The rapidly evolving role of the physical store: Definitely different, far from dead

The rapidly evolving role of the physical store: Definitely different, far from dead

Until recently, the overwhelming majority of brick-and-mortar locations operated with a relatively simplistic purpose: they were places for consumers to see what was on offer, make a product selection -- on their own or with the help of a salesperson -- pay for it, and take it home (or, in the case of bulky items like furniture, big screen TVs or major appliances, arrange for home delivery).

Operating performance was evaluated in a straight-forward manner as well. Sales per square foot, same store sales growth, inventory turnover, and profit contribution were the primary measures of a given location’s success. Accordingly, physical store investment decisions, such as openings, closings, relocations, or remodels, focused completely on optimizing the retailer’s return on investment.

As a result of this mindset, retailers focused on initiatives aimed at increasing the amount of store space dedicated to merchandise sales. Furthermore, supply chain efficiencies were designed to minimize off-the-floor stock and allow merchandise to flow efficiently to the shelves, racks and tables, as well as other process and technological changes designed to maximize “4-wall” performance.

But a funny thing happened on the way to this productivity nirvana. As it turns out, the rapid ascent of e-commerce and all things digital began to change just about everything, making channel-centric thinking and measurement not only irrelevant, but sometimes dangerous. New roles for stores began to emerge and once under-the-radar purposes became more elevated.

At first, this shift was nearly imperceptible to most retailers. But some forward-thinking organizations started to notice how a growing percentage of customer journeys started in a digital channel, even if the transaction ultimately occurred in a physical store. Conversely, more and more shoppers were using brick-and-mortar locations as showrooms prior to making a purchase online.

One project that I led for a major retailer some 15 years ago -- in what many still see as the comparatively primitive days of online shopping -- showed that a substantial percentage of our customer base made purchases from both our stores and website each year. A further analysis of our marketing efforts revealed that our digital advertising was driving lots of business to our stores, while our stores often served as advertising for our “.com business.” Evaluating our marketing ROI from a channel centric perspective was systematically causing us to make the wrong decisions.

This was not news to many of what I call the “OGs of DTC” (think Williams-Sonoma, REI, and other brands that began in the mail order catalog business and subsequently embarked on a store expansion strategy). These companies understood that their direct and digital marketing efforts drove both their online and physical store business. They learned that when they opened a new store, their online business went up in that trade area.

The newer wave of direct-to-consumer brands (think Warby Parker, Bonobos and Allbirds) eventually figured this out, and have since collectively opened hundreds of showrooms that explicitly serve as advertising for their brand, regardless of where the customer ultimately transacts. The role of store as advertising has become increasingly obvious.

As e-commerce continued to grow, become more diverse in product offerings and the battle for accelerated delivery times escalated, the role of stores in online order fulfilment and return processing has become far more prominent. At the same time, building the vast infrastructure to cost-effectively compete with Amazon on same day or next day delivery began to look like a race to the bottom.

Instead of seeing their stores as liabilities to be reduced, many savvy brick-and-mortar dominant legacy retailers began to see them as important assets in the convenience wars and began adding (or building out) capabilities for Buy Online Pickup in Store (BOPIS), curb side pick-up, ship from store via the mail and local delivery from store. Buy Online Return to Store (BORIS), while not new, is becoming an increasingly popular service.

Turning stores into fulfilment and customer service centers is not only a major new role for many retailers, it requires a big mindset shift, significant investments in re-allocating and outfitting space, new technology, new processes, and new organizational structures. Target is the leader here. Earlier this year they completed their 1,000th remodel and plan to invest another $5 billion in their stores in coming years. On Target’s most recent quarterly earnings call, the company reported that 20% of sales are ordered online, but roughly 95% are fulfilled from a store.

While not yet as pervasive, a growing number of remarkable retailers are repurposing once dedicated selling square footage for new, immersive experiences. Camp, an innovative “family experience” store, foregoes the “stack it high and let it fly” mantra and dedicates significant space to creative merchandising vignettes and an immersive experience behind a “Magic Door.” In Dick’s “House of Sport” format, a large rock-climbing wall takes center stage. Nike’s “House of Innovation” concept has a sneaker lab where consumers can watch artisans creating their custom kicks. Retailers are increasingly live-streaming shopping events from their stores and conducting personal shopping appointments via Zoom.

As retailers accept the expanding role of their stores as more than just a place to buy stuff, but rather a place to offer brand experiences, there will be a new age of retail with profound implications. Performance metrics and investment criteria must be redefined. New processes and technologies must be deployed. In some cases, store staffing profiles and organizational structures need to be radically reconfigured. Investments must be made from a customer and total brand view, not just from performance within the four walls of the store.

While many markets still have too much retail space -- or the space that exists must be transformed for the modern world of retail—ironically, the disruptive forces and rapid growth of online shopping has not made many brick-and-mortar locations irrelevant. The ongoing growth of sales rung up in physical stores and the thousands of locations that continue to be opened indicate that physical retail is far from dead. However, what’s evident is that a successful location in the blurred world of shopping today is one that continues to evolve to demands and embraces new approaches to drive remarkable results.

What’s in store for your organization’s brick-and-mortar estate and beyond? If you’re seeking strategic advice on how to plan for long-term results while embracing what’s next, discover practical and proven approaches from Honeywell here. You can uncover how to unite all the moving parts of your organization with technology to create continuous improvements.

Steve Dennis

Steve helps organizations understand and respond to retail disruption by creating customer-centric, memorable and profitable growth strategies.