ekkasit919 - stock.adobe.com

Convenience, digitisation and the impact on the physical store

Digital technologies and the need for convenience have changed the way consumers shop, but what will this mean for the purpose and size of physical stores?

When Amazon moved into the world of bricks-and-mortar retail by purchasing the supermarket chain Whole Foods in 2017, the news had a dramatic effect on retailers around the world.

On a positive note, it suggested to them that if the mighty Amazon wanted real estate, then their own stores might have some value after all. On a negative note, however, it showed that nowhere in retail was safe from the behemoth.

Amazon has revolutionised the retail sector by bringing great convenience to customers, and other retailers have had to adapt to its presence and market-beating offers by embracing technology to compete on a multichannel front. Some have managed this better than others.

Ocado is one of the success stories, with its technology-based model for efficient grocery delivery. Stuart Rose, chairman of Ocado, says: “When Amazon acquired Whole Foods, the Ocado switchboard lit up with the world’s retailers calling and wanting to have a chat about working together.”

The food retailers Ocado now works with have bought into its unique automated delivery infrastructure, which has given them a high-tech convenience proposition. The desire for convenience has been driven by digital – which Amazon has leveraged to dramatic effect – and this is having a seismic impact on retailers’ physical store estates.

Convenience requires choice

Daniel Lucht, director at Research Farm, says the ability to buy online and enjoy home delivery is changing shopper behaviour and mindsets. However, convenience involves both home delivery and the positioning of stores closer to shoppers. With groceries, there is clearly a move online for some people, but stores are still very valuable.

Using Sainsbury’s as an example, Lucht says the supermarket’s latest results showed footfall up as shoppers were now buying more frequently, with smaller basket sizes, and at more varied hours of the day.

The ideal scenario for grocery retailers would be to deliver from smaller convenience stores, but that represents a challenge in terms of balancing these small units in central, built-up locations with the ability to hold sufficient stock. “One solution is to have a part of the store dedicated to handling click-and-collect and home delivery orders, with a reduced space for in-store shoppers,” says Lucht.

While click and collect has so far played a role in food delivery, it is much more widely used in other categories. For example, Nick Thomas, founder and former managing director of Built, says that when he implemented click and collect while working as e-commerce and multichannel director at book store The Works, the key aspect was to fully leverage value of the store estate.

“We wanted the two million customers at the 350 stores to enjoy the shop as well as the extended range online. Enabling stores to take online orders and post the items to other stores for click-and-collect orders freed up millions of pounds of unsold stock at the stores. It was hugely successful in marrying online and offline,” he says.

The balancing act of maximising the value of physical space while handling the increase in online orders is a challenge for all established retailers. Fashion and home retailer Next has been proactive and taken a scientific route to potentially solving this problem.

“Our guess is that there will be shops in 15 years’ time, but they will be fewer in number, possibly smaller and much less expensive”
Simon Wolfson, Next

Next CEO Simon Wolfson says it is often asked how much less space it will need in the future. “It is the wrong question,” he says. “We do not have too much space – we have too much rent, rates and service charges. The amount of [physical] retail space we trade in in the future will depend on whether the cost of retail space adequately reflects the reality of retail trading conditions. Our guess is that there will be shops in 15 years’ time, but they will be fewer in number, possibly smaller and much less expensive.”

The retailer has calculated that it is likely to suffer a like-for-like sales decline of 10% per annum in its stores over the next 15 years, while over the same period its online sales will enjoy a 7.5% compound annual growth rate. To react to this changing landscape, Next has a strategy of closing unprofitable stores, with an assumption that when it shuts a store, around 25% of trade moves to alternative nearby stores.

Its base assumptions indicate that it should close up to 350 units over the next 15 years, but management has recognised that it must also take into account the negative effect this will have on its online business in terms of losing many online collection and return locations. Next has therefore concluded that it will likely keep open 120 loss-making stores to maintain online services in key locations.

Sezin Turner, principal retail innovation manager at Vodafone, agrees that the process of managing stores needs to be more scientific. It is piloting a tool to assess its store portfolio.

“We’re using machine learning and big data in all parts of retail. We use data to understand our store catchment, such as demographics, sales, number of customers and competitors in the area. We use machine learning to look at catchment in a more scientific way – to find the ideal store footprint, how many stores we need, and how will there be a shift of sales into digital,” she says. 

Such changes are also leading to a major reassessment of the role of physical stores.

Rethinking retail spaces

When Thomas moved from The Works to become digital and e-ventures director for DIY firm Travis Perkins, during which time he worked on the Built business for the firm, he developed a very digitally integrated retail store concept, designed to be suited to the new – more convenient – way that consumers now wish to buy goods. The concept was similar to an Argos-style model with space used to primarily hold stock and serve it promptly, with no walk-around element to the outlet.

