Sunday, March 8, 2015

It’s the End of the Retail World as We Know It

Retail businesses not yet engaging in online platforms need to catch up, and quickly. Trade is in our bones.
Retail has been with us since prehistoric times. Some say that long-distance commerce started 150,000 years ago, and was a main form of communication used by Homo sapiens along the Danube River around 35,000 and 30,000 BC. 

Moving forward very fast, capitalism is fueled by consumption, which is in turn served by retail and hence the link to present times and the importance of the retail in our world. 

Told you it is in our bones. 

But retail is changing, and fast. Pure players will not be able to survive if they continue selling on only one single channel, says Scott Galloway, professor of marketing at NYU. 

They will have to change and be excellent not only in retail, but also in digital. And so, pure-play retailers will have to be online, and pure-play e-commerce will need to have physical shops to support their sales. 

From Brick-and-Mortar to E-Commerce 

There are macro-economic trends that are affecting retailers and forcing them to change the way there are doing business, most notably:
  1. Increased costs of rental, especially for brands 
  2. High costs of inventory 
  3. Hyper-competition on prices from e-commerce shops 
  4. Demographic changes in the areas of the shops 
And so traditional retailers are growing and investing significantly in their e-commerce business. 

Among the fastest-growing e-commerce businesses in the U.S. are the traditional retailers: Nordstrom, Macy’s, Costco, AutoZone, and a few others. 

These companies understand the importance of having a physical presence as well as an online presence, and invest a lot of their budget in digital channels. And it’s clearly paying off: from an investor standpoint, Macy’s, Nordstrom, Walmart, and Best Buy yielded better returns for their investors when compared to Amazon for the period of December 2013 to December 2014. 

The advantages of having an e-commerce presence are clear: allowing greater reach to more customers, and capitalizing on existing inventories and warehouses to deliver goods without the expensive retail space and personnel involved in selling the merchandise. 

Despite this, you will be surprised that some of the world’s most famous brands and retailers (not only in developing economies) still do not have e-commerce shops. Take a look at the luxury industry – brands like Chanel or Panerai, to name but two, do not have any e-commerce presence. 

Having said that, many retailers do have at least one online channel they are selling on – let’s call it "traditional e-commerce." 

From E-Commerce to Brick-and-Mortar

However, there is no safe haven in the pure-play e-commerce sector, with its own pressure points on the business model, such as:
  1. Low profit margins due to the ease of comparing prices online 
  2. Returning buyers. The third repeated purchase is the Holy Grail of retailers. However, customer retentiononline is not easy.  
  3. High customer acquisition costs 
  4. Shipping costs, which can also be a silent killer for any business 
Research also supports that, for a variety of reasons, consumers still prefer to touch and feel the goods before making the buying decision. 

And that is why many pure-play e-commerce businesses are opening physical shops.

Examples? Sure! In the U.S., traditional pure-play e-commerce players like Warby Parker and Rent the Runway opened brick-and-mortar shops. In Asia, the Ensogo group and Groupon opened click-and-collect shops. 

The advantages of a physical shop are clear: a point for the customers to interact and feel the products before they buy them, and they also provide savings on logistics and shipping as well as places to warehouse and centralize goods delivery in case of need. 

They also improve brand building and interaction in the real world with customers, and hence have an impact on loyalty, too. 

The Collision Point of Multi-Channel Retailing: O2O

The Holy Grail, therefore, for this sector is multi-channel retailing. The key here is the connection between the channels, hence O2O (online-to-offline). The primary driver of O2O and multi-channel selling is the mobile economy that shapes the way we are researching products and buying them.
I will dedicate one of my next columns to the mobile economy. What does it mean for digital marketers? It means that you will need to drive an omnichannel customer experience and generate revenue on different channels as your business is changing. 

Here is a partial list of possible channels: 
5march15-ohad-hecht-graph

The need of the consumers to touch and interact with products, the increase of costs of delivery and rental, as well as the explosion of the mobile economy, are all redefining the way the products are going to be marketed and sold to us as consumers. Until next time, stay tuned, Ohad.

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