Brick and mortar (B&M) retailing is an endangered species as more consumers prefer to shop online. While retailers may die, B&M retailing is here to stay. It has gone through several transformations from the location to the convenience to the in-store experience advantage. In the post Covid world, B&M retailing will not only survive but also thrive by reposi- tioning from selling merchandise to offering value-added ser- vices and from a low-tech to high-tech experience in the store.
From the Journal of Strategic Marketing
Jagdish N. Sheth (2021) Future of brick and mortar retailing: how will it survive and thrive?, Journal of Strategic Marketing, 29:7, 598-607, DOI: 10.1080/0965254X.2021.1891128
Brick and mortar retailing is going through an enormous transition being disrupted by the e-commerce market exchanges including Amazon, Alibaba, and Flipkart in different parts of the world. What’s the future? Will brick and mortar (B&M) retailing survive? If it survives, what will be the new avatar or reincarnation that will take place? My own view is that brick and mortar retailing will survive and even thrive as it has survived over time with many transformations and disruptions (Sheth, 2020).
We’ll take a historical view and suggest that the brick and mortar stores will survive in the future by transforming itself from low tech to high tech, and from selling merchandise to selling value-added services for which the consumer is willing and able to pay. In other words, it is the unbundling of free services into paying services, just like what the airlines have done: you pay for excess baggage and even for a seating assignment.
The global retail sector achieved a revenue of 23 USD trillion in 2017, which is bigger than the U.S. economy and should continue to grow to 28 USD trillion by 2020 with an average annual growth rate of 3.8% since 2008 (Wood, 2016). That growth rate is significant because the majority of retailing revenues are in advanced economies, and 3.8% is a significant number compared to the GDP growth of 1.5% or maybe 2% in most advanced economies. The retail sector represents 31% of the world’s GDP and employs millions of people. Furthermore, these numbers do not account for cash-based informal retailing, such as street vendors and small rural shops in many parts of the world, and especially in emerging markets.
E-commerce itself has grown significantly at 23% per annum between 2012 and 2019. It will reach 15% of the total retail sector by 2020. In 2020, the retail sector grew by 2.4% in the last quarter which includes the Christmas season; the e-commerce growth was at an astonishing rate of 47%. It is growing faster than 3.8% average growth and, therefore, will catch up eventually from the physical brick and mortar shopping to digital or online shopping. E-commerce will grow faster due to the pandemic lockdown and store closings. It is likely to continue after the pandemic subsides. Consumers enjoy the convenience of online ordering and home delivery of virtually everything, and surprisingly for daily necessities, such as paper products and fresh produce.
The brick and mortar retail sector is in trouble. World-class retailers such as Toys ‘R’ Us, RadioShack, and Sears are all under Chapter 11 protection (bankruptcy). Also, many iconic brands including H&M, Ralph Lauren, and Michael Kors are also selectively closing stores and reducing their physical presence. More than 9,300 stores were closed in 2019 in the U.S. alone, a 63% increase from 2018 when more than 5,700 stores were closed (Peterson, 2019).
A large number of store closures in 2019 were primarily large retail chain stores. The numbers were staggering: Payless Shoes, 2,500 stores (they decided to quit the game and go for Chapter 11 protection); Gymboree, 805 Stores; Dress Barn, 650 stores. And these are just some examples. In 2020, Covid pandemic has also forced many independent retailers to close down as well. The reality is very grim.
Why do good retailers go bad?
The old theories are the Wheel of Retailing (Hollander, 1960), which means, as you start in a no- frills environment, like the no-frills airlines, you do very well because you offer a great value to the customers and low price is a good mechanism. Now you outgrow and you go into a more expensive location such as the 5th Avenue in New York. This makes your cost of doing business (overheads) high. Somebody else starts a new business in the space you vacated with another retail concept or merchandise and competes with you. A second explanation of why good retailers go bad is the product life cycle concept and the inevitability of birth, growth, and death. But there are retailers who are in business for more than hundred years.
