The rise of eCommerce gets a lot of blame for the waves of recent retail store closures in the U.S. Yes, online sales are a factor, but they still account for less than 10% of total retail sales. It isn’t online that’s wounding retail. The industry is doing that all by itself.
One major problem is poor utilization of real estate. Retailers have too much store space and that’s a big waste of money. When they can’t attract enough shoppers into those stores, they typically rely on price discounts to move inventory, which is probably the oldest strategy in the history of retailing. That works fine if you’re the only one doing it, but not so well when all your competitors are also discounting. Retail margins have always been thin, and the advent of low-cost sellers and ruthless online competitors have driven them even lower. It’s time to try something different.
The answer lies in the convergence of online and brick-and-mortar retailing—a kind of hybridization which is blurring the lines between eCommerce and traditional stores. The companies that survive and grow over the next five years will be those that have found the optimal combination.
This will require significant improvements in inventory management. From a supply chain perspective, traditional store replenishment is radically different than direct-to-consumer (D2C) fulfillment. It’s all about putting the right selection of inventory as close to the consumer, and at the right time, as possible.
It isn’t online that’s wounding retail. The industry is doing that all by itself.
This contrasts with the old model of stocking huge warehouses with bulk shipments and then making big scheduled deliveries to a network of stores.
Retail’s transformation looks a lot like the disruption in the airline industry 30 years ago. If you traveled in the 1980s, you might remember occasionally flying on a half-empty airplane. That almost never happens today. Back then, many passengers flew on large jets between major hubs like Chicago, Los Angeles, and New York, and then transferred to smaller planes taking them to their ultimate destination. This was inefficient. Airlines had too much capacity on trunk routes, which weren’t taking people where they really wanted to go. When smaller planes were built that had enough range to fly anywhere in the country, the hub-and-spoke model gave way to direct flights between smaller cities, and those planes proved much easier to fill than 350-seat widebodies.
The current trend in inventory management is very similar. Like airline passengers, the stuff you buy is increasingly traveling directly to your home instead of crawling through a hub-and-spoke network. Maybe there are still times when you want to go downtown and spend a day shopping for multiple holiday gifts that have been stockpiled at big retail stores. But often we just want to buy an obscure item or two at odd hours, and we want it delivered tomorrow. The store is never closed. Retailers are having to process customer orders 24/7, all while trying to manage the optimal inventory selection in physical stores. And they better get the order right because their competition is just a click away.
From a real estate perspective, retailers have two (and a half) options: they can either build specialized facilities suited for eCommerce fulfillment, or they can find a way to fulfill online orders from existing stores and warehouses.
For legacy retailers, letting go of the old methods can be hard. Many big-name department stores have amassed a wealth of sales data stretching back more than 100 years—what products need to be in what stores at what time of year. It’s hard to buy a swimsuit in late summer because the stores have moved on to back-to-school season. That’s because their logistics model was also developed decades ago, before anyone had heard the term “electronic fulfillment”. And that’s why so many are struggling. Services like “click and collect,” where customers buy online and pick up their orders in a store, present new, major challenges for supply chain and inventory management.
From a real estate perspective, retailers have two (and a half) options: they can either build specialized facilities suited for eCommerce fulfillment, or they can find a way to fulfill online orders from existing stores and warehouses. But either choice requires risky investments in buildings, equipment, personnel, and technology.
Can they efficiently operate a connected fleet of their own trucks and integrate robots into their facilities? Maybe. But for hundreds of companies, the best decision is to hire someone to do all this for them, at least until the future is clearer.
Online merchants can generally act more nimbly to build a complementary physical presence.
That’s giving rise to an increased demand for third-party logistics providers, or 3PLs, which offer transportation and fulfillment services that can ramp up or down, as customer needs change. A 3PL can help move inventory more smoothly between a company’s facilities, or to customers, while deflecting the risk that comes with creating a captive, self-performed new supply chain.
And by the way, eCommerce companies also face the hybridization challenge. But since they aren’t starting with a huge embedded real estate portfolio to retool, online merchants can generally act more nimbly to build a complementary physical presence. This includes Amazon, the granddaddy of them all, but also smaller outfits like eyeglass seller, Warby Parker, or men’s clothing seller, Bonobos, which are finding ways to very successfully sell in brick-and-mortar stores. These companies also need to rethink their supply chain in ways that don’t add undue risk to their business.
So where will we be in five years? Retailers are not going to go away entirely, but we think an awful lot of them are. We will continue to see store closures and bankruptcies in many recognizable names, and the business is going to look very different than it does today. Margins will remain razor thin, and legacy retailers will need to right-size their real estate portfolio with a better balance between stores and fulfillment centers. The retailers that survive and prosper will be those that build a supply chain that can effectively serve both in-store and online shoppers.