Master OPINION PIECE 11

E-commerce hasn’t killed physical retail. It’s made it more important than ever

Why we need a new approach to measuring the hidden value of brick-and-mortar retail.
8 July, 2022
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E-commerce boomed during the pandemic. That, coupled with widespread store closures, led many retail pundits to predict the final death of physical stores. In some ways, they were right. Approximately 50,000 (5.7%) stores in the U.S. are forecast to close by 2026, while online sales are expected to grow by 50%. This is prompting brands to close more stores as they question the value that brick-and-mortar retail has in a post-pandemic world.

But the reality is that the rapid digitization of commerce is completely transforming—rather than eclipsing—the role of the physical store, and we need new ways of measuring its impact.

The true value of the retail environment today is no longer solely tied to direct financial profit, which is increasingly the domain of e-commerce. It’s in the less tangible, yet critical, value of emotional and experiential engagement that only physical retail can offer. These softer elements are fundamental to establishing long-term consumer loyalty, brand reputation, differentiation, and, ultimately, sales.

It’s no surprise that brands are missing a trick here. In 2020, Covid-19 triggered a massive acceleration of e-commerce. Amazon posted its biggest-ever profit, Walmart announced a 97% leap in online sales, and some physical stores saw earnings drop by as much as 256%. Brands worldwide urgently shifted their efforts toward capturing consumer engagement in the digital world. However, in the rush to evolve their e-commerce, many brands forgot to also evolve the way they measure the impact of their remaining physical stores.

In a recently released white paper (click to download), we created a “prioritization matrix” in which brands can score every step of a customer’s experience of a store, from first arriving to when they check out and as they stay in touch with the brand online. Each step of the customer’s experience can be scored for its impact on the customer, the brand, and the business to get a full picture of how the store is performing. Scores are estimated by looking at industry best-practices, previous consumer testing, and in consultation with external experts.

This approach provides a much broader and more thorough picture of the true impact that stores are having, beyond profit and footfall alone, and also reveals how and where their value can be improved.

CUSTOMER IMPACT

Customer impact takes into consideration customer service, how engaging the store’s design, layout, and features are, and the overall experience that customers have when they visit the store.

It’s important for brands to measure this because by prioritizing the impact on the customer—instead of profit alone—stores can bring lasting value that benefits sales in the long run. A PWC report revealed that when brands offer a superior customer experience, their customers are seven times more likely to purchase from them than from their competitors.

When American Express stopped treating customer service as a cost center and turned it into an opportunity to improve a customer’s overall experience of the brand, it resulted in a 400% increase in customer retention. Here, prioritizing customer relationships—instead of focusing on keeping call times down—led to an increase in profit. Physical stores that use design to prioritize the individual goals, motivations, and needs of target customers will likely see a similar increase in long-term profits.

Examples of positive customer impact include the “Nike Live” concept: smaller-format, community-focused stores with tailored offerings and rewards based on local customer feedback and insights. From a more customer convenience-led approach, Target’s increasing number of “in-store shops” from the likes of Disney, Apple, Ulta Beauty, Levi’s, and Lego offer customers the benefit of multiple branded shopping experiences without the need for multiple trips.

BRAND IMPACT

As e-commerce escalates, physical stores—which were once mere distribution channels—are playing an increasingly critical role in bringing the brand to life. Even if the final purchase is made online, the importance of the memories, experiences, and emotions tied to the physical space cannot be underestimated in how they contribute to a final sale. After all, 55% of shoppers visit a physical store before making a purchase online. This is “brand impact”—the role of the physical store in making customers feel more loyal to the brand.

U.S. toy retailer Camp is transforming its stores into experiential retail hubs offering places to socialize with others and family activities that stretch way beyond a traditional toy store. This has led to 50% of customers returning once a month and 17% returning once a week, and while they may not be making purchases in store on every visit, the loyalty fostered will likely make Camp.com a much more likely choice for customers when the time comes to make a purchase.

A leading food giant recently challenged us to create a new retail brand that would appeal to Gen-Z consumers while reinventing the outdated pudding category they are known for. They wanted to increase brand awareness in the U.S. market, which we achieved by offering customers a variety of shareable and emotionally engaging in-store experiences. Customers were able to personalize their pudding; the interior was designed with multiple photo opportunities to encourage customers to share their experience on social media; and playful “seatingscapes” invited families and friends to enjoy pudding together in a more informal playground-like setting, encouraging spontaneous conversations. Despite improving sales not being part of our brief, this campaign had the knock-on effect of increasing overall sales by 42%.

BUSINESS IMPACT

As humans, we ultimately buy into warm, personal connections more, which can’t be replicated in the comparatively cold digital environment. A First Insight reportfound that 71% of shoppers spend $50 or more when shopping in-store, compared to only 54% of respondents who spend the same amount when shopping online. At the same time, customers—especially younger ones—say they actually prefer physical stores for browsing and experiencing products.

Physical stores can therefore still play a critical role in pushing business objectives and commercial targets forward. This potential can be maximized by ensuring stores score high by ensuring customers have the most positive overall experience of the store when they visit, which in turn increases the chances they will make repeat purchases and visits.

Ikea’s central London stores provide free planning and house-organization services, rather than being a traditional showroom of products for sale. This may seem like a simple business move—opening new stores to attract new audiences—but its success lies in how Ikea has adapted its retail model to focus more on providing customers with new services and experiences tailored to urban living, rather than simply recreating their out-of-town warehouse format.

Finally, the perceived notion that e-commerce is more cost effective than physical stores is complex. The rising costs of digital marketing and over-saturation of DTC brands can significantly reduce gains made by saving on the overhead of a physical space. Celebrated DTC brands Casper, Allbirds, and Wayfair reportedly spent a respective 32%, 25%, and 10% of their revenue on marketing in 2020. In the meantime, retail rents—often the biggest expense—are still below pre-pandemic peaks in many prime areas, such as Manhattan, while retail rents in major European cities. including Paris and London, are set to fall between now and 2025. All this means, it’s now a tenant’s market, with much greater flexibility and discounts available on retail rents than pre-Covid-19. Sales figures are further complicated by the fact that at least 30% of all products ordered online are returned, compared to 8.89% for brick-and-mortar stores.

This is why many brands are opting for a hybrid, “phygital” approach, includingbuy online, pick up in-store, or buy online, return in-store approaches, giving the physical store a fulfillment role that removes the need of an expensive warehouse, making e-commerce and physical retail interdependent. For example, roughly 20% of Target’s sales are from e-commerce, but over 95% of this is fulfilled by stores, not a dedicated DTC fulfillment center.

The rise of e-commerce and the effects of the pandemic have not confirmed the death of brick-and-mortar retail. It has simply given it a more complex—and valuable—role than ever. It’s now time to start recognizing and maximizing that value, and importantly, finding new ways to measure it long term.

This article was written by George Gottl, and first appeared on Fast Company: https://www.fastcompany.com/90...

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