differences in our relative situations, but when it comes down to why they are the leader and Neiman’s–and plenty of others–are playing catching up, it comes down to this:
- Nordstrom had a CEO who fundamentally believed in the vision and who committed to going beyond short-term pressures and strict ROI calculations
- They went all in.
In a world that moves faster and faster all the time, organizations are really left with two core strategic options: Wait and see or go all in. Most choose the former and end up going out of business or stuck in the muddling middle.
Going all in doesn’t mean investing with reckless abandon or rolling the dice. Most all in companies do plenty of testing and learning. But testing with a view toward scaling up or moving on is a sign of commitment and strength not uncertainty and weakness.
Going all in must start at the top, with an executive who is wired to say yes. An all in strategy is fraught with risk. Mistakes will be made. You need a boss who has your back.
Going all in necessarily requires a supportive culture, but without complete organizational commitment it’s not nearly enough.
Going all in doesn’t pre-suppose a journey without bumps in the road. All in companies know how to fail better.
Culture eats strategy for breakfast?
Commitment eats strategy for lunch, dinner and a late night snack.
In the first decade of e-commerce’s ascension, with rare exception, the consumer was sitting in their home or office using a desktop computer to do their online shopping. It was a completely virtual experience where the advantages were clear: 24/7 access, wider selection, often lower pricing and so on. So were the disadvantages: inability to try on the product, no instant gratification, no sales help, etc.
Even as e-commerce began to chip away at brick & mortar stores’ dominance, the physical retail experience stayed basically the same. To reap the advantages of in-store shopping you had to travel to the store. Once there, if you wanted product information you had to track down a sales associate and hope that he or she knew what they were talking about. What you could buy had to be in-stock in that particular location. And when you wanted to buy something, you went to a sales register at the front of the store or located in a merchandise department.
With the explosion in mobile devices and smart phones the consumer decision journey is rapidly becoming untethered. Previously a digital shopping experience by definition meant you weren’t in (or close to) a store. But, more and more, what we once counted as an e-commerce shopping trip or sale, versus one made in a physical store, is a distinction without a difference. It’s now a bricks and mobile world.
Increasingly, store sales associates are untethered from their POS registers, lending them the ability to work with a consumer at the real point of sale and arming them with the digital tools that can meaningfully enhance the customer experience.
Today’s omni-channel leaders are keenly aware of how the un-tethering of retail is profoundly altering the consumer and competitive landscape.
For others–the relentless defenders of the status quo–it’s their thinking and willingness to act decisively that needs to be untethered. Hopefully that occurs before their business model becomes unhinged.
A number of years ago my team crafted a proposal to re-organize our company around the customer.
It was apparent that more and more consumers were using multiple touch-points to engage with our brands. Our analytics team had calculated that 50% of our customer base had made a purchase from both our physical and e-commerce channels during the past year. Researching online before shopping in our stores was increasing dramatically. And one of our key competitors had embraced “channel-agnosticity”, was investing heavily in cross-channel integration and starting to grab market share.
We, on the other hand, were locked in silos. We had entirely distinct and decentralized organizations for our online and brick & mortar operations. Separate channel inventory could not be accessed on behalf of the customer. Metrics and incentives were channel specific. Despite “knowing” that a high percentage of our best customers received direct marketing campaigns from both of our separately managed channels, virtually no effort was made to coordinate these consumer communications. In fact, our opt-out rates were greatest among our highest spending customers. To us, the call to action was clear.
So we pitched our CEO on a plan to address these issues. It was a dramatic shift to be sure, with a fair amount of complexity and numerous assumptions about how we would ultimately justify the investment.
Yet, what my boss focused on was how several key executives would be impacted and how they would react if we were to embrace the proposed customer-centric transformation.
“John is going to be angry. Sally would have a lot fewer people reporting to her. How can we move Paul over here, Linda (his boss) will be upset. I promised Tim a CEO title.” And so on.
Needless to say, none of the most critical recommendations were implemented. Eventually, under a new CEO–and mounting evidence of how the company was falling behind–most of the proposed changes were made. By that time I–and every single one of the personalities at issue–had left the company. And market share had continued to erode.
I don’t mean to be callous about the individual concerns and needs of folks working in companies. But the reality is that consumer needs have evolved radically and traditional approaches simply don’t work. The evolution (or revolution) in your strategy is certain to shatter the status quo and be painful for some (or all) of your managers and executives.
Yes, it’s inevitably going to hurt some of your people. But not going through the pain is ultimately certain to hurt your customers–and your results.
It’s a stark choice. But the choice seems clear.
I’m just back from the intimate little affair known as the National Retail Federation’s “Big Show.” Of course if you’ve ever been, you know that it is, in fact, far from intimate. The multi-day extravaganza in New York’s Javits–from the Hebrew, meaning “non-existent mobile connectivity”–Center features thousands of attendees, hundreds of exhibitors and buzz-words aplenty.
In many sessions, barely a minute could go by without a speaker uttering “omni-channel” this or “omni-channel” that. Yet the attentive listener would quickly conclude that not only was there often more heat emitted than light shed, there was also a fair amount of out-and-out hooey and semantic mumbo-jumbo.
Let’s get a few things straight, shall we?
First, omni-channel is no different from what many leading retailers have been investing in for years: the vision of a customer-centric, anytime, anywhere, anyway, seamless experience across channels and touch-points. Call it “channel-agnosticity”, “frictionless commerce” or “multi-channel integration”, it’s all more or less the same. Customers don’t care what you call it, they care what you do with it.
Second, the point is not to simply add more channels. The “omni” part of “omni-channel” is about being intensely relevant in all the channels your customers care about and making the experience frictionless for her as goes through her decision journey. I heard one executive say they were the best omni-channel retailer because they sold in more channels than anyone else. That’s very misguided thinking.
Third, participating in, or being pretty good within, all the channels that your customers employ is not enough, nor is having a decent experience across all channels for your average customer.
Winning in omni-channel is all about the mix. The mix of customers you serve. The mix of products and services you offer. The mix of media employed to drive engagement and loyalty. The mix of channels where consumers can learn and transact. And so on.
To be sure, there are some foundational ingredients of winning in this evolving omni-channel world. Possessing a single view of the customer and the ability to uniquely identify, track and reach individual customers regardless of where and how they engage with you is critical. Without breaking down organizational silos (and the culture, incentives and metrics associated with them) you won’t get very far on your transformation. Making your entire brand’s inventory available to the customer at all points of sale (supported by easy, channel of choice returns) is rapidly becoming the price of entry.
Yet without the capabilities and commitment to treat different customer differently, your omni-channel strategy risks being an also-ran.
Many of the NRF’s Big Show presenters and vendors were pushing ingredients. Ingredients are essential, as is a good recipe. But the customer wants the finished product. And it’s the mix, that perfect blend, that really makes something special.
Fix it in the mix.