The disintegrating retail economic model and the dual-pronged approach that will replace it

Retail future
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It's HR in Retail month on HRZone! We're focusing on all things retail - check out our HR in retail hub to read all our great content!

We caught up with Doug Stephens, founder of Retail Prophet, on the breakneck pace of the ecommerce market, the changing nature of consumer knowledge and why a dual-pronged approach to stores is the way the retail industry will survive and thrive into the future. This is what he told us...

"We must try and appreciate the scale and velocity of ecommerce. Contrary to mythology, all the big companies are profitable too, including Amazon and Alibaba. Ecommerce is growing by around 21% a year. Will this normalise and decline to the level of the whole retail industry, about 6% a year?

No, I think we will continue to see the same trajectory - it might be more significant, actually - because we can start to include the Internet of Things, devices that will make ecommerce even more frictionless.

A growing number of the things we want will come to us directly, based on the tacit permission to order of enabled devices: our trainers that will order another pair automatically when they are worn out, for example.

The emerging powerhouse of ecommerce 2.0

So we’re closing the page on the first chapter of ecommerce and starting chapter two. Against that backdrop, why would someone still want to go to a store?

The answer is that we will go to stores for unique experiences, not for products. The old world was always around investing in media to drive people to come to stores to buy products. Now media has become the store. We can buy directly from a tweet, or an email, for example.

There’s an inordinate level of downward pressure on retail profit margins. That’s no secret.

Stores will simply become integrated into this new paradigm: they will become another form of media, acting as powerful engines to bring consumers into a brand ecosystem and spawning a relationship whereby the consumer will buy from the brand across multiple channels.

Against the velocity of ecommerce growth, smart retailers should start designing those unique experiences today.

There’s a physicality to retail we shouldn’t ignore - but we have. If I go into a B&Q, how many of their products can I actually have an experience with? We’re coming out of an era in retail when it was just about vast amount of merchandise 20 feet above the floor where I can’t touch them.

Have you heard of 'Pirch?'

There’s a high-end appliance retailer in the US called Pirch. They have nine stores. It’s a completely different take on appliances for the home.

You can go in and use every single appliance or product in the store, including showerheads. You just have to bring your bathing suit. And it makes sense: you’ll use your shower at least once a day for life.

How can you walk out the shop and not know what it feels like? This approach is working: the average length of stay in their stores is two hours.

The dialogue between retailers and manufacturers/wholesalers has been adversarial, beating each other down on price.

Right now we try and get this ‘real life’ experience by going to Amazon. Before I make a purchase I can read a review from someone who I assume is unbiased, who bought the product and used it, and I’m relying on that information. Whereas when I go into a retail shop now it seems like an information vacuum.

There’s information on price and features but there’s no social validation at all.

From this, our minds are being conditioned to the online reality of purchasing. You go into a big shop with 1000 products and the choice is overwhelming. Yet on Amazon there might be 10,000 or 100,000 and yet it’s much easier to come to a final decision.

That is a glaring, glaring problem that stores are having now.

I think that will change for sure - if I take my forecast further and look out on a 10 year horizon, I think we’ll see an overhaul of the retail economic model.

There’s an inordinate level of downward pressure on retail profit margins. That’s no secret. Retailers feel under pressure from ecommerce, undercut by heavy discounters.

And so the dialogue between retailers and manufacturers/wholesalers has been adversarial, beating each other down on price.

This will come to a breaking point in my view. Brands are also going direct to consumers more than ever before.

Under Armour, for example, is talking about opening hundreds of new stores. Upwards of 30% of Nike’s revenue comes from direct-to-consumer sales and they want to double that in the next five years.

Retailers aren’t going to be happy simply to eke out a living between manufacturer and customer while the brands they are selling in-store are going direct to consumers.

The fragmentation of retail into two distinct arenas

So, I think the retail marketplace will split into two constituents:

  • direct-to-consumer, verticalized brands taking products direct to consumers through their own stores.
  • experiential, cross-product or cross-category stores

The latter category of retailer will not buy in volumes of product and try to sell it directly to shoppers. Instead, they will design experiences around the categories they specialise in that are truly outstanding and remarkable. And they will charge brands up front to be part of those experiences.

Both types of stores will take on a media model, making revenue as a media channel rather than purely as a distribution channel.

The retail sales ecosystem of the future

This will resemble an ecosystem. Retailers will have to look at stores not as separate channels with separate profit goals but as a gateway to the rest of the ecosystem.

They will expect shoppers to come in, have a great experience, then go home and buy the product online. It doesn’t really matter where they buy it. And so, pure profitability of a store may not look amazing or improve year-on-year, but they will be important parts of the purchasing journey.

Now, you can’t have a store losing $20m a year and not attract attention from the CFO. So the need for companies to develop a single view of their customer is paramount.

They need to know that someone came into the store on Wednesday, for example, and then went home and bought a product online on Saturday. Establishing a causal relationship between the store visit and the purchase later in the week is very important.

Ultimately retailers must build experiences that are so compelling that customers are willing to declare who they are across multiple channels, so retailers can build this single view.

Retailers must stop thinking about how they can trick customers into revealing data and instead roll up their sleeves and design experiences that customers cannot live without.

This, in my view, is the retail picture of the future."

It's HR in Retail month on HRZone! We're focusing on all things retail - check out our HR in retail hub to read all our great content!

About Jamie Lawrence

Jamie Lawrence, HRZone

Jamie Lawrence is editor of global online HR publication and community He is committed to driving forward the HR agenda and making sure that HR directors have the knowledge and insight necessary to make HR felt across the whole organisation. He regularly speaks to audiences of 250+ and has interviewed key HR industry names, including Daniel H. Pink. He has worked previously as a small business journalist and a copywriter and has published non-fiction that reached #2 on the NYT Children's Bestseller List. In his spare time Jamie likes writing fiction, films, fitness and eating out.


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