Voor de ‘Insights Scientist van het jaar’ award zijn de artikelen gebundeld in de publicatie MOA Topic of the Year 2019: Surviving the Retail Revolution. Dit keer het artikel van Els Gijsbrechts en Katrijn Gielens die samen inzicht geven in de bedreigingen waar retailers mee te maken krijgen.
Katrijn Gielens & Els Gijsbrechts
Traditional Brick &Mortar (BM) grocery retailers are in a difficult spot. They face shoppers who want maximum value-for-money and shopping convenience, and are under attack from hard-discounters and online players. To fight these attackers, we offer two paths forward. First, BMs can exploit their complementarity by offering higher service, shifting emphasis to categories and brands that cater to consumers’ need to trade up, and turning their store into a ‘fun’ shopping place. Second, they can go ‘omni-channel’ and, apart from setting up convenience or discount outlets, use their stores as a distribution network for online orders that reduces fulfilment cost and creates impulse moments for more ‘rational’ online shoppers.
The store is dead (?)
The retail landscape has been in great turmoil over the past decade as consumers’ mindsets and attitudes have changed forever.1 For one, digitalization has transformed the way consumers think about service, assortment and convenience. Moreover, the last recession resulted in a consumer price-discount addiction that, combined with the rise of digital juggernauts and smartphones as shopping tools, has pitted retailers against one another in a never-ending price war (Wahba 2017). In addition, spending is shifting from goods to services implying that consumers are looking for experiences rather than just a product (Halzack 2016).
When push comes to shove, Consumers 2.0 want it all. They want ‘value-for-money’– the best possible products (both quality and variety), in an enjoyable shopping experience, at the lowest price. In addition, their ‘convenience’ expectations are ever broadening, comprising the ability to shop without physical or cognitive strain, in accessible and nearby shopping locations, in a ‘routinely’ fashion, while allowing for top-up and impulse buying, and returning unsatisfactory items (Gielens, Gijsbrechts and Geyskens 2019). These expectations, combined with increased technological advances and investments, have led to a ‘retail-scape shakeout’, leaving Brick &Mortar stores (BMs) under attack from above as well as below.
Attacks from the clout: the rise of online
Undeniably, the largest ‘disruption’ has come from the advent of online players. In 2017, retail e-commerce sales worldwide amounted to $ 2.3 trillion and are projected to grow to $ 4.88 trillion in 2021 (Statistica 2019). Among the digital disruptors, Amazon is the main challenger whose model has become the benchmark for most other e-retailers. By now, Amazon Global’s total banner sales exceed $343 billion (compared to, for instance, $552 billion for Walmart) – an astounding 30% growth compared to the year before (Planet Retail 2019). Other pure-play online retailers like Alibaba and JD.com in China, or Zalando, Bol.com and Ocado in Europe, have followed suit around the globe, operating in a broad range of product categories.
From the consumer’s perspective, the business proposition of these online players seems hard to beat at first glance. With no shelf-space restrictions and with the help from third-party affiliates, online retailers can offer endless-aisles assortments without holding inventory for each product. For instance, Amazon’s offer encompasses about 50 million SKUs, compared to only 2 million for Walmart (Planet Retail 2017a). Online ease of navigation and algorithm-based individual recommendations help consumers find their preferred product with little search effort or choice overload. Online price-comparison algorithms help identify the cheapest items and best ‘deals’. Lastly, online retailers promise home delivery within a short time span. For instance, Amazon guarantees its ‘Prime’ customers free delivery within two days. As such, it seems that online players can live up to the Consumer 2.0’s expectation of getting the exact right product, right here and now, at the lowest price and without any effort (‘from couch to couch’).
Attacks from below: the rise of the hard discounters and online private label lines
BM stores have also been attacked ‘from below’ by value or hard-discount models (HDs) that offer small and private-label dominated assortments at rock-bottom prices in no-frills stores. These HDs, with Aldi and Lidl as prime exemplars, have shown an unprecedented rise in Europe, and are making their way into the US (Steenkamp 2018). On a global level, both Aldi and Lidl now rank high in the top ten of grocery retailers with sales levels exceeding 110 billion US$ for each chain (Planet Retail 2019); and with the Schwarz Group (owner of Lidl) expected to become the runner-up of Walmart as largest global grocery retailer by 2021 (Planet Retail 2017b). Though the wheel of retailing has been turning – HDs have ‘face-lifted’ their stores into more pleasant shopping environ- ments, while including a limited selection of national brands and increasingly emphasizing private-label quality – the key points of differentiation remain: low prices, in a lean and easy-to-navigate shopping environment.
As consumers become ever-more value-conscious, cheap is the new smart, leaving conventional retailers in an unfavorable position. Operating on very tight gross and net margins, they find it hard to outcompete HDs on price in a sustainable way. Also in the private-label realm where they used to make their value mark, conventional BMs are threatened by both HDs and digital retailers – with digital powerhouses like Amazon entering the private-label arena.
