The bankruptcy of Sears, following the collapse of Toys 'R' Us and Brookstone, is a reminder retail is in only the early stages of a major disruption. Many thousands of storefronts will close, and more iconic names will end up in bankruptcy.
To survive in today's cutthroat environment, brick-and-mortar retailers must evolve constantly and many will need to radically change.
More than the "Amazon effect" is at work. Yes, retailers are facing competition from shopping websites. But, increasingly, they are going head to head with their own suppliers who, for decades, had relied upon stores as their primary sales channels. Not anymore.
The vast majority of consumer goods companies around the globe — 88%, according to a new PA Consulting survey of the top 150 firms — expect their direct sales to consumers to increase over the next two years. Every one of these companies reported that it is in the process of either strengthening or developing its direct-to-consumer offerings in order to build tighter relationships with shoppers and have more control of how their brands are presented. To achieve this, many are now adding an online shopping capability as well as putting more emphasis on the brick-and-mortar storefronts that they already operate.
What's required for retailers to compete in this rapidly changing market is to rethink the very concept of a store. No longer is a brick-and-mortar location merely a place to ring up sales — Sears' downfall is a very stark reminder of this. As shoppers who have grown up in a mobile world enter their prime purchasing years, stores need to cement brand loyalty by creating in-person experiences — part entertainment, part education, part traditional retail. By strengthening the bond with customers, retail outlets can drive sales both in person and online. But it takes a truly customer-centric mindset, an appetite and ability to innovate constantly, and often the willingness to make major investments in new customer experiences.
Helping retailers reimagine and reinvent
American retailers can look to UK department store Selfridges & Co, and Swedish retailer H&M for inspiration. Selfridges sees its central London department store as much as a stage on which to present new performances as a conventional retailing outlet. The store hosts a variety of promotional events. Last week, there were artwork installations exploring "brand deities" in the store as part of an ongoing partnership with a well-known sculpture park. Earlier this month, window installations encouraged passers-by to "see the world differently."
All of these displays are designed to keep the customer entertained and wanting to come back to see what's new and exciting. Does it work? Well, at a time when department stores around the world are under such extreme pressure, Selfridges' latest fiscal year sales are up 11.5%, and operating profit is a record for the fifth year running. Of course, this isn't all due to funky window displays. Rather, it shows what is possible when a retailer strives to bring new experiences to the shopper.
At H&M's flagship stores, the goal is also to lure in shoppers as much for the experience as for the product. At its Times Square location, shoppers can "virtually" try on products, test out a new look with friends on social media, and win the opportunity to appear in a live in-store catwalk show that's shown on a huge screen in Times Square. Precisely how much such experiences are boosting sales in the flagship store is a closely guarded secret. But what does seem certain is that they boost visits to the store, brand and social media engagement, and, ultimately, sales. H&M's latest results, a strong 9% rise in quarterly sales after experiencing several years of difficult trading — like many others in fashion apparel — suggest the new strategy may be working.
While offering customers new experiences is key, capturing relevant data and learning from it is absolutely crucial if retailers are to engage with shoppers in relevant ways. Many of the high-growth online retailers describe themselves as first and foremost data-led companies that are in the retail business. Store-based retailers have to adopt a similar mindset.
That requires advanced data literacy. Without this, retailers won't understand what products and shopping experiences customers want. Many established retailers are doing a very good job of putting customer data at the heart of their business. UK-based Shop Direct, for instance, owns a number of female-focused, clothing-led businesses, many of which were mid-market department stores with old-fashioned catalog businesses attached, similar to Sears. Shop Direct smartly realized that this type of retail had no growth prospects, and possibly no future at all. So the business transformed into a data-led online retailer and exited the legacy physical stores and catalog operations. It still sells mid-market clothing, but does so in ways that are far more relevant, engaging and personalized around the preferences of its customers. In its most recent fiscal year, Shop Direct's profits rose 11%.
As retailers reimagine and reinvent their businesses to be more customer-centric, they will also need to look hard at their store portfolios and address some challenging, but fundamental questions.
How many stores is the right number? Far less than they have today will almost certainly be the right answer for many.
How can stores be reinvented to stay relevant? For some, this will mean reimagining stores so they are far more than purely transactional environments. For others, it will mean radically reinventing what convenience means and perhaps replacing people with digital screens, robots and augmented reality, as Amazon is doing in its Amazon Go store.
The explosion of online retailing remains one of the greatest threats in history for traditional retailers like Sears. But for farsighted companies that can navigate the complexities and create and implement effective consumer engagement strategies, the future remains rich in opportunity.
Alan Treadgold is a retail expert at PA Consulting