We recently set up a conversation between Harte Hanks CMO Frank Grillo and Kimberly Whitler, Assistant Professor at the University of Virginia Darden School of Business, to discuss the current and future state of retail both digital and physical. The two ended up having a lively, insightful exchange of ideas.
Read on to get their take on topics ranging from the necessity for placing key focus on the customer and their buyer’s journey, to the many possible futures of brick and mortar [B&M], to how competitors should expose the weaknesses of Amazon (yes, believe it or not, Goliath has a weakness).
The common narrative we’re seeing right now—that retail is dead—is crazy. It’s not the demise of retail we’re seeing, it’s the radical change of retail.
We had an analyst from Forester do a read-out to our entire management team and he pointed out how much digital has truly skewed the conversation. Everyone is focused on the growth there. However, when you take the entire retail marketplace and look at true digital commerce (buyer’s journeys that begin and end online) you’ll see that it made up 13% in the U.S. in 2017.
Where we see the largest dollar growth in the retail marketplace is a buyer’s journey that begins digital, but ends physical. These are customers doing their research online, but following up with an in-store purchase. According to Forester, the projected growth rate for pure digital in 2018 is $48 billion, but the projected growth rate of in-store purchases that begin digitally is $69 billion.
So, from a hard dollar standpoint, the largest dollar growth is from people still buying in-store. But because digital’s growth is a high percentage on a small number, everyone tends to focus purely on the digital conversation. They’re missing the fact that the majority of what we buy is still in-store. We’re using the retailer a bit differently and looking for different things out of the store itself.
The real issue is there are retailers that don’t have any relevance in the market. They’re searchingfor relevance, don’t have a good digital or physical experience, and they’re not fulfilling anybody’s needs, so they’re going away.
That’s the conversation we’ve been having and we’re looking for your insight to see what you think is going on and how should retailers be thinking about the future?
I think it’s actually fairly simple, digital has exposed the flawed way in which retailers historically thought of themselves. The point of retailers in 1950 or 1970 was to create a mechanism for consumers to simply go buy products. They were basically a distribution solution.
What happened with digital (Amazon) is that shoppers no longer need a store to provide distribution because they can get the products they want delivered right to their front porch. For many consumers who don’t like shopping, the need to have a physical store for distribution is going to become less important. Grocery stores, for example, were just a mechanism to get fresh fruit to consumers. Today, Amazon will find a way to get that to my front door. There are good retailers (and there are still a few) who always understood that it’s about more than distribution, but there are many who are going to be faced with the reality that they have to create value beyond a distribution solution.
For brick and mortar to win, it’s not just being relevant, it’s understanding their target customer and figuring out how to create unique value that can only be served through a physical location. The process is to identify how to create unique value for consumers and then to understand what the role—if any—of brick and mortar is in delivering that value. The problem is that many brick-and-mortar-centric retailers focus on how to make the physical relevant. This is a problem because they are product rather than consumer centric. In some cases, retailers should acknowledge that a physical presence isn’t critical in delivering a superior, differentiated, unique, and valuable consumer experience.
Consider Sephora. They are as much about advice, counsel and guidance as they are about the distribution of products. Customers who go into the stores can explore different products, become educated on different solutions to specific problems, and get tips/advice on application. The physical location then becomes a training and advising center. It’s easier to order the products online but the value created in-store is different, more likely ensuring the viability of the B&M.
So, throw away the idea that you have either brick and mortar or digital. Start with your customer. Figure out how you can create value for them, and then figure out where the right location is as a retailer.
What about brands, like a Warby Parker, moving from digital to include a physical location? How would you address this move we’re seeing as digital retailers move into physical?
In some cases, there seems to be a belief that moving from digital to B&M is easier than extending B&M into digital. And this simply isn’t the case.
As an example, a board member who had created and sold a company that was essentially an aggregator (i.e., a website), demonstrated in discussions a lack of understanding of the complexity associated with creating product, sourcing product, getting it delivered to a location, hiring store labor, satisfying hourly workers to try and reduce turnover, making real estate decisions, creating superior in-store experiences, creating pricing corridors, and integrating this with a website. While developing a website is clearly challenging, there seemed to be an under-appreciation for the unique and equally challenging process of winning in B&M. In contrast, B&M-originating companies seem to understand and appreciate the challenge associated with going digital.
So, the bias I’m seeing is: “I’ve been successful in digital so brick and mortar should be easy.” I think it’s as hard for Walmart to go digital as it is for Amazon to go physical. And we don’t seem to see the value the migration equally.
Do you think buying your way into it fixes that? By not doing it organically, but by buying someone who already runs brick and mortar and having them do it for you?
Potentially it can. But there are a lot of questions. Are you buying somebody who’s really good at it? Are you buying a firm who is a great strategic fit with your operation? What is the synergy?
