Two news items really caught my attention:
1. Worst-rated grocers — this rating, published in the Fiscal Times, was originally a survey of consumers in the US.
2. Internet sales tax1 — the current, raging debate about whether or not to implement sales tax for Internet sales. The logic here is that Internet retailers that don’t collect sales tax have an unfair advantage against bricks-and-mortar businesses that do.
With these thoughts as the backdrop, as well as a recent omni-channel talk we gave at the Retail Value Chain Federation (RVCF) in Dallas, our goal was to move beyond the obvious omni- cross- multi- merged-channel debate to the real issue for brand manufacturers, wholesalers, and retailers — competition.
Mostly, when people talk about omni-channel retailing, they get bogged down in mobile versus web versus bricks-and-mortar channels. No doubt, these are very important parts of the discussion. (ChainLink Research has written about this before (see Merged Channel Nirvana). However, beyond the mobile buzz, you really have to get to the heart of consumer preferences: Why do shoppers prefer one channel over another? Or more fundamentally, why do shoppers prefer one retailer over another?
A large percentage of our population probably is ambivalent toward shopping. Some see trading of goods and services and finances as a necessary part of living — we need food, we need transportation, we need fuel. But some people see shopping as something more — an experience in which to surround themselves with the kinds of goods and services that improve the quality of their lives and lighten their senses and spirit.
Retailers have or have not given shoppers a reason to shop in their store (however you want to define a store: etail, retail, ‘Schmeetail’). Etailers give shoppers wider variety, generally; no check-out lines; and the ability to shop 24 hours a day. Conversely, bricks-and-mortar businesses give shoppers (hopefully, delightful) experiences which include the ability to sample and sense the merchandise before they purchase. Both of these channels have their advantages.
With Amazon and eBay now beginning to open distribution centers in various geographies, they bring themselves closer to another advantage that a bricks-and-mortar retailer may have had: the so-called same-day delivery model. For etailers, this may take the form of customers going to a park-and-pick (distribution center) and picking up merchandise. (See the report “Winning at Home Delivery“). Same-day may be a very attractive option for certain kinds of merchandise such as food or medicines; or for a customer who is about to leave town and needs some last-minute supplies. But of course, same-day is not free. Setting up distribution centers means that Amazon, for example, will now have to invest dollars in physical plants, personnel, and insurance; and, of course, collect sales tax. But they’re betting on the fact that the instant gratification component will increase sales and offset the expense associated with building some of these warehouses. (Obviously, these warehouses will not be built in Buffalo, Wyoming but in more metropolitan areas with an increased likelihood of having the needed sales density.) As Amazon opens a distribution center, it will face the same challenges that any retailer has: determining the proper assortment for that particular warehouse to support that particular customer demographic or segment in the community that they are trying to serve. The internet advantage narrows! Of course, bricks and mortars also have interstate e-commerce. So they, too, will have to charge sales tax for Internet sales. Again, the advantage narrows!
However, the problem is that many retailers, whether etailers or retailers, don’t manage either channel particularly well. And here is a real issue: what are you doing to make shoppers want to shop at your store? Whining about sales tax will not substantially change your competitive position. Certainly, on some plane, it does affect the playing field. But while the bricks-and-mortar retailers are whining, they should not forget that etailers have a mountain of investing and learning to do in order to enter local markets: physical plant investments; purchasing merchandising and assortment technology (or at least possessing merchandising know-how); allocating the correct merchandise to a particular warehouse or geography (being smart on a national level about what your customers will buy will no longer suffice once one has distributed warehouses across the country); hiring local staff that understand the local customers; partnering with regional shippers for attended delivery services such as installation and removal (national carriers such as UPS and FedEx may not suffice for these kinds of same-day delivery options); and dealing with returns, pricing, and markdowns that may now flow into local warehouses instead of national return centers.
That’s a tall order for etailers to take on right now considering the variability of the economy. Of course, for Amazon, who seems to have the cash on hand to begin the process and is also smart enough to run various pilots at selected locations, this all may be possible. But not without pain. However, the bricks and mortars also have investments ahead. If we learned a few lessons from the recent removal of the J.C. Penny CEO, one takeaway is important, I think, and that is, what did JCP actually do to bring the new shoppers into the store? For example, creating great merchandise for the new shopper (which I believe they achieved) as well as having some enticing elements such as the mini-boutiques within the store (for example, with Sephora) were great ideas. JCP’s Sunday circulars with great color block ads were extremely attractive. But when I got to the store, where was the buzz that an 18 to 30-year-old shopper would be looking for?2
In the battle ahead, the bricks-and-mortar retailers need a strategic response to the home delivery element that is now taking the hot spot in US retail. For retailers to be successful in local markets, they’re going to have to learn a lot of lessons about taking care of those markets without losing their ‘inventory shirt’ and significantly increasing the cost of goods sold. Retailers, in general, need a competitive response to the inherent challenges of capturing customers, building loyalty, and maintaining that loyalty over a lifetime. That will take work and investment. And in what are now to me the immortal words of Michael O’Guin, “Competitors never halt innovation and new product introductions; therefore, if a company fails to invest, it should assume a deteriorating competitive position.”3 So invest we must. But think and act on behalf of your customers and give them a compelling reason to shop with you. That is the real answer to competition.
1 Pro internet sales tax: Internet sales tax is good for Md. Business – The Baltimore Sun
Against the sales tax: Internet Sales Tax: Another Terrible Bill Congress is Set to Pass – Policymic
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2 Also, it appears, former J.C. Penny CEO Ron Johnson failed to understand how important the weekly sales were to the JCP customer base. He did away with them and went to everyday low pricing (like Walmart). BUT JCP’s competitor is Macy’s, and they still have those lovely weekly sales that draw people in. So he really didn’t do all his homework about his JCP customer base. — Return to article text above
3 Michael C. O’Guin, author of “The Complete Guide to Activity-Based Costing”
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