We also have a large number of formulas for retail gravitation: consumers shop primarily within five to seven miles or 10 kilometers (Bucklin, 1966; Grether, 1983; Reilly, 1931). That theory is also out of the window now because people shop from all over the world or from all over the world on e-commerce platforms.
In reality, most retailers go bad when they are either unable, or more importantly unwilling to adapt with the changing ecosystem in which they exist or thrive, such as technology, nontraditional competition, and consumer lifestyles (Sheth, 2007).
Today, consumers go to Amazon and buy ordinary daily necessities, such as toothpaste and paper towels because of the convenience of home delivery rather than get out of their home and drive a short distance to go to a neighborhood grocery store. Convenience matters to consumers. They are driven more and more by time poverty and not just by income. Therefore, stores that deliver to you online at home are surviving especially during the Covid shutdowns. Consumers are buying daily necessities at Amazon, Walmart, and Target. These include shampoo, toilet paper, and napkins in addition to buying high ticket items.
Today, you can buy everything on Amazon. Its inventory is massive compared to what a retail store can keep up especially because it is also a market exchange. My view is that this will be further accelerated with smartphones, 5 G networks, artificial intelligence, virtual reality, and blockchain technology as they all become mainstream. As the artificial becomes real, retailers will have to reposition themselves for survival and growth.
Evolution of retailing
Let us review the evolution of brick and mortar (B&M) retailing first, and then suggest repositioning of the brick and mortar retail stores. Retailing has a fascinating historyFigure 1.
Historically, the three laws of retailing have been location, location, location, which is how retailing began. In the agricultural economy, these were bazaars or trading posts on the silk route, for example, and in the U.S., there were trading posts from the east coast to the west coast. Bazaars became shopping centers. Location was very key. When competition was able to equalize the location advantage it gave way to convenience: how do you make it easy for the consumer to do shopping by accepting credit cards in addition to bringing cash or writing for example.
Once convenience was equalized, retailing pivoted toward customer experience and eventually, as suggested in this paper, retailing’s future will be with value-added services. At each inflection point, retailing has transformed itself to survive and even thrive. Retailing is not dead: retailers may be dead, but retailing is here to stay.
Repositioning of the brick and mortar retailing
Retailing needs to reposition from selling merchandise to offering value-added services. It also needs to reposition from low tech to high tech to enhance customer experience with respect to merchandising and atmosphericsFigure 2.
The vertical dimension is low-tech to high-tech. How to make the retail experience with digital technology more exciting by having video game arcade (electronic games machines) that consumers can go and play. Second, the focus of retailing always has been selling the merchandise either by the sales clerks or by self-service. Where you locate the merchandise, point of sale and experience is pretty low tech. It is high touch today but it also needs to be high tech. And the focus must shift from merchandise selling to offering more value-added services.
Value-added services are those for which the customers are willing to pay. There are a number of examples of value-added services and some of them are more profitable than the merchandise. I was surprised many years ago (almost 30 years ago) when I learned from the Chairman of Sears that out of the 24 USD billion merchandise retail group, the most profitable businesses were none of the merchandise (Kenmore appliances, Craftsman tools, etc.).
The two most profitable businesses were credit card financing and extended warranty service. 34% of the total profit came from credit card charges and 30% came from the extended warranty services on the products that Sears sold. Sears had more than 50 million credit card holders, more than Visa or Mastercard at that time. Here are eight recommendations of value-added services. Each retailer has to decide which of these value added services they have the capacity and the capability to implementFigure 3.
