Up to now, only a few pure online Shops dared to venture into Brick and Mortar Retail. But there is increasing Evidence for this long-expected Move:

  • Amazon continues to invest heavily into In- Store Technologies. With the opening of the first Amazon Go Concept Store on 7th Avenue, Seattle and numerous Stores still to be opened, Amazon is aiming at the 92% of Retail Volume still sold through Brick and Mortar Stores

E-Commerce and Brick and Mortar are blending into one. The Customer does not seek a “Sales Channel Experience” – she seeks a superior brand experience, instead.

The Clumsy Moves of Brick and Mortar Retailers

Brick and Mortar Retailers have been venturing into E-Commerce for Years, on the whole rather clumsily. They build up independent E-Com Organisations, treated E-Com as “just another store”:

  • Allocate Merchandise, give someone Responsibility for the Sales and everything else will follow
  • Hire a Host of Fulfillment Service Providers to handle those nasty Aspects as Accounts Payable in a Business to Customer  Setting, Single Item Ordering and Returns
  • Manage e-Com as a Sales Channel, but effectively treat it as a Store for all operational Purposes

The Results? Mediocre.

  • Revenue growth has underperformed overall E-commerce Growth
  • Profits have been negligible
  • Customers find it hard to understand why she can not return Goods bought online in stores or vice versa. They wonder about difference in price, discounts and assortment. Thereby the credibility of the brand itself is undermined

All Brick and Mortar Stores try to improve. Every Chain is hastening to roll-out “Click to Collect”, “Return anywhere” or “Order from Store” Service Offerings to the Customer. But these services are mostly build on hastily developed, flimsy Processes and Systems.

The quality of Services is usually pretty low, as Organisations and Systems are not set-up for such Models. The Sales Channel is what dominates the internal Structure of a Retailer. Not the Customer. All Organisational, Process and Logistics are based on the premise to serve a Sales Channel. The Customer is all but an Afterthought.

How an E-Commerce Pure Play approaches Business

E-Com Pure Play and Brick and Mortar retailers have a very different outlook on their business of selling merchandise.

ecomret.png

Mindset: Explorational

These differences stem largely from the Point of Sales. E-Commerce Companies have the luxury of having a lot of data available in real time in their shop system.With this data, the all important visit and Conversion Rates can be scrutinised in every Detail: Where did Customers come from? How long have they been on the Site? What did they View? What kind of Customer is it – or even better who exactly has been the Customer?

E-Commerce Companies invest a lot of time in analysing Data.  As a Result of this they are experimenting by constantly, changing their Site to conduct A/B Testing, offer different Landing Pages, tweaking the Recommendation Engine, tweaking check-out and check-in Processes etc. Change is constant and everything happens in Real Time.

Brick and Mortar Retailers, on the other Hand, experience much less Change. A Store Location is fixed, internal refurbishments are costly and should be done not for one but for all Stores for the sake of Standardisation, Scale, Manageability and -finally- efficiency. The Time Horizon is the Interval, the daily Sales Report in the morning.

The physical Structure of the store determines the mental Agility needed by the Organization. Once a good set of reliable KPI’s has been found there is no need to revisit these again and again. These are fixed and stable.

For a traditional Retailer Data Analytics is Routine Work.

For E-Commerce Pureplays it is Exploration. 

This is an extreme inherent disadvantage in the mindset of a Brick and Mortar Retailer.

 Growth, Sales and Marketing: It is the Customer, stupid

An E-Commerce Pure Play is not inhibited by physical Stores as a go-between between the Company and Customers. Its communicates directly with the Customer via the Web Shop, not via Sales Representatives. Sales Representatives are influencing any Message that a Retailer wants to get to a Customer. It is not difficult to see, that this Message is changed via this relay, especially in an Environment of lots of temporary and part-time Workers.

Marketing is done in Ways to seek Conversations with Customers directly – where else Brick and Mortar Retailers are limited to anonymous Mass Marketing Channels.

Growth in a store can be influenced directly by Marketing and to a lesser extent by an increase in the Assortment. In a store, the physical location of a store limits the amount of what Marketing can achieve: No matter how much Money is spend, if the Store is too far away for a customer, she will not come.

In addition to that, Assortment Sizes can’t be increased indefinitely: There is only so much physical Space available in a Store. The Relationship between Sales and the Number of Items per Square Meter of a Retail Store follows a Bell Curve. If there is too much Stuff, the Customer won’t find the Things she needs.

