The final retail battle: Brick and Mortar vs. eTailers

For many years retail was a simple art: stand-up a store, fill it with merchandise and let the shoppers take home what they like. The advent of the internet and on-line retailers like Amazon changed all that. This blog will attempt to explain how the electronic retailers changed customer shopping habits and what “hurdles” remain for electronic retailers or eTailers, for short, to completely disrupt what was once the beloved brick and mortar model. This blog will also comment on what opportunities and actions are available to brick and mortar retailers to restore their competitive advantage against the threat of complete domination of eTailers.

I-                    Traditional Shopping model

In the traditional brick and mortar shopping model, a merchant decides to build a store in a community taking into consideration the people within a particular distance radius of where the store will be located. It is assumed that the store’s merchandise will cater to those people and as such the assortment is carefully selected – within the constraints of space at the store – to maximize the product turnaround. Careful analysis of the store demographics is performed to fine tune the assortment, and pricing is determined both by demographics, and other competitive options that people might have available within the store radius of influence.  This model worked well for many years, allowing the creation, consolidation and growth of national, regional and local retailers that followed pretty much these same principles when opening new stores.

This model had a very good advantages, the customers knew what to expect and how to operate within the model and It was very straightforward: 1) look for something that you like on the shelf, 2) take to the register where it will be bagged and 3) pay for it and take it home. This model was also defined by some as “Cash and Carry”, as you would pay for things with cash (or equivalent) and take the merchandise home with you. This model provides an immediate gratification to the buyer and it is fairly simple for the retailer to operate as most of the goods were delivered to the store from a distribution center (Figure 2)

In order for the traditional model to work, both the Distribution Centers and the customers should be close to the store. Physical distance was of paramount of importance because both the cost of delivering goods to the store and the hassle for customers to get to the store increase proportionally to the distance it takes them to reach to the store (Figure 3)

So while people could potential drive a longer distance to get to their favorite store, the reality is that if the store is too far, they would probably not do it, and they would probably just settle for a comparable alternative that was convenient to them.

II-                  The Internet Shopping model

The internet changed the entire paradigm by opening a virtual store that is always a click away, taking the shopping convenience to an entirely new level where you can shop from anywhere you have a connected device without worrying about distance, gas or how you look.

The virtual store itself brought significant advantages to shoppers given them access to an expanded assortment – not limited by physical shelve space constraints, lower prices – giving that the ecommerce retailers could pass on the savings in store personnel, store maintenance, parking lots, etc – and in many instances lower taxes –typically companies are not required to withhold local sales taxes for out of state shoppers.

Many old time retailers were skeptical of the new model as it require access to a computer, internet and the ability to buy based on a limited description of the item rather than having access to the item itself, however time proved them wrong as the internet expanded into everybody’s pockets with the advent of the smartphone and tablets. Further, the benefits of price and selection outweighed any potential concerns of not being able to touch the item, especially for commodity such as books, electronics and many others categories.

The new model was not perfect; it had a small chin in the armor, the wait time. Typically shoppers would need to wait between 3 to 5 business days to get their item after submitting the order. (Figure 4).

The battle was on, with location and immediate gratification as its only weapons, brick and mortar retailers tried to wage war on their ecommerce counterparts with limited success. The ecommerce retailers counterattacked by building additional distribution centers closer to their customers and by introducing special programs that allowed members to receive their orders in about 2 business days. Having lost the battle on price and selection to the internet retailers (Figure 5), brick and mortar retailers could not afford to let them eliminate the location hurdle to wipe them over, so a new strategy was needed.

III-                Transforming Location into a competitive advantage

The strategy for the brick and mortar retailers needed to incorporate elements of the eCommerce counterparts by adding an internet channel but rather than replacing the traditional store channel creating a hybrid strategy that allowed pushing flexible and valuing add services, such as:

a)      Inventory origination flexibility: If the inventory for the item was not available at a particular store, you could find availability of that product within the “distribution cloud” – e.g any distribution center or even other stores that had the item(s) in stock could function as the shipping center, either sending the product to a nearby store where the customers could pick-up the items or directly sending the purchased items to the customer’s home

b)      Personalization: You could order the item on-line with your specific instructions, e.g. A birthday cake with a particular design and/or theme and pick it at the store,  or perhaps an engraving line for that new tablet

c)       Value added-services: like remembering your past purchases and offering you the ability to repeat the same purchase. Especially useful for prescription like items that you need to refill every month, or even for seasonal items that you bought last year and would like to complete the set or maybe for remembering the wine and cheese pairing that your significant other bought that was delicious and you cannot longer remember

d)      Social: you could immediate share what are you buying, your experience with the retailer and your experience with the product to your inner circle or to the masses with a few clicks

The most complex and daunting initiative was perhaps the establishment of the distribution cloud (Figure 6). This distribution cloud would become the new virtual hub to the retailer delivery operations, coordinating across stores and distribution centers to find the most optimal location to ship the inventory from; depending on availability, distance to destination and handling speed/cost.

 IV-               Enabling visibility within the new distribution cloud
Retailers quickly realized that the implementation of this new distribution cloud was a game changer, but they also realized that in order to achieved the promised competitive advantages they needed a way to get visibility into what was happening within the distribution cloud as their existing information systems were not design to provide the visibility required by the additional, smaller transactions being generated by the on-line channel. The new system required the implementation and sometimes definition of the new capabilities, including reverse logistics (e.g. if the customer returns the item to whom would it be shipped back - probably not the original inventory location of the item) and the ability to detect potentially fraudulent transactions, including money laundering. Further, additional business rules needed to be captured that enabled the proper routing of orders to the best suited distribution points, including equipment and labor available on a quasi-real time basis.