- The first strategy is ordering online but delivering at home or pick up at the store. This is a pretty common phenomenon today. This is also called the omnichannel. The best example of omnichannel is in the pizza delivery industry. What is a pizza delivery model? You dine in if you want or you can have a takeout order or the delivery at home. I think the same thing one can do in retailing, but you price it differently. You charge it differently depending upon the schedule and urgency. Surprisingly, for the home delivery of products, Amazon is leading the way. Brick and mortar companies have yet to learn how to organize and deliver from physical locations to home delivery or at least to implement a store pick up strategy. They are all experimenting. This includes Kroger supermarket and Walmart.
- The second service strategy is financing and having payments over time. One of the largest industries that survives on financing is the automobile dealers. Very few consumers can afford such an expensive durable product. And financing does not have to be limited to the durable or expensive products, such as home mortgage or car financing. One can finance grocery products as they do in emerging markets where the local merchant (often a very small owner- managed grocery store) has a lifelong relationship with consumers in the neighborhood. A store employee would come to the home of the customer and deliver the products, take the order, and the store owner also finances in case the customer does not have income that particular month. Financing is a very key ingredient in the retail setting. There are companies such as large furniture retailers (for example, Rooms to Go) who will offer five to six years of financing given such low-interest rates. And, you don’t have to have any money upfront to buy the merchandise, in this case, the furniture.
- A third strategy is to focus on public assistance programs. In the U.S., food stamps are one of them, but it is not limited to food stamps. There are many government- subsidized programs for food, rent, utility, and medical services for the low-income consumers. Tapping into that market will require a different skill set altogether, and different from the consumers who come with food stamps to make payment for the groceries they buy. This is much more a B2B institutional selling by tapping into the government budgets both at the federal and the state level. Public assistance programs are more or less universal and worldwide. It represents a multibillion industry.In emerging markets, the cellular telephones took off because of prepaid service unlike in advanced countries. You pay the money upfront. You have no credit card, no credit record either, and you pay as you use the mobile phone.How can prepaid services be possible to offer? It requires a lot more automation of sales promotions and discounts. It’s very possible to offer a large amount of online sales and offering online promotions, to bring the people to the store. Unfortunately, most brick and mortar retailers have large legacy systems. Very similar to banking, both have the same legacy IT infrastructure. Retail banking (going to a bank branch) is a very slow process.
- The fourth strategy is smart loyalty programs. What the brick and mortar retailers can do is to invest in what I call smart loyalty programs. Loyalty programs are there. We all have several loyalty cards, but they’re dumb. There is no good data mining of historical records at any grocery store or department store. History can tell the retailers what the next best thing each customer should be offered to members of the loyalty programs. Most retailers have historical records but no analytics is done to target customers on a one-on-one basis.
- The fifth strategy, especially for large department stores, is installation and mainte- nance. Home Depot and Lowe’s (which are do-it-yourself outlets) also offer value- added services, not just financing, and not just home delivery, but also an installation by professional certified people. Costco, which is a very large membership retailer, similar to Sam’s wholesale club by Walmart, is targeting services for their growth in addition to Costco merchandise. These include optical (eye glasses) and travel services in the store. Walmart is already offering many services. This was true for Sears Roebuck at one time, including Allstate Insurance. Services are where the future is for retailers.
- The sixth strategy is used as merchandise, especially for consumer electronics and department stores. Lots of merchandise can be refurbished and one can offer it at a separate location. Goodwill Stores are a great example. Goodwill is a not-for-profit organization. It provides jobs, but their retail stores have become a fashion place to shop for donated items now. In fact, in their premium retail stores, Goodwill has excellent fashion (clothing) and high-end furniture, which people have never used, but they want to give it away as a charity.As a recipient, the donor gets a tax benefit and the Goodwill store re-merchandises it properly.Similarly, there are many recertified products in consumer electronics such as smart phones, headsets, and smart speakers. Of course, neighborhood garage sales are still popular in America. Flea markets are also popular. All of them are unorganized forms of retailing. How can they be organized? Used merchandise is an important component of the market except fresh groceries due to food safety laws and regulations. For example, used car market is very large. Anything that’s durable (furniture & cars), semi- durable (garments), one can recycle it or even rent it.
