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2013-07-17 13:03:22
Retailers in the rich world are suffering as people buy more things online. But
they are finding ways to adapt
THE staff at Jessops would like to thank you for shopping with Amazon. With
that parting shot plastered to the front door of one of its shops, a company
that had been selling cameras in Britain for 78 years shut down in January. The
bitter note sums up the mood of many who work on high streets and in shopping
centres (malls) across Europe and America. As sales migrate to Amazon and other
online vendors, shop after shop is closing down, chain after chain is cutting
back. Borders, a chain of American bookshops, is gone. So is Comet, a British
white-goods and electronics retailer. Virgin Megastores have vanished from
France, Tower Records from America. In just two weeks in June and July, five
retail chains with a total turnover of 600m ($900m) failed in Britain.
Watching the destruction, it is tempting to conclude that shops are to shopping
what typewriters are to writing: an old technology doomed by a better
successor. Seattle-based Amazon, nearing its 19th birthday, has lower costs
than the vast majority of bricks-and-mortar retailers. However many shops, of
whatever remarkable hypersize, a company builds in the attempt to offer vast
choice at low prices, the internet is vaster and cheaper. Prosperous Londoners
and New Yorkers ask themselves when was the last time they went shopping; their
shopping comes to them. Retail guys are going to go out of business and
e-commerce will become the place everyone buys, pronounces Marc Andreessen, a
celebrity venture capitalist. You are not going to have a choice.
Online commerce has grown at different rates in different countries, but
everywhere it is gaining fast (see chart 1). In Britain, Germany and France 90%
of the rather modest growth in retail sales expected between now and 2016 will
be online, predicts AXA Real Estate, a property-management company.
Old dog, meet new tricks
This would hurt less if shoppers were spending more; smaller slices are more
acceptable when they come from bigger pies. But in many rich countries,
especially in Europe, consumers are still smarting from the bursting of the
credit bubble and high unemployment. American consumers are perkier, but seem
to be clinging to the bargain-hunting habits of the recession. Services have
been consuming a bigger share of their wallets for decades, leaving less to
spend on things (see chart 2). Ageing populations could shrink the pie further.
Old people shop less.
When shoppers both know what they want and are willing to wait for it they will
go online. And retail s simple moneymaking ways of yesteryear find a catchy
concept, fuel growth by opening new shops and attracting more shoppers to
existing ones, use your growing size to squeeze suppliers for better margins
have run out of steam. But that does not mean that there are no new options for
bricks and mortar.
Shopping is about entertainment as well as acquisition. It allows people to
build desires as well as fulfil them if it did not, no one would ever
window-shop. It encompasses exploration and frivolity, not just necessity. It
can be immersive, too. While computer screens can bewitch the eye, a good shop
has four more senses to ensorcell. No one makes the point better than Apple; in
terms of sales per unit area its showrooms-slash-playrooms best all other
American retailers.
And shops make money. Bricks-and-mortar retail may be losing ground to online
shopping, but it remains more profitable. The physical world is also
increasingly capable of taking the fight to its online competitors. Last year
online sales of shop-based American retailers grew by 29%; those of online-only
merchants grew by just 21%. Apart from Amazon which has long spurned profits in
favour of growth most pure-play online retailers are losing market share, says
Sucharita Mulpuru of Forrester Research. The bricks-and-mortar retrenchment
will be painful, but the survivors may make shopping a less formulaic, more
satisfying and possibly even more profitable experience, both offline and on.
Many brands still think shops are the best way to attract customers. Inditex of
Spain, owner of the ubiquitous Zara fashion brand, opened 482 stores in 2012,
bringing its total to 6,009 in 86 countries. Primark, a fast-growing vendor of
nearly disposable clothing, sells nothing on its website, relying on its 242
shops for almost all its sales. The same can hold at the luxury end, too few
will buy a $10,000 necklace online, or entrust it to the post. Space on the
snazziest streets in London, Paris and New York is in such demand that luxury
retailers pay millions in key money to secure it, says Mark Burlton of
Cushman & Wakefield, a property company.
Offline-only, though, is a shrinking category. Now that the initial shock of
the online onslaught has worn off, most big retailers have joined it. They
proclaim themselves to be omnichannel merchants, as adept as Amazon online
but with the added excitement and convenience that comes with physical shops.
Philip Clarke, chief executive of Tesco, Britain s largest retailer, says that
app development will come to be as important to his company as property
development. Walmart, the world s biggest retailer, has 1,500 employees in
Silicon Valley trying to out-Amazon Amazon in areas such as logistics and
making the most of social media.
Some online natives are going omnichannel, too. Pace Mr Andreessen, New
York-based Warby Parker, which sells trendy spectacles at prices lower than
those charged by famous brands, has opened 14 shops, one of them a school bus
that tours the country. Some potential customers were wary of buying spectacles
from an online-only merchant. We thought bricks and mortar would bring
gravitas to the brand, says Neil Blumenthal, a co-founder. Its SoHo flagship
resembles a library. Appointments with the in-store optometrist are displayed
on a railway-station-style time board.
