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The Future of Retail

Online vs. Brick-and-Mortar

November 9, 2017, Bruno Jacobsen

The growth of online retail sales, fast outpacing the growth of brick-and-mortar sales, has many wondering whether the future of retail resides online. But there are good reasons to think that retail stores will not go away anytime soon. What, then, does the future look like for the industry?

Brick-and-Mortar is still king.

We can't blame anyone for thinking that most things are being digitalized and that digital stores will dominate the future.

Online retail sales in 2016 grew 10.1% compared to 1.4% for total retail sales, or 7.4 times more. This trend might remind some of similar past trends, such as those in the news industry when it seemed online might be their future. That did happen and, today, newspapers find themselves in difficulties trying to find a profitable revenue model, both offline and online. Will retail follow a similar path?

At the moment, we can’t say it will. The truth is, right now, there is only one online retail company that features among the top 10 US retailers — Amazon, Inc. And even then, it ranks only 7th in retail sales, behind competitors such as Walmart, Costco, and Walgreens.

According to Barbara Thau, writing for Forbes, there are other signs indicating that brick-and-mortar stores, not online, are the future of retail. One would be the conversion rates. People who enter physical shops are much more likely to purchase one item than those who visit websites. Another, and perhaps a more compelling one, is that brick-and-mortar retailers have gone on an acquisition binge, buying out online retailers too small to compete. This would compromise a future of online-only retail.

Indeed, even Amazon seems to be trying to make the case for physical retailers. Its recent acquisition of Whole Foods for almost US$14 billion, in addition to the several brick-and-mortar bookshops it has already opened in the US, give away the impression that the company believes a successful strategy includes a combination of online and offline. To maintain a sustainable competitive advantage, one of those streams alone might not be enough.

Physical retail shops allow customers and consumers to go through entirely different experiences, still unavailable online. Factors like the smells, sounds, and human interaction that can be found at a store are hard to replace and will likely be a driving factor for brick-and-mortar survival. It is estimated that in 2020, in the US, more than 80% of retail sales will still happen within physical stores.

 

Online-shopping is rising.

But there’s no getting around that online is rising. And by online we don’t mean only digital clicks to purchase products or services.

When thinking about retail in the future, there are several areas to consider. For instance, as VR improves, and the technology approaches real-world replication, many of the experiences once thought belonging to the brick-and-mortar world can be translated into the digital world. The ability to visualise how pieces of clothes would look on you, to walk through a digital store, and to interact virtually with other people may take a lot away from the beauty of physical shops.

Artificial intelligence, too, will have a big impact. As we become more and more connected to the digital world, and as our ability to make use of data increases, purchasing may become much more “natural” online. We’re already exposed to targeted ads, news, and much more. Although far from perfect, we should assume that this will continue to improve significantly. As this happens, the ability to predict our needs and wants might become just too compelling to ignore, and slowly chip away at the benefits of brick-and-mortar.

Another factor contributing the rise of online retailers is fast delivery. If you ordered something online a few years ago, it would take at least a few days to arrive. Today, with drone technology, and with online retailers developing their own delivery chains, the norm has become 2-day delivery, and customer expectations have adapted. According to Lin Grosman, we’re not too far from two-hour delivery, and Amazon has even talked about 30-minute delivery.

With delivery times so short, shopping online becomes exponentially more convenient, no doubt driving demand for it too. And while we may think that it matters little for most of us, for people living in rural areas, small towns, or seeking products not available near their locations, this might become their preferred method of shopping. Walmart created a successful business around large outlets near small towns; fast delivery brings similar benefits, without the costs.

 

Online, offline, or a bit of both?

So will online ever become dominant?

It depends.

When thinking about this, we should pay careful attention to what kind of shopping we are talking about. If you think it’s all the same, think about your typical shopping experiences. There are many items you may enjoy purchasing, such as a car, an iPhone, ingredients for a special recipe, new furniture, or a special clothing item. But then there are items you don’t care for as much, such as toothpaste, generic spaghetti, or toilet paper.

In the first case, in-shop experience may speak louder, while the purchasing of items in the second case might be more prone to automation. In fact, this how the industry seems to be developing.

Instant and regular purchasing

For many items, consumers will become accustomed to “instant and regular” shopping. Meaning that you get goods immediately, in the comfort of your own home, regularly or on demand.

Some goods people need often and they already know what they are getting, so they will most likely order them online. This could be either via a subscription, where consumers receive some groceries or household supplies on a regular basis, or driven by demand, whenever they need them.

Other products, like books, plain white t-shirts, and even (for many people) smartphones, will also benefit from an increase in online demand. With so much information about them, or consumers' deep knowledge of the product (such as plain t-shirts), it is not likely that a brick-and-mortar store will add too much value to the transaction. Of course, this won’t work for every product. But many will fall under this category.

We can expect companies to begin moving in this direction and consumers to accept it quite willingly, because of its convenience and cost savings, and especially as newer generations become accustomed to living within a digitally connected world.

Physical stores as showrooms and experiences

But not all is bad news for physical retailers. At least for now, physical locations seem to be here to stay. The vast majority of purchases are still offline and consumer habits can take a while to change. But even when they do change, and in a scenario where they would begin to lose sales at high rates to web-stores and companies like Amazon, they can always repurpose their locations to become showrooms and places where consumers go to have better experiences.

According to Strategy&, there are good arguments to transform many retail outlets into showrooms. It allows them to decrease inventory and make customer service much more personal. Whether it’s clothes, furniture, or any other items, one is able to see how they would look or work, can learn more about it, understand what’s best for their needs, and then order easily through a store iPad or online. It would likely also provide the retailers with more information on customers, through a better understanding of their needs and the data provided at the store.

Naturally, different types of retailers will experience different changes. It would be difficult for a company like Walmart to begin using its stores as “showrooms.” This will likely not happen. Likewise, it may be difficult for smaller retailers to become strong in the distracting world of online shopping, where a handful of powerful companies can compete effortlessly with low prices and product variety. So different approaches will be needed and companies will need smart strategic decisions going forward.

 

The ability to adapt, or drive change, will be key

As always, it is difficult to predict with high levels of certainty what the future will look like for retailers. Simple, broad brush predictions claiming that web-retailers will take over and that we will purchase everything online should be taken with some skepticism. But so should those predictions claiming that that this possibility doesn’t exist or that brick-and-mortar will always be the more dominant.

In the end, it can depend tremendously on the type of retailer in question or on the ingenuity of human minds in coming up with new ideas and solutions. These can either support the status quo or, who knows, change it completely. This digital transformation will demand retailers, physical or digital, to adapt if they want to survive and prosper. Agile capabilities, often lacking in the retail sector, will be key.

 

 

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