As much as media would like you to believe, “Retail Apocalypse” isn’t coming anytime soon.
Many dominant brick-and-mortar retail brands are not only opening new stores, they’re growing in revenues and profits. It turns out that digitally native vertical brands (DNVBs) that once raised a fortune from growing VCs are now seeing most of their margins from physical retail rather than online retail. Take Apple and Amazon (two of the three most valuable retail brands in the world) for example. They’re constantly expanding their physical footprint because they see their grow strategy closely tied to their offline presence.
Not only isn’t physical retail dead, dozens of DNVBs are forging partnerships with legacy retailers for physical reach (such as Quip at Target and Allbirds at Nordstorm). These stores are generating more profits than their online counterparts, most of which remain unprofitable. The future success of many digital companies will be determined by their offline expansion.
Reason is simple. Customers like to feel the product. We like to touch, inspect and even try on the product before handing over hard-earned cash easily. And from the business standpoint, many brands find their customer acquisition costs in store far lower than the acquisition costs via advertising fees they pay to digital goliaths like Google and Facebook. Moreover, as high as 40 percent of the apparel sold online are returned, in comparison to under 10 percent of the return rate for in-store purchases. The bottom line is this. Physical retail will remain an essential part of creating a remarkable, sustainable business.
Customer is the channel.
“We no longer go online. We live online.” – Google
Scarcity is now in the past. An abundance of choice and a tsunami of information and increasingly distracted customers have made it nearly impossible for a brand to send a unique and compelling signal and stand out amidst all the noise.
Gone are the days brands won customers over low prices, dominant varieties and convenient access. The new age of retail requires brands to constantly upscale, experiment and narrowly focus on a niche if they were to play the long game.
What once was scare no longer is.
Information abundance empowered customers to make better and informed decisions while pushing the brands to take a quick look at how important aspects of scarcity has quickly dissipated.
- Media are no longer scarce
- Information is no longer scarce
- Access is no longer scarce
- Choice is no longer scarce
- Convenience is no longer scarce
- Connection is no longer scarce
- Cheap is no longer scarce
Before the Internet revolution, consumers had a limited range of products that may or may not work for us. We purchased at a price that we thought was right, normally during regular hours. And we wait for the item to arrive on the retailer’s terms.
The new scarcity is customer experience.
The rise of Internet and e-commerce married with the explosion of social media and review sites have ultimately turned the tide. Today, the expectation is that we can have everything we want anytime we want it. Retailers must constantly seek ways to earn consumers’ trust, and this isn’t a small task. Mostly, we must command attention in new, novel and interesting ways by creating compelling experiences and over-delivering our promises over and over again.
For businesses, good enough is no longer enough.
Digital doesn’t replace physical. Digital complements physical, and vice versa.
Digital isn’t just an online transaction. Digital drives customers into physical stores. If brands look at it this way, they can shift the way they think about the retail economy. Rather than fearing digital, they start to realize and harness the power of digital. Likewise, when brands start to look at their stores as ‘assets’ rather than ‘liabilities’, they lean into making their stores more relevant by leveraging the many benefits of stores.
Retail brands must embrace the vanishing middle.
In the world where rich becomes richer and the poor becomes poorer, many consumers are trading down to less expensive purchases. At the other end of the spectrum, affluent consumers are driving growth and profits in premium, luxury space. The two extremes are clearly taking away margins from the moderately priced retailers. Take Ulta and Sephora for example. Their trading-up phenomenon contributes to the troubles among the boring, undifferentiated middle.
Brands should find ways to ‘increase revenues’, than to ‘cut costs’.
Rather than trying to innovate and increase revenue stream, the most common reaction among brands is dealing with lagging store performance by engaging in a series of cost-cutting moves – which in most cases aggravate the situation.
Digital revolution has eliminated the need for ‘middle-man’.
The digital revolution has allowed businesses to have a direct one-to-one conversation with their customers on many levels. Part of that leverage comes from the ability of the brands to glean consumer insights without having to rely solely on focus groups and research studies. As companies become direct marketers, instead of selling through distribution partners, they can now build massive insightful customer databases through in-store visits and online behavior.
Before the digital revolution, this wasn’t possible. Consumer insights were largely made invisible by the distribution partners. Now every brand has the privilege of bypassing intermediaries to reach their customers directly and harness consumer insights.
