The Omni-Channel Gamut

Retail in the US, traditionally started with the mom and pops around the corner in the early 1900s.

‘Cash and carry’ was the model customers followed with the limited choice of merchandise sold in such small stores. And then departmental chains started in the 1920s, it was just when the automobile came into existence.

As the country was growing, people started moving into suburbs, open-air malls started in the 50s and 60s. Southdale Center, popularly referred as Southdale in Edina, Minnesota is the oldest mall in the united states with 1,30,000 sq. ft. and occupied by about 123 retail tenants.

And the 70s and 80s were full of a massive expansion of large chains, discount stores and category killers spreading rapidly across the country, hurting all the small mom and pops.

Then finally, in the 90s is when eCommerce started with Amazon era or the rise of asset-lite business models.

Fast forward 30 years, Lowes operates 1850 stores in US, Canada, and Mexico. Home Depot with 2,240 stores in the competing DIY (Do It Yourself) space. Wal-Mart has about 11,853 stores in 28 countries, in the US alone 90% of Americans live within 15 miles from a Wal-Mart store. Kohls with 1,162 stores in 49 US states. CVS has about 9000 stores in the US, Walgreens with 8000 stores. Costco has about 800 warehouses. Ross, the discount store has about 1250 locations in the US.

But the large store expansion model is almost out of fashion now.

  • Adding more stores to serve more consumers is old retailing
  • Adding new servers to serve more consumers must be the new retailing

Companies need to balance and offset their online and offline worlds. Costco, for instance, has not fully invested in their online and mobile channels yet, in 2015, when E-Commerce was growing their online sales accounted for only 4%. For time being, they are seeing a steady increase in revenues from their stores, but not having Omni-Channel readiness could be risky from a long-term strategic perspective. The fundamental problem with any physical store is keeping the lights on when no customer walks in, there absolutely is no financial benefit.

The list below shows the number of stores being closed per a time magazine article in 2016. Total about 2500 stores being closed in 2015 and 2016 together. Essentially, going forward retailers cannot afford to build such capital heavy, large infrastructural initiatives and suddenly close them. Because consumer thinking and retailing are changing so rapidly, asset-lite models might driver better revenue.

Wet Seal: 500-plus
Office Depot: 400
Barnes & Noble: 223 (through 2017)
Walgreens: 200
Children’s Place: 200 (through 2017)
Aeropostale: 175
Walmart: 154
Finish Line: 150
American Eagle: 150 (through 2017)
Sports Authority: 140
Sears/Kmart: 128
Chico’s: 120 (through 2017)
Pier One: 100 (through 2017)
Sports Chalet: 48
Macy’s: 40
Gap/Gap Kids: 35
Target: 13
J.C. Penney: 7

All the above statistics, leave us with the big clue for the ‘Amanzonification of commerce’, the way Alex Niehenke, principal at a popular Silicon Valley VC firm, Scale Venture Partners terms it.

A cross-channel business model companies use to increase the customer experience – Wikipedia definition of Omni-Channel. In a perfect Omni-Channel world, I as a customer should be able to browse, shop, buy any item across the available channels i.e. Store, Call Center, Online, Mobile, Tablet, Watch, Wearable anywhere and anytime I want. And the retailer should ideally maintain consistency in customer experience, price, promotion, product, shipping, delivery and returns across the board. This might look good on paper, but can be a nightmare for retailers.

A full-blown Omni-Channel vision puts a lot of pressure on existing retailers (E.g. Wal-Mart, Lowes, Kohl’s, CVS) strategies, cultures, processes, operations, architecture, and systems. To begin with, most of these retailers have separate business units for each channel, almost operating as two different companies. Jeff Bezos, calls it the ‘Umbrella Problem’, as sometimes they tend to compete with own business units. Outsiders might think Walmart.Com is the same as Wal-Mart Supercenter, but it’s very different from an insider’s perspective. They are two separate businesses, with different cultures, thinking, and mindsets. By far and large, it’s the same case with other Multi-Channel retailers too.

Internet Retailer report mentions J.C.Penney, the 114-year departmental chain has been investing to merge online and offline channels to enable Order Management and Fulfillment. This move worked well because customers have realized the change in focus and started enjoying the benefits of their Omni-Channel experience.

During Q3 2016, almost 40% of J.C.Penney’s orders came from the Buy-Online-Pickup-In-Store model. And 40% of those customers have ended up shopping for more at the time of Pickup. Such mass acceptance and responsiveness is a rarity in retail.

Amazon is venturing into smaller store formats and plans to open about 2000 stores by 2017 in the united states. This bold move can potentially drive store sales. Simple reason being, starting online and transitioning into stores is significantly easier than vice versa. Example: Ross Stores Inc. is a retailer with zero online presence. They operate 1250 stores across 33 US states, with no E-Commerce investments and have managed to stay away from the Omni-Channel problem. Company’s entire sales come from stores; they are cash rich with revenues ranging from 9 to 12 billion dollars every year. Ross has also managed to maintain a fantastic employee friendly culture, which is very well known in the retail circles with almost no layoffs since existence.

Next part of the puzzle is ‘Technology’. The industry still lacks a robust CIO shop powered by Omni-Channel enablement with full consistency and visibility in price, product, margin, returns, logistics across all channels (Store, Online, Mobile). IBM, SAP, Oracle, HP have legacy solutions and offerings leading the industry segment.

For instance, Department reports generated across core functions of the retailer are still channel specific and not channel agnostic. Such mismatch can create a lot of confusion and internal conflicts, from an operational standpoint. Hence the buzz word ‘Omni-Channel’ is still a gray area and usually a nightmare for retailers.

