Retail’s Rough Road to Omnichannel
After reading about my favorite craft store — Michaels — partnering with Instacart to offer same-day delivery from its stores, I started thinking about delivery’s position in the retail space.
We are all aware that delivery has increased fivefold in the grocery business, from 3–4% of US grocery spend to 10–15% of total grocery sales(1). It now seems all types of retail are trying to catch the delivery wave. The Michaels announcement got me thinking about retail delivery — mostly how stores will differentiate themselves from Amazon — and the effect delivery will have on retail real estate.
In my opinion, the instore experience is what mainly differentiates Michaels and its competitors (JoAnn, Hobby Lobby) from Amazon.
At these colorful crafting stores, the ability to walk through the aisles and pick up countless supplies you didn’t know you needed creates joy for customers and impressive revenue for the retailers.
I have personally spent hours in a craft store, buying various supplies to fuel new hobbies, not to mention resulting in MANY unfinished projects. Without this exploratory experience, customers may not indulge in these impulse purchases at the same rate. This not only lowers the average order value, but also makes it more difficult to hold onto their core value proposition and differentiate themselves from Amazon. When both Michaels and Amazon are selling the same paint brushes online, the customer’s foremost concerns are price and speed of delivery. Amazon is well-positioned to win the price war with their ability to squeeze their suppliers, leverage economies of scale, and work on extremely tight margins, when needed; speed of delivery is in Amazon’s DNA.
The implications of delivery and e-commerce on the retail real estate market are fascinating. As stores like Michaels increase their delivery penetration, it is likely that they will transition to holding more inventory in their warehouses and reduce their physical retail square footage. Reduced foot traffic will also contribute to depressed margins at the store-level. Michaels 1,272 US stores will be at risk as customers become more excited about shopping from the comfort of their own homes. This risk is not unique to Michaels. This risk affects all brick and mortar retail and the result will be an increasing number of empty anchor stores and big-box spaces at shopping centers.
Other retailers have started exploring unique omnichannel models. Nordstrom, for example, has opened a new concept called Nordstrom Local in big cities, such as New York and Los Angeles. These “Local” stores are less than 2,000 square feet and operate as online pickup spots, personal styling services, tailoring locations, and more. They are an interesting hedge against the real estate risks department stores face, and a smart omnichannel solution for customers who still want that in-person experience.
So…is delivery the solution to retailers sustained comp growth or will it end up being a double-edged sword?
It is no doubt that the change in consumer mindset and behavior will have a significant impact on the industry. It is not as simple as adding a delivery partner to a primarily brick-and-mortar retail business. Retail stores will require fundamental strategy changes and less square footage to position themselves in an Amazon-dominated e-commerce world. No doubt there will be ripple shocks felt throughout the retail world.
The road will be rough, but I am excited to see the creative ways retailers adapt to this new reality…