Purchasing and Fulfilment: Where Mind and Matter collides

Let’s take a look at the Balance Sheet of a traditional Retailer: Usually, the Costs of Goods Sold (COGS) of a Retailer amount to 40 to 60% of Sales of a Fashion Retailer, for a Food Retailer this number is usually at 70 to 85 %. This Block  far outweighs all other Costs: Personal Costs should be at 20 to 25% for a Fashion Retailer, at 5 to 15 % for a Food Retailer, closely followed by Rental costs.

The basic Profit Proposition of a traditional Retailer is to sell high and buy low. And if Sales are more or less fixed because of the physical Configuration of Stores, Profits are to made from squeezing Suppliers. This is exactly what traditional retailers did for Decades, Centuries and Millennia.

E-Commerce companies think different. The Purchasing Price still needs to be good, but in a global Marketplace with global Sourcing, this is only a modest Challenge. Good Craftsmanship in Purchasing will suffice. Globalisation means that there is a Buyers Market out there – Suppliers, on the other hand, are abundant. Purchasing must be done well, but getting the attention of the Customer to come to your Site and convert him to buy  is the main Challenge.

E-Com Pure Plays think Traffic & Conversion – Retailers think Purchasing.

That is where Mindsets collide.

Physical Matter is obstructing the move of traditional Retailers to eCommerce, as Processes, Systems and Warehouses have been set-up to serve the Store Network with scheduled Supply Runs. Business to Customer, Single Item Delivery in Real Time has never been foreseen in the evolved, rigid while efficient Supply Chains of Brick and Mortar Retailers.

In contrast: E-Commerce Pure Plays have everything in their physical arrangement of Process, Systems, and Warehouses arranged for the Customer.

Retailers have arranged every Supply Chain Process for the Retail Store.

E-Commerce companies have arranged it for the Customer.

Beware of the Market Entrant, Retailer!

If every factor is weighed, I come to the conclusion that to expand from E-Commerce to Brick and Mortar Stores should be much less difficult to do than going from Brick and Mortar Retail to E-Commerce.

While traditional Retailers still need to re-build their Organisations, Processes, Systems and (most important) Mindsets to put the Customer first in every operational Aspect of their Doings – not just the usual Customer centric Gibberish uttered by CXO’s – E-Commerce Companies are already there. They “just” need to learn a new trick, handling physical Stores.  Of course, they need to adapt Organisations, Processes, Systems and Warehouses, too.  But they are starting from a much better starting Position. In their Business, the Customer is already the central Element of everything that they are doing.

So is it just a “Craft” that E-Commerce Companies need to learn? The Craft of Handling Stores? And think there is more to it..

How should an E-Commerce Company enter into Brick and Mortar Retail?

The optimal approach for an E-Commerce Company should evolve along the following considerations:

  • Experimentation: Maybe traditional Retailing, with its intense needs of capital and rigid physical Store Network is more and more a thing of the past. While the physical proximity of Goods and Services to Customers remains important, there might be other ways to fulfil this need, e.g. Temporary, rented “Pop-up” Stores or Brand Centers focused on the Goods Experience without Stocks while Delivery is done directly to Customers Homes.
    In any Case, Experimentation of Formats should be done excessively
  • From Zero to One: How should an optimal single Store look like? Size, location, layout, supporting processes. How should the Customer be served and Sales be done?
  • Self-reinforcing Feedback Loops: How can each Element of the Design be set up in such a way to support the other Elements? No Parameter of Store Design is independent of another: Square Meters, Assortment Size, Personal Customer, Customer Experience, Capital needs are all interconnected
  • Scaling: To scale reliably and efficiently is not a Skill that most E-commerce Organisations are accustomed to, esp. not if the Element to be scaled is physical Infrastructures, whose build-up involves Rental Contracts over 10 and more years in costly Locations. Planning and Standardisation over a long time horizon are key. This is a Challenge experienced by a lot of former Start-ups, too, eg. Tesla or Apple. Some “old economy” Skills are to be integrated into the Culture

Let’s explore the question how the enter into Brick and Mortar Retail in a second post in detail, especially the notion of self-reinforcing feedback loops.

 

 

 

Posted by frankthun

One Comment

  1. […] E-Commerce Companies do venture into Retailing, yet. Amazon seems to be gearing up (How would an E-Commerce Company get into Retail? Part 1/2) and the Gig-Economy is on the […]

    Like

    Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s