Making stores matter in a
multichannel world
As the role of the brick-and-mortar store evolves, retailers will continually have to refine how they use their real estate.
For
decades, the retail industry has
followed the same straightforward formula for growth: open new
stores. By replicating a proven store format in a new catchment area,
retailers could reliably enlarge their customer base and count on
healthy increases in sales.
But
the world has changed. More than half of consumers now research their
retail purchases online, making purely in-store purchase decisions
the shrinking minority. In many categories, e-commerce has
dramatically lessened the need for physical stores. “Virtual
space”—which we define as the floor space that would be required
to generate the sales volume that online retail now accounts for, at
a sales density equivalent to the industry average—is expanding at
a staggering rate. In this new world, what is the role of the
brick-and-mortar store?
Many
retailers find themselves struggling with the question and saddled
with more real estate than they know what to do with. After all,
their property departments are geared up for expansion and
acquisition. Their finance departments have traditionally focused on
reaping investment returns from stores and tend to be jittery about
investing in new and unproven technologies. On the flip side, their
e-commerce directors are frustrated by this lack of understanding of
the pace and mind-set such companies need to become digital winners.
To
position themselves for success in a multichannel world, retailers
would do well to take a disciplined approach that begins with a
reassessment of the role of the physical store. We recommend a
five-step approach we call STORE: starting with a clear vision for
the future role of the store, tailoring categories and formats
accordingly, optimizing the store portfolio using forward-looking
analytics, reinventing the in-store shopping experience, and
executing systematically across channels.
The incredible shrinking footprint
The
effects of online migration in the retail industry are evident in
every category. In the United States, apparel retailer Gap closed
more than 250 stores in 2013; department-store chain Sears closed
almost 200. Walmart’s new stores are about a third smaller than
they were five years ago.
In
the United Kingdom, the number of vacant retail shops rose by 355
percent between 2008 and 2013,1 and
in 2013 and 2014, three of the “big four” supermarkets took a
combined write-down of £1.2 billion (approximately $2 billion) on
the value of their undeveloped property. Perhaps the most affected
category has been consumer electronics, where a 20 to 30 percent
decline in physical retail space in the UK market between 2006 and
2012 was fully offset by the addition of an equivalent amount of
virtual space.
Of
course, online retail has affected more than just physical floor
space. Amazon, for one, has put intense pressure on retailers’ top
and bottom lines by having key items priced 13 to 20 percent lower
than average, an assortment 17 times larger than the average
retailer’s, and a cost base that is 3 to 4 percent lower than
brick-and-mortar competitors’, all while achieving the highest
customer-satisfaction scores in the industry. The combined effects of
Amazon and other online retailers have rapidly hurt traditional
retailers’ return on invested capital, as fewer sales flow through
existing physical assets.
Many
retailers’ instinctive response to these headwinds has been to
close underperforming stores and to look for operational
efficiencies, but these moves only buy time—they can’t fully
close the performance gap (exhibit). “Shrinking to greatness” is
not the answer.
A framework for change
Shifting
from a store-focused approach to a multichannel mind-set requires
retailers to change their traditional frames of reference and ways of
working. As consumers increasingly shop across channels, terms like
“convenience” and “efficiency” take on new meanings. Customer
expectations are rising: for instance, customers now expect price
consistency across channels, the ability to buy online and pick up or
return in store, and a range of payment options. Price transparency
puts pressure on retailers to develop ultraefficient operating
models. The wealth of online information available to consumers
raises the bar for in-store service and expertise.
But
let’s be clear: the brick-and-mortar store is not dead; it just
plays a different role now. In fact, in a multichannel world,
physical stores can provide a competitive advantage. Some
multichannel retailers have seen growth in their online sales and
penetration among consumers who live near their stores. In several
sectors, “click and collect” is proving a popular and
increasingly efficient means of serving the customer. More than 50
percent of Walmart’s online sales and around 40 percent of Best
Buy’s already are picked up in stores. Best Buy’s
store-within-a-store partnerships with Microsoft, Samsung, and other
suppliers capitalize on manufacturers’ need to show off their
products in a physical retail environment. Former online pure plays
such as Oak Furniture Land and sofa.com have opened physical stores
that now generate as much as 60 percent of sales.
Some
retailers are now reshaping their store networks in response. One
approach is to lead with a handful of flagship stores—which
essentially become a marketing and service channel for the online
business—supported by numerous smaller outlets that offer
convenience and a curated product offering. British retailer Argos,
for one, is experimenting with a hub-and-spoke distribution system in
London, with products being delivered from large stores to
smaller-format “digitally enabled” stores—allowing all Argos
stores in the area to guarantee same-day or next-day fulfillment on
some 20,000 products.
In
light of rapidly evolving technology and consumer behavior, we
believe retailers that take a forward-looking view and heed the
following five imperatives can position themselves for multichannel
success.
