The Future of Bricks & Mortar Retail

By Angus Gillespie

The advent of the digital era has brought about a huge change in how consumers and retailers interact with one another, but before we go sounding the death knell of bricks and mortar establishments, much needs to be considered. In fact, if we look beyond the hype, the truth of the matter is that many retail chains have adapted quite nicely. The ones that have found themselves in an assortment of failing predicaments most often have had little to do with computers and the ability to shop online.

Firstly, an example of a corporation that has not had an easy transition: Sears Canada. The decades-old retailer closed its flagship store in Toronto’s Eaton Centre in 2014 as a part of a $400-million sale of five of its leases. But that had little to do with an advancing digital era. Then there was Target, which was a victim of poor planning and execution. Stores opened across Canada, but mostly in Ontario, and frustrated shoppers were greeted by shelves that were half-stocked, at best. There was no inventory.

The latest statistics tell us that tell us bricks & mortar retail is up 7.8% but the numbers will also reveal that e-retailing is up considerably higher than that at 43%. There is no denying online is growing at a faster percentage (than b&m but one must remember that online is starting from a very small base. It can grow significantly but when it accounts for only about 8% of the total, it’s not moving very far very fast.

Marvin Ryder, Associate Professor, DeGroote School of Business, McMaster University remains bullish that b&m retail will continue at a healthy level for a long time into the future.

“Many people want to say e-retailing is taking over and the traditional retail stores will be gone. But as of today, 92% of retail sales still take place in a physical store,” he says.

The record store business is an example of one type of retail that simply could not survive, because the end product could easily be purchased over the Internet on sites such as iTunes or the many Torrent sites without the quality being compromised – and it was much faster.

Another reason that the demise of b&m retail is greatly exaggerated according to Ryder can be attributed to the ‘must have it now’ factor. While there are certain products we have patience to wait for, others we simply must have right away, and in order to achieve that you need to go to a store and pick up the product. Otherwise, it may be several days – or more – before it arrives in the mail or via parcel delivery service.

“E-tailing does not give us the ability to receive something this afternoon,” notes Ryder. “I don’t want something to arrive in a week. I want it now so I can finish the job I’m working on. However, I might go online to see what my options are at the store and decide what I want.”

Another aspect that cannot be dismissed is the delivery charge. Sometimes deals online seem too good to be true. The cost of the product may be nominal, but it’s not uncommon to be bitten by a large delivery shipping charge that all of a sudden doesn’t make it such an economical purchase.

“There is something called AmazonPrime, where you pay $100 for membership and you get free shipping. To me that’s a bit of a lie. By sending them $100 you have prepaid your shipping fees for the year ahead,” says Ryder. “Don’t get me wrong, I would never tell someone not to be an e-tailer. I buy things on eBay and Amazon but it isn’t replacing most of my day-to-day shopping. I still go to the grocery store and the pharmacy. It will have some continued growth but I don’t think it will ever completely eliminate shopping.”

Target did several fundamental things wrong in what turned out to be a disastrous foray into Canada. When they opened their stores here the whole fulfillment issue of having the right products on the right shelves was a complete mess. If there was an advertised sale, more often than not the product was nowhere to be found.

“I just don’t think Target ever fully understood how to deal with a country the size of Canada. They went from zero to 132 stores in less than two years. But you have to have the infrastructure to support those stores, what we call fulfillment centres – warehousing and transportation,” says Ryder.

Before Target opened its first store a mistake was made in assuming that Canada was just like the United States with respect to shopping habits. While we may seem to be quite similar in many ways, there are also many inherent differences as well.

“Target really didn’t offer a value proposition to Canadians,” continues Ryder.

A number of factors led to Sears Canada being in the position it is in. A lack of leadership could easily be included as one of the core reasons for a failure in setting a strategic tone for the organization. From 2010 to 2015 there were three CEOs. Each one came in and developed a plan for a turnaround including the costs to do so, shipped it down south of the border to the bosses in the U.S. who essentially refused to fund the venture.

“Sears in the U.S. eventually washed their hands of the Canadian operations and basically told them to do whatever they had to in order to survive on their own. They are not looking at a bankruptcy but rather a strategic downsizing by eliminating stores. The stores that remain will undergo some renovations. The good news is that in the stores that have been refreshed year-over-year sales are actually up. They believe they have a strategy for a turnaround. But they got too big,” says Ryder.

Sears has also somehow landed itself in the so-called ‘unwashed middle’ – which is really in no-man’s land. It’s one thing if you want to compete at the low end with the likes of Dollarama or Walmart or at the high end with The Bay and Holt Renfrew. In the middle there just isn’t much room for any appreciable amount of consumer base to withstand the economies of scale.

