Increase in the number of Americans who completed 50% or more of their shopping online, from 17% in 2006 to 34% in 2013
The announced death of traditional retail may be premature, as organisations build a firmer, more agile foundation on which to differentiate
Physical retail is not dead – online-only will make up less than 20% of the overall retail market by 2030
Standing still isn’t an option for retailers, as online, mobile and other channels have disrupted their business models and transformed the nature of customer experience
New BearingPoint Institute research offers hope for those prepared to embrace new inand near-store technologies
They need to address the needs of ‘swing shoppers’ – neither traditionalists nor wedded to online purchasing, in particular pre-millennials who have grown up with technology but still retain an element of tradition
The announced death of traditional retail may be premature, as organisations build a firmer, more agile foundation on which to differentiate
The world of physical retail is in turmoil, as a tsunami of data indicates the rapid growth of online spending. In the US, for example, research firm Prosper Insights & Analytics reported that during the 2013 Christmas season 34%, of American consumers completed half of their shopping online – nearly double the figure for 2006 (note 1). Meanwhile, online spending in the UK accounted for 11.6% of total retail sales in 2013 vs. 10.2% in 2012, and is set to represent 13% in 2014 (note 2).
One company dominates the landscape: Amazon has come to represent an embodiment of combined fears about what technology has brought to retail. The company was only founded two decades ago, so its progress is staggering: worldwide sales were USD 74.5 billion in 2013 (note 3) and, in the same year, 180 million customers bought 3.5 billion items in the USA, placing it in the top 10 US retailers for 2013 with the second fastest growth in the retail sector that year (note 4). Also, in a 2013 brand equity poll, over half of the respondents said Amazon was the first website they visited when shopping online.
What precisely has made Amazon such a retail juggernaut? The answer lies substantially in the company’s consistent, continuous operational excellence, built on a backbone of its ‘elastic’ (dynamically scalable) infrastructure. ‘Amazon’s one-click payment and ease of return have contributed to raising customers’ expectations,’ says Isabelle Buisine, Head of CRM Group at Kiabi, a fashion designer and retailer.
Increase in the number of Americans who completed 50% or more of their shopping online, from 17% in 2006 to 34% in 2013
Whilst some commentators have forecast that Amazon spells the death of traditional bricks-and-mortar retail, the company is not without its own challenges – indeed, the business is still running at a loss after two decades of activity. In the light of this threat, should physical retailers look only for efficiency savings or do opportunities exist to differentiate themselves actively against the onslaught of retail Goliaths, like Amazon? The answer to physical retailer strategy lies in the integration of online and offline experiences, encapsulated by the concept known as omnichannel. Even so, the journey will not be easy, as confirmed by an executive at a major UK high street retailer. ‘Meeting customer needs is a more nuanced, complex challenge than ever before – and has costs associated with it, of course. But if we don’t make it easy, painless and a pleasure for customers to make their journey with us, they’ll have their customer journey with a competitor.’
We wanted to drill into these models more deeply, so the BearingPoint Institute undertook a study across five European countries that went beyond the usual questions of whether or not stores should have an online presence to investigate what steps they had taken to protect themselves against the online threat. The headline finding was that 59% of respondents held the view that consumers will continue to purchase goods and services in-store. Understanding how and why this conclusion was reached offers deep insight into how traditional retailers can gear up for future success.
Consumers continue to shop in store for a number of concrete reasons: facets of the physical shopping experience cannot be matched by online commerce. In particular, respondents to our survey saw the following factors as crucial:
Tactility – the ability to touch, see, try and test products. 88% of the panel considered tactility to be important, a figure that increased to 90% for women over 25 years old. One respondent told us: ‘In grocery shopping, the ability to smell, to touch products will only increase in importance.’
Instant ownership – the desire to possess a product as soon as the buying decision has been made. 81% of respondents concurred, incorporating 86% of men between 26 and 45 years old. Once the decision has been made, even a 24-hour wait is seen as too long.