Start by redefining the role of the store
The
first question that retailers should ask themselves at the beginning
of their store-network transformation journey is, “What role will
my brick-and-mortar stores play in a multichannel world?” To answer
the question, retailers must find out what their customers truly care
about. They need to know which aspects of a store matter most to
customers and what purpose a store serves for them:
- Convenience and proximity. Do they value the ease and speed of being able to visit a store and get what they need?
- Efficiency. Do they see the store as a place that helps them make better use of their time—for example, by enabling them to make faster decisions or by serving as a pickup location for something they ordered online?
- Inspiration. Are they looking to discover—and be surprised by—new ideas and products?
- Instant gratification. Do they look forward to store visits as a chance to make impulse purchases and get things they want immediately?
- Discovery of a solution, information, or service. Are they seeking knowledge and expertise above and beyond what they can find via an Internet search?
- Entertainment and social interaction. Do they see stores as places where they can be entertained and have fun with family and friends?
- Experiencing brands and products. Do they visit stores for a chance to touch, feel, and be won over by products and brands?
Economic
considerations are important as well. For each of the purposes above,
retailers should ask, “How can stores do this profitably?” There
may be more than one answer and therefore more than one winning store
format. In any case, the agreed-upon role (or roles) of the store
should dictate every decision about the store operating model:
location, assortment, staffing, supplier funding, employee training,
and so on.
A
supermarket chain, for example, had been investing in costly
service-led formats in which store staff provided expert in-person
advice to shoppers. Customer research revealed, however, that service
was a priority to a subset of customers in only one-tenth of its
stores. Given these findings, in the other 90 percent of the
retailer’s stores, it shifted its emphasis away from service and
toward efficiency (with fewer service counters and more automated
features, such as self-checkout) and instant gratification (for
example, by heavily promoting new impulse-buy bargains), which were
higher priorities for customers in those stores. The retailer was
thus able to reduce operating costs materially while better meeting
customers’ needs.
Tailor categories and formats accordingly
Customer
priorities and store economics should next become critical inputs
into ongoing category reviews, to ensure that assortments and space
allocations are continually optimized for a multichannel world.
For
example, with niche products—the so-called long tail—becoming
searchable and available to consumers online, retailers can capture
tremendous savings by stocking such products only in central
warehouses rather than in stores. That said, some slow-moving
products should remain available in stores, including emergency items
(for instance, home-improvement retailers should stock tools and
spare parts for fixing a leaky sink) and products that are part of a
bigger basket (because customers buying paint or wallpaper in the
store to complete a home-decorating project will be frustrated if
they have to buy a ladder separately online).
Through
customer research, an electronics retailer found that the frequency
and purpose of customer visits, as well as average driving times,
varied significantly by category. Only half of customers were willing
to drive more than ten minutes to buy kitchen appliances in person,
compared with almost 100 percent of customers buying a TV. Indeed,
half of customers said they would never buy a TV without first seeing
it, testing it, or comparing it with other models in a store. These
insights suggested that the retailer needed different assortments in
its in-town and out-of-town stores, as well as different space and
service levels for each category.
Format
decisions should also be driven by customer needs and priorities.
Some retailers are adapting their store formats to the tastes and
preferences of certain customer segments. Macy’s, for example, has
embarked on a major effort to court millennials: it has launched more
than a dozen segment-specific brands and created “destination
zones” for millennials in its stores.
Optimize the portfolio using forward-looking analytics
The
next step is to reevaluate the store portfolio through a multichannel
lens. Leading retailers regularly analyze correlations between sales
performance and catchment data to identify promising locations for
new stores and to figure out the winning formula for top-performing
stores; they examine factors such as population density, income,
competitor presence, and average tenure of the sales staff. This is a
valuable exercise, but in a fast-changing business environment, it’s
not enough. Retailers must look ahead: they must extrapolate the
impact of macro and industry-wide trends on the store network’s
economics and operating model. And they must understand the impact
that channels have on one another. One retailer that already had 100
unprofitable stores in its network found that another 100 would be in
the red within three years given competitor trends and the shift to
e-commerce.
The
most forward-thinking retailers use analytical tools and techniques
to reshape their entire store networks. They use financial and
geospatial modeling to highlight not only where stores should be
opened but also which should be closed, resized, or reformatted.
Using geospatial modeling, a grocery chain made the counterintuitive
discovery that a critical mass of stores in certain regions was
highly correlated with a boost in online sales. The company therefore
took a renewed interest in a number of locations that it had
previously rejected. Analysis also showed that the grocer’s target
customer groups were growing rapidly in neighborhoods near those
sites, suggesting further upside.
Geospatial
analysis is useful for creating a “blank sheet” optimal mix of
store formats by location type. In a populous city, for instance, the
optimal mix for an apparel retailer might include one or more
flagship stores with a long drive time, high-footfall destinations
(such as stores in malls or on suburban main streets) with a medium
drive time, and “in-fills” (such as seasonal shops or pop-up
stores) to cater to small catchment populations. Through geospatial
analysis, a big-box retailer discovered significant overlaps in its
stores’ catchment areas; its flagship stores were attracting
customers from far-flung neighborhoods in which it also had smaller
stores. It thus realized that it could reduce both the number and
size of its smaller stores while still serving the same population.
