Retailers: stuck between a brick and a hard (market)place

The last few years have seen incumbent ‘brick-and-mortar’ retailers being challenged by new entrants playing the ‘online’ card. In the UK, although 85% of retail sales are still made at ‘offline’ (or ‘store-based’) retailers, according to the Centre for Retail Research, the momentum is clearly in favour of online, which has been enjoying a value growth of 15% in 2015 compared with 2% for the ‘store-based’ market. Given this trend, online should overtake offline by 2026 – and yet the tipping moment may happen earlier.

Online retailers benefit from generally lower prices (inherited from a leaner cost structure and a heavily centralised purchasing strategy), a typically broader assortment and, more importantly, a great knowledge of customers’ preferences which enable targeted marketing operations. Amazon’s recommendation engine is lauded as one of the most efficient, generating an estimated 20-25% sales uplift by either classifying items through their attributes (‘content-based filtering’) or analysing user behaviour (‘collaborative-based filtering’).

Small but tremendously impactful.
Small but tremendously impactful.

Convenience in general, and delivery time in particular, used to represent a major drawback of ecommerce. Massive investments in supply chain (including truck fleets) and the proliferation of pick-up points (such as Amazon lockers or through partnerships with local offline retailers) have shifted the balance of power – ‘next-day delivery’ is increasingly often seen as the ‘new normal’ – and the prospective advent of drones could speed up the circuit even more.

Facilitating mobile payment is also a key consideration to convert the visit into a hard sale. Typing bank card details on a mobile device can be tedious and potentially unsafe. This may explain why although many retailers report that up to 70%-80% of website browsing occurs through customers using mobile devices, only 28.6% of UK online retail sales were made through those devices (as opposed to PCs) in 2015.

On their end, ‘offline’ retailers have been trying to address the customer knowledge gap, historically through loyalty cards which are now complemented by more technologically advanced methods. Several start-ups, such as France-based Openfield, track visitors in shopping malls (up to 40 000 customer journeys per second) to infer their preferences – the visitor can be identified when he uses one of the shopping centre terminals. Gathering offline customer information is also the aim of Index, a Google Wallet-backed company.

‘Offline’ retailers are also trying to turn their weaknesses, namely a numerous workforce and expensive real estate-related expenses, into strengths. Relying on the power of their ecommerce website for ‘casual’ purchases, retailers are now increasingly transforming their stores into showrooms, where in-store staff are here less to ‘sell’ than to ‘advise’ – the relevance and the quality of the interaction could only be reinforced by a more precise knowledge of the customer’s preferences ex-ante. The ‘human factor’ is a clear advantage over online retailers which have been developing machine learning-based bots as ‘humanised’ customer service interfaces.

What we should conclude from this post is that online and offline desperately need each other, and this balance will probably hold for at least the next few years. The combination of offline and online, both in terms of customer knowledge and product offering, will yield the best results – that is at least the bet that many offline retailers, including Walmart and Auchan, have made. The Paris-based Galeries Lafayette have understood the need to work together, not fight, by collaborating with Plug & Play, a Californian incubator, in order to support “around 20 start-ups per year”. Another good example of online-offline symbiosis comes from Instacart, an app (i.e. an online-based tool) which relies on an express check-out system within and a detailed aisle mapping of existing grocery stores to complete deliveries in an hour. Better than Amazon, for now.


Update (13/09): Talking about customer knowledge, TechCrunch wrote an article today about Breinify, a start-up that not only tries to anticipate what you may fancy, but also adds a time element to the recommendations (e.g. it will endeavour not to recommend pizzas or beer at 9 am).

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