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Restoring retail

3 factors for finding the right bricks-and-clicks balance

RFP
Working women at their store The recent crisis has divided retail markets into three groups: thriving, surviving or failing.

Apparel stores, department stores and other retailers that depend on physical locations have seen significant store closures and bankruptcies driven by online competition and changing customer preferences. Meanwhile, many discounters like Dollar General and grocery stores like Aldi have been opening new stores and are thriving. In between are retailers that are surviving, often by altering capabilities to address evolving customer buying habits and needs.

US e-commerce as a percentage of total retail sales
Online sales have been eroding in-store sales, and the pandemic significantly accelerated that trend as shoppers bought more online and now plan to continue that pattern – with the biggest breakthrough in online grocery orders. According to the Census Bureau of the Department of Commerce U.S., estimated adjusted e-commerce as a percentage of total retail sales increased in Q2 2020 to 16.1% from 10.8% in Q2 2019 and prior to the COVID-19 in Q4 2019 was 11.3%. Before COVID-19, many brick-and-mortar retailers had already started developing online sales, shifting to a proactive “bricks and clicks” omnichannel sales strategy. Then, ready or not, many businesses switched to an online-only strategy as non-essential stores were required to close. Now, they’re wondering when and how their sales will readjust after markets stabilize.

Physical and digital retail need to be integrated, but how? Companies need to weigh new considerations for the overall number, size, location and cost structures of their stores, but the stores still create another customer touch point and can be valuable for their customer experience and brand affinity.

According to Simon Jewkes, Managing Principal for Retail at Grant Thornton, “Retail is being transformed in sectors such as apparel, where companies and investors recognize the value of retail brands and are re-evaluating the excessive rent and labor costs of a large store footprint. We are continuing to see acquisitions to combine retail brands under one owner that can leverage these brands’ purchasing power, cross-selling products and channels and cutting back on excess corporate costs.”

As retailers balance or re-balance their bricks-and-clicks strategy, three areas of intervention emerge:

1. Smart inventory
Stores need to have a more targeted in-store inventory. Some retailers might be willing to gamble on a strategy where stores are less profitable and primarily support online sales (such as serving as fulfillment centers), but most retailers still start with profit or return on investment as a core store requirement. When stores focus on high-volume or hard-to-ship items, they offer customers an enticing alternative to waiting for online orders. But it’s also worth remembering that, as you narrow your inventory, the costs, brands and other aspects of the products you stock in stores will increasingly define and differentiate your brand.

Retailers should consider their online sales in their inventory decisions. By tracking online orders for their area, retailers can learn more about local customers that they might not have seen in their stores, but are fans of their brand. While some online customers will want to stay online, others might be willing to connect with your store and your brand if they can purchase key items the same day – and have the option to “buy online pick-up in store” (BOPIS).

2. Seamless interaction
During COVID-19, many retailers have offered hybrid brick-and-click options for online purchases, like curbside pickup and local delivery. Customers have become accustomed to these options, plus the more traditional ship-to-store option, and they may expect these services to continue.

Retailers can also integrate the other side of transactions – returns. By using stores to offer customers a better return experience, retailers can differentiate themselves even for customers who never make initial purchases in-store. That uses your store to differentiate your business to a wider range of customers – people who might have only been online customers before. A return in the store creates some foot traffic that can also drive new sales, just like BOPIS.

Online retail giants have even started plugging into local stores operated by other retailers to help process returns. That’s partly because returns have become a default – but inefficient – way to resolve issues with online orders. These in-store returns drive better customer service, help integrate the digital and physical experience and can result in incremental sales.

Given the expected lasting impact of COVID-19, retailers need to clearly tell customers what is happening in their stores. Customers are looking for safe environments and clean stores where they can shop. They feel more comfortable when retailers clearly communicate the actions they have taken to enhance the store experience. Retailers can further demonstrate responsiveness to customer concerns by implementing technology enhancements like contactless payment and other tools to limit contact.

3. Experiential brand
According to Zeynep Koller, Principal and Strategy Retail Lead at Grant Thornton, “The motivation to go to a store will be materially reduced. Retail environments will need to invest a lot more in engagement to attract and meet evolving needs, drive education, build understanding and maintain a steady social experience that is relevant and buzzing.” Bringing customers into a physical store can create brand affinity in a way that differentiates you from any online-only retailer. If customers have one positive interaction or experience, even for a return, that can resonate and help to drive subsequent purchases both online and in-store. The purpose of the store will have to evolve with the customer to create the desired experience.

Stores can play an important role in developing your social media and online advertising strategy, as your marketing team uses local events, services, location tagging, or other store-based experiences to differentiate your online outreach. Many online direct-to-consumer (DTC) businesses understood this and opened physical retail locations.

Customers want convenience, whether they are online or in a store. You will go a long way toward building brand loyalty if you are able to meet a customer’s shopping needs, no matter what channel they choose. Companies with strong brands like Nike have adapted their business models from being a manufacturer to also becoming retailers, both with a large store footprint and a push to digital sales through their website. This shift boosts profitability by cutting out other retailers and increases their direct interaction with customers.

Make it work for you The role of retail locations varies from pure “showroom” retailers that feature samples with no sellable inventory, to more traditional store-first retailers that depend on stores for almost all sales and are just beginning to offer online ordering.

There is no golden ratio for in-store versus online sales in a successful bricks-and-clicks strategy, but the penetration of online sales is clearly growing and will continue to do so. Each retailer needs to find the right omni-channel balance, but they need to consider the three core factors and plan for trends that continue to tip the scales toward online retail.

Contacts:

Simon Jewkes Simon Jewkes
Principal, Managing Principal for Retail
T +1 212 624 5496


Zeynep Koller Zeynep Koller
Principal, Strategy Lead for Retail
T +1 617 320 9440