Retailers
can choose which specific stores to keep or close by forecasting
future performance, lease profiles, and expected customer retention.
For problematic stores with longer leases, retailers may need to make
creative moves—such as subletting part or all of these stores or
closing more profitable nearby stores with shorter leases and
switching customers over to the remaining stores.
Reinvent the in-store shopping experience
Creating
the store of the future will mean overhauling the in-store customer
journey, in part by using new technology to make the shopping
experience as seamless and easy as possible. Some retailers simply
copy the in-store moves of multichannel champions such as Apple and
Burberry or equip sales staff with iPads to give their stores an
updated, high-tech look. But cosmetic changes alone won’t result in
lasting impact. A multichannel mind-set must be embedded in the store
design and in employees’ new ways of working.
Retailers
could, for instance, give store staff easy access to detailed and
up-to-date product information so that they can provide knowledgeable
customer service without needing to memorize too many specifics.
Mobile devices that tell store employees where exactly in the store
an item is located and how many units are in stock could enable them
to better assist customers. Handheld payment points would allow
customers to avoid long checkout lines. In Nike stores’ online
“studios” or kiosks, shoppers can not only place orders but also
customize products.
Retailers
should prioritize the basics: again, focusing on what matters most to
their customers and enabling multichannel shopping (for instance, by
establishing fast-pickup counters for online orders) while being
ruthless about taking costs out of the things that customers don’t
care about.
That
said, even as retailers work on the basics, they should constantly
test and tinker with digital innovations. They should rapidly conduct
systematic experiments, ideally cofunded with technology providers or
product partners, to confirm the game-changing potential of a
particular technology—for example, by measuring its effect on
overall conversion or customer loyalty—before making big capital
investments to roll it out across the network.
Execute systematically across channels
Change
of this scale is not easy and affects many functions across the
organization. Some retailers make the mistake of developing a
store-network transformation plan that extends past 2020, by which
time parts of the plan will probably be obsolete, or else they embark
on a massive change program that will take so long to roll out that
it will be out of date before it is halfway done. Retailers are
typically better served by developing a detailed plan for the next 12
months and a high-level road map for the next three years.
Pace
and flexibility are critical. “Gold plating” an entire store
takes too long and tends to be expensive. Retailers should instead
test new ideas quickly, and they should pilot individual aspects of
store design to figure out specifically what is working and what
isn’t.
Given
the scale of a network redesign, taking a lean approach can
significantly reduce capital expenditures and increase return on
investment. By using cost-saving levers such as offsite
prefabrication, relaxing fixture specifications to widen the supplier
pool, applying principles such as design to value and total cost of
ownership, and ensuring disciplined project management, a global
big-box retailer completed a major store-transformation program 25
percent faster and with 21 percent lower capital expenditures than
similar previous programs had involved.
Of
course, capabilities and organizational design, both at headquarters
and in individual stores, must evolve as the network evolves.
Retailers should ask themselves: Does the organizational structure
support the new network size and role? What would it take to shift
the mind-sets of the property team away from a focus on opening new
stores and toward making better use of existing space, introducing
and refreshing store concepts quickly, and even scaling back on real
estate? How can the online team—which, at some retailers, still has
a cottage-industry status—become fully integrated with the stores?
This integration is crucial: the store of the future should allow
shoppers to move seamlessly across channels. Store staff should be
well trained and comfortable in directing customers to the right
products, both offline and online. The technology and systems staff
members use should be connected to or aligned with the retailer’s
website, so that they won’t have to spend precious time trying to
reconcile different information. The web can support the stores as
well—for example, by showing inventory levels for nearby stores.
The
logistics and store teams should work hand in glove with the online
team to ensure that orders are fulfilled efficiently and to get
products to consumers quickly. Amazon already offers same-day
delivery in more than a dozen cities and guarantees one- to two-day
ground delivery across the continental United States; we believe
consumers will soon expect comparable shipping speeds from all
retailers.
Even
as retailers reassess and revamp their store networks, they shouldn’t
focus exclusively on the stores. A store-network transformation will
have the desired impact only if the online channel is at fighting
strength. For retailers whose online presence is already robust, it
is simply a matter of ensuring a dual focus on both channels. For
other retailers, getting the requisite multichannel capabilities and
mind-sets in place will require a full transformation. Either way,
the online channel must not be neglected in the face of the daunting
changes required in the physical-store network. The future of retail
will belong to retailers that can satisfy the customer, wherever he
or she decides to shop.
This
article is adapted from a version that appeared in Perspectives
on retail and consumer goods,
Number 3, Summer 2014.
http://www.mckinsey.com/insights/consumer_and_retail/Making_stores_matter_in_a_multichannel_world?cid=DigitalEdge-eml-alt-mip-mck-oth-1412
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