While many existing data warehouses already had some of these elements and were producing reports that measured some of these metrics, it was required to retrofit them with the new business rules of a hybrid, order on-line pick in store/receive at home system. New capabilities were required for an end-2-end Business Intelligence distribution platform that could provide the visibility and thus corroborate the effectives, savings and the acquisition/retention of key customers through this system (Figure 7)

V-                 Summary
In summary, in order to survive the brick and mortar retailers are being forced to adopt some of the same strategies that they are competing against. However, if they want to win the race, they need to leverage the competitive advantage their physical locations provide them over pure ecommerce retailers to implement a hybrid strategy that leverages the physical assets that in close proximity to the customers and integrate well with an on-line ordering channel that enables value add services. 

The brick and mortar retailers also need to be prepared to invest in expanding & enhancing their supply chain and distribution cloud business intelligence systems to enable the proper measuring of the new key metrics, thus accounting for the intelligence needed to fine-tune the system and make it delivers the game changer results they need.

How much is loyalty worth?

Have you ever wondered how much is loyalty worth? Ever since the beginning of business history, business owners have tried to reward their best customers to entice them to continue to do business with them. The practice definitely got more popular when American Airlines launched their AAdvantage in 1981, establishing a competitive differentiation for the airline.

Let us explore why loyalty programs were such a game changer in business. If you think about it, most of the items and services you buy are considered commodity (e.g. they can be acquired from more than one service provider or manufacturer with very little differences between the two (or more) companies that provide that service or product). The airline business truly reflects this, if you are traveling from LA to New York, you will get the same if you fly airline A, airline B or airline C. All the planes travel at more or less the same speed, leave and arrive at the same airports and offer similar amenities (or lack of these days). So if three airlines fly the same route, you will always pick the one with the best price right?

Well, here is where things start to get interesting. The best loyalty programs not only give a kickback (or reward) with every purchase, but they are designed in such a way that the more you consume that product or service, the greater the rewards become. Going back to our airline, all the three airlines give you “miles” when you fly with them, but the differences are significant for people who fly them occasionally to people who fly them more often. More frequent flyers start to move up in tiers that offer additional perks such as “priority boarding”, “free bags”, “upgrades”, “better availability of award tickets”, etc.

If you are thinking that these perks hardly matter, think again, these so called perks influence millions of people to acquire products or services from a particular provider just to maintain or attain a particular tier or milestone in the program. In fact, many travelers will choose a particular airline for a route even if the price is higher than competition because of their status in the loyalty. Before you start thinking that these people should be criticized for letting airlines get away with higher fares, let us analyze the reason behind the behavior and what these travelers get in exchange for a few(or a lot) extra dollars: Most people think that if they travel a particular airline often enough they will get upgraded to first class. For good or bad this is true, most (if not all) airlines allocate unsold first class tickets to their most loyal customers often times as a free upgrade. Not to mention that frequent travelers enjoy priority lines and other benefits that do not cost the airline anything extra but they make the traveler feel important and do provide some additional comfort.

So far so good, it seems that users are willing to stick to a particular service provider in exchange for perks even if the price is a little higher for a commodity like service, but what happens when something does not go according to plan? Let us stick to the airline examples and revisit a real life scenario that happened recently in an American Airlines flight from Charlotte to Dallas. The next flight to Dallas had an empty seat that was allocated to the people on stand-by, one executive platinum (the highest American Airlines tier level) got the seat (even though his confirmed flight was four hours later) and boarded the plane early as per the airline policies. When he boarded the plane he noticed that a seat was broken and it was marked with masking tape, because the seat was not assigned seat he did not think much about the issue. Fast forward 20 minutes later when boarding was almost complete and surprise there is a person standing because she got allocated the seat that was broken. Given that no other seats are available the airline personnel needs to make a decision to ask one person to leave the flight.

If the airline truly valued the customer loyalty, who do you think they would asked to deplane? The last person who bought the ticket? The last person who checked-in? The person that got assigned the broken seat? Maybe the person who had the least miles in the airline loyalty program? Well no. By federal law when bumping a passenger from a flight for mechanical reasons (e.g. a broken seat), a confirmed passenger is entitled to compensation, which typically varies from 200 to 400 USD travel voucher for a domestic flight. So in order to minimize the expense the local airline supervisor decided to ask the Executive Platinum passenger who got the stand-by seat to deplane as this passenger was not entitled to any compensation because he did not hold a confirmed seat.

You must be thinking hum, so the loyalty program is good and valid only when the marginal cost to the airline of providing those “benefits” is marginal, when there was a real cost involved the loyalty of this frequent traveler was not worth as much as compensating a confirmed passenger for the next flight… So going back to the original question that this blog posed, how much is loyalty worth? Certainly for American Airlines it was worth much less than a couple of hundred bucks. Do you think the local supervisor made the right decision? What would you have done in his place?

More importantly, while this example applies to a particular airline, what greater lesson can we derive from this experience? My recommendation: be sure that you have a good way to measure the benefits (consumer) and cost (business) of the loyalty program, so the effectiveness can be objectively evaluated. And most of all, keep in mind that even the best loyalty programs will require trade-offs at some point in time and most importantly define that loyalty cannot be taken for granted. It gets renewed with every iteration consumers and business and it gets define over time taking into consideration all the acceptable alternatives.

In conclusion, like it or not, loyalty programs are here to stay. They provide a systematic way to influence consumers towards a particular brand and have proved to be extremely successful in encouraging repeat business. However, we need to be aware that everything comes at a cost for both consumers and business and that as good as the programs might or might not be, at the end is the people element that will make a lasting impression and determine the memory of the experience.