What about the reverse? Amazon buying Whole Foods. Arguably a good retailer in a lot of ways, does it help or hurt?
I know a lot of people think that was a great strategic purchase. But I think it depends on what you’re talking about: core strategy, marketing strategy, distribution, efficiency, finance. There’s a lot of different angles on whether it was a great purchase.
If you look at the Amazon purchase of Whole Foods, do the two companies have a similar consumer or a complementary customer? Are they positioned similarly (i.e., how does Whole Foods’ superior quality, superior management and quality in sourcing products, superior in-store service and customer experience that consumers are willing to pay more for fit with Amazon’s positioning)? Something as simple as the belief about employee treatment – how does Amazon fit with the Whole Foods employer brand? When you purchase a firm, you have to make sure that the acquisition is net positive. I think there are clear pros in the merger, but there are clear negatives. I haven’t seen data on the brand image of Amazon, but I think it is more similar to Walmart—large number of product options at low prices. Does a Walmart-Whole Foods make strategic positioning sense?
I like where you’re going. I’d like to interject with a statement and then a question. You say that you hate to shop, you use Amazon. I like to shop, I have certain items I care about that I wouldn’t shop for on Amazon.
I heard John Deighton, Baker Foundation Professor of Business Administration, Harvard Business School, make a bold statement two years ago: “Amazon is where brands go to die.”
His assertion was that Amazon’s job is to deliver the lowest price product that fulfills your need that’s easiest for them to get to you. They’re about operational efficiency and putting the best price out. And they don’t want brand to be between you and them.
Whereas brands (which is different than retail) have a different goal. They want customers to be loyal to them.
Is there one other disintermediation hitting retail right now, which is that brands view the distribution channel as between them and the customer and have an equal desire to get retail out of the way?
Yes. And Unilever and Dollar Shave Club are good examples of getting rid of the retailer. Manufacturers have wanted to get rid of retail for a long time if they could find a way. The retailer controls shelf space, distribution location, owns a lot of knowledge about the customer because they own the data, and is an expensive intermediary. But they have been a requirement. Finding alternative routes to control the customer-brand experience would be desirable if possible.
Right. Amazon isn’t giving the advice to which product (cheap or branded) as a customer you may prefer; something with tons of pieces to put together versus something useable right out of box. If you’re a brand, you want to express your meaning to your customers. Amazon can’t convey this. Brands are wanting to have a direct conversation with their customers. That’s why Birkenstock left or why we see L’Oréal opening a store for the first time.
They’re saying: “Retailers aren’t proving my brand value to customers, so I need to do it for myself.”
Retailers are now squeezed between brands saying I own digital experience but maybe I need to build my own physical channel too.
There is a cost of going your own way. Few people understand the complexity of having both your own brick-and-mortar store while also distributing your product through retailers who sell your brand and a variety of other brands. Select Comfort is an example of this or high-end fashion designers. They have their own stores but they also sell their product through retailers who sell other brands. This then becomes problematic. A retailer distributing your product is also competing directly with your store. It is easier to do this in the digital realm.
They do. L’Oréal, for example, on their website has a spot where customers can build a profile, experiment with products, and have a palate to work with. But if they walk into a Nordstrom or Macy’s store they don’t have any access to that. Because of this, the buyer’s journey is broken. The customer wants the in-store representative to know what they’ve been working with online. Retailers, brands and manufacturers have to make this become more seamless, the consumer doesn’t want to have to redo everything or they will start to pick which journey they prefer.
You bring up a good point. Hopefully the L’Oréal’s of the world will think it through: how do we create mechanisms to make it easy no matter where our product is sold?
Throw away the idea that you have either brick and mortar or digital. Start with your customer. Figure out how you can create value for them, and then figure out where the right location is as a retailer. - Kim Whitler
The big takeaways: Retail needs to rethink its reason for existence and it’s not distribution. They need to focus on where they are adding or creating value beyond just being a source for distribution. And I wanted to point out that you emphasize, some of them aren’t going to survive that transition.
There are some older models that cannot survive—or can’t recover from their lack of relevance in the modern world. It’s basic physical distribution, not even well designed. They need to create a reason for their existence separate from the distribution, though they might be out of time.
What would you say is the question that retailers need to ask in order to rethink themselves?
Too often retailers want to start with the question: “how can I make my store more relevant?” That’s not the right question.
The right question is tiered: “Who is my target? Is that who I want my target to be? And then, do you understand what they want?” And what if you find out that most of your target is not like Frank (someone who likes to shop), but they’re people who don’t have time or like to go from physical store to physical store to shop? In a world where these kinds of consumers have an option to never step in a store again, they would take it. Then you’ve got a problem, and you have to rethink your business model and if you don’t you’ll become obsolete.
You need to be anchored on the consumer and what they want and how you create value. Then ask the question “How does brick and mortar fit into that?”
