Though 90% of Spending Still in Stores, a Time of Peril for Retailers

It is a time of both peril and opportunity for retailers. For many there’s more peril than opportunity, despite the objective fact that physical stores dominate retail spending and customer preferences.

The overwhelming majority of retail spending remains offline (90%+). According to the US Commerce Department, online shopping has grown to 8.3% of total US retail. As a practical matter that means, out of approximately $5 trillion in consumer retail spending last year, there was about $400 billion e-commerce.

Many in the digital marketing industry simplistically assume that younger shoppers are turning increasingly to e-commerce at the expense of physical stores. It’s not true.

Recent survey data on “Gen Z” (born after 1995) reflects that they are actually more inclined to shop in stores than Millennials. According to research conducted by IBM for the National Retail Federation, “more than 98% [of Gen Z shoppers] still prefer to make purchases in bricks-and-mortar stores. These data points should give some comfort to traditional retailers — shouldn’t they?

Gen Z Shopping

Source: IBM “Uniquely Generation Z” study (2017)

Despite these encouraging figures and demographic data, traditional retail is in a deepening crisis. Macys, GameStop, Abercrombie, JCPenney, Kmart, CVS and Payless, among others, are closing hundreds of stores. The Limited decided to close all its locations and become a pure-play e-commerce company, which is probably the kiss of death for the brand.

In the past few years, retailers have come to rely heavily on discounting to drive shoppers into stores (or buy online), which creates a kind of destructive cycle that conditions shoppers to expect big deals before they’ll buy. According to one study, involving footwear, large percentages of shoppers won’t go into a store without the promise of a big discount: “45% of women must see a markdown of 41% or greater to even enter a store.”

Undifferentiated store experiences, lackluster service, too many locations and the discounting death spiral are all afflicting traditional retail right now. Yet physical stores have numerous built-in advantages, which can be sustained if:

  • Retailers can make intelligent store closures
  • They use data and tech intelligently
  • Make in-store experiences and service better
  • Take advantage of mobile devices and apps for “pre-shopping” and in-store enhancements

I’m not talking about coupon notifications in the shoe department. I’m talking about offering product and price information, product aisle locations, shopping lists and available deals — and so on. Meeting basic informational needs and providing service and product knowledge that store associates no longer provide in most cases.

Stores fundamentally help support e-commerce, which is why The Limited is probably toast. Euclid Analytics CEO Brent Franson told me during a recent conversation that when stores disappear, it hurts online sales as well.

Stores help give people confidence to buy online, knowing they can return items locally. They also allow people to see and touch products that they may later buy online. One could argue that the “store of the future” should be a showroom that leads to online transactions, shipped to your home. This is what Amazon is reportedly working on now.

Franson argued that there should be an “intelligent reduction of store footprint that takes an agnostic view of where the purchase happens.” He says that stores should become “product playgrounds,” where people can feel and touch products and get help from live sales and customer service reps.

Franson is bullish on the value of humans in stores. But store associates need to be well trained and genuinely helpful, rather than grudging, ignorant or indifferent. These circumstances are a by-product of years of de-skilling and cost cutting under the assumption that advertising and marketing could do the heavy lifting of delivering shoppers and conversions.

But customer experience matters — a lot. Today that includes online, offline, customer service and mobile. The brand and customer loyalty is the sum of all those factors.

Things have dramatically changed in the past decade. Retailers need to shift some of their focus to the local level and pay much more attention to the shopping experience. And while technology isn’t a panacea, it can be used intelligently to help personalize the in-store experience and improve service.

At the recent SIINDA event in London, UK retailer House of Fraiser’s Chief Customer Officer David Walmsely argued that “retail is theater.” How many US retail experiences live up to that standard? Not many — or none — is the answer.

By all objective measures, traditional retail should be winning. But many retailers are beset by organizational challenges, outmoded technology and risk-adverse cultures. I think it’s safe to say that retail as a whole is not going away — but the same cannot be said any individual retailer.

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