People of a certain age will remember the Sears catalogue and how it would have been ideal to transfer that material to a website. Ryder believes Sears really dropped the ball on that one.

“Where they should be the online leader in sales they are trailing. The story late last year was the opening of a fulfillment centre and then we get to Christmastime and we hear that Sears has told its customers the product you ordered for Christmas won’t be delivered until January. That just can’t happen,” says Ryder.

Another sign that the b&m retail is doing much better than some would think is the advent of several large outlet malls. In addition to that some of the largest online retailers are even opening up physical locations.

Amazon Goes B&M

Amazon announced earlier this year that it was going to be hiring 10,000 people with at least half of that amount being hired to work in their stores.

“Amazon unveiled a concept of a totally automated store that when you walk in you are recognized either through your phone or credit card,” says Ryder. “As you put things in your shopping cart an online tally gets made. If you are sure you have everything you want you press a button and it gets charged to your card and you can walk out of the store with your purchases. The fact that an online-only retailer such as Amazon is talking about having bricks & mortar stores tells me there must be some kind of a future there.

Dollarama plans to add 60 stores a year for the next 10 years and they are already at more than 1,000 stores in Canada. IKEA has a plan to grow from 10 stores to 20, which is a sizable commitment when considering the tremendous volume of square footage involved.

In no business is it ever to remain static. There must always be new innovative thoughts and processes in order to keep up with the competition. But enhancements are a far different thing than abandoning a process altogether and it seems quite clear that the bricks & mortar retail industry fits into that spectrum.

Joseph Aziz is a retail expert who is a Senior Business Analyst and Category Adviser for Walmart Canada. As Aziz points out a bricks and mortar business needs the extra real estate and personnel investment compared with its presence online or that of an online-only rival. The question is whether or not the investment would pay off. The answer is in the type of merchandise carried in the physical store location vs. online, which of course varies depending on the line of products being sold.

In November 2015 Fortune retail wrote “Walmart executives said e-commerce accounted for 0.15% of its sales growth.” That is miniscule.

“The online business is a tiny fraction of the stores sales and that holds true for most retailers,” says Aziz.

Consumers from all ages pick and choose what they buy online and what they buy in store. For Aziz, it depends on certain criteria and unwritten principles related to the human senses. Here is his criterion:

Principle # 1: if I need to see how I look in it, I would not buy it online.
Principle # 2: if I need to smell it, I would not buy it online.
Principle # 3: if I need to feel it and touch it, I would not buy it online.
Principle # 4: if I need to taste it, I would not buy it online.
Principle # 5: if the product is localized (used only in certain community or country) I would not buy it online rather go to specialty store.

Any products that do not follow any of Aziz’s principles noted above, he would buy online, but only if they were to come with convenient delivery methods.

“In my professional opinion I see the bricks & mortar businesses will most definitely survive but they must offer their customers two focused channels. First, channel at the store with concentration on the senses principles. Second, channel for every possible item they can sell online,” explains Aziz.

From his extensive experience in working with different retailers, Aziz says that there is a lack of focus, perhaps because of the ongoing ‘war of domination’. In reality if every retailer focused on what they do best there would and could be a guaranteed market share for just about everyone.

“Retailers must push aside the ‘sharing the pie’ idea leading to fights over getting a larger piece and instead start thinking more on how to better attract and serve customers rather than being obsessed with attacking the competition,” continues Aziz.

It is Aziz’s assertion that Sears Canada could have survived in its prior incarnation if it focused on who it was and where it stood in the retail space instead of lowering its standards and getting down in the mud with the lower-end retailers and being part of a price war. That was never the space Sears generated its customers from, yet it wound up in that group.

“Sears’ products possess a certain quality that should’ve kept their fair retail price as it got no real competition from the low quality products displayed in other retailers who are committed to low retail,” explains Aziz.

Aziz says that although the online virtual store is very appealing to the cost cutting mentality, the buying power still in the hands of majority that prefer bricks & mortar locations.

As one business person opined, to say that digital commerce is killing off physical stores is lazy thinking and a half-truth at best. Retail bankruptcies that have cropped up have largely been caused by inefficient management and processes as opposed to fierce online competition. In other words, consumers are not trading physical bricks for online clicks.

All but one of the top 10 North American retailers are physical chains where people can shop in person, with Amazon being the lone online-only company. And, contrary to belief, statistics show that Millennials also prefer physical store locations and they are a generation that has grown up with the likes of Amazon, eBay, Facebook and Instagram. A recent survey reveals more than 70% of Millennials prefer the in-store experience. In the U.S. a research paper by Accenture shows 80% of Millennials prefer the in-store experience and 77% of Generation Z, (those people born between the mid-1990s and the early 2000s).

Bricks and mortar retail has been part of our mainstream business landscape for decades, and it would seem as if that’s going to continue for some time to come.