The reports of the death of bricks and mortar retail stores have been greatly exaggerated. While it’s true that, according to the Department of Commerce, e-commerce is the fastest-growing segment of retail sales, it still represents less than 10% of the total market. Each year it grabs a bigger share, but it still has a long way to go to replace the sheer volume of bricks and mortar sales.
So why is there such a boom in online commerce? It’s not just the volume that is being sold online by big retailers like Amazon, but it is also the fact that many independent producers can’t get into the retail stores. They have to sell online. Online sales have made direct to consumer sales much more plausible. So now, anybody who wants to sell anything can sell it online – but they may never get into physical retail.
When you may see the biggest online retailers, like Amazon buying a physical bricks and mortar retail grocery store chain like Whole Foods, you know there’s a good reason. Sure, now they will receive orders on line and deliver them to your house. But there’s something much more important going on that hits at the very future of retail.
Having built a CPG brand through a national distribution network in physical retail stores, we are in a unique position to appreciate the implications of this move. Products that are heavy, such as liquids and groceries, and products that sell for under $20, customers prefer to pick up, rather than have them delivered. Here’s why: the cost of home delivery is a much greater percentage of the total purchase. Like for us, nobody’s going to pay four dollars to have a five dollar bottle of wine delivered to their home. They’ll just go pick it up with other items that fit the same deliver- to-cost profile.
“But isn’t delivery free?” you may ask. No, it’s built into the cost of the product. FedEx, UPS, and DHL are all still getting paid! The packaging materials companies are all still getting paid. In the early days of online sales, a compelling promotional offer was, “Free Delivery!”
Amazon Prime askes a one-time annual fee for “Free Delivery” among other benefits. But the annual fee keeps going up. Why? Because that free delivery is costing Amazon.
But there is a sea of change now in the works as it’s becoming clear to online retailers that they don’t need to eat the delivery cost if they can get the customer to meet them halfway (or at least at their neighborhood bricks and mortar retail store).
You see, the bricks and mortar physical store distribution system is really quite efficient when you think about it. Instead of packaging each item separately and sending each item to your home in a separate vehicle, the customer can go to oneplace in their own neighborhood and pick up 20 items in two bags. Those items got to that store in big trucks carrying many items at a time. Now Amazon can get those sales.
As fast as home delivery is getting in online direct to consumer commerce, it still does not provide the instant gratification the customer can realize when they stop off at the store on their way home to pick up their dinner. They have the products instantly.
Also, if the customer is going to Whole Foods anyway, for instance, why not pick up the packages they’ve ordered on Amazon while they are there? They no longer have to worry about packages left at their front door getting lifted when they are at work. Just eliminating the delivery leg between the store and the customer’s house reduces delivery costs and, in some cases, packaging costs as well.
But wait, there’s more! Why not let the customer order their products online and just pick them up at curbside? Done! And more to come in the future.
What does all this say about the future of physical retail? It says that home delivery is a big factor in e-commerce. It says that ultimately, home delivery costs are going to get passed on, one way or another, to the customer. When that starts to happen, and it already has, everyone will see what Amazon already sees. And that is that your products will cost less when the customer goes and gets them at a retail store than if they have them delivered to their home.
At first there will be incentives to get customers to pick up their own purchases at some kind of a neighborhood bricks and mortar store or distribution center. In the future, the two will be combined, just like in the old days in the small towns when there was a post office inside the store. In the future there will be an Amazon pick up desk inside the store.
Online sales seem glamorous to the producer, because you think you’re cutting out the middleman, making all the profits, and selling direct to the consumer. But ultimately online sales are a race to the bottom pricewise. It’s the nature of online commerce. Once customers want something they immediately shop the price. It’s difficult to sell value at higher prices online.
Online there’s no tactile contact. You can’t physically compare one product to another. And you certainly can’t stumble upon, or discover, that notion item you bought on impulse that you just can’t live without. But in a bricks and mortar retail store, your customers can see, touch, and appreciate your quality product compared in others in the same category. You can demonstrate enough physical value that the customer will pay a higher price for quality.
Online sellers face expensive media campaigns and online advertising to get the word out to their target market. The retail store already has a loyal clientele shopping at their physical location on a regular basis.
