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April 17th, 2017

Customer Experience Trumps Channels

Most retailers have made significant investments over the last few years to transform their businesses across online, mobile and in-store channels, but clearly this hasn’t brought foot traffic back into retail outlets. Today, the economic equation has shifted to make investing in online transactions more worthwhile than investing in comparatively inefficient transactions inside physical stores, with the related inventory, staffing and real estate costs.

Major U.S. department stores, including Macy’s, Kohl’s, Walmart and Sears, have collectively closed hundreds of locations in the last couple years to stem losses from unprofitable stores and the rise of ecommerce (and they’re not alone). Of course, the closures are far from over. What’s driving all of this? Here are three reasons behind the retail meltdown of 2017.

There was an interesting piece published in The Washington Post recently, titled “The troubles at the American mall are coming to a boil.” It reminded me of an interview with the CEO of Macy’s that aired in December, just after the company announced the planned shuttering of about 15% of its retail locations during 2017. As I recall, he commented on the dramatic shift in consumer buying behavior and the diminished significance of physical retail operations.

The U.S. has over 23 square feet of retail space per person, compared with 16 square feet in Canada and 11 square feet in Australia— the two countries with the next-highest retail space per capita, according to a Morningstar report from October. Europe has only 8 feet of retail space per person.

Mall stores like Aeropostale (which filed for bankruptcy last year), American Eagle, Chico’s, Finish Line, Men’s Wearhouse and The Children’s Place are in the midst of multi-year plans to close stores. Most analysts expect many more announcements like these in the coming months.

The Washington Post article concludes that as stores continue to close, many shopping malls will be forced to shut down as well. Indeed, a recent analysis from Credit Suisse found that if Sears alone continues to close stores, about 200 shopping malls are at risk of shutting down.

The shuttering of U.S. retail stores (graph from Credit Suisse)
Sadly, this shift drives retailers directly into the path of the 800-pound gorilla, Amazon. Based on current trends, online shopping will account for over half of all purchases a decade from now, with Amazon set to overtake Walmart as the world’s largest retailer. Based on our work in the retail segment, we believe very few big retail players are truly prepared to make the large-scale changes needed to compete, absent a distinct experience element inside their stores.

Revenue from mobile ecommerce (graph from Credit Suisse)
Moving beyond first-generation online catalogs, retailers are accepting that mobile devices have become a favored buying channel. The customer now shops at home, at work, in the store or waiting in the dental office. Mobile web and apps spread rapidly, and they now contribute to declining interest in physical store visits. An amazing 42% of all mobile sales generated by the leading 500 retail businesses comes from mobile apps.

However, a mobile app is only one dimension of the total customer experience.

Shopping in physical stores offers consumers both a social and a tactile experience—something unique and valuable compared to the digital domain. Still, shoppers are finding less value and pleasure in this core element of the physical retail experience.

One key reason for this declining value is that consumers now expect a physical experience that replicates the online user experience, from goods being in stock to multiple delivery options. Consumers want to use technology to help them engage with the store at every step of the shopping journey.

Unfortunately, these new expectations are not being met and, as a result, consumer satisfaction with retailers is alarmingly low.

If we buy into this conclusion that shopping via physical visits is in rapid decline, how will the wallet share of the consumer be earned if it’s not through a physical visit? And secondly, what will become of all of the real estate that has been devoted to retail operations, especially in the U.S.?

Countless studies, and DMI’s own research, concludes that customers are demanding personalized, contextually relevant, real-time experiences from retailers. You might say that every retailer’s brand is the sum total of experiences they deliver. They are all now in the “experience business.”

While some retailers may still be debating whether they should adopt an experience-led business model or continue trying to operate with a transaction-led strategy, the simple fact remains that brands are competing in terms of customer experience, whether they like it or not.

So, what is to become of the physical store and the shopping mall? The store has the potential of becoming an extension of the digital experience that could bring the customer back to the brick and mortar shop. But that experience will need to conform to the online virtues of diversity and ease of use.

Look at the strategy of Target, particularly in contrast to its faltering longtime rival Kmart. Target has focused more heavily on digital, while simultaneously innovating around its in-store experience. Target hired some of the best in the digital industry, and in 2015, the brand invested in $1 billion in ecommerce. Last year, more than 50 percent of total visitors shopped at Target exclusively through smartphones and/or tablets.

With the emergence of virtual reality, retailers could add a whole new dimension—literally—to the customer experience. A customer’s living room could be transformed into a virtual store, where shoppers could try on or test out products from the comfort of their homes.

Successful companies are creating a universal brand experience. It’s not about competing on just one level, but melding the digital with the physical in order to drive sales and create brand advocate relationships. Target has established a digital advantage because of its physical presence, not despite it.

In the future, we are likely to see not just more online shopping, but a blurring of the online and physical experience, with shoppers at home visiting virtual changing rooms and shoppers in the store accessing a cloud of product information.

Soon, the “Internet of Things” may be applied to entire stores, with every product given a digital identity, every movement mapped and every preference logged. This will produce a rich stream of data to be mined. Analyzing and acting on those data patterns will be key to retail success.

When people do visit stores, it will be for entertainment and for the leisure experience, so expect to see chef demonstrations, live entertainers, gaming, auctions and food tastings.

As for the real estate today’s shopping malls occupy, how will it be repurposed? In my mind, retailers will embrace the convergence of physical and digital experience models as part of their strategies to leverage proximity. Customers want their purchasing experience to be seamless, regardless of where and how they interact with the retailer. Retailers may be obsessed with “channels,” but consumers are not.

Peter Allen

Tags: customer experience mobile app mobility retail smartphone

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