Online-only, also known as pure-play retailers, have quickly established themselves in a very competitive retail landscape. Their agility and customer-centricity have placed tremendous pressure on traditional retail businesses, stealing revenue and customers from them. Traditional retailers have been sluggish to respond to this threat and are scurrying for solutions. This article outlines the reasons for their slow response and provides some key takeaways.
The growing online retail landscape
I don’t need to convince you that buying online is convenient, efficient, and cost-effective for customers. It saves a journey to the store, finding and paying for parking, and is super convenient for busy people. The pandemic has exponentially grown online sales and although this is an exceptional case, it is commonplace for international retailers to generate more than 25% of their sales online. H&M reported that their online sales as a share of the group’s net sales in 2021 were 38%.
This figure, for clothing retail in South Africa, is only 3.5% indicating that we are in the infancy of our online retail evolution. The potential growth is noteworthy with this author believing that the figure could grow to rival international online sales figures. To back up this claim, the growth in smartphone usage is over 62% penetration – nobody would have believed this in 2005. It proves that our population demands connectivity and convenience. Our consumers need convenience and time which is exactly what buying online provides them. In addition, our consumers’ transport costs are a significant portion of their monthly earnings. Saving transaction costs, for them, is a key driver of online growth.
The caveat though, is that online shopping needs to be cheap and easy, with the delivery of goods done conveniently. If done correctly, customers who are skeptical about online shopping, build trust in this retail channel. This conversion rate is critical to growing online spending.
Why so sluggish?
So why were the traditional retailers so slow off the mark? And how can they leverage their capabilities to compete in the online space? The reasons for the slow reaction differ for each business but the main themes include margin protection, legacy systems, and skills.
Retailers did not want to erode their margins at the expense of shifting their business model to compete in an expensive online environment. Soon they realized, however, that they’d better start their journey to multichannel retailing or face the risk of losing market share, if not, go out of business altogether. Reluctantly they began investing but not nearly sufficiently to change their business model. They’d soon realize that an online channel isn’t about having an alternative but rather a complement to their brick-and-mortar channel. Multichannel retailing can increase margins if the channels work symbiotically.
The IT systems issue is one where retailers developed business systems, over many years, to support store-based retail. Supporting these systems and developing new capabilities within them is a sizable undertaking. Redirecting attention away from the brick-and-mortar retail requirements, essentially pausing any new developments in favour of online systems development, is a game-changer. They never needed to deal with customers digitally because their stores handled customer engagement and sales. Indeed, a complete paradigm shift.
Lastly, the skills requirements for online differs from traditional retail. It’s like an athlete needing slow-twitch muscle fitness for a marathon versus the fast-twitch requirements for sprinters. Selling online needs agility and speed.
Retailers found themselves in a race against time to close the gap that pure-play retailers had gained. Once the strategic direction had been accepted, capital was released to invest more significantly in their online capabilities.
This evolution is not plain sailing though due to their systems, processes, and culture set up to serve their stores effectively. Mindsets needed a major shift from the C-suit to the fulfilment staff.
So, how do brick-and-mortar retailers compete with their pure-play competitors?
Leverage store inventory by fulfilling from the store: One of the obvious dilemmas traditional retail faces, relates to the use of their store inventory to fulfill online customer orders. Conceptually this seems to be all too obvious. However, there are many deciding factors on how best to implement this. Depending on store locations in relation to customer delivery points, size of the store, size of the basket, and where their offer lies on the commodity-fashion continuum will influence the optimal solution. The use of statistics and operations research assists retail supply chain managers to determine the best option. If done correctly, this could be a huge competitive advantage and one that the pure-play retailers are not able to use. The pure players likely see this as a substantial threat to their business.
Access to capital: Traditional retailers would likely have more access to capital. The reason is that they have a history of generating revenue and have had the ability to build up reserves, versus their pure-play counterparts who are generally in start-up mode requiring funding from investors. Although the capital would still need to be used for store developments and other related items that pure plays don’t have, funding should be easier to come by versus pure-play retailers. Capital should be redirected into online commerce projects carefully balancing the needs of stores.
Brand and product allegiance: Retailers should leverage the power of their brand support to drive their customer retention, whether online or in-store. Marketing plays a key role in making customers feel like they are engaging with a familiar brand and transaction process across channels. If the retailer has a social media following or a credit base, this should be used to establish a strong relationship. Use the voice of the customer (VoC) data to determine critical touchpoints and improve customer engagement.
Develop an agile, innovative mindset: To counteract the corporate internal silo problem slowing decision-making down, an innovative mindset needs to be part of the culture. Data-driven analysis and decision-making will develop an agile supply chain environment resulting in the business becoming more responsive.
Conclusion and take-away
The retail landscape is going through a paradigm shift not seen before. Customers have more choices than they have ever had, and competition between retailers is higher than it’s ever been. Successful multichannel retail requires a carefully thought-out plan delivering the digital and in-store experiences consumers actually want, versus the ones retailers think they want. It requires significant investment in systems, people, and fulfilment solutions. Market share and survival are on the line.