It’s a snowy Saturday in Chicago, but Amy, age 28, needs resort wear for a Caribbean vacation. Five years ago, in 2011, she would have headed straight for the mall. Today she starts shopping from her couch by launching a videoconference with her personal concierge at Danella, the retailer where she bought two outfits the previous month. The concierge recommends several items, superimposing photos of them onto Amy’s avatar. Amy rejects a couple of items immediately, toggles to another browser tab to research customer reviews and prices, finds better deals on several items at another retailer, and orders them. She buys one item from Danella online and then drives to the Danella store near her for the in-stock items she wants to try on.
As Amy enters Danella, a sales associate greets her by name and walks her to a dressing room stocked with her online selections—plus some matching shoes and a cocktail dress. She likes the shoes, so she scans the bar code into her smartphone and finds the same pair for $30 less at another store. The sales associate quickly offers to match the price, and encourages Amy to try on the dress. It is daring and expensive, so Amy sends a video to three stylish friends, asking for their opinion. The responses come quickly: three thumbs down. She collects the items she wants, scans an internet site for coupons (saving an additional $73), and checks out with her smartphone.
As she heads for the door, a life-size screen recognizes her and shows a special offer on an irresistible summer-weight top. Amy checks her budget online, smiles, and uses her phone to scan the customized Quick Response code on the screen. The item will be shipped to her home overnight.
This scenario is fictional, but it’s neither as futuristic nor as fanciful as you might think. All the technology Amy uses is already available—and within five years, much of it will be ubiquitous. But what seems like a dream come true for the shopper—an abundance of information, near-perfect price transparency, a parade of special deals—is already feeling more like a nightmare for many retailers. Companies such as Tower Records, Circuit City, Linens ’n Things, and Borders are early victims—and there will be more.
Every 50 years or so, retailing undergoes this kind of disruption. A century and a half ago, the growth of big cities and the rise of railroad networks made possible the modern department store. Mass-produced automobiles came along 50 years later, and soon shopping malls lined with specialty retailers were dotting the newly forming suburbs and challenging the city-based department stores. The 1960s and 1970s saw the spread of discount chains—Walmart, Kmart, and the like—and, soon after, big-box “category killers” such as Circuit City and Home Depot, all of them undermining or transforming the old-style mall. Each wave of change doesn’t eliminate what came before it, but it reshapes the landscape and redefines consumer expectations, often beyond recognition. Retailers relying on earlier formats either adapt or die out as the new ones pull volume from their stores and make the remaining volume less profitable.
Like most disruptions, digital retail technology got off to a shaky start. A bevy of internet-based retailers in the 1990s—Amazon.com, Pets.com, and pretty much everythingelse.com—embraced what they called online shopping or electronic commerce. These fledgling companies ran wild until a combination of ill-conceived strategies, speculative gambles, and a slowing economy burst the dot-com bubble. The ensuing collapse wiped out half of all e‑commerce retailers and provoked an abrupt shift from irrational exuberance to economic reality.
Today, however, that economic reality is well established. The research firm Forrester estimates that e-commerce is now approaching $200 billion in revenue in the United States alone and accounts for 9% of total retail sales, up from 5% five years ago. The corresponding figure is about 10% in the United Kingdom, 3% in Asia-Pacific, and 2% in Latin America. Globally, digital retailing is probably headed toward 15% to 20% of total sales, though the proportion will vary significantly by sector. Moreover, much digital retailing is now highly profitable. Amazon’s five-year average return on investment, for example, is 17%, whereas traditional discount and department stores average 6.5%.
What we are seeing today is only the beginning. Soon it will be hard even to define e-commerce, let alone measure it. Is it an e-commerce sale if the customer goes to a store, finds that the product is out of stock, and uses an in-store terminal to have another location ship it to her home? What if the customer is shopping in one store, uses his smartphone to find a lower price at another, and then orders it electronically for in-store pickup? How about gifts that are ordered from a website but exchanged at a local store? Experts estimate that digital information already influences about 50% of store sales, and that number is growing rapidly.
