The Art of Retailing

Daniel Malinin
Aug 8, 2017 · 4 min read

In the last decade plus, we’ve seen a shift in domestic consumer sentiment when it comes to brick and mortar (B&M) vs. online shopping.


Online vs Brick and Mortar offer distinct incentive structures

B&Ms face a tall order of funding high upfront CapEx (land, building, machinery, etc.), holding costs (inventory), and ongoing general/admin expenses (headcount, maintenance). This may put business owners at an initial disadvantage as a company may find itself in a material debt position before opening its doors on Day 1.

The company may find itself selling products that have absolutely nothing to do with the store. How many times have you been offered a store-branded credit card?

Underwriting standards are usually weakened in order to issue these cards and that often, they cannot be used outside of the store. And what happens if a store is in decline or goes bankrupt?

Let JPM’s relationship with Circuit City* be the foreshadowing you need. We’re looking at you Citibank and Sears/Kmart.

E-Commerce is less labor intensive relative to B&Ms and therefore is able to pay higher wages to employees. Another advantage is the absence of a so-called internet tax. Online shopping incentives a shipping distribution network with nodes/hubs that can be used to drive down inventory holding costs and sell idle space through colocation.

Marketing is not a fair fight since the internet already collects and trades on an impressive amount of information and allows for effective retargeting. And this is ignoring your browser’s cookies :)

B&M cannot fight against digital retailing and instead should focus on the consumer experience

B&Ms should remove redundancy and focus on the consumer experience and redefine what makes the store special. Shifting to a lifestyle-focused position and signaling that there is a meaningful reason to enter the store may help a company reconnect to its consumer base. It may not even matter if the store actually sells anything (e.g. Tesla showrooms), the store must reinforce the brand values.

Ultimately, the customer should never ask themselves “why am I here?”

Mental health is material wealth

Figure out where pricing is elastic vs. inelastic and focus on customizing previously standard services. Sell peace of mind.

Most people would not forget sitting down and having a glass of wine or champagne while their purchase is being processed. Or being offered a massage before or after getting a hair cut. In fact, this is likely the best word-of-mouth advertising — these unique experiences separate the old from the new.

Here’s an example of messaging that could be used. Notice the transition from final sale to a moment of relaxation. The consumer can preview new, unavailable items and communicate interest. In closing, the store incentivizes a chance to return.

“Thanks for shopping at Future Co. Let us put together the items you’ve selected. In the meantime, you can have a seat on this leather couch and have a look at our catalogue. None of these items are available for purchase at this time but we want to share our excitement with you. If you see anything you like, let us know and we’ll include a coupon for X% off for your next in-store purchase….”

In the future, the B&M store will have one of three functions:

Complement online retailers that are used to store unique hard goods

-Serve as a destination for subject matter experts

-FOMO/perceived exclusivity such as limited design runs and pop-up stores

Purchasing will be conducted primarily online and a B&M will fall into one of the categories above. It’s possible that B&Ms will become loss leaders for large companies, or that the physical space will be used as a makeshift warehouse.

Of the three options, unique hard goods could be defined as something that you need to “try before you buy” but this definition will evolve as technological changes erase former buying practices. We can see this through 3-D capturing, printing, molding technology that will allow you to see what that couch will look like in your living room. Or how tight fitting those pair of jeans will sit on your waist.

SMEs are likely safe as this information asymmetry is difficult to adjust for. Quality is more important than convenience. Consider who you would go to talk to if you had a problem with your car, or computer.

However, one of the most interesting of the three options may be the last.

Pop-up stores focusing on single events are becoming increasingly common and create an artificial exclusivity (or FOMO). From a fiscal perspective, these are often a boon for both designers and merchants. A limited design pattern, low inventory holding costs, and low overhead are all benefits that can be found in a pop-up store.

I would wager that future retailers will lease out a portion of their store to a pop-up shop for one day a week in order to cash in on local events. AirBnB for retailers.

Treating people has never been more important (incentive reprisal)

In-person switching costs are much higher relative to their digital counterpart. Loss of institutional knowledge can be crushing and if your brand is nameless, faceless then choosing value is based on price considerations. Just a few clicks.

When people leave your brand, they are likely gone forever. Maybe they’ll come back, but there’s probably a good reason they left. And if you have not created a consumer-first culture and have not incentivized custom experience, then what are we even talking about?

*To those wondering what is a Circuit City? At its peak in the early aughts, it was like the 2006 Best Buy

Sources:

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