Customisation and after sales – the response to consumer needs for flexibility and personalised products and services. 75% of interviewees concurred, increasing to 78% of men over 25 years old and 78% of large city dwellers – a sample of more than 1 million inhabitants.
Personalised relationship – 73% of consumers, mostly women aged 46+ – expressed a preference to buy from people they know and who know them, in return. This factor was a priority. One responder told us: ‘The sales attendant should have my details and order history.’
The importance of engaging in a personal experience cannot be overstated. This factor is more than simply being ‘known’ as a customer; it is the need to have ongoing rapport and relationship with retailers, built through sharing genuinely value-added conversations with passionate sales people. Comments such as ‘Good morning, Mrs Robinson. Did that light fitting work for you?’ come across much stronger when they are made by a real person who genuinely cares.
Not all offline factors were seen as so important – for example, ‘sales assistant advice’ was mentioned by only 42% of the overall sample, although this figure varies according to the sector. This result illustrates a dilemma faced by physical retailers: consumers value a relationship, great service, and so on, but do not necessarily want long conversations with sales staff. Does this mean consumers want to have their cake and eat it? Perhaps – but the customer is always right!
Retailers are familiar with the need to deal with oftencontradictory behaviours, some of which are exacerbated by the online experience. As discussed in the BearingPoint article, ‘Customer paradoxes in a digital world’ (note 5), one way to deal with this trend is to become more proactive in creating customer needs, rather than waiting for them to express their expectations of future in-store experience.
As emotions play an important role in our industry, we don't see stories disappearing.
Folkert Schultz, managing director, strategic company development at Fressnapf Tiernahrungs GmbH
Building on these findings, are there certain demographic groups whose needs are more likely than others to depend on these factors?
Our research identifies a ‘hard core’ of consumers who value physical store factors more highly than other people and who are more likely to shop consistently in-store. For example, 32% of the respondent group – who we call ‘retail ambassadors’ – strongly believe in-store retail is not dead and see themselves as fervent defenders of physical shops.
Whilst this group does not represent the totality of consumer behaviour, nonetheless it demonstrates that a fundamental rule of marketing practice still holds sway: ‘know your audience’. Folkert Schultz, Managing Director Strategic Company Development at Fressnapf, a pan-European retailer of pet food and accessories, comments: ‘Stores will still be important to certain target groups, especially those customers seeking [advice and] personal interaction with specialists and passionate people. As emotions play an important role in our industry, we don’t see stores disappearing.’
Women are going to save traditional trade, they want a real shopping experience and don't see it as a simple utilitarian need.
Thierry Benhaimm, Deputy CEO, Sales France and Benelux, Ludendo
So, which groups are important? In some ways, the question is less important than the answer because organisations that identify target groups that are meaningful to them can be more successful than those that do not. The French company Ludendo Group is a leading trade specialist of toys and games and also owns Hamleys, the flagship toy shop in London. The Group is directly focusing on the gentler sex: ‘Women are going to save traditional trade,” says Thierry Benhaim, Deputy CEO, Sales France and Benelux, Ludendo. ‘Women demand sharing more time together, more pleasure and more passion. They want a real shopping experience; they don’t want to see it as a simple utilitarian need. Women enjoy hanging around in nice stores.’
A highly important group across many retail organisations is the ‘pre-millennial’ group – that is, twenty-somethings who are just old enough to remember life before the web became dominant and universal. Interestingly, this group makes up 20% of all retail ambassadors, with little variation between countries. Those retail ambassadors are in majority females (20% more than males). Some 36% of them express loyalty to certain brands and stores, which suggests that brand association is something worth striving for with this group.
Meanwhile, what did our research suggest about online behaviours? According to respondents, the main factors keeping people online were:
Delivery cost – 82% of respondents said that an acceptable price of delivery was a key factor. This figure was higher for the 16-45 year old age range, namely 87.5%
Price comparison – 77% overall of people giving feedback to the survey, expressed the importance of being able to compare prices at a glance. This figure rose to 80% for male respondents and 87% of Germans.