As it evolves, digital retailing is quickly morphing into something so different that it requires a new name: omnichannel retailing. The name reflects the fact that retailers will be able to interact with customers through countless channels—websites, physical stores, kiosks, direct mail and catalogs, call centers, social media, mobile devices, gaming consoles, televisions, networked appliances, home services, and more. Unless conventional merchants adopt an entirely new perspective—one that allows them to integrate disparate channels into a single seamless omnichannel experience—they are likely to be swept away.
Why will digital retailing continue to grow so fast? Why won’t it peak sometime soon, or even implode the way it did the last time around? Anyone who has shopped extensively online knows at least part of the answer. The selection is vast yet remarkably easy to search. The prices are good and easily compared. It’s convenient: You can do it at home or at work, without using gasoline or fighting to park. Half of online purchases are delivered free to U.S. consumers—up 10 percentage points over the past two years. Many returns are free as well. Product reviews and recommendations are extensive. Little wonder that the average American Customer Satisfaction Index score for online retailers such as Amazon (87 points) is 11 points higher than the average for physical discount and department stores.
The advantages of digital retailing are increasing as innovations flood the market. For instance, Amazon has already earned valuable patents on keystone innovations such as 1-Click checkout and an online system that allows consumers to exchange unwanted gifts even before receiving them. Digital retailers drive innovation by spending heavily on recruiting, wages, and bonuses to attract and retain top technical talent. They were also among the first to utilize cloud computing (which dramatically lowers entry and operating costs) and to enhance marketing efficiency through social networks and online advertising.
Customers are out in front of this omnichannel revolution. By 2014 almost every mobile phone in the United States will be a smartphone connected to the internet, and an estimated 40% of Americans will use tablets such as the iPad. If you doubt whether consumers are ready for technology-driven retail solutions, find a “dumb” video display in any public location and look for fingerprints on the screen—evidence that people expected it to be an interactive touchscreen experience.
Meanwhile, traditional retailers are lagging badly. Online sales account for less than 2% of revenue at Walmart and Target. Nor are traditional retailers pioneering digital innovations in other channels, such as mobile shopping and call centers, or seamlessly integrating these technologies in their most important channel—physical stores.
It’s not surprising that these retailers are bringing up the rear. As a consultant, I often walk through stores with senior retail leaders whose knowledge of physical retailing is impressive: They know precisely where a fixture should be, exactly how lighting is likely to affect sales, and which colors work best in which departments. As a group, however, they are shockingly subpar in computer literacy. Some retail executives still rely on their assistants to print out e-mails. Some admit that they have never bought anything online. Technophobic culture permeates many great retail organizations. Their IT systems are often old and clunky, and knowledgeable young computer geeks shun them as places to work.
But it isn’t just computer illiteracy that holds traditional retailers back. Four other factors are at work as well.
Retailers were burned by e-commerce hype during the dot-com bubble.
Many created separate online organizations to maximize valuations. The separate organizations targeted different customer segments, inhibited collaboration, and created serious frictions and jealousies. When the predictions of dot-com domination proved wildly optimistic, overpriced acquisitions began failing, and store organizations smugly celebrated. A decade later, real collaboration between retailers’ store and digital operations remains rare.
Digital retailing threatens existing store economics, measurement systems, and incentives.
Traditional retailers live and die with changes in same-store sales, in-store sales per labor hour, and compensation systems based on such metrics. That was fine when online sales were 2% to 3% of revenues, but the whole system falls apart when that number reaches 15% to 20%.
Retailers tend to focus on the wrong financial metric: profit margins.
