AI in Retail: Beyond The Hype and Into Reality for Store Operations.
The Top 10 AI use cases that Retail Operators at every level told us would transform their daily work. AI for Retail Operations is...
At NRF 2020, the role of the store was center stage. After years when physical retail had been second fiddle to the glitz and glamour of a rising ecommerce, many asked the question: what is the role of physical stores in retail? And now, after everything we’ve learned from 2020, we’re asking whether this role changed once again?
Physical’s demise has been visible over the last decade. Yes, in many sub-sectors (e.g. toys), ecommerce has risen to around the 50% mark. And yes, after a period of mass expansion the US became over-stored. But we forget two factors.
Firstly, that physical still plays a crucial part in how consumers purchase and want to be fulfilled. Ecommerce is currently hovering around 20% of total retail sales. Even in a pandemic year, physical is still the way most customers choose to shop. 2020 has also shown the importance of the store as a logistical hub, both as part of ecommerce last mile delivery, but also for the rise of BOPIS.
Secondly, the store still plays a very important brand role, highlighted by Doug Stephens as the ‘store as media’. When customers enter your store, there is the possibility of a transaction but there is also the absorption of a brand experience. In the same way that every click to a website is valuable to a brand, so should be every in-store visitor: 100k store visitors is the brand value equivalent of ~$100k.
Stores are vital, yet their role is moving beyond a four-walled box simply to transact goods into something broader. For the store to succeed, we need to re-examine two crucial questions:
Ever since Italian monks discovered double entry bookkeeping, retail has looked at the P&L and Balance Sheet as the cornerstone of performance. Despite the exponential rise of available operational and financial data, stores have still been viewed and incentivized on like-for-like sales growth and inventory stock turns.
Such metrics now look less relevant as the cornerstone of store performance today: Firstly, they ignore the broader role a store now plays across brand and fulfillment. Secondly, these are lagging indicators that are the outcomes of buying and shopping activities, rather than inputs that lead to sales. Thirdly, and perhaps key, we need to start harmonizing physical and digital performance metrics to be able to better understand and evaluate effectiveness across all channels in retail’s omnichannel approach today.
The pandemic has shown that an omnichannel approach is no longer just physical + website, but physical + BOPIS + curb side + social + last mile. Customers want to shop where they want, when they want, and how they want.
Table 1: Example of harmonizing physical and e-commerce performance metrics
Table 1 above provides a view of how some digital and physical performance metrics can be better harmonized and even learn from each other in some of their core funnel and value metrics. From ecommerce, the ideas of traffic, conversion, customer acquisition cost (‘CAC’) can be equally useful in understanding store performance. But online can equally learn a lot from physical stores.
Ecommerce’s strong focus on pure growth and capturing market demand has often come at the expense of cost efficiency – for example, the growing issue of returns. Optimizing costs is a core area of focus for Store Operations. Shrink and waste, for instance, have the support of full asset protection teams. A similar focus is needed on the ecommerce side, providing a great opportunity for performance improvement and improving margins.
Harmonization is not just important for assessing the relative value of the different channels, it is also key for agility. Digital channels have been able to rapidly experiment and learn and scale what works for consumers, in a way stores haven’t to date. Retailers should also see the potential of every store as an experiment engine where, with the right measurement in place, they can test, measure, learn, and scale what is driving the most value for the consumer.
Combined with measurement, the way that Store Managers are coached and upskilled also needs an urgent rethink. Typically this has been the role of the monthly (at best fortnightly) Area Leader store visit. The challenge with the store visit is that it has become a mostly compliance-focused activity over the years. Checks and balances to see whether inventories have been properly checked and stores and presentations laid out correctly are very limited views of the business.
To be more growth-oriented, the relationship between Area Leaders and Store Managers should evolve in two ways.
Firstly, it should be growth-focused. It should be about setting OKRs – objectives and the measurable key results to drive them – as introduced by Andy Grove, who used this approach to build rapid growth at places like Google, Microsoft, and Uber.
Secondly, the role needs to be more cross-functional and understand how a store’s success is driven by the collaboration between different stakeholders, merchandising, supply chain, marketing, and other departments. To date, store operations have been too siloed, only focusing on the execution challenges from an operator’s perspective.
The store isn’t dead, but has a lot of new roles to play.
After a decade of being seen as the less favored child in retail, stores remain critically important to the overall experience retailers provide to their customers. Rather than being digital versus physical, it’s how both are blended to provide customer value that will drive their success in the future. Both the old steward of the store and the young newbie of digital can learn from the other’s experience and results. Yet in both their measurement and in outlook, there is an urgent need to turn to focus on harmonization and growth, rather than a backward and compliant view of performance.
Ultimately it’s those retailers who blend best the benefits of both who will be the most successful.