“Our range is more heavily comprised of commodity lines, far less enhanced by an in-store browsing experience than, say, fashion. We found an enthusiastic body of customers who were much more comfortable being digitally led in their buying journeys,” he says, adding that only 25% of sales were from walk-ins buying either from digital kiosks or through staff with mobile points of sale, with the remainder ordered online for either delivery or for click and collect.

The success of this new way of shopping is evidenced by the concept consistently achieving a Net Promoter Score in the 80s – a score Apple would be proud of. “As well as being well-liked and more convenient for trade customers, the new format has the potential to be highly process driven and occupy trading space more efficiently than traditional merchant models,” suggests Thomas.

However, like other retailers, Travis Perkins has found the success of its own in-house disruptive new models problematic. Rather than taking advantage of its creation and rolling it out to relevant existing Travis Perkins units, the senior management has decided to end the project. This highlights the difficulties that established businesses have in adapting to the new demands of consumers.

B&Q is another retailer that has been playing around with its formats. It has recently opened a smaller store in North London, offering a more convenient way for shoppers to purchase home and DIY products. The unit is only 5,400ft2 and stocks 6,000 products, whereas a regular 100,000ft2 B&Q store stocks 40,000 products. Customers either use in-store screens to buy goods or order via click and collect on the company’s app – these are ready for collection in five minutes. A further 20,000 products can be ordered to these smaller format stores for next-day collection.

B&Q is not alone in its introduction of new types of store. Others, in more “touchy feely” retail categories, have a very different approach. Creative home and furniture brand Made.com is building showrooms around Europe purely to enhance its brand and give customers a great experience as opposed to directly driving sales.

“We see things as starting online and finishing online. The showrooms are part of the digital journey of customers, but we don’t need to do transactions in the showrooms. It’s about touching and feeling and the brand experience”
Philippe Chainieux, Made.com

“We see things as starting online and finishing online,” says Made.com’s CEO, Philippe Chainieux. “The showrooms are part of the digital journey of customers, but we don’t need to do transactions in the showrooms. It’s about touching and feeling and the brand experience.”

Although the stores use technology such as smart tags, from which customers can access further product information, Chainieux is keen that the experience is about human interaction. “Self-service in showrooms is wrong. If people make the effort to go into a store, then we don’t want them on screens. We want them to be reassured by a person. The showrooms are not a retail channel to drive revenues. They are an extension of our online business,” he says.

By focusing in this way, Chainieux says the stores do not have the complexity of having to hold stock and they only showcase a small – regularly changing – mix of products. Each showroom measures 500-1,000m2 and can only hold a single-digit percentage of the company’s total number of products.

It is a similar story at health and beauty retailer Sephora, where CEO Christopher de Lapuente says: “We’re building an ecosystem of stores and e-commerce, with people going back and forth. If they choose not to buy today in-store, they might come back another day and maybe tell their friends. It’s all about the experience in the store. At the end of the day, we are here to sell, but we want to have a great relationship with customers.”

This is a very different approach to the in-and-out-as-fast-as-you-can-type stores being developed by various other retailers. Amazon again set the ball rolling in this area with its creation of the checkout-free Amazon Go stores concept in the US. In the UK, Sainsbury’s opened the first such supermarket where shoppers use the company’s SmartShop Scan, Pay & Go technology on its app to scan their groceries as they travel around the store and then pay for their goods.

Clodagh Moriarty, group chief digital officer at Sainsbury’s, says: “We know our customers value their time and many want to shop as quickly as possible – technology is key to that.”

This is recognised by Michael Love, group CEO of Netto, but for now he is not following suit as he believes the discounter’s low-cost model, operating exclusively through physical stores and without snazzy technology, can continue to be successful for some time.

“I don’t know of a market that is more penetrated online than the UK. All the elements are in place to support the massive growth of online grocery shopping, but it is not exploding. It will be a while before it fundamentally attacks the more conventional forms of retail. We’re going to get our toes wet at some point [online] and find a way that is unique to us. Online is not putting any pressure on us right now in any of our markets,” he says.

Despite the pace of change set by the likes of Amazon, Ocado and Sainsbury’s, Netto is proof that there is still room for many different types of approaches to be taken as the industry ultimately works its way towards some sort of equilibrium between physical stores and online retail.

Read more about digital in retail stores

This was last published in June 2019

Read more on E-commerce technology

Start the conversation

Send me notifications when other members comment.

Please create a username to comment.

-ADS BY GOOGLE

SearchCIO

SearchSecurity

SearchNetworking

SearchDataCenter

SearchDataManagement

Close