There has been much written about the impact online shopping is having on traditional physical store retailing: much of it laden with hyperbole (‘retail is dead’). Bricks and Mortar retail isn’t dead and (as highlighted in my last post on In-store Beacons) is beginning to find ways to change stores to add more value to shoppers. But online shopping, together with other phenomena such as channel proliferation is striking at the heart of supermarket economics. Will supermarkets survive the onslaught?
Supermarket economics
As many of you know big retailers make money (simplistically) in two ways. They make a profit on the products they sell, and they take fees from suppliers for slotting, displays, and pretty much anything they can think of. Some also make money from cash (actually selling the goods before they pay the supplier for them). From these activities, supermarkets make relatively slim margins (Walmart make around 3% or 4% net margin) but they stay successful by making that margin on a huge amount of sales.
Both of these sources of revenue are dependent on getting a large number of shoppers (called traffic) and getting them to spend as much money as possible when they come to the store (basket size). Retailers hit on a great model to deliver this through supermarkets: get a great location, a great range, and sharp prices, and people will be drawn to the store, and buy lots of stuff when they get there. More traffic and larger baskets drive sales, but also drive fees: as suppliers are in effect paying to get their product in front of the biggest audience possible.
Online shopping smashes the supermarket model
But what if these things change? Online shopping is taking relatively small shares of total sales, but it is eating away at both traffic and basket size (supported by the availability of other channels). Big retail has been built around shopping habits: people buying a wide range of goods in the store. But the average shopper is now likely to shop at more outlets, and as more options come, shopping trip fragmentation is likely to increase. The desire for “now” will drive impulse shopping, which might drive sales in some areas, but also may reduce the need for stock up shops. Many shoppers I know buy their packaged goods online, but search for fresh at a supermarket. But the economics of a supermarket were built around these shoppers buying their washing powder toiletries and tissues at the supermarket too.
Can retailers cope with doing both online and offline well?
Right now many retailers are diving into online as a must – but many are losing money on these operations. One element of the brilliance of supermarket economics is that they outsource logistics to the shopper: the shopper picks the product, often packs the product, and takes it back home. Online retail forces retailers to absorb all of those costs, and yet still offer a sharp (or even sharper) price.
At the same time retailers recognize that if they are to keep stores viable, they need to improve the shopper experience. Better service, increased technology, renovated stores, fresher products: all require funding.
Can retailers afford to fund a loss making online business, cope with stores that are becoming less and less profitable, and increase investments in those stores to deliver the enhanced shopping experience that is required to make stores worth visiting? Perhaps, but for how long?
The next generation of shoppers could be very different
Most of the forecasts I read paint a pretty straight line growth in online sales. I’m not sure this is going to be the case. In certain categories, growth has been exponential (personal care in some parts of the world). Demographics favor online. Younger generations take on online shopping as natural; whilst a burgeoning older population may find the convenience of home delivery too much of a temptation.
Bricks and Mortar isn’t dead. What is (hopefully) dying is the retail belief that business can be based largely on what the retailer wants to give, rather than giving the shopper the experience they truly want. Big retail has for too long held the shopper to ransom because they owned the distribution channel – which meant that shoppers had to put up with what they were offered. Retailers that really think about what shoppers want (and it’s not always fancy ‘experiential’ stuff – sometimes it’s easy, quick and available) – will thrive – on or offline.
Whatever happens, brands and retailers have turbulent times ahead. To learn more about how better understanding shoppers, both online and online, can revolutionize your strategies and transform your sales and profits, please contact me
for a free phone consultation to understand better your situation
