How Physical Retail Can Survive — and Thrive — in the Age of Digital Disruption

This is Part 2 of an adaptation from an MIT Sloan project in the course Competitive Dynamics and Strategy: Winning in Technology Markets. My MBA team, working with IDEO Cambridge, examined the role and the future of brick and mortar retail as more shopping goes online. We created two concepts — one at Walmart, the other at Staples — that would revitalize the customer experience at each store. In Part 1, I laid out the analysis that went into the two concepts. In Part 2, I assess the implications for retailers.

The concepts generated by our project are only two of a myriad of possible futures for the role of physical retail in an age of increasing online commerce. While the two concepts are aimed at specific retailers, the findings from our research and the ideas that underpin the concepts have a number of implications for the legacy physical retailing model. Traditional retailers will have to re-imagine their customer experience, their merchandising strategy, their approach to services, their partnership strategy, and even their fundamental business model of taking inventory from suppliers and reselling to customers in order to thrive in the new environment. A few of the most salient implications for physical retailers are articulated below.

Retail guys are going to go out of business and ecommerce will become the place everyone buys. You are not going to have a choice. — Marc Andreessen

Our concepts suggest that the future is not quite as dire as Marc Andreessen predicts: smart, well-designed physical retail experiences will always have a place in the shopping landscape. But getting there will be a huge challenge. Here’s why:

General multi-brand retail will always be at a disadvantage to brand-owner retail

Stores like Walmart and Target in mass retail, Best Buy in electronics, or Macy’s and other multi-line department stores, succeeded in part because of their wide selection of products from a range of suppliers, offering customers everything under the sun, using purchasing power with suppliers to drive prices lower. As I point out in Part 1, however, the convenience of physical retail is being rapidly eroded by online retail. Meanwhile, vertically-integrated retailers which carry only their own brand of products — apparel companies like Gap, grocers like Trader Joe’s, and the Apple Store in electronics — have much fewer SKUs and offer customers a more focused set of products.

This evolution in the online retail world is best typified by the entry of “digital native” brands into the physical retail channel, such as the menswear brand Bonobos, the disruptive glasses manufacturer Warby Parker, or the apparel rental startup Rent the Runway. These digital natives are following the lead of the Apple Store in creating immersive customer experiences. This is risky, as expansion into physical retail requires a number of different capabilities and assets from online-only retail: site selection, store operation, and a capable cadre of in-store sales reps, to name three. But the risks should pay off if the companies can achieve two complementary strategic goals:

· For customers who became aware of the brand and loyal users in their online-only incarnation, it serves as a new sales channel that allows them to touch and feel more products. This also allows the retailer to create an omnichannel strategy, where customers’ preferences and previous buying history online can influence service delivery in the store.

· For new customers, particularly those who are averse to buying products like clothes and glasses sight-unseen, it serves as an entry point to the brand and its product selection. Importantly, the goal is not always to move product: at Bonobos guideshops, for instance, customers can look at a range of products and try them on, but orders are placed and fulfilled online — people cannot take their purchase out of the guideshop with them.

Customer experience is where physical retailers who own their merchandise brand will always have an advantage over general multi-brand retail. When the retailer only sells one brand of product, and when the product can only be bought in one place, the experience and the product become inseparable.[1] To take an example in grocery, “going to Trader Joe’s” is closely linked with having Trader Joe’s unique private-label products, because they can’t be bought anywhere other than the store. This has the effect that customer experiences are by nature more immersive and stronger in brand-owned retail.

Omnichannel strategy will become table-stakes rather than a differentiator

A natural extension of the above is that online commerce will continue to creep into the world of physical retail. The news that Amazon, the giant of online retail, is experimenting with pop-up stores or more permanent physical presences is perhaps the strongest sign of the coming shift, but others also beckon. For legacy physical retailers, then, the focus must be on simultaneously improving the customer experience in the store, while also improving online complements (e.g., Walmart.com, Staples.com) to match Amazon on convenience. It is not an either/or proposition: improving both is critical to fulfilling shoppers’ value drivers across channels.

Online retail is also at an inherent advantage because of their flexibility to change offerings and formats instantly. Amazon has mastered the art of using customer shopping and preference data to customize the offers, advertisements, and featured products that are shown to a customer. Other online retail startups are following the lead, heavily investing in A/B testing and lean principles to customize the online experience for their users. While online shopping can be immediately tweaked and customized, changing a physical retail store format, merchandise, or in-store technology can take months. Andreessen, talking about an investment in an online shoe retailer, says, “A lot of what they’re doing is tweaking the website. That stuff can be done quite quickly, whereas a turnaround at JCPenney takes many times longer.”[2]

For these reasons and more, physical retailers need to focus on improving their online outlets while also investing heavily in new service bundles and technologies that improve the in-store experience and cannot be replicated online, while using all of the outlets cohesively to maximize the value of customer data.

Bundling and co-creation of services are key to the new customer experience

Both concepts rely on a rethinking of the business model of selling product at a markup. Because online retail can and will out-compete on price, the future of physical retail will rely on a combination of product and service offerings that cannot be replicated online. Walmart has gone down this path already in its Supercenters, offering banking services, pharmacy services, and basic health clinics, among others. Our concept for Staples takes their print services division further and creates a “third space” for SMB customers where all product and service needs can be met. It is important to note, though, that Walmart, Staples, and other retailers can’t do this alone. Just as Walmart partners with local banks to offer financial services in the store, other retailers will need to find service providers to partner with to get them in the store. This is going to require a significant re-think of the business model and careful consideration for how revenue is generated and shared with partners, but will ultimately offer customers greater value that can’t be replicated online. Additionally, retailers will face branding challenges in moving to a bundled-service model: very few customers today would think of Staples as an innovative SMB-oriented service business that hosts startups and offers workshops. Solving these branding challenges will be important for getting customers to rethink the role that physical retail plays in their shopping lives.

[1] This raises an interesting dynamic in the case of Bonobos: the company simultaneously began opening guideshops and selling their product through traditional retail channels via Nordstrom. It is our contention that the Bonobos guideshops will be more successful and strategically important to the company’s growth due to their ability to fully control the shopping experience.

[2] “Andreessen predicts the death of traditional retail. Yes: Absolute death,” Pando, January 30 2013: http://pando.com/2013/01/30/andreessen-predicts-the-death-of-traditional-retail-yes-absolute-death/