As a global recession drives an increasing number of retailers to retrench or to go bankrupt, will the low storage and distribution costs of electronic commerce finally mean the end of the bricks-and-mortar model in the U.S.?
Since 2008, retailers in a range of industries have filed for bankruptcy. The roster includes off-price clothing store Filenes Basement, electronics retailer Circuit City, home goods chain Linens 'N Things, gadget vendor Sharper Image, and toy seller KB Toys.
Meanwhile, retailers including Macys, Starbucks, and Home Depot have shuttered “underperforming” retail locations in a bid to cut costs as consumers hang onto their cash.
An online business model may significantly reduce inventory costs, since it encourages “just-in-time” stocking levels with items sometimes drop-shipped from the original equipment manufacturer; and an online-only e-tailer can do away with lease, personnel and other expenses associated with maintaining a physical storefront, note faculty from Emory University and its Goizueta Business School.
Bricks-and-mortar may offer a competitive advantage
But physical customer contact can deliver a competitive advantage, they add, so a pure e-tail model is not always the best decision.
“The bricks-and-mortar retail model is not dead,” assures Reshma Shah, assistant professor in the practice of marketing at Goizueta. “The Internet is a sales channel, but it is only one among a variety of such channels. The chief drawback of online retailing is that it cannot offer a unique sensory experience.”
A purchase decision entails more than just price, she explains. Taste, touch, sound and other senses may play into a choice.
“Activities as mundane as buying food, or as exciting as buying a diamond ring are all largely experiential when many choices exist and when markets are mature,” Shah says. “You can certainly market these goods online, and consumers may research price and other components online, but they are more likely to make a purchase at a place where they can experience the goods. That’s why New York’s Diamond District is still in business.”
That also explains why companies like Microsoft Corp. and Dell Inc. have expanded their retailing presence from online to bricks-and-mortar.
In February, for example, Microsoft announced it hired former DreamWorks Animation SKG executive David Porter for the first full-scale roll out of Microsoft-branded retail stores, a step that competitor Apple Inc. took in 2001.
Dell, which initially sold its products by phone and online, has been available in Best Buy and other retail merchants since 2007. For a time Dell also sold through its own kiosks, but announced in January 2008 that it would abandon the project.
“Despite the success of online booksellers like Amazon.com, bricks-and-mortar booksellers like Barnes and Noble offer consumers a place to chill, or hang out,” observes Shah. “Similarly, Abercrombie & Fitch offers a unique atmosphere that enhances the buying experience. Before they commit to an exclusive online presence, retailers need to consider what they’re selling and what the purchase influences are.”
Shah points to value-expressive products—like perfume or even premium casual wear like the kind carried by Abercrombie & Fitch—as an example.
“Value-expressive products are typically selected as a way for a consumer to present herself or himself to the world,” Shah says. “The brand choice is an intensely personal one, and it usually needs to be done in person. Clicking on a picture just won’t do it.”
Product characteristics can play a big role in deciding on an e-tail, retail or a mixed business model, says Greg Thomas, director of research for the Emory Marketing Institute at Goizueta.
Characteristics of a good online candidate
“If the product is uniform and the qualities are discernable in advance, or can be specified with great precision, then the need to have a physical retail location is diminished,” he says. “If the product is intangible, like information goods, then the need for a physical store has mostly evaporated.”
He points to the closing of Tower Records as an example.
“The music business has mostly shifted online [reducing the need for bricks-and-mortar record outlets],” Thomas says. “More recently we see Blockbuster on the brink of flopping as alternatives like Netflix and OnDemand provided added value through convenience in service and more attractive pricing. Netflix notably has a much larger assortment of movies offered which appeases the movie aficionados. And a large percentage of the fees that Blockbuster was collecting came from movies that were not returned on time, and no one liked these penalty fines to begin with, so alternatives are warmly embraced.”
But if a product or service is not uniform and not discernable in advance, or cannot be specified with great certainty then the need for physical retail operations is important, he adds.
“For example, if you want a new pair of jeans and have not purchased any in a few years you may not be familiar with all the assorted brands and sub-brands available at the store,” Thomas says. “Typically, you will find which one suits your taste by trying them on. It’s hard to do this without being in the store. Also, some shopping trips are complex and people find it easier to make decisions in the store rather than in advance.”
This is why Webvan [an online grocery business] crashed-and-burned in the dotcom era,” explains Thomas. “There are so many thousands of products in a grocery store that people generally have an idea of what they want, but they cannot recall all the brands in a category without being prompted by the packaging arrayed on the shelves in the store.”
Impulse buying also plays a part, he adds.
The entertainment factor
“A large percentage of shoppers do not use a shopping list but instead make decisions in the store as to what to buy,” Thomas says. “Strolling down virtual store aisles is just too limiting and time consuming. And some shopping experiences, like Build-A-Bear Workshop, are there to serve as the purpose to shop. You can order stuffed animal bears online but it’s not the same as going and experiencing the customization of the bear for a child.”
