By Christopher Mims
With brick and mortar stores shuttering at a record pace, retail
in the U.S. feels like it's at a tipping point. Many of the stores
that once filled the malls of America have become "zombies," while
online retailers capture ever more of the most valuable consumers
-- the young and affluent.
Legacy retailers are trying to play catch-up, but they're
saddled by huge fixed costs, investors who prefer dividends to
innovations, and CEOs incentivized to focus on the next quarter,
not the next decade. It's only a matter of time before Amazon.com's
army of physical retail formats turn into an existential threat to
everyone from Mom and Pop to Kroger and Wal-Mart.
That doesn't mean retailers are taking this lying down. As
online brands begin to build physical shops, the old guard is
taking notes -- and in many cases, writing checks. Wal-Mart, for
example, has been on an acquisition binge of late. It's now in
talks to buy men's clothier Bonobos for $300 million.
After surveying analysts and CEOs, I learned the three biggest
lessons physical retailers are grappling with as they face this
rocky transition.
Data is King
When I asked Target, Walgreens and grocery chain Giant Food
about loyalty programs and the fate of customers' purchasing data
-- which is the in-store equivalent of your web browsing history --
they all declined to comment. Why so cagey? Perhaps because of the
uproar that occurred when Target sent coupons for baby clothes and
cribs to the home of a teenage girl, alerting her family she was
pregnant, says Michelle Evans, an analyst at consumer research firm
Euromonitor.
Data has been a vital part of Amazon's retail revolution, just
as it was with Netflix's media revolution and Google and Facebook's
advertising revolution. For brick-and-mortar retailers, purchasing
data doesn't just help them compete with online adversaries; it has
also become an alternate revenue source when profit margins are
razor thin. For example, Unilever might buy store sales data to
figure out which products are in high demand and when people buy
them. (Ms. Evans says that when retailers sell data, it's
anonymized and not linked to individual consumers.)
Physical retailers must catch up to online retailers in
collecting rich data without making it feel so intrusive. Why,
exactly, does my grocery store need my phone number?
Personalization + Automation = Profits
There's a debate in the auto industry: Can Tesla get good at
making cars faster than Ford, General Motors and Toyota can get
good at making self-driving electric vehicles? The same applies to
retail: Can physical retailers build intimate digital relationships
with their customers -- and use that data to update their stores --
faster than online-first retailers can learn how to lease property,
handle inventory and manage retail workers?
Online retailers know what's popular, and how customers who like
one item tend to like certain others. So Amazon's physical
bookstores can put out fewer books with more prominently displayed
covers. Bonobos doesn't even sell clothes in its stores, which it
calls "guideshops." Instead, customers go there to try clothes on,
and their selections are delivered through the company's existing
e-commerce system.
Amazon's upcoming Go convenience stores, selling groceries and
meal kits, don't even require cashiers. That's the sort of
automation that could position Amazon to reap margins -- or slash
prices -- to a degree unprecedented for retailers in traditionally
low-margin categories like food and packaged goods.
While online retailers are accustomed to updating inventory and
prices by the hour, physical retailers simply don't have the data
or the systems to keep up, and tend to buy and stock on cycles as
long as a year, says George Faigen, a retail consultant at Oliver
Wyman. Some legacy retailers are getting around this by teaming up
with online players.
Target stocks men's shaving supplies from not one but two online
upstarts, Harry's and Bevel. Target has said that, as a result,
more customers are coming in to buy razors, increasing the sales of
every brand on that aisle -- even good old Gillette. Retailers have
long relied on manufacturers to drive customers to stores by
marketing their goods and even managing in-store displays. The
difference is this: In the past, new brands had to persuade store
buyers to dole out precious shelf space; now the brands can prove
themselves online first.
Legacy Tech Won't Cut It
Perhaps the biggest challenge for existing retailers, says
Euromonitor's Ms. Evans, is finding the money to transition to this
hybrid online-offline model. While Target has announced it will
spend $7 billion over the next three years to revamp its stores,
investors fled the stock in February after Target reported 2017
profits might be 25% less than expected.
When Warby Parker, the online eyeglasses retailer, set out to
launch stores across the U.S., the company looked for in-store
sales software that could integrate with its existing e-commerce
systems. It couldn't find a system up to the task, so it built one
from scratch.
These kinds of systems allow salespeople to know what customers
have bought both online and off, and what they might be nudged
toward on that day. "We call it the 'point of everything' system,"
says David Gilboa, co-founder and co-chief executive.
Having this much customer knowledge available instantly is
critical, but it's precisely what existing retailers struggle with,
Mr. Faigen says.
Even Amazon is experiencing brick-and-mortar difficulties. In
March, The Wall Street Journal reported that the Go stores would be
delayed because of kinks in the point-of-sale software system.
Andy Katz-Mayfield, co-founder and co-chief executive of
Harry's, is skeptical that traditional retailers like Wal-Mart can
make the leap, even if they invest heavily in technology.
The problem, he says, is that selling online isn't just about
taking orders through a website. Companies that succeed are good at
selling direct to consumers -- building technology from the ground
up, integrating teams skilled at navigating online marketing's
ever-shifting terrain and managing the experience through
fulfillment and delivery, Mr. Katz-Mayfield says.
That e-commerce startups are so confident about their own future
doesn't mean they are right about the fate of traditional
retailers, however. A report from Merrill Lynch argues Wal-Mart is
embarking on a period of 20% to 30% growth for its e-commerce
business. A spokesman for the company said that in addition to
acquisitions, the company is focused on growing its e-commerce
business organically.
It isn't hard to picture today's e-commerce companies becoming
brick-and-mortar retailers. It's harder to bet on traditional
retailers becoming as tech savvy as their e-competition.
(END) Dow Jones Newswires
April 23, 2017 07:14 ET (11:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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