DIFFERENTIATION

To enable scale and growth, mid-sized online retailers, need to focus on the following: Great content, Good online marketing, Strong customer retention programs and supplier negotiation for exclusive designs, styles, and colors. Few other ideas could be to customize sites per retailers, leverage offshore to become their own private label brands and increase their brand presence online if they don’t have awareness created already. Monitoring such key initiatives on a weekly basis is the key to drive growth.

A very smart strategy we could observe with few players is: Selling on Amazon instead of competing with them. With over 80million households, Amazon Prime can be a lucrative platform to sell products. ScotteVest an online men’s designer wear, were struggling last 3-4 years as their sales growth plateaued. Last year they pivoted their strategy by listing their products on Amazon, and now they are making more profits in Amazon than their own websites (the co-opetition strategy).

Moosejaw, started in 1992 is now a top 3 online retailer operates 12 stores across 4 states. They have grown 3x last 6 years. Moosejaw’s award-winning website, Virtual Reality App differentiates themselves from Amazon with a rich site and product content on their landing, list, and product detailed pages. Their mission is to be the most fun outdoor retailer.

A report from higher visibility noted that 75% of online shoppers do not look beyond the first page of a search. Landing pages for E-Commerce websites are very important. Browsing through Moosejaw’s website one could notice their unique identity lies in creating a fun and lovable experience as opposed to Amazon which purely focusses on price, selection, and delivery. Another area Moosejaw beats Amazon is live chat. Amazon has support in terms of off-shore email that respond within 48 hours, where shoppers could chat with Moosejaw associate for questions throughout their site visit. They also have interesting videos on their product detail pages that are funny, useful and leave an impression on their customer’s mind.

LOGISTICS & DELIVERY

Wal-Mart announced in 2016’s annual shareholder’s meeting to enter a strategic partnership with Uber and Lyft to monetize on the last mile without comprising on the customer experience.  This can be a hit combination if ordered are delivered with utmost efficiency.

Lets think about it, a Wal-Mart US store is nothing but Mini-Warehouse.

At 160,000 sq. Footage per store, average store size is about 2.5 times the size of an average international store.

Probably why they have fewer stores in the US compared to the rest of the world. And the product stocked per store, has been designed to cater needs of local communities. So, one way large store retailers like Walmart could compete with Amazon is by executing the ship from store option.

Speed is critical to winning in the last mile delivery space. Running few pilots will better explain the order fulfillment challenges at the ground level, but theoretically, justifies the business sense. Best-buy sometimes does such ‘short –window’ sales a companywide delivery focused mentality is created, but it’s still a rarity on usual days. Present day consumers wish more convenience and speed be exercised in the last mile delivery space.

Newegg Inc. sells computer software and hardware online and aims to beat Amazon’s faster delivery. They offer both Same-Day and Next-Day deliveries. Consumers these days are expecting every retailer match Amazon’s selection, price, and delivery; which naturally leads retailers to continuously re-think logistics strategy to push further on top line revenues and bottom lines profits.

Delivery hero is another great example of how speed and agility can be a great working model across 33 countries with 4000 employees in the hyperlocal space.

The business model combines internet, delivery logistics, and food into one platform. Foodpanda, Swiggy, and Zomato are some of the fast-growing food delivery apps in India. Not only the apps but also the high selling street stalls in India, arguably operate at the same rattling speed, but in a complete offline mode.

FedEx reported 70% of the consumers would choose merchants that offer both free shipping and free returns over free shipping only. Returns come with an additional cost for the retailer but can be a huge convenience factor for the customer. Customers will spend more when they know they can return. And going forward, flexible fulfillment can lead to higher cart conversions for e-tailers, that way consumers can have their product shipped to the location of their choice.

Shopify predicts that consumers that make a second purchase are twice more likely to make a third, and so on. Hence, delivery totally boils down to convenience.

From the very beginning, delivery networks have been crucial to supporting the retail industry. One cannot survive without the other. Even though Logistics is a hard labor intensive business with high infrastructural costs, it still has a lot of room to innovate around the distribution channels.

Amazon soon plans to invest in trucks, cargos, and airplanes with an intent to build their own delivery eco-system and might soon compete with FedEx and UPS in the transportation business. A few years ago, startups started to invade in this space as well. Deep logistics expertise is needed to run a delivery business. And the core skills required to scale such models towards profitability go beyond pure software i.e. supply chain logistics, global trade policies, AI and IoT.

Flextrade is an upcoming startup in the air and ocean freight space that provides complete visibility across the supply chain for large companies. In Sept 2016, they closed their series-B round of $65Million in funding and are well positioned to gain market share in the global supply chain business.

Every Omni-channel retailer must think about having a unified goal across the full supply chain. From increasing delivery speeds, having fewer out of the shelf, educating the vendors and merchants; optimizing the supply chain can be a lengthy time-consuming process. It gets more complicated especially when critical teams like Analytics, IT and Supply Chain must come together and define common goals. And for that to happen, leadership must support strongly such company-wide initiatives.

Startups don’t have this challenge as teams are new, passionate, arguably young and energetic. In a conventional retailer, the functional teams always have always worked in silos. So, bringing them together can be a challenging task for the leadership, but not impossible.

But, with leadership alignment, monetizing off the last mile and maintaining an optimized supply chain network can be a great way to increase profits and reduce operational costs for every retailer.

 

(Featured photo by Léonard Cotte on Unsplash)