The retail revolution is here. The online retail force has finally arrived, and the results are dramatic.
Retailing sectors that are most sensitive to online competitors are downsizing. That set includes book sellers (Borders), video stores (Blockbuster), consumer electric stores (Circuit City), office supplies, stationary/gift shops, and big box stores. Chains are going out of business or dramatically downsizing the number and size of stores. The fact is that online competitors often have lower costs and a wider selection. Big box storefronts are being replaced growing retail concepts such as fast-food and fast-casual restaurants, fitness/health clubs, dollar stores, thrift stores, medical services, automobile services and wireless stores. The retail revolution is here, but the number of retailers, on average, is not declining.
The retail sectors that are less sensitive to online competition are holding their own. Sectors such as clothing (especially high-fashion), grocery (especially take-out and specialty foods) and high-end luxury goods are booming. It is hard to deliver any of these online, though certainly not impossible. In the UK, online grocery stores have benefited from a compact population and widespread internet access.
There is a major effort for brick & motor retailers to become online participants. They have economies of scale and can offer store pick-up service as well as delivery options. More importantly, they have a brand and the credibility that goes with it, which makes them a player and perhaps even a leading player in the online space. There is evidence that brick & mortar retailers that have online businesses are growing faster than retailers that are exclusively online. There is also growth in the effort of branded manufacturers to become online retailers in order to link directly to their customers.
One implication of having brick & mortar retailers move into the online world is a new role for their store fronts. Physical retail outlets are now charged with building the brand and its value proposition, in addition to creating sales. A store is a place to provide information, energy and entertainment, none of which is readily available in online only retailers. Fewer store fronts are need for this function, and fewer store fronts will be found.
Another implication is that online-only retailers have pressure to create a brick & mortar presence in order to give their brand visibility, clarity and credibility. Some online retailers are moving in this direction.
The use of handheld smart phones and tablets are having a major effect. There is the “showroom effect,” where customers shop in stores but buy online. Stores are adjusting by offering items unique to the store or at least not susceptible to comparison shopping over the Internet and by offering incentives for shoppers to buy from the store brand either while in the store or online. Some also adjust the employee incentives so that credit is given to online sales from store customers. In addition, brick & mortar retailers are bundling products and selling services that provide margins without affecting the selling prices of items that are shopped. The development of shopping-related apps is one of the battlefields in the new era of retailing.
The retail revolution has been a long time coming. It’s here, and the change is real with profound effects on strategies, shopping centers and customer shopping patterns. See The Economist’s take for some statistics.