Smaller niche brands, disruptors powered by social media, and online pure plays are snapping up customers from established companies and the impact on brick-and-mortar retail is widespread. Major retailers from Toys “R” Us to Aeropostale to Gymboree have filed for bankruptcy protection this year and others have closed thousands of stores.
Before you think this is another warning about the often cited “retail apocalypse,” relax, the industry is booming and stores still matter. Recent data from the U.S. Census Bureau still shows that less than ten percent of all retail transactions happen online. So in the future, stores will play a new role to differentiate a brand and many retailers have lots of work to do on cultivating a good experience for shoppers in their stores if they are going to thrive even more.
The industry is experiencing a transformation as foundational as the birth of the big-box store or discount shopping nearly 50 years ago. As credit rating and analysis firm Morningstar Credit Ratings recently found, there’s an overabundance of American retail space. The United States has 23.5 square feet of retail space for every person, the highest ratio in the world. Well behind it are Canada, with 16.4 square feet per person and Australia, with 11.1 square feet. And while the U.S. is oversaturated, physical space is still quite valuable for a brand to create new experiences, new means of engagement, and most importantly, customer loyalty.
There is reason to remain optimistic about the role that stores will play in the future. Generation Z is the first digitally native generation, meaning they have never known a world without constant connectivity and digital devices. While most would assume they want to shop primarily online, a study released by IBM and National Retail Federation last year found that the majority of Generation Z prefer to shop in stores. This generation wants new ways to touch, feel, and experience products before they buy them, physical experiences only accomplished in a store. With the global Gen Z population set to reach 2.6 billion by 2020, retailers need to create more interactive engagement in their stores to serve the “always on,” mobile-focused, high-spending demographic. We need to bring digital technology into the store to truly transform the customers experience. Stores still matter, but we must work to make them matter more.
As retailers are working to make stores matter again, they are starting to experiment with new capabilities to attract, engage, and retain shoppers. For the past 50 years or so, retailers have invested in stores to facilitate sales transactions—not necessarily to create an experience focused on fostering a relationship. The industry needs to make stores matter again to customers, yet most of today’s advances in stores are one-off flagships, concept stores, or incremental changes that are not truly transforming the customer shopping journey.
Perhaps the cause for this slow adoption is funding. Historically, free cash flow has been used for store openings, merchandise category expansion, more traditional technology to support operations. As I have previously argued, this needs to shift toward investing in innovation and new capabilities to improve the customer experience. We only need to look at recent news of Alibaba’s $15 billion investment in overseas research hubs to realize the tides and budgets in the consumer industry are turning towards operationalizing an ongoing process of innovation.
There is not a roadmap, nor a single answer for which capabilities a retailer needs to build or how to redefine the customer experience. I hate to say it, but, it depends on the retailer’s strategy, as well as their brand aspiration. Many retailers we are working with today are employing customer centered design thinking by listening carefully to shoppers to discover unmet needs that they can address in a competitively differentiated way.
For example, City Furniture in South Florida recently launched three MobileFirst for iOS apps for iPad Pro used by 400 store associates across 15 City Furniture showrooms and 12 Ashley Furniture HomeStore showrooms to get in-store shoppers the products they want faster. When creating these apps, store manager Britney West took part in a design thinking session so designers and developers could address the key pain points she experienced working with customers in the store.
Before the apps, she wrote, she would spend hours of shopping with the customer to find complementary furniture and sit with them at a deskbound “green screen” to manually enter information and finalize the order. Today store associates with mobile devices like Britney, have access to customer data and analytics-driven information to make personal product recommendations so they can better upsell and cross-sell products. This has resulted in 12 percent growth in the average purchase or basket value per customer. Further, there has been a 28 percent increase in in-home warranty revenue.
Some retailers are focused on enabling empowered store associates with better technology and information to better serve customers. Others are seamlessly marrying their physical footprint with their online systems to improve distribution and by proxy, the customer experience. This is a distinct advantage physical retailers have over online pure-plays.
Best Buy is a great example of a physical retailer thriving in this turbulent environment. In fact, the company’s stock price has risen more than 50 percent in the past year. Previously, however, the company’s online ordering system was separate from its stores. If a customer placed an order on the website, it would ship from a central warehouse, and if that location did not have the item in stock, the customer faced serious delivery delays. That kind of experience and lag time is bad for business.
Bet Buy realized that by utilizing their stores as mini-warehouses for the surrounding area, they could ship packages quickly and directly to customers. Now, when a customer orders a product on Best Buy’s website, the item is sent from the location that can deliver it the quickest— a store down the street or a warehouse five states away. This small strategic change enabled Best Buy to improve both shipping times and the customer experience. And as the New York Times recently reported, now roughly 40 percent of Best Buy’s online orders are either shipped or picked up from a store.
What makes these two examples important is they show how retailers are using stores in new ways to serve unmet needs and streamline operations to improve the customer experience. There is no tried and true formula for how the physical retail market, particularly in the United States, will fare in this time of our industry disruption. One thing is for sure, retailers need to construct and drive an ongoing process to foster innovation in their enterprise.
Making stores and retail brands matter again will not be easy or without significant investment…but this is the table stakes to survive and even thrive in the years to come.
