Don't Close Your Stores Just Yet

In his opening keynote presentation at the Shop.org Annual Summit in Denver, Jerry Storch, chairman and CEO of Toys"R"Us, stated his case why brick-and-mortar stores still play a vital — and often profitable — role in the retail industry today. While it's true that e-commerce sales are growing at a clip faster than the traditional store model, the fact remains that the vast majority of consumer purchases still occur within the confines of brick-and-mortar stores.

This is certainly the case for Toys"R"Us and its 875 Toys"R"Us and Babies"R"Us stores in the U.S. As for the reasons why brick-and-mortar stores are still smart investments for retailers, there are a couple of inherent advantages to the channel, Storch said:

• shopping in-store is a national pastime for many, especially women;
• some product categories are better suited to be shopped for in-store (e.g., apparel); and
• the immediacy of the store experience.

Physical stores make sense for retail brands from a P/L perspective as well. Stores are the most efficient delivery vehicles for products, Storch noted. Everything bought in-store is free shipping. In addition to not having to pay the costly shipping expenses that online retailers are burdened with — "free shipping" has to be paid for somewhere, Storch said — brick-and-mortar retailers can offer high-quality customer service that can be hard to find when shopping online.

Is it Really Cheaper?
Storch said he can't help but laugh when he reads articles stating that online retailers are able to offer lower prices. Why? The pricing model is standard for all retailers, no matter the channel: product cost + supply chain cost + profit margin= consumer price. The cost to buy a product from a manufacturer is going to be the same for a brick-and-mortar retailer as it is for an online retailer (if it isn't, someone should contact the Justice Department, Storch joked). The supply chain costs are going to be significantly higher for an online retailer than a brick-and-mortar seller — Storch estimates one-and-a-half times to two times more expensive for pick and pack in the distribution center and 30 times to 40 times more expensive to deliver freight to a customer's home — so where's the profit?

"Anyone can sell an infinite amount of commodities at below cost," Storch said, repeating a quote of his from over 10 years ago on the future of e-commerce.

Some other misconceptions regarding advantages that online retailers have over their brick-and-mortar counterparts are that online customers are more loyal and therefore have a higher lifetime value — Storch countered this argument by stating that his company sees an influx of customers when it lowers the price of diapers by the smallest of amounts. "They're just as loyal to stores based on price," he said — and that physical stores have overhead costs that are prohibitive.

The distribution centers that are sprouting up all over the country to fulfill online orders aren't being built for nothing, Storch said, adding that the employees picking and packing those orders are being paid as well.

Omnichannel is the Future
What Toys"R"Us has done to meet the needs of today's consumers — and make money in the process — is adopt an omnichannel philosophy. This omnichannel strategy most definitely includes the internet. "The internet is as much an opportunity as a threat for Toys"R"Us, Storch said, noting the retailer's online sales grew 40 percent during last year's fourth quarter.

The companies that succeed going forward will be those that build the best consumer-facing network, whether that be retail stores, an e-commerce site, mobile apps and website, catalog, etc. It's about the brand, the product and the experience, Storch said.

Merchandising is an area where Toys"R"Us excels, Storch believes. That's a good thing considering he lists merchandising as the core skill in retail. In fact, he says the brand already knows what the hot toy of the holiday season will be, he just wasn't willing to give up that information to the packed session. He wants to keep it a secret so Toys"R"Us can buy up all of those toys and grow its market share.

Ship to store is an example of Toys"R"Us operating with an omnichannel mind-set. The program allows in-store pick-up orders to be fulfilled with inventory from the brand's stores around the country. The company doesn't have to segregate inventory pools (e.g., store and online) by operating mini pick-and-pack centers in the backs of its stores.

Merchandise pick-up kiosks are starting to appear in Toys"R"Us and "Babies"R"Us locations as well. The kiosks allow customers that have ordered online and are picking up in-store to go right to the kiosk, thus avoiding the lines at the pickup counter, to scan their barcode and have the fulfillment process begin immediately. Increased foot traffic in it its retail stores and cross-channel returns are two more benefits of the omnichannel retail model that were cited by Storch. In fact, he went as far to say that online-only retailers would be adding brick-and-mortar stores in the future, a notion that many retail analysts would scoff at.

"Omnichannel is the retail model of the future," Storch proclaimed.