The Offline Future of Online Retail: Is there room for new business models?
Implications of the convergence of retail business models
Where is eCommerce today?
For all the hubbub about eCommerce destroying brick and mortar retailers, eCommerce is still only ~6% of US retail sales (about~10% once you exclude cars, gas and restaurants). Given that the vast majority of us PREFER to shop online, what explains the disconnect?
Online sales in certain categories (e.g. books and media) are much higher than 10% of course, but offline stores are inherently much better suited for a few major product shopping use-cases:
- Need it now/soon (e.g. meds, toilet paper)
- It’s cumbersome to ship (e.g. perishables, low value per pound)
- It requires customer service/trial (e.g. electronics, apparel)
Amazon is trying to solve 1 & 2 by building out same-day shipping and local warehousing infrastructure. Problem number 3 aka showrooming is a more complicated beast.
Showrooming: problem and opportunity
People often like to try-on or try certain products in-person before they buy them. Online retailers have tried to facilitate this through free/easy shipping and returns, but that process is slow and most customers still find it annoying. Some online retailers have been brazen enough to encourage consumers to go to physical stores to try products and buy them online.
Showrooming obviously draws the ire of offline retailers who feel online retailers are exploiting their investments and infrastructure to make a profit. But this strategy also poses a big risk for online retailers: what if the customer buys it when they try it? How much bigger would the discount (and lower their margins) have to be to prevent that?
Online Retailer Response to Showrooming
Online retailers are dealing with showrooming by — you’ll never guess — opening physical showrooms. eCommerce start-ups Warby Parker and Bonobos have opened up retail locations and guide-shops. It appears their goal is not to have a comprehensive store footprint and inventory but provide a few central locations to serve customers’ need to see and try things.
Offline Retailer Response to Showrooming
Offline retailers have been combating this threat by investing in ‘Omni-channel retailing’ (something clearly named by a consultant). They are basically trying to create a seamless experience between their online and offline storefronts so people can easily cross-shop across channels while they track their behavior. Some retailers have taken this a step-further to transform themselves for an internet future. For example, Restoration Hardware reduced its store footprint by 23% from ‘11-’13 even as sales grew by 1.5x. They are converting locations into large showcases. Customers are encouraged to check-out in-store and order online.
The showroom as a business model
It appears online and offline retailers (esp. in apparel and furniture—our favorite categories from last week) are converging towards the same lower-capital intensity business model: majority online sales and a small store footprint for showcasing with low investment in-store inventory.
Many apparel and furniture brands like to maintain control of their product experience in their own retail stores, but one could envision a new business model that would help them reduce capital intensity further—a showroom aggregator. I am essentially proposing a redesigned department store/mall/offline marketplace concept that works like this:
- Have retail showrooms in prime locations, allow different brands to display their products using the brands’ employees
- Carry no inventory nor significant own labor
- Charge a fee based on revenues, like an online marketplace.
The model can justify earning a fee by making the overall retail model more efficient through scale (e.g. lower rent per sq ft) and by providing greater flexibility in brands’ store footprint. Next week, I will pencil through the economics of this to see if it can actually be a viable business.
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