Photo by: STRF/STAR MAX/IPx 2021 3/3/21 Target saw more sales growth in 2020 than the last 11 years ... [+] combined.STRF/STAR MAX/IPx
As I finished writing the second edition of my new book late last year, the predominant retail narrative was the so-called great acceleration of all things e-commerce. More recently, ebullient stories portend the resurrection of the mall and suggest that department stores are back (narrator’s voice: “Let’s not confuse better with good”). Unfortunately, much like the years-long fascination with the “retail apocalypse” and just about all things omni-channel, there is some truthiness in all this, but not much that provides tangible strategic guidance .
What the COVID crisis accelerated profoundly—and what I would argue demands a dramatic re-think of most brands’ strategy, performance metrics and investment plans —is what I call the hybridization of retail. And guess what? Physical stores are key to it.
For much of my career, retail was pretty straightforward—and rather dualistic. Physical stores were largely singular in purpose. Consumers traveled there to see stuff, pay for it, and take it home with them. Choice was mostly limited to what was in stock, accessible only during regular store hours. Direct-to-consumer (DTC) was the other major way to shop, albeit far smaller. Demand was mostly generated by catalogs and, eventually, via email and digital marketing. Orders were placed by mail, fax, phone and, as e-commerce came into existence, by computer. DTC fulfillment was almost entirely by parcel delivery from centralized distribution centers.
The blurring of the lines between traditional brick mortar and DTC shopping has been accelerating for some two decades as Amazon and non-store retailers (from Williams-Sonoma to Warby Parker) expanded into other forms of distribution, many retailers rolled out features like buy-online-pick-up in store (BOPIS) and consumers increasingly engaged in both digital and physical touch-points to inform their purchases.
Yet throughout all of this, we still tend to analyze e-commerce and physical store performance in isolation, engage in channel-centric thinking and processes, and conclude that the massive growth of online ordering comes at the expense of brick mortar. However, many remarkable retailers—including “old dogs” like Walmart, Target, Best Buy and Tractor Supply Co., as well as newer disruptive digitally-native brands, like UNTUCKit and Warby Parker—embraced the blur that is modern shopping well before the pandemic and now find themselves increasingly well positioned to respond to retail’s new era of hybridization.
NEW YORK, NEW YORK - AUGUST 08: People wearing masks walk past Warby Parker near Rockefeller Center. ... [+] (Photo by Alexi Rosenfeld/Getty Images)Getty Images
To appreciate the growing role of hybridization in retail—and to better understand how much reimagining of marketing, store formats, operating processes and more must occur, let’s take a quick look at how various parts of the retail equation are evolving rapidly from overly simplistic notions of online vs. physical shopping to more diverse hybrids.
The hybrid shopping journey. For most retailers—for a growing percentage of consumer purchase occasions—the typical shopping journey involves both physical and digital (and more and more than means mobile) interactions, regardless of where the sale is ultimately rung up. Digitally-influenced brick mortar purchases surpassed 50% in many categories prior to the pandemic. Now that number is more like 70%.
The hybrid store. For decades, the role of the store was pretty simple: to display products, aid in a customer’s selection (through assortment curation, visual presentation, sales help, etc.) and consummate the transaction. In a future article I will go into more detail on the evolving role of physical stores, but it’s clear brick mortar locations have gone from merely places to buy things, to product showrooms (e.g. Indochino, Allbirds), distribution hubs (where customers go to pick up their online orders and retailers fulfill local home delivery orders or ship e-commerce packages), customer service centers, places to engage in community with “the others”, and more entertainment oriented venues (e.g. Lego). They are increasingly powerful sources of brand advertising that are critical to overall brand success in the local trade area, regardless of transactional channel.
Stores that were built for a more singular purpose (and that’s just about all of them) will need to reimagine just about every aspects of their size, location, staffing, technology, operating processes, and much more to stay relevant and become more remarkable.
The hybrid shopping center. In aggregate, it’s the end of the mall as we know it. While many of the best malls don’t need to be completely transformed, many traditional centers will need to be massively repurposed or bulldozed to make way for a higher and better use. The answer for many will be an aggressive re-mixing to include residential, entertainment, dining, office and more. The monolithic formula of having several department store anchor tenants, a movie theatre and all the usual suspects in specialty stores and upscale dining, will yield to a much more diverse tenant portfolio.
