The Supply Side: Changing role of stores continues to reshape retail

Brick-and-mortar retailers large and small face many changes. While a majority of shopping still occurs inside a physical store, its role is likely to evolve to more of a fulfillment center for online purchases as e-commerce continues to grow.

Sucharita Kodali, a retail analyst with Forrester Research, said during a recent podcast the role of retail stores over the next two to five years will change.

“We see three cost levers in retail — labor, real estate, inventory — all three are opportunities to rethink retail,” Kodali said.

She said while there are lots of changes underway in retail, there are elements which are not changing, and that’s equally important for retailers to recognize. She said it’s crucial for retailers to recognize when to invest and when not to bother.

“I have to give Walmart a lot of credit for its test and learn mindset,” Kodali said. “The company continues to be strong financially and still maintain its share in a vast world of retail. Walmart has become a bit more agile since acquiring Jet. This fail-fast and hire deliberately mentality that uses small teams of innovators hasn’t been easy for large legacy retailers. It’s not easy to be as agile as Amazon.”

Kodali also credits Home Depot with moving in that direction with hefty digital investments which are starting to show success. But there are still plenty of struggles to figure it all out.

Kodali said Amazon has flipped the inventory model upside down and the rest of the retail industry is now trying to quickly figure out how to sell items they don’t own through third-party marketplaces.

“This radically changes how inventory can be sourced,” she said. “I expect to see retailers at times fulfilling some online orders from competitor retailers. Walgreens could fulfill an order from Amazon or Walmart inventory on commoditized products in an effort to hold on to their loyal customers.”

Kodali said brands will also have opportunities to bypass retail stores and online sites and sell directly to consumers.

“We see Nike and Google doing a good job of this, and if they can build it out, it could be transformational,” she added.

Labor is the largest expense for brick-and-mortar retailers outside of inventory. Kodali said as more sales move online, retailers will have to get creative in how they staff stores because when the cost of labor goes up, so do expectations for sales. Stores are turning to technology to do some tasks and asking more from the fewer employees they do keep, she said.

“In the future I can see retailer’s using technology like FaceTime to allow home-based employees to interact with shoppers and questions coming from stores,” she said.

The real estate within physical stores is also a big opportunity for retailers to grow revenue. Kodali said stores within stores for big box companies like Walmart or Target are a great way to garner lease revenue while also providing shoppers access to unique brands. Walmart has an Apple counter in some of its Supercenter stores with access to the latest Apple products. Kodali said Walmart also routinely has lease space in its Supercenters for services such as doctor’s offices, hair and nail salons and quick-serve restaurants. Walmart is also experimenting with a veterinarian service in-store in Florida.

“Other retailers need to look for alternative ways to monetize their physical real estate.” Kodali said. “That could be selling advertising within its store to brand suppliers, much the way Amazon sells ads on its website. The Amazon model harnesses the visitor traffic and sells that exposure for cash to brands who sell on the site. Walmart has millions of customers in its physical stores each week and these shoppers are there for much longer than the average Amazon online shopper. Yet I don’t see Walmart or other brick-and-mortar retailers capitalizing on prime real estate ad opportunities.”

Another obvious role for stores is fulfillment for online orders, but Kodali said in reality, that can be hard to accomplish. She said on paper it looks like a winning idea to leverage out the costs by fulfilling from a retailer’s in-store inventory, but variable costs can be higher than expected with that strategy. She said teen retailer Zumies fulfills 100% of its online sales from stores, but few others have been able to duplicate it.

She said if the bulk of what a company sells online also has be sold in a physical store, fulfillment from stores is cost effective. There is not a one-size fits all approach to omnichannel, Kodali said, because assortment, labor models and proximity to customers change the dynamics.

Walmart and its 10-mile proximity to 90% of the U.S. population with fresh items bodes well for fulfillment from stores. The retail giant is equipping about 800 stores to fulfill online grocery orders for home delivery through early next year. Walmart U.S. CEO Greg Foran has said when a store is used for online order fulfillment it raises the bar for financial performance. He said demands on the store are much higher than normal, as is the risk for out-of-stocks.

Kodali said retailers can and should do a better job reading consumer demand. She said retailers rely too much on what their suppliers say consumers want rather doing their own research.

“The most obvious way for retailers to improve on what customers want is to keep a record of every time a customer enters a store and can’t find what they want,” Kodali said. “No one is doing that in brick and mortar but that’s precisely what Amazon does. Every time somebody searches on their site for an item and it’s not purchased or not found then some item category manager then chases down that product wherever it’s sold and then invites the seller to be a third party on Amazon so future customer’s don’t experience that same problem.”

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.