- The seventh strategy is to enlarge the scale and scope of festivals and other events. Consumers spend extra money during festivals and holidays. We do have the Christmas and Thanksgiving sales, for example. China has a one-day sale. India has a Diwali new year’s sale. There are so many festivals out there, especially at a local level. Each county has a County Fair in America. Each city has its own festivals at a local level. A large multinational corporation often has a central festival strategy group and it is implemented locally. Think global Act local is a very creative approach to revenue growth through creating excitement and bring people to the store. Festivals as a strategy will require a show business mentality, whether those are faith-based or culturally anchored holidays and festivals.
- Another valueadded service offering is to offer a subscription-based App. I think brick and mortar stores can develop world-class Apps similar to online retailers. Their advertising dollars can be used on the app itself, capable of mass personaliza- tion. The store App can become a social media community similar to Facebook and YouTube. If Facebook can do it, it is possible for a retail store with a large loyalty program to do it alone. This is especially good for hardware stores and department stores which have lots of sku (stock keeping units).
These eight strategies have one common thing. It is the old razor and the blade principle (or a camera and the film principle or today a printer and the jet ink principle). You give away the razor, but your margins in blades are high and the customer becomes a customer for life. Kodak invented the camera and the film principle. Gillette invented the razor and the blade principle. Hewlett Packard does the same with its printer and its ink business. The best analog brick and mortar companies can learn is from the airline industry today. Today all of the additional ancillary services in the airline industry like meals and luggage are generating billions of dollars of extra revenue for the airline. Ryanair in Europe has stated that they would like passengers to fly free because passengers can buy merchandise. Margins in the merchan- dise are greater than in flying. It’s like a flying shopping center. You don’t make money on flying itself, but you make money on the merchandise in the plane when people are basically captive customers for one to two-hours or longer flights.
From low tech to high tech
The second repositioning dimension is how to go from low-tech to high-tech. Consumers are very much becoming more and more virtual shoppers. They often like virtual experi- ences more than real-life experiences. In the store, virtual reality is very possible today. It is also affordable today to get into the digital technology at the store level one can create an emotive bonding more so than with sales people we did at one time in a retail store.
There are two key parts to retailing at a store level: sales clerks and merchandise. Merchandising layout and display location, along with the sales clerks are the three foundations of great retailing. How can one make the tripod of retailing (merchandise, atmospherics, and sales people) smart?Figure 4
- The first strategy is smart checkouts. People have no time to wait in line. Amazon Go is a good example. At Amazon Go, everything is cashless, there are no people to serve you. There may be somebody just to help in case you need it. Today, we do have the self-service checkout counters at supermarkets or at department stores, to some extent. I think smart checkout is very important because it’s hassle-free. Consumers don’t like friction when they’re shopping. They have no time and they’re stressed out. I think technology can enable a good brick and mortar retailer to enhance the experience through smart technology and make it easy to do business.
- Smart mirrors are a second major technology. It is being installed now at many of the fashion retail chains. Smart mirrors enable greater personalization and enable the shopper to imagine how the garment or jewelry will look on her before making the purchase decision. Consumers want beyond convenience and consultative selling to more personalization.
- A third high-tech evolution is robot assistants. Very soon the day will come when the robots will be the greeters. At Walmart, you don’t need a human being to greet. Lowe’s, which is a do-it-yourself company similar to Home Depot, has experimen- ted with robot assistants who come and guide you to the shelf space and point out the specific merchandise and not just the Isle where it is located. Most retailers today have a kiosk with a computer when you walk in so you can find out which merchandise is in which aisle in their large warehouse-like space, which makes it easier to shop in a self-service environment. Robots will make it even more friendly and easy. Robots can also have a conversation with you often better than a real human being. I’m a strong advocate of using artificial intelligence and robot assistants in the brick and mortar stores. Voice recognition has matured enough today with Siri and Alexa to have a voice-based conversation with machines.