If a change dilutes margins, it’s bad. But Bain’s research shows that retailers’ stock prices are driven by return on invested capital and growth rather than by margins. Amazon’s five-year operating margin is only 4%—far below the 6% average for discount and department stores. But with faster inventory turns and no physical store assets, Amazon’s return on invested capital is more than double the average for conventional retailers. As a result, Amazon’s market value, $100 billion, is roughly equivalent to that of Target, Best Buy, Staples, Nordstrom, Sears, J.C. Penney, Macy’s, and Kohl’s combined.
Conventional retailers haven’t had great experiences with breakthrough innovation.
They are most comfortable with incremental improvements and with following the well-known dictum “Retail is detail.” Too many store reinvention programs have launched with great fanfare, only to die unceremonious deaths. Propose a more novel approach and retailers will ask why, if it’s such a good idea, nobody else is doing it.
Retailers tend to believe that their customers will always be there. But as customers grow more comfortable with omnichannel shopping, they grow less tolerant of what they encounter in stores. Sales associates are hard to find. When you find one, he or she doesn’t know much about the merchandise. Stockouts are frequent, checkout lines long, returns cumbersome.
An omnichannel world, in short, represents a major crisis for traditional retailers. Customers are passing them by. Online players are gaining. To keep up, existing retailers will need to create an omnichannel strategy—and pick up the pace of change.
Redesign Shopping from Scratch
The first part of any such strategy is facing reality. Retailing executives must acknowledge that the new technologies will get faster, cheaper, and more versatile. They need to forecast the likely digital density in their categories and prepare for the effects. What should I do differently today if I believe that 20% of our sales will soon come from digital retailing—and that 80% of our sales will be heavily influenced by it? Should we be opening any new stores at all? And if so, how different should they be? How should we adjust to a world of greater price transparency? What happens when traffic-building categories shift online and no longer pull customers into our stores?
Situations like these call for start-from-scratch, across-the-board innovation. In the book Idealized Design: How to Dissolve Tomorrow’s Crisis…Today, coauthor Russell L. Ackoff recounts a similar turning point at Bell Labs in 1951. The vice president in charge of the labs asked a group to name the organization’s most important contributions to telephonic communications. The VP pointed out that each one, including the telephone dial and the coaxial cable, had been conceived and implemented before 1900. He challenged the group to assume that the phone system was dead and had to be rebuilt from scratch. What would it look like? How would it work? Soon Bell’s scientists and engineers were busy investigating completely new technologies—and came up with concepts for push-button phones, call waiting, call forwarding, voicemail, conference calls, and mobile phones. Retailers need the same start-over mentality.
The design specifications of omnichannel retailing are growing clearer by the day. Customers want everything. They want the advantages of digital, such as broad selection, rich product information, and customer reviews and tips. They want the advantages of physical stores, such as personal service, the ability to touch products, and shopping as an event and an experience. (Online merchants take note.) Different customer segments will value parts of the shopping experience differently, but all are likely to want perfect integration of the digital and the physical.
The challenge for a retailer is to create innovations that bring the vision to life, wowing those customers and generating profitable growth. Let’s see what this might mean in practice.
Pathways and pain points.
Retailers traditionally defined their job with three simple imperatives: Stock products you think your target customers will want. Cultivate awareness of what’s in the store. When prospective customers enter the store, make it enticing and easy for them to buy. The job in an omnichannel world is more complex. Products themselves can more easily be customized to the preferences of individuals or small groups. Shoppers’ awareness depends not solely on company-generated marketing efforts but also on online expert reviews or recommendations from friends on Facebook and Twitter. The shopping experience includes not just visiting the store but searching for various vendors, comparing prices, quick and hassle-free returns, and so on.
Retailers today have a variety of precision tools that they can apply to discrete parts of these shopping pathways. Consider the job of creating awareness, which in the past relied mostly on mass-market advertising, promotions, and the like. Today marketers can send coupon codes and offers to customers’ mobile devices. They can optimize search terms and location-based promotions. They can provide targeted offers to customers who check in to stores through external platforms like Foursquare. The list of possibilities is getting longer by the day.