Convenience – 73% of people in general valued the opportunity to shop anywhere at any time. Specifically within the 16-45 year old age range, the figure was 82.5%. Also, 78.5% respondents from the UK and the USA championed this feature of online retail.
Reviews – The availability of customer reviews or opinions was important to 69% of respondents, generally. In the specific subgroup of female respondents aged 16-45 years old this figure was 82%.
Recommendations – Product suggestions and targeted recommendations were valued by 59% of respondents overall. Within the age range 16-45 years old, this figure rose to 69%. These capabilities are difficult to replicate offline: for example, personalised product recommendations depends on having access to a customer’s user profile and complex recommendation algorithms, such as those used by Amazon.
Proportion of ‘retail ambassadors’ that is lost to traditional retail
Even so, an important new finding from our research is that only 9% of the population demonstrates a deep-rooted desire to make future purchases only via the web or mobile: we call this segment ‘online ambassadors’. People in this group are more likely to be male, city dwellers (especially if living in the USA) and consider quality as more important than price. In addition, online buyers do not have to compromise on product quality, after-sales service or returns. Therefore it is easy to see how certain retail sectors – such as technology and photographic equipment – have become a more difficult proposition for physical stores. Retailers may have to face the fact that the online ambassador group are lost to traditional retail. Enticing online buyers back into stores through marketing and sales promotions is a tough and expensive process with a high risk of failure.
Some retail sectors such as technology and photographic equipment have become a more difficult proposition for physical stores
Our findings show that strong support still exists for offline models, particularly if specific demographics and contextual factors are taken into account. This fact is reflected in other research: for example, according to a MOONDA DKC study in March 2013, 70% of visits to a retailer’s online store lead to the customer visiting the physical store. MOONDA DKC found that 50% of consumers learn about a product on the web before buying it at the bricks-and-mortar shop (note 6). Isabelle Buisine, Head of CRM Group at Kiabi believes: ‘Retail’s upcoming disruption will be more significant than what has taken place over the last ten years, implying a radical transformation within retailers’ internal organisations. However, it won’t question the fundamentals of commerce.’
The door is still open: physical retailers may have an easier ride by focusing on specific populations to discover what is important to them, rather than by targeting diehard online groups.
Taking this point a step further, there is an undecided, ‘swing shoppers’ group that lies between the group of online and offline ambassadors, which is characterised in the BearingPoint research study as people who responded ‘somewhat retail’ or ‘somewhat online’ to our survey questions. This group amounts to almost 60% of the overall sample, with no major variation across the countries we surveyed.
The "pull" world is comprised of passionate, aware and enthusiastic customers who are looking for value-added advice that goes beyond product descriptions they find on the internet.
Erik Campanini and Kyle Hutchins, Darwinism in a consumer-driven world
This is the space in which the battle will be fought for the future of retail.
37% - What can we say about the ‘swing shoppers’ group? Most importantly perhaps, we know from our research that they make up a significant proportion of the pre-millennial group – some 37% of twenty-somethings have no default position as to whether to buy online or in physical stores. This is despite the fact that pre-millennials are more connected than any other group (with over 20% more owners of digital devices).
67% - Also, a majority of respondents (67%) see shopping as a social activity, whilst half of our sample (50%) discuss items they plan to buy and wear with their friends.
At the same time swing shoppers by their nature are unsure what they want from retailers and wait for them to launch sales promotions and marketing incentives. Swing shoppers only decide whether or not they are going to make a purchase when they visit a store or go to a website. From the retail perspective, this behaviour demonstrates a frustratingly lax attitude shown by a significant group of consumers. Such behaviour remains, however, the prerogative of the customer: swing shoppers provide little feedback, but they vote with their feet.
