As digital shopping continues to grow at a rapid pace, it is causing tremendous disruption to the economic model that retailers have relied upon to build and run their businesses. Today, retailers are competing with other traditional brick-and-mortar stores, the digital giants like Amazon and Wayfair, as well as new digitally driven threats from rental and resale businesses such as Rent the Runway, The Real Real and Stitch Fix.
This disruption represents a fundamental shift in shopping behavior that will accelerate as a new generation of digital and value-savvy consumers become an even greater economic engine. Retailers that rely heavily on traditional brick-and-mortar sales as their primary source of growth must urgently adapt or face significant declines in operating earnings and working capital.
Why? The digital environment is evolving.
- Amazon and Wayfair continue to rapidly grow sales and share. Consider this: while Amazon grows by more than 20 percent annually, most traditional retailers experience flat to slightly positive comparable sales, if successful. Amazon has taken an additional USD20 billion in sales each year out of the market share that was previously attributed to traditional retail stores — on top of the USD20 billion each previous year. That cumulative impact is huge.
Also troubling is the fact that, despite the liquidation, bankruptcies and downsizing of numerous traditional retailers over the past few years, little of the market share released was captured by traditional retailers. Rather, Amazon — as well as the discount channel and value chains — captured most of this available market share.
- Following the leader isn’t always the answer. Amazon is also continuously raising the bar and innovating, pushing retailers to keep up for self-preservation. But often all the traditional retailers are doing is increasing their costs and complexity without bringing additional top-line sales. Amazon continues to invest heavily to deliver goods faster to customers. When Amazon introduced Prime membership, for example, and its two-day (now evolving to one-day) free shipping guarantee, traditional retailers tried to match that offering. But, while Amazon can leverage their 100-million-plus Prime membership base (representing USD10 billion in annual fees) and profits from their hugely successful Amazon Web Services business to offset shipping and other related costs, traditional retailers aren’t so fortunate.
- Everything old is new again. Companies have increasingly been jumping into the rental apparel market to try to capture customers. Macy’s is exploring an apparel rental service and Bloomingdale’s service is about to launch. Many others are getting onto this trend also. The proliferation is, in part, fueled by the desire of brick-and-mortar retailers to adapt to changing consumer habits and find new revenue streams. According to a report from data analytics firm GlobalData, the rental subscription market was valued at around USD1 billion in 2018 and is expected to grow more than 20 percent a year, reaching USD2.5 billion by 2023.
Given this evolving landscape, it is not surprising to see numerous retailers experience significant declines in their operating earnings and working capital. While some struggle for survival, others are no longer in business.
Manage the omnichannel shift carefully to avoid further disruption
To remain competitive and play to their strengths of offering a physical experience that allows customers to “touch and feel” the merchandise, many brick-and-mortar retailers have adopted omnichannel offerings. Importantly, however, a recent HRC Advisory survey among C-Suite executives at more than 30 North American retail chains found that, if not implemented properly, omnichannel strategies can inspire a host of additional challenges on the financial and customer-service front.
For many retailers, e-commerce represents a cannibalization of earlier sales from their physical stores. Which means they must incur additional capital and operating expenses to achieve the same total sales level — if at all. This has resulted in a significant deleveraging of store operating infrastructure costs (store occupancy, labor and other costs) and a decline of as much as 40 percent in retailer EBITDA-to-sales performance.
Common issues to avoid in making the shift to an omnichannel strategy include:
The high cost of digital sales. Providing customers with the flexibility to shop online or in store may sound like a profitable plan. But the reality says otherwise. Revenue from multiple channels may equal prior total store sales but this is only made possible by the addition of massive capital and operating costs, with no overall incremental sales bump.
In its aim of serving digital and omnichannel sales, the retail landscape has evolved from a largely fixed-cost environment to an increasingly variable-cost one. While digital sales now account for up to 15 percent — and as much as 40 percent or more (for those with a digitally connected customer demographic) — of total sales, unfortunately, for most retailers, up to 95 percent of those digital sales represent a channel shift from their brick-and-mortar stores — not incremental sales.
“Any retailer looking to rise above these challenging times must up the ante with a compelling customer service experience and seamless omnichannel offering.” — Antony Karabus, CEO HRC Retail Advisory
Many of these chains, moreover, cannot justify investments in store upgrades to maintain their brand standard, a necessary tool for keeping and attracting younger customers to their stores. Our research found that 40 percent of store fleets have not undergone a meaningful remodel in more than 10 years (the number is closer to 60 percent for capital-constrained retailers).
Inventory management, serial returners and other challenges. Retailers trying to adapt to the new retail environment using omnichannels often face a steep learning curve, with challenges along the way. Unproductive inventory often gets “trapped” in the wrong store or distribution center, for example. Addressing that issue is an expensive one, whether through transfers, deep markdowns, liquidation or write-offs. And then there are the costs of free shipping and serial returners, the latter a particularly serious issue that severely undermines profitability, according to studies conducted by our firm.
Raising the level of play. Any retailer looking to rise above these challenging times must up the ante with a compelling customer service experience and seamless omnichannel offering. One of the strongest weapons retailers have in their arsenal, omnichannel allows them to increase sales, traffic and customer loyalty.
But it’s not easy to get right. Retailers must ensure their inventory is accurate and integrated across channels. Getting the execution right means the product is available where and when it’s needed to meet customer demand, while minimizing markdown and inventory liability and potential customer order cancellations. And, of course, brick-and-mortar retailers must implement the right tools, processes, infrastructure and organization for the greatest chance of success in this new digital environment.
Traditional retailers are experiencing the many, seemingly insurmountable effects of the evolving environment. And they’re incurring high costs trying to exceed customers’ needs across all channels as well as e-commerce demands and the invasion of Amazon. But it does not have to be this way. A bespoke approach with tailored solutions can help them rise above and survive these difficult circumstances. It’s no longer a question of whether to take the next steps, but how soon they can begin. Once they do, positive outcomes are sure to follow.