Omni-channel’s migration dilemma

The shift in retail to a more omni-channel world is dramatic and profound. And since the term “omni-channel” gets thrown around a lot–often vaguely or carelessly–let me be clear about what I mean: more and more customers are becoming engaged in utilizing multiple channels–stores, mobile, online, social networks and the like–to explore, research and transact.

One important implication of this phenomenon is that many consumers are becoming what I call “blended channel” customers; sometimes choosing to transact in physical stores, sometimes buying online. And they commonly use multiple sources to aid in the decision journey, regardless of where their ultimate transaction may be recorded.

Their loyalty is to the brand, not a channel.The pressure, therefore, is on retailers to become more channel-agnostic, break down their operational silos and create a frictionless experience across channels if they hope to win over this growing cohort.

So, at one level, it’s easy to understand the retail industry’s frantic quest for so-called omni-channel excellence. But the success from omni-channel will not be evenly distributed–and for reasons that go beyond a given company’s willingness to invest or their capability to execute well.

What many leaders and analysts fail to appreciate is that as customers migrate even a small portion of their purchasing from physical stores to digital channels, a number of important dynamics come into play, and a huge dilemma may emerge.

It’s important to understand that the transaction economics of physical stores and direct-to-consumer (D2C) are quite different. Brick and mortar is mostly a fixed cost business characterized by lots of capital tied up in real estate and the supply chain, married with some relatively high costs just to stay open and staff the store during typical open hours. By contrast, above a basic scale, D2C is highly variable. In most cases, it costs more or less the same to take an order, process it, pick it out of central inventory, pack it up and ship it, regardless of whether the item is priced at $15 or $150. Generally speaking, the higher the average order size, the greater the profitability. If you sell cheap stuff on-line–particularly if you can’t recover your shipping costs from the consumer–good luck making any money.

So if the variable economics of the digital channel are superior to brick and mortar–everything else being equal–the more customers become omni-channel in their behavior, the better a brand’s economics become. This is one of the reasons you’ve seen brands with higher average order sizes (e.g. Nordstrom, Neiman Marcus) investing aggressively in building out their e-commerce capabilities for over a decade.

If the marginal economics of the digital channel are worse than bricks & mortar AND the brand is growing slowly or not all, a real dilemma emerges. On the one hand, changing consumer preferences essentially demand investments in omni-channel capabilities. And this is no cheap date. Yet as customers migrate from stores to online, the overall economics deteriorate in the aggregate. Worse still, a dramatic shift away from physical stores to e-commerce will make many stores questionable economic propositions. Yet, closing those stores may cause the loss of some or all of a blended channel customer’s business. It’s easy to see this as the start of a downward spiral (I’m looking at you RadioShack).

From a consumer’s point of view, the deployment and improvement of omni-channel capabilities is a bonanza. From a retailer’s point of view, the rush to all things omni-channel–without a clear understanding of the underlying economics, the different behaviors by different customer segments and how physical channels interact with digital channels to deliver a remarkable total customer experience –can lead to some very serious mistakes.

 

Note: For an insightful and data rich discussion of many of these issues, I wholeheartedly recommend Kevin Hillstrom’s blog: http://blog.minethatdata.com/

“Chief Silo-busting Officer”

We’ve all heard the term “customer-centric” ad nauseam. And “omni-channel” is quickly reaching similar status.

My inbox and RSS reader are chock-a-block with articles, white-papers and sales pitches, all promising the keys to omni-channel success. Some extol “a single view of the customer.” Others opine on cross-channel inventory visibility or similar elements of a supposed seamless customer experience.

By now, the building blocks of what I like to call “frictionless commerce” are well-known. By now, if you’ve been paying attention, you know what to do. Yet it’s not getting done. We all know it and the customer data proves it.

The simple fact–the blindingly harsh reality–is that a bottoms-up strategy takes too long. The business world is not short on well-intentioned VP’s and Directors each pushing their particular agendas to act on behalf of the customer. Yet despite their passion and clever PowerPoint presentations, they all hit the wall at similar points.

Time and time again, over and over, the barrier to customer-centricity, omni-channel success–or whatever the heck you want to call it–starts and ends with organizational silos: silo-ed systems, silo-ed customer data, silo-ed inventory, silo-ed metrics, silo-ed incentives and on and on. When customers don’t care about channels, yet brands remained anchored in channel-centric thinking and structures, the gap between expectations and reality remains stubbornly large.

Some more forward-thinking companies have put senior executives in charge of “omni-channel.” Others have named Chief Customer Officers.  Good for them. Necessary perhaps, but not sufficient.

The hard, essential work of moving towards remarkable customer-centricity and true frictionless commerce requires an all-in, top-down strategy. And that, my friends, means it must be owned and driven by the CEO, supported by the Board of Directors.

Until the Chief Executive Officer becomes the Chief Silo-busting Officer all the talk about omni-channel this and omni-channel that is really just that. Talk.

 

HT to Suzanne Smith at Social Impact Architects. She addresses this issue for the social sector in a recent post.

Let’s get physical

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.

 

The heart of omni-channel

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.

Different, not dead: The future of brick & mortar retail

“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:

More focused.

More differentiated.

More relevant.

More remarkable.

More personalized.

More integrated.

See you in the blur.

 

* This isn’t, apparently, the actual quotation, but one that has become part of his folklore.

5 reasons Sears should liquidate ASAP

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.