The hybrid supply chain. Retail supply chains were largely built to get “store ready” bulk multi-unit packages to brick mortar locations, execute home delivery of big-ticket purchases (furniture, appliances, big screen TV’s, etc.) and pick, pack and ship online orders through the mail. Not easy by any stretch of the imagination, but relatively straightforward—and largely oriented to achieving large scale efficiency. When the definition of speedy delivery goes from 2 or 3 days to 2 or 3 hours, when a rapidly growing percentage of e-commerce orders aren’t fulfilled from a massive, highly-automated distribution center, but from a store built for a different age, when home delivery orders contain multiple items, many of which may be fresh, frozen or refrigerated, and when average order values may not cover the marginal cost of home delivery, it’s increasingly clear a new, hybrid strategy is required.
The hybrid brand distribution strategy. While brand flagship stores on the grand boulevards of global cities have been around forever—and vertically integrated brands are hardly new (LL Bean, Lands’ End, J.Crew, just to name a few)—by and large most manufacturers relied primarily on their wholesale distribution partners to build their brands. In recent years, dozens of digitally-native product brands that once eschewed brick mortar locations are opening their own stores and forging distribution partnerships with multi-line retailers like Target. Well established brands like Nike are having great success aggressively investing in direct-to-consumer initiatives (online selling and more company owned formats).
An employee adjusts a sneaker displayed for sale at the Nike by Melrose live concept store in West ... [+] Hollywood, California, Photographer: Patrick T. Fallon/Bloomberg© 2018 Bloomberg Finance LP
The hybrid market-by-market format strategy. For decades, the main playbook for most retail format expansion for decades has been to find a core prototype that be readily replicated and rapidly scaled. To be sure, there are a few notable exceptions. And there might be an “urban” version to make challenging and expensive real estate work. By and large, though, successful retailers primarily invested in formats with a singular purpose and relatively little variation.
As the shopping experience itself becomes more hybrid—and individual stores need to become more hybrid in the functions they must perform, a wholly new approach to format options and real estate deployment must be considered. The idea that one size can possibly fit all of modern retail’s situations is rapidly losing steam.
Whole Foods is a great example of the change that has been accelerated and how retailers can fail without a new hybrid approach. Whole Foods keeps trying to perform the expanded fulfillment options for grocery (and Amazon more broadly) while continuing to be a highly differentiated, upscale grocery store that is enjoyable to shop. They are performing poorly at both. Unsurprisingly, they continue to lose share.
Fortunately, there are examples that work far better. While hard hit by the drop in higher end apparel and accessory spending during the pandemic, Nordstrom’s market by market approach to format deployment is pointed in the right direction, particularly as they expand their Local concept. Dark stores, ghost kitchens, order pick-up only locations and more may all be part of the hybrid mix that will be required by retailers to reduce reliance on over-sized, poorly placed and expensive real estate while getting closer to customers and better addressing their evolving, diverse needs.
An employee stands outside a Nordstrom Inc. Local concept store in New York, U.S., on Thursday, ... [+] Sept. 5, 2019. . Photographer: Demetrius Freeman/Bloomberg© 2019 Bloomberg Finance LP
This IS big and hairy
There are a handful of retailers that appreciate the profound shift that the hybridization of retail and the attendant changing role of the store imply. Not only are they seeing physical store as assets, instead of liabilities, they are moving aggressively to shift their store, supply chain and real estate strategies. They are unbundling and re-bundling functions to focus on driving share growth regardless of the channel that gets sales credit. In fact, they see the customer as the channel and they embrace the blur that is modern shopping today. They accept that winning, growing and keeping profitable customers in the future is not about tweaking the current formula.
The investment to put this hybrid strategy into place is far from cheap. The cultural changes, along with developing the required new metrics, processes, capabilities, etc. are significant. Silos need to be busted and heads may need to roll. And very little of this can happen quickly, as reconfiguring existing store footprints for the new role of the store and/or getting out of leases to develop and redeploy a hybrid format strategy takes both time and money.
But what choice do most retailers have? The ones that mostly watched the last 20 years of digital disruption happen to them are mostly dead or dying. The notion that a slightly better version of mediocre will turn out to be a winning strategy seems an awful lot like trying to create a faster horse. Too much of physical retail (and the supporting infrastructure) has been built for an era we no longer live in.
If recent earnings announcements and conference presentations by less than remarkable retailers are any indication, we have entered a moment of high-fiving ourselves for our innovation and agility during “unprecedented times” and celebrating that the “consumer is back!” Call me skeptical.
What’s much more likely—from where I sit anyway—is that once the dust begins to settle it will be glaringly obvious that the mediocre retailers that embarked on a timid transformation will continue to lose market share and deliver unimpressive investment returns. Conversely, those that accept the profound shift that the hybridization of retail represents, will embark on a path of creative destruction that will not only solidify their competitive advantages, but unleash many exciting new growth opportunities.