When it comes to volume sales, online sellers sell in onesies and twosies direct to consumers, whereas producers who sell to distributors can sell thousands of items at a time. This enables them to have the cash flow to further reduce their costs because they can now afford to buy their supplies in quantity and enjoy volume discounts.
The real issue throughout this entire discussion centers not only on volume, but also on the cost of delivery and the efficiencies of distribution. For the foreseeable future physical retail stores have the advantage. Their cost of delivery is less than direct to consumer because their distribution system is more efficient. The other factors we mentioned are just icing on the cake but for now, bricks and mortar retail is here to stay.
But it may look quite different in the future. One promising attempt to further reduce the cost of inventory management at physical retail is the Bonobos model. This style is also being used with much success by Tesla and others. In this model, the customer goes to a physical bricks and mortar store that’s strictly a show room. They go shopping, see the product, feel it, physically compare it, in the case of Bonobos, try on clothes in their size. They just can’t take them home. The sale is made at the store and home delivery is made the next day.
What’s interesting about this model is that the stores don’t have to carry inventory, just samples. They can put all their efforts into customer service since they are no longer handling inventory. If the customers are willing to postpone their desire for instant gratification for just oneday, they can enjoy all the other in-store experiences of a physical bricks and mortar retail store.
The other potential ace that physical retail has up its sleeve is entertainment. People like to get dressed up and go out shopping. So-called “retail therapy” is hard to duplicate online. Customers are getting much more than the products they buy. They’re getting a complete recreational experience. They look forward to it, have fun doing it, love to discover new things, and enjoy taking home the products they have chosen.
More and more physical retail stores are beginning to cash in on this very human social need. They are providing new experiences including technology that shows you how you will look in a particular garment, in-store demos that taste you on products before you buy, informational kiosks to educate you about products, and in-store dining, just to name a few of the expanding trends.
Expect to see a major increase in robotics as well as retailers compete for best entertainment value. Robots will be interactive and demonstrate products. They will answer questions and provide inventory.
The bottom line is that physical retailers are not giving in; they are instead improving the retail experience to entice more customers. We’re sure they were blindsided by the rapid growth of online sales, but now they are reassessing and magnifying their unique hidden assets.
Big box stores, in their desire to achieve more standardization and more efficiency, are becoming more utilitarian – and more boring. They are selling price over quality to attract their customers. This creates an opportunity for a resurgence of independent retailers who offer high quality specially items you just can’t get in the big box store. We are already beginning to see thriving merchant associations pushing for smaller shops in towns that have outlawed big-box stores. Customers want variety, they want a social experience, and they want to physically get out there and shop! This is not changing anytime soon.
Another thing that is not changing anytime soon are the seasons and the holidays and the desire of retailers to decorate their stores specifically to take advantage of these occasions. Customers look forward to Christmas Holiday decorations at retail, but there are many more opportunities to attract customers throughout the rest of the year and we predict those will be amplified like never before.
When we built the Barefoot Wine Brand, we practiced what we called, “retail entertainment.” We realized that the retailer wanted to provide a fun, unique entertainment experience for their customers. We wanted to help them do just that.
So all of our in-store advertising materials, including small and large signage, as well as giant display pieces, were seasonally themed. When we looked at the retail selling year on the calendar, we noticed it was broken down into seven or eight seasonal selling periods. Each one ended in a holiday, or a three day weekend.
Before the year began, we would get out a calendar of the coming year and identify all of the three day bank holiday weekends like Easter, Memorial Day, and the Fourth of July. We would also identify all the special events during the year like Super Bowl, World Series, Father’s Day, and Mother’s Day. Then we would come up with decorative advertising and slogans that specifically addressed those events.
Then, when customers went into the stores where our products were for sale, our decorative ads would help our retailers add value to their in-store entertainment experience. Our retail entertainment program would help the retailers decorate their stores to be in tune with the seasons, holidays, and events that were taking place during those times. We wanted to help them reinforce the festivities that were already taking place in their customers lives. You could say, it gets the retailers and their customers into the spirit of the particular occasion.
More CPG product producers are beginning to realize that they have to help the physical stores where their products are for sale with retail entertainment. Those that do will be favored by the retailers now and in the future.
Seasonal relevance cannot be communicated in such an effective way online. When customers are shopping in a retail store, they are physically surrounded by signs and decorations that remind them of the events that are happening now!
We think the future of retail in physical bricks and mortar is bright. Retail is not dead yet – by any means!