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Retail is undergoing a major shift. The long predicted move from high street to online is reaching what appears to be an endgame with major names disappearing from physical retail at an alarming pace.  

Jessops, Comet, Blockbuster and HMV weren’t isolated examples of poorly run companies, they were the result of tectonic shift in the way that everyone shops.

The fact is that, for many, physical retail as a primary margin model is essentially over. The costs of high street rent, combined with the inefficient logistics of a store network, mean that a traditional retailer is going to struggle against online competition at the most fundamental level.

This is nowhere more true than at the value end of the market, where every micro-percentage of margin counts and the savings offered by the likes of Amazon are the most significant.

The standard answer to this rather depressing scenario is that this shift doesn’t mean that retail is dead, it’s just living in a different guise. Online is the new home of retail and it’s a thriving, growing and vibrant marketplace, it argues.

Worryingly, however, a peek below the surface of online retail shows a truth that’s rather less rosy.

Whilst traffic costs have moderated in recent months, they’re still at what many would argue is an unsustainably high price point, particularly in the most hotly contested categories. Moreover, intense price competition has cut already thin margins to the bone, drawing much of online retail into an unedifying race to the bottom.

Some players are clearly thriving in this market, most notably Amazon. However, its margin model of massive discounting supported by immense buying power and huge volumes is an option open to only the largest players.

If Amazon is the only viable future for online retailers, it’s going to be a market made up of a few, massive players, rather than a thriving and diverse retail ecosystem. 

Many would point to consistent revenue growth as a sign that online is, in fact, in rude health. However, this fails to acknowledge the nature of growth in this market.

While online retail is approaching maturity, it has still not reached saturation amongst its potential audience. Growth is, in large part, coming from an expanding audience as more and more users come online. As soon as online reaches saturation, this organic growth will cease, leaving retailers to find growth simply through increased sales or increased margins. 

If online retail is sick, what is the medicine that can heal it?

There isn’t one answer, it’s a combination of factors, many of which can, counter-intuitively, take their lead from what’s happening on the high street.  

The high street players that are thriving through this retail apocalypse are those that are offering a differentiated and delightful shopping experience.

Look at John Lewis or Apple. Their physical retail margin model is based on a recognition that you can compete for customer on service, as well as price.  

Apple has its incredible design and Geniuses, whilst John Lewis offers engaged staff and added value services. Both, however, recognise that great products and going the extra mile for customers means you can maintain healthy margins, despite the presence of discount alternatives.

But what does this mean for an online retailer?

In store it’s obvious that a great assistant can choose the right moment to intervene and help a customer who’s looking lost. But what can an online retailer do to add this same feeling of support and engagement, how can they add service value in an essentially impersonal online interaction? 

The first way is to ensure that you’re offering a delightful shopping experience on your website. You obviously need to have great products, but you also need to be agile and awake to consumer trends.

You need to be able to move quickly enough to predict and react to the latest style trends and offer them to your customers. You also need to give your customers a sense of community – give them the social features that lets them share their experience in the way they might a high street trip, or give them access to reviews from their friends to help form their retail decisions.

 You also need to make the experience simple and convenient.  Let the customer know what you stand for upfront, let them know what to expect. Don’t give them any nasty surprises on product availability or shipping costs.  

Don’t make it hard for them to pay or to get their product delivered at a time and place that’s convenient for them. It’s all route one retailing, but it’s also what’s working for the online players like Fab.com who are thriving today.

Perhaps most importantly, you need to make the shopping experience personal in an impersonal world. The online equivalent of your shop assistant is your data analyst.  

They may not be able to look at individual customers and help them one by one, but they can look at aggregated behaviour to identify common problems or stumbling blocks and help users through them. They can identify different groups of behaviour and build the service to be responsive and targeted in catering for their needs.

There’s nothing systemically wrong with online retail, indeed much of it is in rude health. However, for many online players now is the time to accept that the easy days of a constantly growing audience, an ever expanding pie, are gone.

In this new and ever more competitive world the answer may be to not just look to the future, but look to the past of classic retailing for the answers to future profit.

Ian McCaig

Published 2 April, 2013 by Ian McCaig

Ian McCaig is Founder at Qubit and a contributor to Econsultancy.

29 more posts from this author

Comments (2)

Mark Pinkerton

Mark Pinkerton, Director of Optimisation at Practicology

Good article Ian - my experience agrees with this completely.

One of the implications of the article is that the mid-market will get squeezed - those who cannot compete on service or price and don't have a sufficiently differentiated offer. It just may take a while for this to work its way through, dependent on the market.

over 3 years ago

Ashley Friedlein

Ashley Friedlein, Founder, Econsultancy & President, Centaur Marketing at Econsultancy, Centaur MarketingStaff

Good piece Ian. I think it points to an 'inconvenient truth' that few like to admit. And, actually, I don't think there are many more people flooding online in mature markets so it is increasingly about market share. And 'mobile' doesn't really represent 'new' opportunity it just displaces other media (and is an extra cost for the retailer so hits margins).

So it is a tough place! And I fear it won't get better. I'm not even that optimistic that people will stay loyal to someone like John Lewis. They'll take the great service and staff and then buy on their phones via Amazon? In the past people have complained about the power of Tesco, squeezing suppliers and killing the smaller players in the High Street. But most of those people still then shop at Tesco.

Delivering a great experience (online and offline) is, I fear, increasingly just expected as opposed to a USP.

So what are the answers?
1. Buy shares in Amazon
2. If you can be a 'luxury' brand then I think the threat is less
3. Have unique product (niche players who offer something unique can survive)

That's about it?!

over 3 years ago

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