It’s very externally focused versus navel gazing. Many begin by asking the following question: “I have stores; how do I make my stores relevant?” This is a product centered way of thinking not a customer centered way of thinking. These retailers are not focusing on customer journey, they’re focusing on product—which is their stores—and trying to figure out how to improve relevancy and I think that’s a mistake.
Perfect. I love that! And then the flipside is, as the digital world comes to understand that for some of their customers there is a required brick-and-mortar component. However, there’s a real risk of them not understanding the complexity of operating a brick and mortar environment.
For example, Amazon is used to an offer management environment, not an advice-driven environment. So how are they going to make the transition to operating a brick and mortar environment that is inherently a bit less efficient and more challenging and second that functions very differently as a role? They need to ask, “What am I trying to do in a brick-and-mortar space?”
Your assertion is that as digital looks to potentially open brick and mortar it could be fraught with peril because it’s so different than the world they grew up in?
Yes. There seems to be some arrogance oftentimes within the digital realm, with what they’re doing. In the website example I mentioned earlier, a lot of it is coding. It’s one-dimensionally complex. It’s very different when you’re talking about a physical retail experience.
I’ll use my time at David’s Bridal as an example. We sourced the material, we created the designs and we manufactured the garments, we shipped them and made sure they were in the right location at the right time for women to try on, and then had to customize them for weddings. We had to think about pricing versus local, national, and digital competitors. We had to manage integrated communications in-store, through our associates, our call center, and marketing materials. How do we modernize the stores—create enhanced in-store experiences that interacted with the digital experience to create a seamless journey that brought joy to brides. Digital alone was hard. B&M alone was hard. But it seemed to me that the complexity of B&M was far greater when you add in the hourly labor / physical location-related challenges.
Where we see the largest dollar growth in the retail marketplace is a buyer’s journey that begins digital, but ends physical. These are customers doing their research online, but following up with an in-store purchase. - Frank Grillo
Sure. Even the people management. There are customer-facing salespeople to manage, not just coders and technical support. There’s a whole different personnel aspect to the business.
Definitely. Companies are miscalculating all of these challenges within the brick-and-mortar environment.
Are there other issues that may arise—as digital retailers like Amazon look to move into physical locations—that you can think of?
While Amazon is doing a lot right, let’s look at some of their challenges. A significant one is their basic search function, which often times is poor. Many times you have to go outside of Amazon’s search to Google to find the right item on Amazon. That’s compounded by the fact that Amazon takes advertising dollars and sponsorship. So, no longer is Amazon actually feeding you what you’re looking for—they now have a compromised position where they have to feed you solutions that they’re being paid to feed you even if it’s not exactly what you want.
Imagine if I went into a store and I want to see everything, but in fact the store is hiding different products—sure, end caps and shelf positioning may be somewhat like this, but it’s pronounced online when you have 25 pages of solutions to a query to scroll through.
Yes, from the physical perspective it’s a lot easier to get around the end cap than it is to get around Amazon’s prioritizing of all those pages of content.
Right, so if I were a competitor of Amazon’s, I would attack this. Can you trust the solutions that Amazon feeds you? Why hasn’t their sorting functionality improved in the past several years? Why can’t I sort on basic features such as color or size? Look at Zappos’ functionality when searching for shoes versus Amazon. There is no comparison in terms of the ability to find what you are looking for. And Amazon owns Zappos.
Zappos features a search function where the consumer can filter on size, color, size of the heel, even primary benefit (i.e., comfort). That search is sophisticated. Yet Amazon hasn’t progressed in years. You get the same limited functions: average customer review, low-to-high price, high-to-low price, etc.
It’s not a very good search function, which actually means that they’re failing at what they are there to do: help the consumer find what they want quickly. They have some vulnerabilities that a smart competitor could potentially take advantage of. Yet nobody is talking about the downside or negative experience of Amazon.
That’s a great point. And it will be interesting to see over time what will happen. Will competitors become aware of the opportunities to attack these weaknesses? And using the ideal Amazon customer (someone like you who only wants to shop online)—do they start to put up their own guard—they want to buy everything digitally but find out there are only certain things they can safely buy digital, some shouldn’t be bought digitally at all, and others that are probably better off not bought digitally, but if they’re looking for maximum convenience they’ll take the risk. In other words, will these consumers start to self-gate their own Amazon experience?
Again, I think a lot of this is that you have to know the nature of your target. Some shoppers like you consider it enjoyable. I consider it a root canal. My mother considers it sport.
Consumers who want the story, the sport, want a brick-and-mortar experience because it’s part of the value they get from shopping. But if you have the Kim Whitler consumer, you also have to understand how you’re going to create value for them.
Retailers are acting like they can’t compete with Amazon. That’s not true. They may not have the breadth of selection, but we know from research that too many options isn’t always better and can create cognitive overload.