EXPERT OPINION
Fighting the Disruptors Compelling customer service experience, seamless omnichannel offering are key By Antony Karabus As digital shopping continues to grow at a rapid pace, it is causing tremendous disruption to the economic model that retailers have relied upon to build and run their businesses. Today, retailers are competing with other traditional brick-and-mortar stores, online giants like Amazon and Wayfair and new digitally driven threats from rental and resale businesses such as Rent the Runway, The Real Real and Stitch Fix. This disruption represents a fundamental shift in shopping behavior that will accelerate as a new generation of digital and valuesavvy consumers become an even greater economic engine. Retailers that rely heavily on traditional brick-and-mortar sales as their primary source of growth must urgently adapt or face significant declines in operating earnings and working capital. Why? The digital environment is evolving. Consider this: While Amazon grows by more than 20% annually, many traditional retailers are experiencing flat to slightly positive comparable sales (if successful). Also troubling is the fact that, despite the liquidation, bankruptcies and downsizing of numerous traditional retailers over the past few years, little of the market share released was captured by traditional retailers. Instead, Amazon — as well as the discount channel and value chains — captured most of this available market share.
Manage the Omnichannel Shift Carefully To remain competitive and play to their strengths of offering a physical experience that allows customers to “touch and feel” the merchandise, many brick-and-mortar retailers have adopted omnichannel offerings. Importantly, however, a recent HRC Advisory survey among C-suite executives at more than 30 North American retail chains found that, if not implemented properly, omnichannel strategies can inspire a host of additional challenges on the financial and customer-service front.
For many retailers, e-commerce represents a cannibalization of earlier sales from their physical stores. Which means they must incur additional capital and operating expenses to achieve the same total sales level — if at all. This has resulted in a significant deleveraging of store operating infrastructure costs (store occupancy, labor and other costs) and a decline of as much as 40% in retailer EBITDAto-sales performance. Common challenges to consider in making the shift to an omnichannel strategy include: • The high cost of digital sales: Providing customers with the flexibility to shop online or in store may sound like a profitable plan. But the reality says otherwise. Revenue from multiple channels may equal prior total store sales but this is only made possible by the addition of massive capital and operating costs, with no overall incremental sales bump. In its aim of serving digital and omnichannel sales, the retail landscape has evolved from a largely fixed-cost environment to an increasingly variable-cost one. While digital sales now account for up to 15% — and as much as 40% or more (for those with a digitally connected customer demographic) — of total sales, unfortunately, for most retailers, up to 95% of those digital sales represent a channel shift from their brick-and-mortar stores — not incremental sales. Many chains, moreover, cannot justify investments in store upgrades to maintain their brand standard, a necessary tool for keeping and attracting younger customers to their stores. Our research found that 40% of store fleets have not undergone a meaningful remodel in more than 10 years (the number is closer to 60% for capital-constrained retailers). • Inventory management: Retailers trying
to adapt to the new retail environment using omnichannels often face a steep learning curve, with challenges along the way. Unpro-
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ductive inventory often gets “trapped” in the wrong store or distribution center, for example. Addressing that issue is an expensive one, whether through transfers, deep markdowns, liquidation or write-offs. • Serial returners and other challenges: The costs of free shipping and serial returners are other concerns, the latter a particularly serious issue that severely undermines profitability, according to HRC studies.
Raising the Level of Play Any retailer looking to rise above these challenging times must up the ante with a compelling customer service experience and seamless omnichannel offering. As one of the strongest weapons retailers have, omnichannel allows them to increase sales, traffic and customer loyalty. But it’s not easy to get right. Retailers must ensure their inventory is accurate and integrated across channels. Getting the execution right means the product is available where and when it’s needed to meet customer demand, while minimizing markdown and inventory liability and potential customer order cancellations. And, of course, physical retailers must implement the right tools, processes, infrastructure and organization for the greatest chance of success in this new digital environment. Traditional retailers are experiencing the many seemingly insurmountable effects of the evolving environment. And they’re incurring high costs trying to exceed customers’ needs across all channels as well as e-commerce demands and the invasion of Amazon. But it does not have to be this way. A bespoke approach with tailored solutions can help them rise above and survive these difficult circumstances. It’s no longer a question of whether to take the next steps, but how soon they can begin. Once they do, positive outcomes are sure to follow. — Antony Karabus is CEO of HRC Retail Advisory, leading retail consulting firm that has assisted over 150 national retail chains since 1990 to adapt their economic operating model to compete more profitably and effectively in the evolving, increasingly complex retail environment (akarabus@hrcadvisory.com).
NOVEMBER/DECEMBER 2019
CHAINSTOREAGE.COM
11/11/19 10:19 AM