Retail: Retail's Final Frontier?

This is the last of a three-part series examining the current and future state of brick-and-mortar retail and how it’s being integrated into other forms of retail. Parts 1 and 2 ran in our June and July issues.

The nature of the internet business model allows more centralized inventory control and more efficient order and fulfillment management than a retail store network. And of course with centralized fulfillment, online merchants don’t incur the cost of distributing inventory around the country, or even throughout a region. In addition, they can extend or cancel promotions depending upon demand and inventory levels.

Consequently, lost sales due to out of stocks, excess inventory and the need for clearance sales are all minimized. All this improves any company’s margins.

But what about the customer who absolutely needs to look, feel and touch an item before making a purchase?

Back to the Future?
One retail chain we work with is testing the concept of converting its stores into showrooms. The idea is to have limited inventory at each store — just enough to allow customers to handle items and try them on if they want. But then all orders are fulfilled from a centralized warehouse and shipped to the customer. A big step forward in increased cost efficiency.

Online inventory management also provides the opportunity for “just-in-time” strategic marketing initiatives not possible in a fixed distribution environment. We’re in the process of building a home-entertainment planning microsite for a major cookware marketer. Depending upon the information a visitor provides about an upcoming event, the site can offer just the right products to meet that visitor’s immediate needs.

What’s more, the internet lets merchants test new product ideas, pricing, presentation and promotional concepts quickly and easily in real time — and without a lot of risk — against small, but representative, samples of a customer base.

The combination of “just-in-time” inventory management and real-time strategic marketing allows online merchants to quickly respond to current events that may impact their customers — in days, hours or even minutes. Contrast that with the months it takes for a traditional merchant relying on a traditional supply chain to respond.

Main Street Can Survive
We’re not suggesting that Fifth Avenue, Rodeo Drive and Main Steet U.S.A. will be boarded up or turned into retirement communities for former retail mavens and their consultants. But there is a glut of retail space, with more stores closing all the time.

We do believe that online marketing will become the predominant retail model, because it just makes sense. A large retail marketer we work with operates about 1,000 stores generating approximately $15 billion in revenue — $11.5 billion through its stores and $3.5 billion over the internet. We calculate that if it were forced to sell its internet volume through its fixed distribution system, the increase in cost for more stores would be roughly proportionate (i.e., about 30 percent). That’s a serious hit to the bottom line.

Fewer Stores, More Web
Conversely, from a margin optimization standpoint, this retailer would ideally like to have fewer stores — perhaps 250 to establish its brand — and generate a much higher share of sales via the internet. In fact, the company recently announced the closing of some 150 stores this year, with 500 more closings planned over the next couple of years.

While it seems safe to say that the century-old love affair between the American consumer and the retail store is on the rocks, it would be a mistake to short-sell personal consumption. After all, personal consumption accounts for some 70 percent of the American economy. The difference is that the economic crisis has driven shoppers into an “essentials-only mode,” which may last a good while.

Fortunately for enterprising retailers, the internet is rapidly evolving as a merchandising and marketing medium to help them respond. It won’t be quick or easy. But for those committed to really getting to know their customers and willing to cede a significant level of control back to consumers, while re-engineering their models to conduct business in real internet time, the future is there for the taking.

Rick Braddock is chairman/CEO of online grocer FreshDirect (rbraddock@midoceanpartners.com). Donn Rappaport is founder and chairman of data marketing services provider ALC, and CEO of Zumbox, a paperless postal system (donn.rappaport@alc.com).