For U.S. retailers, the past few years have been challenging, to say the least.
From the escalating pace of retail’s redefinition by digital technology and the emergence of e-commerce companies muscling into the market, to a major expansion of the discount sector and the ongoing arrival of international competitors, these factors are forcing brick-and-mortar retailers to transform their businesses in order to protect, maintain and increase their market share.
Most retailers have limitations on available capital and are struggling to find the right balance of investment in all channels.
This Amazon effect has caused retailers to shed a disproportionate amount of their capital spend on e-commerce, despite the reality that most of their profits are still coming from their brick-and-mortar sales. Too many retail chains are investing their capital to compete directly against pure-play, e-commerce retailers’ online efficiency, breadth of assortments (endless aisle) and discounted pricing.
But this is counterintuitive to what will really drive profits.
For my part, brick-and-mortar retailers typically underestimate the enormous advantage they have relative to their e-commerce counterparts, in particular their physical brand assets. Brick- and-mortar retailers can provide consumers what they love most: the opportunity to touch and feel the merchandise, while experiencing the store’s environment.
While e-commerce investment is crucial in this increasingly digitized retail world, it has taken on a much larger proportion of retailers’ total capital, largely due to the ongoing hype of the channel, coupled with a fear of not keeping up with the competition’s digital spend.
Recent conversations with top retailers as part of my ongoing chief executive and chief financial officer study series showed that despite how important the physical store should be, only 20 percent of some of the largest retailers I spoke with are increasing capital to invest in their stores. And an astonishing 80 percent of the retailers surveyed are investing in new stores rather than remodeling their existing store fleet.
Retailers must invest in their flagships and other key locations where their most loyal consumers expect to experience the brand.
And despite the fact that the physical store channel produces virtually all of a company’s profits, our research with cfo’s — of more than 20 top retailers — indicated that the rate of deferred maintenance on the physical fleet was increasing every year.
For many retailers, 40 percent or more of their stores are approaching 10 years since their last remodel.
Given how crucial the physical store channel is to total sales and company profitability, retailers are under-emphasizing the need to invest appropriately in their store fleet, in particular in their flagships and other key units, given the diversion of a disproportionate percentage of total capital spending and management attention to enable e-commerce capabilities.
Further, retailers need to add the most relevant omnichannel capabilities to provide customers the same experience at all touch points.
Our research also revealed that median e-commerce sales for brick-and-mortar retailers was 11 percent of total company sales, while an indeterminate but higher percent of total sales is Web-influenced. This is particularly true for retailers selling big-ticket items, which typically require online research on a consumer’s part prior to entering a store to make a purchase. Additionally, our study indicated that while the median for the percentage of total company sales made through physical stores is 89 percent, a higher percentage of total company profits are produced by the physical store channel. That’s due to the high cost of marketing, shipping and fulfillment, technology and human resources for the e-commerce channel.
Failing to invest in brick-and-mortar — which contributes most to total profits — is likely to have a meaningful impact on a company, particularly as I expect it will result in the store experience falling behind e-commerce.
Retailers who see their stores as a competitive advantage and spend significant capital to bring those stores to the standard of today’s savvy consumer should see huge dividends in terms of sales and profits.
The key to success is balance. Optimally allocating capital spending and management bandwidth involves understanding how to effectively invest in the necessary transformation to not only maintain, but also increase market share in today’s retail environment. It requires serving customers consistently at all touch points — however and whenever customers want to interact with a retailer.
The prize will be huge when retailers find the right balance of capital spending.
Antony Karabus has been an adviser to retailers on strategic and financial performance issues for more than 25 years. Antony conducts regular research studies of retail ceo’s and cfo’s to determine key priorities in assisting their business to enable substantive value creation. He is the ceo of HRC Advisory, a leading strategic retail advisory firm.