To counter these ‘attacks from below’, retailers have typically turned to money-related weapons entailing permanent list-price reductions, temporary discounts, and low-tier private labels. However, extant studies suggest that these tools may be counterproductive. Large-scale permanent list-price reductions often result in price wars that may improve the retailer’s price image, but at the cost of increased price sensitivity and even further-reduced margins (Van Heerde, Gijsbrechts and Pauwels 2008). Temporary price promotions may enhance store traffic and spending (see, e.g., Gauri, Ratchford, Pancras and Talukdar 2017 for a recent overview), but they also lead to a promotion trap where retailers end up caught in ever-recurring rounds of price promotions that hurt the bottom line.
In an attempt to increase the effectiveness of these price promotions, BMs have turned to large-scale ‘savings events’ in which they advertise deep and instant deals across multiple categories under a common theme – examples being Albert Heijn’s ‘Hamsterweken’ and Amazon’s ‘Prime Days’. These events – especially the ones with larger scope and more resonating themes – seem to have an impact beyond the mere price promotion and entail increases in traffic that prevail in the week(s) following the event (Guyt and Gijsbrechts 2019). Neverthe- less, even if savings events can win back customers from HDs, their profit impli- cations are yet to be explored. As for economy PL introductions (like, e.g., Albert Heijn ‘Basic’), the extant literature reveals they hardly increase sales at the expense of HDs – possibly because their quality is inferior – and may even hurt sales in differentiated categories (Vroegrijk, Gijsbrechts and Campo 2016). In brief, trying to beat HDs on their own turf reveals to be a risky and hardly successful endeavor.
The death of the store?
These combined pressures have led many to pass a death sentence for BM stores – as exemplified by a massive wave of store closures. Nevertheless, stores may still offer value to the ever-demanding Consumer 2.0. In the end “there aren’t store customers or online customers—there are just customers who are more empowered than ever to shop on their terms,” as Erik Nordstrom’s, co-president stated (Kapner 2017). The ultimate test therefore becomes: Who can serve these newly empowered consumers better? Are shoppers truly satisfied by all things digital or discount?
The store is dead … or is it?
Despite the promising outlook, the share of online sales has not yet reached double-digit numbers. While it absolutely boomed in sectors like entertainment and apparel, figures for the grocery sector – still about 40% of global retail business – are much lower. At the heart of this phenomenon is a substantial unmet need of Consumers 2.0: the instant gratification of the order is not fulfilled by online operations. Home delivery often remains inconvenient as shoppers have to wait and stay home for delivery, which cannot always be guaranteed at convenient times. On top of that the delivered products may not meet expectations, which holds especially for touch-and-feel goods like products that are hard to ‘evaluate’ at a distance. Moreover, for retailers, home delivery is a costly endeavor – especially for groceries, as these are low-margin orders and logistically very complex. As such, when it comes to groceries, by 2018 only a meager 5.5% of purchases occur online in the US (Grocery Dive 2018) and home delivery remains largely unprofitable (WSJ, 2019).
Similarly, though HDs may gain substantial ground in all the markets they enter, it is unlikely that they will drive out conventional retailers. Next to the (large) segment of value-conscious shoppers, there is a persistent segment of ‘aspira- tional’ shoppers that are not attracted to the discount. Moreover, even value- conscious shoppers may want to switch between formats depending on the shopping needs: they look for low-priced (basic) items in some categories, but want the ‘best-of-the-best’ in others (Vroegrijk, Gijsbrechts and Campo 2013). HDs can only attract these more aspirational consumers or fulfill these higher- end needs by straying from their original concept at the risk of alienating their core value shopper. This implies that there are boundaries to the potential of the HD format.
The store is dead – long live the store!
In the face of these realities, it seems that the BM store can still claim an impor- tant role. BM retailers have to play their trump cards, by differentiating from their challengers, but also by engaging in omni-channel or omni-format operati- ons, alone or in cooperation with other players.
Surviving in a digital world: the role of the physical store
Practitioners and academics have come to recognize the role of physical outlets in resolving the online-channel issues, as they can serve as ‘fulfilment centers’ for online orders. As such, BM retailers have adopted a new format: ‘Click and Collect’ (C&C), in which consumers place orders online but pick up (and, if need- ed, return) the goods at a designated physical location, at the time and place of their choosing. To fine tune this fulfilment model to consumers’ needs different formats can be used, including pickup of the order inside a regular store (in- store C&C); a drive-through facility near the store that allows consumers to stay in their cars (near-store pickup); and a drive-through pickup point in brand-new locations detached from the store (stand-alone pickup) (Gielens et al. 2019).