- The next high-tech strategy is to have cybercafes in stores. We do have the food courts and we have the restaurants in most shopping malls. Harrods in England has one whole floor devoted to restaurants. And cybercafes will be even more relevant in emerging economies like China and India where people don’t have enough space in their homes and apartments. Is it possible that within the store, such as Target or Walmart to have its own separate cybercafés? Just as Starbucks provides space to relax or have meetings while drinking coffee, the retail store can provide space to play video games. The future lies with online games and online cyber challenges in games such as Candy Crush which is more like a solitaire but interactive, engaging, and addictive.
- The fifth high-tech strategy is online festival-centric promotions. As mentioned before, there are so many festivals especially at the local level. Every day there are festivals all over the world, and the numbers are staggering. If you don’t find any festivals, invent one. The U.S. invented so many festivals and events because it is a nation of great marketers. The U.S. has Presidents Day, Memorial Day, Labor Day, and Thanksgiving. The U.S. created the Black Friday phenomenon. We have sales around Thanksgiving and Christmas as well as Valentine’s Day and Halloween. It is possible to invent new festivals for gift giving or buying for themselves. Alibaba generated more than 50 USD billion of sales in one day in October of this year.
Virtual shopping will become more universal and there will be virtual shoppers clubs. Many brick and mortar super stores are located quite far away from the center of the town. They provide price value in factory outlet malls. They are not as convenient but if they offer the same thing to the online shoppers club they will do very well. The brick and mortar retailers can easily create virtual shoppers commu- nities from their databases; just as Home Shopping Network does on cable plat- forms and it is 24/7 all 365 days.The Home Shopping Network actually proved that concept when broadcast television shifted to cable television, and they offered merchandise after merchan- dise exclusively on the cable channel and people bought it by watching the program and ordering by telephone (and now online also). In short, virtual shop- ping communities is one more way to add high-tech to the brick and mortar retailing experience. This can be offered in the store, in kiosks, or in the virtual world on Smartphones.
- The sixth high-tech strategy is to offer a store App. This can be implemented by both large national retailers as well as small neighborhood boutique stores and restaurants. These Apps can become edutainment (education with entertainment).
- Finally, large retailers can also have a dedicated YouTube channel. For example, Walmart can develop a YouTube channel and provide information about its heri- tage including its Founder Sam Walton’s legacy and how he created the largest retailer despite entrenched competitors, such as Sears and K-Mart. The Walmart YouTube (or Facebook) channel can also teach consumers how to use the product or what they can do with the product by creative uses and applications. The users may also provide their own unique and creative ways they use the product. This is very possible for most brick and mortar retailers no matter what their size or scope. Each retailer has the power to create a YouTube channel with which to enhance the engagement of the customer in the virtual world.YouTube channel has a lot of potential. It can generate not only large amount of user generated videos but can offer sales of selective products similar to advertis- ing on social media such as Facebook and Google.
When the artificial (virtual) becomes real, people will find more enjoyment, more comfort, and more security in the virtual world than in the real world. Consumers will migrate to the virtual world not only just for convenience, but also for the experience. Brick and mortar retailers can not only survive but also thrive by fusion of physical and digital, not only for search of product information but also for omni-channel purchases as well as social media engagement.
Retailing is here to stay. Retailers may be gone but retailing will not die. It will be revitalized and repositioned for the future as it has always done since the Industrial Revolution when modern retailing came into existence. Evolution of retailing from location-centric to convenience-centric, to experience-centric will transform into value-added services enabled by the digital technology. Successful repositioning will decide who will be the winners and who will be the losers in the brick and mortar retailing. In 2020, Walmart and Target did well despite the Covid-19 pandemic because of the integration of their physical stores with their online ordering and delivery. Unfortunately, JCPenney was unable to invest and integrate its physical stores with its digital e-commerce platform.
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