Are retailers eating themselves alive? 8 experts chew on the question
Cannibalism didn't end with the Donner Party. Rising e-commerce sales are taking a big bite out of retailer brick-and-mortar revenues — a wide-ranging problem yielding a range of perspectives.
Target is getting crushed… by Target. The retailer’s sales fell 1.3% during the final two months of 2016, with a comparable store sales decline in excess of 3% partially offset by digital sales growth of more than 30% — an untenable dynamic, according to financial analyst Jim Cramer.
“It's a total cannibalization of itself," Cramer told CNBC's "Squawk on the Street" in January, stating that Target’s online growth is “killing” its physical stores. “The main takeaway is, 'Wow! People are shopping at Target. They're shopping big, but they're not going to Target.’”
Target is not alone. Increasing online sales couldn't offset brick-and-mortar declines when home goods and furniture retail company Bed Bath & Beyond missed expectations for its third quarter of fiscal 2016. “One of the issues with Bed Bath & Beyond is that many of its stores are not as compelling as they should be, and this makes them more susceptible to cannibalization from the online operation,” GlobalData Retail CEO Neil Saunders wrote in an email to Retail Dive. “While stores are far from dire, the company’s 'Aladdin’s Cave' approach to merchandising means that shops can be difficult to navigate and find products that are desired. It also makes it difficult to browse and find inspiration. In short, this makes it more convenient and easier to go online.”
While retailers are still releasing their holiday season earnings reports, it’s likely that the overwhelming majority lost physical store traffic to online channels, including their own. Even among consumers who shopped primarily in stores for Black Friday deals in 2015, 31% planned to shop mostly online in 2016, while 20% expected to divide their shopping equally between the physical and digital realms, according to JDA Software Group’s second annual holiday buying survey.
With e-commerce sales continuing to climb, discussion forum RetailWire asked its BrainTrust panel of retail experts the following questions:
- Is online’s cannibalization of in-store sales becoming a bigger problem?
- Are retailers with a major physical presence making the right adjustments?
Here are eight of the most provocative and insightful comments from that discussion. Comments have been edited by Retail Dive for content and length.
1. A classic catch-22
Mark Ryski, Founder, CEO & Author, HeadCount Corporation: Yes, online is cannibalizing in-store sales to some extent and it’s easy enough for retailers to analyze their transaction data to determine exactly by how much. The problem is that retailers are in a classic catch-22. If they don’t have a strong online presence, they risk becoming irrelevant in an increasingly online world; if they do have a strong online presence, they face even more aggressive price competition from online players and they risk cannibalizing their own in-store sales. It’s a delicate balance and most retailers are still trying to find the right balance. But finding a balance is exactly what all retailers must do.
2. Eat or be eaten
Tom Dougherty, President and CEO, Stealing Share: Of course they are cannibalizing their in-store sales.
But Steve Jobs once warned Sony that you needed to cannibalize your own before someone else eats you.
Sony didn’t see it with Sony records and the online sales of individual songs (like iTunes). They still wanted to sell albums.
Steve said, “[Sony] had the inventory and the distribution but they hung onto a failed model (selling entire albums). That ship had already sailed.”
Retailers need to be where the shopper is. They need to be willing to eat their own young if they are to survive and prosper.
3. Pie fight
Dick Seesel, Principal, Retailing In Focus LLC: “Cannibalization” may be the wrong term, because retailers with true omnichannel strategies need to think about how to grow the overall pie. Continuing to think about business silos (e-commerce vs. brick-and-mortar) will stand in the way of a consistent overall approach to the business.
But there’s no doubt that brick and mortar is losing its relevance, as seen in the growing number of chains closing locations or throwing in the towel altogether. To go back to the question of how to grow the overall pie… why isn’t that happening? Why aren’t strategies like BOPIS (intended to drive traffic to stores) driving incremental sales?
These aren’t easy questions to answer, but I continue to believe that the operating demands of turning a physical store into a mini-distribution center are eroding the service-centric reasons why consumers shop in those stores in the first place.
4. Separate ways
Camille P. Schuster, PhD., President, Global Collaborations, Inc.: What a wrong assumption that question uses. Yes, the online sales may cannibalize in-store sales — IF and only if the company sees online and in-store sales as separate and does nothing to create experiences or reasons for consumers to come to the store. If companies see these functions as separate then they should quit the online sales, let Amazon take them and go out of business. Consumers only see retailer, regardless of location, and if the retailer does not see it that way they will eventually lose to the stores that treat all sales as benefiting one company the way the consumers see it.
5. Physical demands
Lee Peterson, EVP Brand, Strategy & Design, WD Partners: You bet there’s cannibalization. Do a little regression/progression analysis and you’ll see that if your online sales keep increasing year-over-year at the same rate they are now (say, 15 to 20%) and your physical store sales keep decreasing year-over-year at the same rate (say, 3%), after eight to 10 consecutive years of that you won’t need stores at all to produce the same revenue you are now. The [average unit volume] will be so low (which will make the stores super expensive to keep), you’ll close most of them anyway.
That’s the pure quantitative side of the equation. But clearly, in order to maintain that rate of online sales increases, you’ll still have to have some physical presence to continue to act as a foundation for the brand itself. A living, breathing ad so to speak. A place where people can touch, feel, see and talk to what you’ve positioned as your reason for being. I think you’re already seeing that now, with store closings that cover the next few years, like what J.C. Penney just did.
What we’re not seeing though, with rare exceptions like UO Spaces, is the physical stores actually becoming that living, breathing brand. The sooner the better, in my opinion. Let’s let the “stack it high” philosophy die a permanent death and be done with it for good.
6. Insufficient leverage
Gib Bassett, Retail and Consumer Goods Industry Principal, Oracle: I think it’s becoming a bigger problem as market trends accelerate (online sales) at the same time that investments in online channels increase. Anticipating growth, retailers are being let down by slowing in-store sales that offset gains in online channels. It’s raising the issue of integration and working to architect the retail business as a unit, as opposed to operating stores and online separately. The places where integration is happening (click and collect, buy online/pickup in store, buy online/return in store) are not sufficient from a leverage standpoint. It highlights to a large degree how retailers are not using insights into the online to offline shopping journey to optimize their operations fast enough.
7. No surfing allowed
Charles Dimov, Director of Marketing, OrderDynamics: Simply put — it’s about giving the customer the experience they want with your brand.
Rather than cannibalizing, think of going online and doing omnichannel as a method of KEEPING your customers. If the customers choose to go online and your brand isn’t there, they will surf to the competitor site and your brand just lost a customer (never mind cannibalization).
An online presence keeps your brand top-of-mind with your customers. Omnichannel retail makes it easy to shop online AND get instant gratification. When customers are in store, that’s your opportunity to upsell, sell extra items and gain customer loyalty through great service. It’s all in your strategic approach.
8. Get on the bus
Liz Crawford, VP Research, Product Ventures: Better to be on the bus than run over by the bus. Retailers who are successfully selling (and cannibalizing) their wares online are surviving in the digital age. Those who are not “cannibalizing” themselves may not live to see tomorrow. How long will physical stores exist as destinations? At a minimum, there will be (and are) fewer actual trips to brick-and-mortar… Therefore: Stay online, stay alive.
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