People
The idea that a retailer’s stores compete with its online channels is as archaic as making a mixtape. For our industry, one of the biggest lessons from pandemic lockdowns is that every channel ultimately only exists to support the customer’s purchase journey. Today, every retailer needs to think about what role its digital channels as well as its stores need to play together to best serve the customer – profitably.
The growth in the share of online sales over the last two years has been impressive, with digital channels making significant adoption inroads among consumers previously immune to its charms. In the thick of pandemic-enforced closures in the second quarter of 2020, the online share of U.S. retail was at 15.7%. By the last quarter of last year, it was down to 12.9%. The ‘new normal’ will settle somewhere in the middle. Every individual retailer is still settling on its own new mix of online and in-store share of sales. This means that every retailer will need its own set of operating models, metrics, and processes to support this new mix.
And while most retailers have invested a lot to keep up with the omnichannel customer over the last few quarters, for most, increased digital penetration is continuing to lead to shrinking profit margins. Through AlixPartners analysis, we know that when online penetration crosses the 10% threshold, profits suffer. This means that retailers must address growing consumer omnichannel expectations alongside increasing customer acquisition costs, higher fulfillment costs, and rising return volumes.
This means that stores can, in many cases, be among your most valuable and versatile channels. Stores that exist to either provide a great experience, enable digital sales, or help enhance customer convenience in another way can and will continue to be an asset. We recommend retailers take an introspective approach to determining their right channel mix by asking the following questions:
Why do our customers choose our brand over our competitors?
There is a set of six models that retailers can use to strengthen their relationships with their customer: cost, convenience, category expertise, curation, customization, and community. Once a company knows what their right model or combination is, it must truly commit to it. According to AlixPartners surveys, 90% of retailers agree that increasing customer lifetime value is a primary goal. However, 65% of them do not leverage customer lifetime value in planning and real-time orchestration efforts. Only about a third believe they have the insights or analytics they need to help with foresight and not just hindsight. Target’s same-day delivery and pickup options were a convenience its customers valued during pandemic lockdowns, which the retailer noted when it increased availability during the busy holiday period after the pandemic-driven needs subsided.
How can we maximize the profitability of all our channels?
In calculating store P&Ls, many retailers fail to account for both the hidden costs as well as hidden opportunities that come with operating as an omnichannel enterprise. Among hidden costs are increased markdowns on online returns made in the store and the cost of processing these returns. On the other hand, stores help significantly with brand building, loyalty signups, and product discovery and can often be the more efficient way to fulfill an online order. Wayfair chief executive Niraj Shah called stores “valuable avenues for discovery, visualization, and marketing” while announcing the digital-first retailer was planning several new brick-and-mortar locations. The exact costs and benefits will differ for each retailer based on its channel mix, geography of stores, brand, and consumer expectations.
Are all our channels set up in a way that best serves our customer base?
Your customers think of you as one brand and one nameplate, not a combination of disparate channels. This is the attitude retailers must bring internally as well. To bring your organization closer to your customers’ perceptions and expectations, eliminate friction among channels. This will be achieved by increasing the interplay between systems, cross-training associates, and implementing convenience-based technology solutions. Walmart made widespread use of stores as fulfillment centers during the pandemic, and it has understood the speed and efficiency benefits associated with this move. It is now attaching automated fulfillment centers to existing stores that will make the most of the retailer’s brick-and-mortar reach while delivering on heightened consumer expectations around online delivery times. Best Buy, meanwhile, has upgraded its chat tool popular during lockdowns to bring store associate expertise to digital channels. Blue Shirt Chat now allows shoppers to skip the line as they arrive at the store and drop off an item to be repaired, pick up an online order, or activate a phone.
Evaluating your channels honestly is critical. After answering, take these immediate next steps:
- Redefine what success means for each channel and communicate it to the organization
- Change your performance indicators to match what constitutes success
- Revise both your near-term and long-term capital strategy
As retailers evaluate the uncertain future, it is indispensable to get both the channel mix right as well as determine how they will interact with and support each other. Keep in mind that every channel, physical and digital, plays a critical role in how consumers interact with your brand. Today’s powerful consumers have the agency and the power to respond if they don’t get what they want.