That’s likely why Microsoft appointed an executive of an entertainment company to lead the creation of its foray into bricks-and-mortar retailing, adds Thomas.
“It sends the message that this new project for Microsoft is aiming at dazzling the consumer with the in-store experience,” he says.
But it’s a move that must be carefully managed.
“The Apple example needs to be tempered with the experience of Sony in creating its Sony Metreon retail mega complex in San Francisco,” Thomas notes. “This complex was a great hit at the beginning with hordes of people visiting the retail experience, but as time went on it seemed to lack direction.”
Sony later sold the Metreon Complex and recently announced it would close its store within the Metreon, says Thomas.
Also, convenience can sometimes trump the desire for an experiential encounter.
“For the re-buy, or repeat purchase, a virtual store is more convenient,” Thomas says. “This is why Zappos [an online retailer that started out just selling shoes but expanded to handbags and other items] is doing an excellent job in selling shoes online. However, ordering a product online has some limitations like immediacy, as it can take a few days to receive the order, and convenience of return, which can be a hassle to repackage and pay postage to return an item.” These are things that Zappos understands pretty well. They ship out orders efficiently, pay for the return postage on any return, and have a generous return policy of 365 days from the purchase date.
In many ways, the retail to e-tail business model has come full circle, points out Douglas Bowman, a professor of marketing at Goizueta.
“Consumer software and PC-based video games were once distributed in mall-based stores store like Egghead software,” he says. “These stores offered high service, yet were physically constrained by their small footprint.”
As consumers became more educated about these products and confident in their ability to make a purchase, distribution evolved to lower rent, lower service outlets such as big box retailers like Best Buy and then, eventually to Wal-Mart, which could leverage inventory efficiencies, says Bowman.
A Bricks-and-mortar and clicks model
“So a view of either bricks or clicks as a one or the other choice is too dated,” he explains. “Now it’s both, and the issue is one of degree and the purpose of each channel.”
He says the experiential component may be important, but it is also often utilized by consumers only at the starting gate.
“Many industries are evolving to a point where shoppers use the bricks for some initial touch, feel, and advice gathering, but then the transaction is later done via the Internet,” he says. “This seems to be happening with big purchases such as car buying, home buying or renting, and durables purchases including electronics, and major appliances.”
Industries that move “from clicks to bricks” often use their physical stores as a place for information gathering, he adds.
“Retailers that grew up with purely physical stores can have a tougher time moving to the Web, in part because the incentive and measurement systems have historically tracked and rewarded outlets based on transactions made in the store,” he says. “They sometimes find it’s a challenge to ensure that the business providing the brick-type service also gets credit for the clicks sale.”
If they can surmount it, retailers may find that e-tailing works well in a number of situations, Bowman adds.
“Consumers that have well-formed preferences can search for just what they're looking for, and thus decide largely on price and delivery, or at least they can narrow their search considerably,” he notes. “Also, if demand is widely scattered geographically, demand may not justify the expense of a bricks-and-mortar shop, but an e-tailer may be able to serve the dispersed aggregate demand. Similarly, clothing retailers in particular typically do not stock very odd sizes in their physical stores, or do so only in very small quantities, but can make them available in their Web-stores.”
Demographics may also drive retailing outlets to consider adding e-tail initiatives, says Bowman.
“There appears to be a move back to cities, away from suburbs,” says Bowman. “If this signals a high concentration of residences in a limited area, shops with small footprints may try to fill out their inventory by driving bricks-and-mortar shoppers to their e-tail location.”
As technology continues to expand both the number and variety of customer touch-points and service delivery channels, “researchers must continue to examine the important, and sometimes contentious, trade-offs between product-channel variety and cost-effectiveness, as well as the consequences of automation in retail service settings,” says Richard Metters, an associate professor of information systems and operations management at Goizueta, who co-authored a paper on the subject for the Journal of Operations Management. “Designers of service processes, especially in retail contexts, must consider the impact on internal efficiency as well as the impact on the external, or customer.”
Maintaining an accurate inventory count is one recurring problem.
In fact a “very successful retailer” estimated that its own store inventory records were inaccurate on 71 percent of the products it carries.
In this context, the line between front- and back-office activities “continues to be blurred, with on- and off-line activities becoming more integrated in some situations and more de-coupled in others,” notes Metters.
As more retail commerce travels through technology-mediated means, retailers’ information level increases and they must decide what pieces of information are most useful in managing the supply chain, he adds.
“Also, can we assemble these transactional data, or combine them with other inputs in order to create more accurate forecasting methods?” asks Metters. “These are cross functional issues that brick-and-mortar retailers and e-tailers alike must consider. I suspect that both kinds of retailers will be busy with this, since there’s enough competitive space for both on-line and off-line business models.”
Or as Goizueta's Reshma Shah puts it: “After 25 years of offering ATMs, banks still have physical branches; and more than a decade after e-commerce launched, people are still going to grocery stores and supermarkets.”
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