As a consequence of such unpredictable behaviour, retailers have no choice but to optimise the quality of all parts of the customer engagement, to develop a winning competitive advantage as well as to create new offers and launch innovative experiences. So, how is the retail sector doing in this regard? Across the retailers that we interviewed, all of them agreed that physical stores would continue to play a part in their engagement with consumers and they planned to continue investing in bricks-and-mortar assets. Equally, however, the question for retailers is no longer whether or not to build an online presence: the new challenges are when they will do so and how will this operate. Rather than being viewed as the competition, traditional retailers see online and digital technology as business enablers.
The days of sales targets for different silos (or channels) are numbered!
Tim Wheen, Head of commercial insight at Heathrow airport
Retail-sector decision-makers concur that the future will be omnichannel, where all retail channels will merge and interact to enable individual sales seamlessly. As Tim Wheen, Head of Commercial Insight at Heathrow Airport says, ‘The days of sales targets for different silos (or channels) are numbered!’
Omnichannel may be the answer but, as our research reveals, this does not mean a ‘one-size-fits-all’ approach. Retailers must deliver specific experiences and engagement models relevant to each demographic group. In practical terms, this means retailers must analyse and define customer journeys that are based on the needs and aspirations of specific consumer groups, and then deliver them across the five dimensions (note 7) shown in figure 2.
By building strategies around these themes, retailers can create new opportunities to engage intelligently with consumers. While ‘customer experience’ may sound like a cliché, there is no doubt that consumers are looking for increasingly differentiated, personalised offerings. For example, a senior executive at a large international grocery chain says, ‘Adventure shopping will rise: smelling and touching the products will become more important.’ Thierry Benhaim at Ludendo agrees: ‘The store increases customers expectations in terms of experience. Experience shoppers are expecting the stores to provide an experience they can’t replicate at home.’
A first step towards this outcome in any retail sector is to build a foundation within and across the company that integrates the customer experience, the supply chain and the delivery channel into a single entity. By this means organisations give themselves the opportunity to add flexibility to their procedures and dynamism into their markets. We term the mastery of this restructuring ‘hyper-agility’ (see figure 3). In addition, hyper-agile retailers can engage more directly, quickly and effectively with their respective consumer groups. ‘You need to put the consumer at the heart – look at everything from the point of view of a consumer who just wants to be able to buy what they want,’ says a global retail director at a home appliances manufacturer. A good example of hyper-agility is a new service introduced by Kiabi to reserve items to try and buy in-store using interactive kiosks (note 8).
Tim Wheen at Heathrow Airport agrees, ‘Consumers are beginning to expect the retail environments they visit to support the convenience and transparency of the online user experience. As retail evolves in this direction, the result will be that retailers will be able to provide consumers with a more personally tailored experience through one-to-one conversations, and so better meet the consumer’s individual needs.’
Let’s celebrate the fact that traditional retail is neither dead nor facing certain and imminent demise. As one respondent told us, ‘Brick-and-mortar will always have a place in society. For me, it’s hard to gauge a product when you’re looking at it online. And it’s so easy for companies to lie about their products online. I rarely buy clothing online since it usually doesn’t look like it does in the pictures, or doesn’t fit correctly!’
With time of the essence, however, retail is no longer a question of strategic guesswork, but rather a matter of execution on new businessmodel strategies. Quoting Folkert Schultz at Fressnapf: ‘Retail does not need to be saved. Retailers have more opportunities than ever before to satisfy their customers. But CEOs need patience and a clear digital and data-driven, long-term strategy to create a sustainable business model that serves our valued customers as well as potential investors.’
But which customers should retailers target? The proportion of retail ambassadors to online ambassadors, coupled with the presence of a sizeable group of ‘swing shoppers’, suggest that physical-first retailers have everything to gain. Traditional retailers need to focus on swing shoppers and the needs of their constituent members: retailers need to understand their mindsets and behaviours when shopping online or offline, by taking proactive actions to entice them into physical stores and by responding positively to their specific expectations and needs (e.g. enabling home delivery of products). All online and offline activities need to combine, to make the physical shopping experience worthwhile for the consumer and to influence customer behaviour and enhance brand loyalty.
