Steve Dennis, retail analyst, podcaster and author of the book, ‘Remarkable Retail’, shares his insights on the changing retail business with Devina Joshi, touching upon Amazon’s winning streak with its media business, physical retail and the ‘omni-channel’ hype, shopping in the Metaverse, and more. Excerpts:
At $31 billion, Amazon’s ad revenue for CY 2021 surpassed that of YouTube’s (at $28.8 billion). What does this say about the future of online retail?
Amazon’s ad business is a function of brands being platforms and trying to monetise their traffic. Amazon is really unique; so basically, no other retailer can do what it is doing. Media will be a growing component for many large retailers, because it is a logical way to monetise traffic, but only a few have the potential for it to become material enough, without detracting from their core merchandising business. Amazon is an outlier, as it has tremendous customer data, insights capabilities and, frankly, so much website traffic. In essence, it is using its first party retail business as a loss leader for the tremendously profitable advertising business.
Is this the pandemic’s doing?
Amazon’s growth in advertising is unrelated to the pandemic.
In your book, ‘Remarkable Retail’, you suggest how physical retail’s problems existed before the pandemic, and probably came to the fore in this period…
The issue primarily relates to brands failing to be remarkable. Having a vast fleet of large stores selling average products can’t be sustainable in a world of abundant choice, access and convenience. In the US, in particular, there has been a growing mismatch between supply and demand — and that reckoning actually started prior to the pandemic. But there is no problem fundamentally with physical retail. Remarkable brands continue to open stores and invest in their brick-and-mortar locations.
‘Remarkable’ means something that is both highly distinctive as well as creates an experience that’s worth talking about, because it is so customer-relevant and memorable. The most interesting physical retail examples in the pandemic are those that shifted toward fulfilling online orders from their stores — via BOPIS, curbside pick-up, local home delivery and ship from store. Target, Walmart, Best Buy and many others had great success with this approach. Target, in particular, fulfilled 96% of online orders — which account for about 20% of all revenues — from its stores.
Physical retail won’t be dead… but what will it take for brick-and-mortar stores to catch up to their online counterparts? How can they play to their strengths?
It’s not a matter of physical retail versus online. It’s a matter of thinking of the customer as the channel and building a harmonised experience that leverages the best of digital and physical. There is almost no such thing as a profitable online-only retailer, so chasing that model is a fool’s errand.
The blurring of the lines between digital and physical was obvious for a long time, but many, slow to transform businesses, were essentially forced to confront it during the pandemic. I have definitely seen some small retailers have to up their game here, with most launching on Shopify if they didn’t already have much of a digital presence. The key here is to distinguish between what is a basic customer expectation now and what are possible competitive advantages. For most neighbourhood retailers, the key is to lean into their unique advantages, and not to try to engage in a race to the bottom with Amazon or Flipkart.
In March, Amazon announced the closure of over 60 of its offline stores in the US, including those selling books and hot items like electronics. What limits companies from achieving success in their omni-channel ambitions?
In Amazon’s case these stores were always experiments. I don’t believe there was ever any seriousness about building these into a large harmonised operation. Their ‘omni-channel’ ambitions are focussed on the categories that really matter long-term to spin their flywheel, namely groceries, fashion apparel and convenience stores. More broadly, what typically prevents retailers from delivering a remarkable harmonised experience is, they operate in silos, thinking about e-commerce and physical retail as separate, rather than complementary. They also often confuse basic competitive requirements with what’s necessary to be truly memorable.
What’s the learning we should glean from closures of big names in the offline retail space, such as department store chain Debenhams in the UK, or Lord & Taylor in the US?
Very few closings were actually caused by the pandemic. For the most part, the chains that closed were already struggling because they failed to transform for the realities of modern retail. In particular Debenhams and Lord & Taylor got stuck in the ‘boring middle’ that I write about in my book.
Are large, flagship stores on their way out, with smaller format stores taking centre-stage in these times? Where does that leave IKEA, for example?
Large stores that don’t add value, like most of the moderate department stores, are dead or dying. Plenty of large scale stores will continue to be successful. But any magnet store has to have a reason to make the trip.
With thin margins, small basket sizes, high delivery costs, and sustainability and supply chain issues, what will it take for e-grocers to become profitable? In India, for example, some e-tailers are fronting the ‘10-minute delivery’ model…
Much of the hyper-fast delivery services will fail over the next couple of years. It will always be cheaper for the customer to go pick products rather than pay someone to deliver them. Also, the capital cost necessary to stock a large number of items in new facilities will limit the total addressable market. It’s important to make a distinction between where a product is ordered and how it will be fulfilled. Ordering online and picking it up at a store will be profitable. A lot of orders online fulfilled by home delivery will not work and will be limited to customers who are willing to pay a substantial premium for convenience.
Do you believe shopping in the ‘Metaverse’ can ever be a reality? And should brands even invest in what is essentially a yet-undefined parallel universe?
Absolutely, but we are in the very early days and just in the first phase of online shopping; no one really understands what this will ultimately look like. Brands should always be testing, and modest experimentations are the way to go for most retailers at this point. Whether we are talking about the Metaverse of any other area worth investigating, the key is to build a culture of experimentation.
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