Nike is a great example. Nike started their consumer direct offense in 2017, and since then they’re greatly bolstering digital spending, upping its innovation, localization and personalization efforts. Above all, Nike tries to cut off the mediocre partners in favor of differentiated ones. So far, the results prove Nike’s approach is working. Their direct-to-consumer growth is steady and e-commence business is on fire.
The Amazon Effect
There are a few things most people get wrong about the e-commerce goliath. First, Amazon isn’t the world’s biggest retailer, at least not yet. Walmart still holds the top spot. Second, Amazon’s online sales dwarf its competitors, however it only claims a small piece of the pie in total US retail (about 4 percent). And more than half of that piece comes from independent merchants selling through Amazon Marketplace, not their own direct sales to customers. Plus, Amazon’s market share outside US is significantly smaller, although it is growing quickly. For Amazon, it has to compete with regional incumbents such as China’s Alibaba and JD.com, India’s Flipkart and Argentina’s Mercado Libre.
What’s more, Amazon isn’t profitable as much as most people think it is. Some divisions of Amazon have taken off recently (most notably AWS which has become Amazon’s cash cow). That said, Amazon’s retail division has barely broken even for most of its history and only started to generate profits just a few years ago. Even then their margins are below industry average.
Amazon may be unstoppable. But that doesn’t mean small retailers have to throw in the towel.
Amazon is ruthless and has left a trail of corpses in corporate graveyard. However, it’s unlikely Amazon will take over the retail industry – at least not in the foreseeable future. Our job therefore is threefold
- Stop competing with Amazon.
- Focus on the areas where Amazon can be beaten.
- Consider using Amazon as a distributing partner.
Whatever we do, we must understand that we’re not going to beat Amazon its own game.
Building a scalable online brand is a lot more difficult and expensive than most think.
There are three basic obstacles. First, acquiring customers online means competing with the bigger, established competitors in the category. And since most marketing has gone online, you must compete with the large incumbents in the same digital fishing pond. Facebook and Google are charging increasingly higher prices amongst the rising competition, and brands become more educated about which keywords to use and how much to bid to appeal to the most valuable customers.
The second obstacle is return on investment (ROI) of the late adopters. Customer lifetime value (CLV) simply stated is the estimated potential revenue that a brand can capture over the lifetime of a given customer. The problem is that best customers find a brand early and come with higher CLVs. Late adopters on the other hand, are generally less loyal and spend less over their lifetime, taking away from the brand’s bottom line. Said differently, the more the brand grows, the less valuable they can become.
The third obstacle is what the author calls ‘omnichannel migration dilemma’. While online sales are growing at approximately five times the rate of offline sales, not all the growth is captured by Amazon and new smaller disruptive brands. Many traditional retailers like Lowe’s and Macy’s have huge e-commerce businesses. Customers who used to shop in store only are now becoming multi-channel shoppers. Not losing share to Amazon or other competitors is good on one level but this shift isn’t always profitable. Investing in multi-channel retailing can be extremely costly. This dilemma is especially strong for small and medium-sized businesses.
Physical stores serve more than one purpose.
In almost all cases, the presence of a physical store can drive online transactions in that area. This is coined as ‘halo effect’ in psychology. Close the store and most often, the revenue drops.
Brands should never make decisions based on the ‘profit’ factor alone. If a retailer is considering to close a lot of stores, chances are they don’t have ‘too many stores’ problem. They have ‘not enough brand’ problem. Put it another way, it’s their value proposition that the brands must fix. If the brand itself is remarkable, they would be opening stores instead of closing them. The lesson here is to work on the right problem, even better ask the right questions before they become problems. And when in doubt, you should prioritize growing revenues over cutting costs.
Status quo remains as the invisible enemy.
It’s common for brands to come up with various reasons for increasing attrition, slowing transactions and slipping NPS scores, and not change the way they approach retail. Spin the dial on the excuse wheel and see what comes up. “My personal favorite: Adverse weather conditions negatively affected traffic patterns in key markets.”, said Steven Dennis.
Sure, taking bold actions is risky. But not taking them at all is riskier. In fact, the main difference between staying in business and ending up in the retail graveyard is the ability to change. RadioShack, Toys R Us and hundreds of retailers have gone bust not because they made a wrong move, because they failed to make a move. It turns out their cling onto the status quo costed them their lives.