Currying favour
Britain may be one of the places where the future of retail is most easily
seen. Online shopping has advanced further there than in other developed
economies. The population is quite tightly packed, which makes delivery
relatively cheap, and 70% have broadband internet access. It is one of the few
places where online grocery shopping has taken off. Eventually, predicts
Panmure Gordon, an investment bank, 20% of the food business will be online.
For non-food items it will average 40%, but there will be a large range. For
entertainment it may be 90%; for DIY supplies as little as 15%.
Footfall on British high streets has declined for seven years running. Citi
Research, part of Citigroup, a bank, calculates that comparable sales at a
representative selection of Britain s clothing chains fell by 3-5% a year
between 2009 and 2012. Shop rents are high and leases are long, which piles on
the pressure. Vacancy rates have risen fivefold to 14% since 2008. A report by
the Centre for Retail Research predicts that a fifth of Britain s high-street
shops will close over the next five years, eliminating more than 300,000 jobs.
Britain s brick-burdened retailers may be heartened, though, by the example of
Dixons Retail, owner of Britain s biggest electronics and computer retailers,
Currys and PC World, and of similar chains in other countries. Between 15% and
20% of sales at Dixons are online, depending on the season, and the proportion
is rising. But Dixons thinks the advantages which online-only merchants get by
doing away with shops and sales staff are undercut by the need to pay more than
high-street shops do to acquire customers (largely by paying Google for clicks
on adverts) and to spend a lot on shipping. So instead of doing away with shops
and sales staff, Dixons is trying to get more out of them.
Shoppers may be tempted to treat electronics stores as showrooms for Amazon and
its like, but at least they cross a retailer s threshold at some point during
their quest 90% of the time, notes Dixons boss, Sebastian James and with
rivals like Comet having closed down, that threshold is ever more likely to be
Dixons . This gives the company the means to procure better terms than online
rivals do from its suppliers, which like the idea of customers actually seeing
their wares in the flesh, shown off by flesh-and-blood people. Sometimes, as
with a recent AEG washing machine and Samsung camera, Dixons enjoys a period of
exclusivity.
Thus people s tendency to use the shops as showrooms is turned, at least in
part, to the company s advantage. Other retailers are seeking to embrace the
practice too. Best Buy, America s biggest electronics retailer, used to cover
up barcodes to stop shoppers from using their phones to compare prices. Today
the retailer s new boss, Hubert Joly, professes to love showrooming because
it means that a prospective customer is on the premises.
Having people on the premises also helps Dixons to bundle sales in particular,
to sell high-margin accessories and services along with low-margin devices. Mr
James says that computers in Dixons were 26% more expensive than on Amazon
three years ago. Now the difference is pretty much zero. So the shops must make
money by selling the world that goes around the product like a computer bag
or high quality cables.
These stratagems depend on having attractive stores and able shop assistants.
Dixons has retrained its staff and changed their incentives. Individual sales
commissions have been scrapped in favour of store-wide schemes linked to
measures of customer satisfaction. To overcome managers reluctance to refer
customers to the website, stores are now credited with all sales in their
catchment area, regardless of whether a buyer entered the premises.
The omnichanneller s dilemma
But though owning shops is basic to Dixons strategy, the number of shops is
dropping, and will drop further. Dixons has cut its British network from 780 to
486; it aims to end up with just under 400. Jessops, which has been reopened
after shedding more than 80% of its stores by Peter Jones, a flamboyant
reality-television entrepreneur, is making a similar bet.
For many retailers, such reductions are an inescapable part of going
omnichannel. You re putting in more capital to keep the sales you have, says
Colin McGranahan of Sanford C. Bernstein, a research firm. Investment which
used to go mainly into new stores must now in part be redirected towards the
technology and distribution that online sales require. And sales through new
channels come in part at the expense of existing shops, the costs of which are
largely fixed. That depresses the retailer s profits and forces it to close
shops.
Other sectors have some advantages over electronics and camera sales. It is not
so easy for shoppers to use food and clothing shops both of which are big parts
of retail as showrooms for online sales. You cannot squeeze a melon with a
tablet computer; phones make poor fitting rooms.
For online-only retailers such products cause extra headaches. Clothes shoppers
return a quarter or more of the garments they buy. Selling groceries online is
laborious, with lots of low-value items stored at different temperatures that
have to be assembled into all manner of unique orders and then delivered
rapidly.
But online-only retailers keep inventing clever ways to overcome such
disabilities. Amazon s subscribe and save service delivers at regular
intervals staple products like nappies and coffee. Fits.me sets up virtual
fitting rooms for online clothiers, which let shoppers enter their
measurements to see how garments would look on them. Citi Research expects
British online clothing sales to double in the next six years. There are no
glass ceilings on any particular category, says Robin Terrell, head of Tesco s
online business.
For Tesco, the world s third-biggest retailer, the challenge of mastering
online grocery while shoring up its traditional business is acute. The company
outsells all other British grocers on the internet; but its market share has
been slipping both online and off and a recent poll rated its shops lower in
quality than those of any other British grocer. Like Carrefour, the French firm
that is retail s global number two, Tesco has pulled back from some attempts to
expand internationally in order to win back lost ground at home.