What actions does BearingPoint Institute’s research suggest? The focus for retailers should no longer be on the question of ‘what’ to do, rather the ‘how’ of achieving their goals. In practical terms, this means:
Retailers need to bring together physical, online and mobile channels. ‘Customers do not think in distribution channels,’ says Folkert Schultz at Fressnapf. ‘They think about their personal needs and about how and where they can be met.' Isabelle Buisine at Kiabi agrees, ‘It is now worth playing on complementarity of the channels. Retailers have to demonstrate added-value to customers through all their actions.’
Economics, psychology and technology are growing together: the retail industry is much more data-driven than in previous years. The chances to getting to know your customer better are more present than ever before.
Folkert Schultz at Fressnapf
Take note that such models can be extended beyond one business. For example, Thierry Benhaim at Ludendo explains, ‘In Las Vegas all shops are connected together, clients don’t need to use their credit cards, they pay only once by leaving the hotel and doing the check-out.’
Suppliers and manufacturers are only too aware of the changes in the retail landscape – perhaps more than retailers, as they work in areas such as brand sales that are not covered in all retail segments. ‘Brands are changing the way that retailers behave, getting them hooked on the same type of model that the supermarkets are now used to – i.e. ‘they make more money from the space that they sell to the brands rather than the products they sell to the shoppers,’ according a home appliances interviewee.
For many retailers, the critical success factor is how well they respond to market demand, which relates to the accuracy of their understanding of the market. A senior executive at a large international grocery chain says, ‘The huge information base likes buying patterns from offline, joined with rapid testing experience [related to assortment, for example] from online sales: [this] is still not used by most retailers. Not only pricing, but also assortments can be analysed dynamically.’ A retail director at a home appliances manufacturer makes this point succinctly: ‘Skill up on data analysis!’
Whilst retailers know they need to adapt, in practical terms it is difficult to capture precisely what this means: it would be dangerous to adopt any new approach in a wholesale manner. Therefore organisations need to learn how to evolve by running pilot and trial initiatives, gaining equally valuable experience from successes and failures. According to Thierry Benhaim at Ludendo, ‘Over the ten upcoming years, physical stores will turn more and more into experimentation places. Retailers should be ready for permanent innovation, to rely on technological innovations to reinvent the customer experience.’
Technological innovations should be considered as opportunities for retailers rather than threats - physical stores will be diffrentiators in creating surprise and the "unexpected" for the customers
Jerome Calonne, Manager organisation and projects departments at Kiabi
No activity can take place in isolation – indeed, siloed approaches may cause physical retailers to lose market share directly. As a result retailers need to have a joined-up strategy that builds on the five pillars of hyperagility. ‘To answer the question of how the role of stores will evolve over the coming decade requires an understanding of the customer journey, relating it to what is most important for the brand to communicate and provide – and then doing that really well,’ says the head of customer insights at a major UK street retailer. Customers who feel that retailers are not addressing their personal needs will soon shop elsewhere. ‘Consumers have real time, 24/7 access to everything from information and comparisons to purchasing possibilities. That tends to loosen brand attachment or, indeed, customer loyalty,’ says Isabelle Buisine at Kiabi.
Customers return to physical stores where they feel they have been well-advised and properly treated, even if there is a price differential. ‘A key issue is the ability to talk to members of staff and get proper expert advice in the categories that need it. I think this will force retailers to provide better service and more experience,’ says a manufacturer. Isabelle Buisine at Kiabi agrees, ‘I believe in a virtuous circle between the sales assistants and customer satisfaction. It’s worth investing in people, training, salesperson’s equipment and the well-being of employees in order to make them the best possible ambassadors of the brand.’ The ‘virtuous circle’ point above does not have to be at odds to bringing in digital channels; on the contrary, the two should work hand in hand. ‘Consumers expect retail environments to be digitised, to support the convenience and transparency of the online user experience. As retail evolves in this direction, retailers will be able to provide consumers with a more personally tailored experience through one-to-one conversations’, says Tim Wheen at Heathrow Airport.