Change is difficult. Failing to change is far more difficult.
There’s no silver bullet to reinvent retail.
Rather, the eight essentials of remarkable retail show you the way from good enough to remarkable. Like any guideline or regimen, you should use the steps to best complement the situation you’re in. You should use the eight essentials as the ‘compass’, not as the map.
Eight Essentials of Remarkable Retail
- Digitally enabled
Retail Essential #1 Digitally Enabled
Think of innovating and radical ways to leverage your digital footprint. For example, most retailers use their websites to sell stuff online, which is very limiting. To avoid the digital trap, never fall in love with the possible solution. Instead focus on the opportunity and use technology as an enabler. Remember, no one buys technology. They buy problem-solvers and pain-relievers.
Retail Essential #2 Human-Centered
To be seen and cared is simply one of the most basic human needs. Sadly, majority of brands see the customer care as a job to be outsourced. They make all their efforts to equip the workforce with hard skills when it’s clearly the ‘Empathy’ soft skill that is most lacking. Human-centered design (HCD) is therefore an essential component of retail strategy.
Retail Essential #3 Harmonized
Yes, the store is a place to buy goods. And yes, the website is too. Except that they are so much more than that. Both the stores and website are marketing billboards. Physical drives online and vice versa.
Retail Essential #4 Mobile
The astounding growth in ‘near me’ searches highlight how mobile the consumer has become. Loyalty programs, cash-less checkouts are all shifting towards mobile applications. To win the moments that matter, you must constantly show up in remarkable ways especially when your consumers are on the go.
Retail Essential #5 Personal
The ‘so what’ and ‘now what’ helps you touch your consumers personally. Remember no one wants to be average. They carry different values and want different things. So, treat them as such.
Retail Essential #6 Connected
People trust people they know more than they do brands. It’s important to deliver extraordinary product and service but what’s equally important is a community for your customers to connect and better yet, sing your praises.
Retail Essential #7 Memorable
There are six characteristics that make a brand memorable (1) unique (2) relevance (3) authenticity (4) wow-worthy (5) ownership (6) scalability/sustainability.
Retail Essential #8 Radical
The more radical innovation you pursue, the more vulnerable you become to criticism and mistakes. If you aren’t okay with that, that’s fine. The exits are clearly marked. But if you want to stay relevant in retail, you need trial-and-error style of exploration even if that leads to crashing and burning. It’s part of your job description.
“We don’t know who discovered water, but we’re certain it wasn’t a fish.” – John Culkin
To see the problems and their solutions in a different light, we have to fish in a totally different pond with a new crew and new tools. Some retails are afraid to spend money without a sensible return, while others take their entire leadership around the world for several weeks to immerse themselves in what the companies do differently to reinvent their physical space, reimagine their customer experience and generally blow up the status quo.
Guess which ones have a better track record of making innovation happen? And which ones would you rather lead?
As much as we want to be in control, we’re not.
One uncomfortable truth in life is that we have absolute power over very little things. This is not to say that we throw in the towel and allow ourselves to be carried along the inevitability. Rather, we must embrace the beauty of uncertainty.
When we acknowledge we might be wrong, we let go of the hammer, stop pounding the same nails and open ourselves up to a new world of opportunities.
“Every morning in Africa, a gazelle wakes up knowing it must outrun the fastest lion. At the same time, a lion wakes up knowing it must run faster than the slowest gazelle. It doesn’t matter whether you’re a lion or a gazelle, when the sun comes up, you’d better be running.”
That about sums up the state of play in retail today. No brand can afford to stand still or tread water as long as the world is spinning, the competitors hustling, the customers evolving and the startups disrupting.
There will never be the perfect time.
“The show doesn’t go on because it’s ready. It goes on because it’s 11:30.” – Lorne Micheals (producer of SNL)
The time will never be right. The conditions will never be right. No one knows exactly what’s going to happen in the future. But chances are, you already have everything you need to go to the next step. And there’s a good chance that it may not work. But standing still, hoping for a little more polish, a really cool PowerPoint presentation or a little more analysis isn’t likely to work either.
“The best time to plant a tree was 20 years ago. The second best time is now.” – Chinese proverb