Change in store
Around 40% of Tesco s British floorspace is in hypermarkets which seem ill
suited to new trends, based as they partly are on the idea of selling things
that people would rather buy online, such as televisions, alongside food. The
Institute of Grocery Distribution, an industry think-tank, sees sales in
Britain s big shops growing by just 6.4% between 2012 and 2017. The growth that
is not found online is going to come from neighbourhood convenience shops,
which the institute sees as growing by 28.5% over the same time. So that is
where Tesco, like Carrefour and Walmart elsewhere, is heading. In April Tesco
took an 804m write down on the value of its British property as it scaled back
plans for future big supermarkets.
After a decade spent bringing its shops online Tesco now sees it as time to
bring the internet into stores , says Mike McNamara, the company s technology
chief. The idea is that this will make shops both more productive and more
popular. Tesco s in-store caf s could have interactive tabletops, which,
prompted by a customer s cellphone, would suggest recipes based on his shopping
list. Similar wizardry could tell staff which fruit and vegetables need
replenishment. The hypermarkets will also sell more clothing and cosmetics,
which have higher margins than electronics and seem a more natural fit with
food.
Online sales are the fastest-growing part of Tesco s business, but analysts
doubt they bring much profit. On a fully costed basis no one makes money in
online grocery, says Andrew Gwynn of Exane, an investment company. But online
offers a real advantage in serving Tesco s most loyal and profitable customers.
Tesco has been hoovering up information through its Clubcard loyalty scheme for
years; computers can take that further. We are teetering on the brink of an
era of mass personalisation, says the retailer s boss, Mr Clarke. Loyal
customers are worth far more to Tesco than footloose ones.
Deep personalisation could have disruptive consequences. Retailers are
beginning to see profit per household, rather than per square metre, as the
thing they should target, according to the Boston Consulting Group. Safeway, an
American supermarket, offers individualised pricing through its just for u
loyalty scheme. Mr Clarke seems wary. Tesco should be classless , he says,
meaning it should not discriminate among its customers. But the temptation will
be there. Tesco still uses traditional yardsticks but customer-level metrics
will challenge the way the company thinks, says Mr Terrell.
Many chains are going through similar change, looking again at every aspect of
their logistics (a 95% accuracy rate is acceptable for shipments to grocery
shops but anything short of 100% risks turning off a customer), their staff
training, the number, size and location of their shops and what they offer the
customer. Asda, a competitor to Tesco in Britain that is owned by Walmart, is
transforming big supermarkets into mini high streets , bringing in Disney
shops and shoe repairs (Tesco has bought Giraffe, a restaurant chain, for
similar purposes). John Lewis, a British omnichannel role model, takes the view
that targeting individual shoppers rather than single channels is the way to
profitability. Click and collect services let shoppers pick up online
purchases at a convenient store where they might also buy something else.
The future shopscape will be emptier, but more attractive. Shoppers can expect
new rewards for simply showing up. Shopkick, a mobile-phone app, gives American
shoppers points that earn them goodies like iTunes songs just for stepping
across the threshold of a participating store. Inspired by Apple, shops promise
experience and hope that sales will follow. Germany s Kochhaus claims to be
the first food store organised around recipes rather than grocery categories.
The ingredients are strewn across tables, not stacked on shelves. Some shops
will opt to sell nothing at all on the premises. Desigual, a Spanish fashion
merchant, has shops in Barcelona and Paris that carry only samples. Shoppers
are helped to assemble them into outfits that they then buy online.
Shopping centres are reallocating space from the classic form of retailing to
leisure and entertainment. In Britain the non-retail share of shopping-centre
revenue has risen from the 5% once seen as standard to 10-15% and could rise to
20% over the next five years, says the British Council of Shopping Centres. The
same trend holds across much of Europe. In America nearly a quarter of the
space in shopping centres is occupied by businesses other than shops and
restaurants. Medical services may become principal attractions, says Michael
Niemira of the International Council of Shopping Centres. Health care accounts
for just 1% of space now but Mr Niemira and others expect it to explode .
Room for improvement
Nothing is settled. The bundles assembled by Dixons and its kind may be
brutally unpicked by online competitors. A logistical arms race is heating up.
Amazon, having given up its resistance to collecting state sales tax in
America, is building fulfilment centres near cities to speed delivery.
Bricks-and-mortar shops are striking back with services such as Shutl, which
arranges fast home deliveries from store networks. And all retailers are
competing increasingly with suppliers seeking new direct routes to market. Last
year online sales by companies that make their own products grew faster than
those of both shops and online-only retailers in America.
And new hybrids are emerging. Yihaodian, a Chinese company owned by Walmart,
has used an app to let phone users visit 1,000 virtual stores accessible only
at specific sites many of which, rather cheekily, were on the doorsteps of
rival retailers. Tesco s Korean subsidiary, Homeplus, puts up images of
products on posters in the subway; commuters can scan them to get the products
delivered. Tangible and virtual retailing may meld in all sorts of unaccustomed
ways. Even Amazon has flirted with the idea of opening physical stores.
Consumers have reason to cheer the survival of the sexiest.