The Future of Physical Retail in the Age of Digital Disruption

The below is adapted 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. Below is the analysis, based on numerous store visits, in-store customer intercepts, and discussions with industry experts, that underpinned the concept generation.

There are two fundamental value drivers in physical retail: convenience and customer experience. We argue below that for many physical retailers these drivers are treated as mutually exclusive, and that is the rare retailer which can fulfill both at once.

Convenience is the value underpinning the mass retail format and the shopping mall. For shoppers, convenience is defined by wide product selection, low prices, economic value, and shopping efficiency. A focus on convenience drove the creation of shopping malls, with many different categories and store formats, that corresponded with the expansive economic growth of the post-WWII period and the creation of America’s suburban middle class. More recently, mass retailers and big box stores have over-indexed on convenience, with companies like Walmart and Target offering everyday low prices on tens of thousands of SKUs to millions of customers and expanding into supercenters to give consumers access to both general retail and grocery in the same location. For retailers focused on this format, product selection and cost/price are the rules of competition. Walmart has dominated the market in part due to its operational excellence and commitment to driving costs out of the operation and out of suppliers, translating cost savings to low prices for its shoppers.

Unlike the chiefly economic value drivers of convenience, the Customer Experience is much more psychological in nature. Customer Experience in retail is defined by product discovery and serendipity, deep product understanding, and engagement with knowledgeable sales representatives. Customer experience is more immersive and interactive. For many consumers, product variety is not as important to the shopping experience, and can in fact be detrimental, as a wide range of available products can be overwhelming and lead to choice paralysis. For retailers who compete on customer experience, operational efficiencies and price/cost competition matter, but are not the be-all, end-all.

While winning the convenience competition has created massively capitalized, highly profitable companies out of Walmart and Target, it has left those companies vulnerable to disruption by online retail. Of the two value drivers, convenience is being massively and quickly eroded by online retail. Product variety and selection is exponentially larger online, typified by the “everything store” vision of Amazon founder Jeff Bezos. Prices can be much lower online due to the lack of store operational and fixed costs (e.g., sales representative labor, real estate). In recent years, improvements in warehouse operations and delivery times have increased, narrowing the gap between online and physical retail in satisfying consumers’ needs immediately and eroding the “convenience advantage” of physical retail. With these trends poised to accelerate in the future, retailers competing on convenience alone will no longer be sufficient. While online retail still only accounts for approximately ten percent of all US retail, it has been growing much more rapidly as a category than physical retail.

Competing on customer experience, meanwhile, gives retailers a much more defensible position in the tension with online retail. An immersive in-store experience is much harder to replicate online: e-retailers cannot offer the same sense of product discovery/serendipity, community, or interaction with a knowledgeable sales associate that high-performing retail stores can, though they are certainly making efforts to.

It is rare that a retailer can successfully break the trade-off between convenience and an immersive customer experience. It could be argued that Trader Joe’s has done so in grocery, but their intentionally limited selection of SKUs, overwhelmingly private label, limit the convenience value proposition, even while they offer one of the best customer experiences in the category. Two retailers that have been successful at delivering both convenience and a strong customer experience are Costco and Home Depot. Costco, with its selection of 4,000+ SKUs across categories, bundling of additional services, operational efficiencies driving low costs and bulk prices to customers, and focus on a wholesale/warehouse bargain shopping experience, has seen tremendous success. Home Depot, on the other hand, offers a large product selection in the DIY home improvement market, but focuses on the customer experience by hiring knowledgeable sales people to help customers create their own home projects and offering in-store training and classes to DIY aspirants.