These C&C formats differ in the relative convenience benefits to consumers. Stand-alone pickup offers the highest spatial convenience and the lowest shop- ping effort, but it is also the least familiar and the least flexible option in terms of top-up shopping or product substitution; in-store pickup is less spatially con- venient and more effortful, but also more familiar and flexible; and near-store pickup is in-between. Preliminary findings of an ongoing study in the French market (Gielens et al. 2019) indicate that consumers make use of C&C (adoption rates up to 12%) and may subsequently spend more at the chain as a whole. Interestingly, adoption is higher in markets where the chain already has a strong store presence. This underscores that BM retailers can build on their strengths – i.c., a familiar physical store network. What’s more, also pure-online retailers inc- reasingly recognize the importance of stores as a fulfilment opportunity, and team up with brick-and-mortar players – examples being JD.com’ s partnership with Walmart and Amazon’s acquisition of Wholefoods.
Another important upside of the brick-and-mortar channel is that it allows con- sumers to physically inspect and ‘try’ products, and enjoy a real-life shopping environment. To capitalize on this advantage, retailers are increasingly transfor- ming their stores into experience centers, with less space assigned to inventory and more room for/attention to personalized service or atmospherics. The store- of-the-future will become less of a ‘transaction’ center but more of an ‘experien- ce’ center that fosters customer engagement. Carrefour’s revolutionary ‘Express Urban Life’ store in Milan, for example, offers free wifi, and features a lounge area, a bar where Happy Hour drinks are served, and a “Barnes & Noble Cafe”, where consumers can check out products in a relaxed atmosphere. Ultimately, this may lead to new concepts eliminating inventory in the store altogether. Nordstrom, for example, opened showroom-like locations that offer services such as manicures, personal stylists and on-site tailoring, but carry no inventory at all, thereby trying to win back consumers who migrated online (Kapner 2017).
Standing up to the HD threat
Because not all consumers are value-conscious and most consumers patronize multiple stores anyway, emphasizing their high-end offer may be a rewarding route for conventional retailers to co-exist with the HD. Indeed, research shows that consumers shop at both HDs and conventional chains to benefit from their complementarity, ‘trading down’ in some categories but ‘trading up’ in others (Gijsbrechts, Campo and Nisol 2008). Conventional retailers thus have an inte- rest in ‘excelling’ where HDs do not, by offering (national-brand) quality and variety in categories where that matters most. Analysis of consumers’ spending patterns before and after local HD entry shows that incumbents ‘complementary’ to the HD are harmed less, and can even benefit from a HD outlet opening up right next to their store (Vroegrijk et al. 2013). This gain is partly at the expense of other supermarkets. Interestingly, it also follows from expansion of consu- mers’ total grocery budgets. Controlling for other factors, consumers who shop at both formats are found to spend substantially more on groceries (and buy larger quantities) than single (HD)-store shoppers (Gijsbrechts, Campo and Vroegrijk 2018). So, stimulating impulse buying is an important ingredient of a rewarding co-habitation strategy for conventional brick and mortars.
Summary and future outlook
Figure 1 summarizes the main insights for traditional BM retailers. To satisfy the Consumer 2.0’s ever-increasing convenience needs, ‘omni-channel’ is the path forward – posing a formidable challenge for all retailers to streamline yet diversi- fy their channel operations and touchpoints in a cost-effective way for ‘maximum consumer delight’. Integrating online operations in offline settings is therefore a must and not an option to BMs. Being able to rely on their physical store pre- sence, however, BM retailers can use their stores as a distribution network that may not only reduce fulfilment cost but also create impulse moments for more ‘rational’ online shoppers. When tying these fulfilment options to engaging store experiences, stores can truly become trip drivers for both online and offline ope- rations. So, stores may ultimately be the right weapon to fight online retailers.
Moreover, integrating online operations may also give BM retailers a competitive edge against HDs. Indeed, with low operating costs being an essential part of the HD DNA, the substantial fulfilment costs of online orders make it hard for HDs to fully employ the online channel. In addition, in order to retain business in value-focused segments and categories, conventional retailers are also setting up their own, lean, discount formats. Examples are Carrefour’s pilot ‘Essential’ hypermarket in Avignon, France, positioned as a ‘must-visit destination for best bargains’, and Tesco’s new format ‘Jack’s’ intended to win back business from Aldi and Lidl. The success of these recent initiatives remains to be explored. Last but not least, given the ever bifurcation of consumers, and of shopping needs within the same consumer, there is room for ‘cohabitation’: upscale and discount stores, as well as online and physical stores, benefiting from and exploiting their complementarity. It also means that for BMs to thrive, they need to focus on differentiation, by offering higher service, shifting emphasis to categories and brands that cater to consumers’ need to indulge or trade up, and tur- ning their store into a ‘fun’ shopping place.
1. See also Gielens and Gijsbrechts (2018), Introduction chapter.
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