Whilst the primary purpose of retail remains the provision of the right product, in the right place at the right price, in the context of an increasingly fickle market, retail’s future depends on the strength of the customer relationship.
It is clear that the expectations and needs of retail ambassadors need to be recognised. This group will remain loyal as long as they are treated right and so provide the backbone of sales revenues. However, an increasingly myopic focus on this group alone will not win the retail battle: retailers need to focus on their ‘swing shoppers’ – specific customer groups that buy products and services, if the offer is right – in order to gain and retain competitive advantage.
A key demographic group is the pre-millennials – twenty-somethings who have grown up in the hybrid consumer era, but who retain some sense of tradition. The future of retail will be dictated by the behaviour of consumers in this tipping-point group, which acts only on the principle of ‘whatever works best’. Acting without prejudice, pre-millennial consumers will visit physical stores if, as and when it makes sense to them.
Acting without prejudice, premillennial consumers will visit physical stores if, as and when it makes sense to them
With such groups in mind, retailers have to add new dimensions to their expertise – the arts of aligning with the aspirations of their customers and of creating great experiences. Retailers need to push ideas out to customers rather than expecting in vain the market to tell them what to do. Pilot studies enable ideas to be tested. Examples of innovation in different sectors include pop-up services, home deliveries, free coffee and/or sofas in-store, increased availability of expert staff in-store and/or online, and increased opening hours combined with proactive telephone hotlines. Retailers can also experiment with smartphone apps in the direct knowledge that the pre-millennial group will be well-represented in such trials.
The long term is far from decided – Amazon cannot continue forever without making a profit. As Kevin Evers notes in the Harvard Business Review, ‘Over the last 15 years, e-commerce growth rates have slowed quite a bit. And if predictive forecasts are correct, e-commerce will command just 18% of the retail market in 2030, up from 11% today. There are a few reasons for why we should temper our enthusiasm. E-commerce companies have very slim profit margins, their fulfilment centres are expensive to maintain, and their pricing advantages have been disrupted by new tax laws’ (note 9). Given that future success is tied to the quality of the relationships between retailer and consumer, physical stores have an opportunity to reach beyond the online experience to inhabit spaces where pure play e-commerce companies are unable to thrive.
While any future strategy contains an element of risk, physical retailers across the board can move forward with confidence by developing strategies that genuinely put their customers first. No room for complacency exists: there is no case for simply setting up shop and expecting products to fly off the shelves. Also, here is one final piece of advice to retailers, which came from consumer feedback to our survey: ‘Don’t be boring.’ All store, online shop, mobile and other formats should be linked intelligently to satisfy customer needs and expectations at every interaction point. Customers also need to be delighted and enthralled in order to buy into a retailer’s brand values, wherever and whenever they choose to engage.
Traditional retailers may have seen their markets eroded by online-only companies such as Amazon but, in an increasingly omnichannel world, the future remains wide open. However, customers are not going to wait for retailers to catch up with their increasing demands. Time is of the essence. To paraphrase a vice-president at a household-name sportswear and equipment company, ‘Retailers won’t die from moving too rapidly, but they will surely die from moving too slowly if they do not take the chances that ongoing digitisation can offer.’
Retailers won't die from moving too rapidly, but they will surely die from moving too slowly if they do not take the chances that ongoing digitisation can offer.
A vice persident at a sportswear and equipment company
Dr Christian Wolter from BearingPoint.
The author is extremely grateful to more than 100 retail executives across Europe who shared their insight for this research.
The author would also like to thank Prof. Dr Joerg Funder and Rene Sehi (IIHD: Institut fuer Internationales Handels- und Distributionsmanagement) for their contribution, scientific expertise and dedication, Jon Collins from InterOrbis and Tanja Dietenberger, Ludovic Leforestier and Jonathan Stephens from BearingPoint for their tireless support, creative ideas and reviews.