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Retail Apocalypse Retail Apocalypse Four Ways Physical Stores Can Survive April 2021 By Karen Lellouche Tordjman, Philip Evans, and Hind El Bedraoui Boston Consulting Group partners with leaders The BCG Henderson Institute is Boston in business and society to tackle their most Consulting Group’s strategy think tank, dedicated important challenges and capture their greatest to exploring and developing valuable new opportunities. BCG was the pioneer in business insights from business, technology, and science strategy when it was founded in 1963. Today, by embracing the powerful technology of ideas. we work closely with clients to embrace a The Institute engages leaders in provocative transformational approach aimed at benefiting all discussion and experimentation to expand the stakeholders—empowering organizations to grow, boundaries of business theory and practice and build sustainable competitive advantage, and to translate innovative ideas from within and drive positive societal impact. beyond business. For more ideas and inspiration from the Institute, please visit https://www.bcg. Our diverse, global teams bring deep industry and com/featured-insights/thought-leadership-ideas. functional expertise and a range of perspectives aspx. that question the status quo and spark change. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, fueled by the goal of helping our clients thrive and enabling them to make the world a better place. Retail Apocalypse Four Ways Physical Stores Can Survive With skyrocketing rates of digital adoption and collapsing traffic in physical stores, retailers face an existential question: Are their in-person locations relevant anymore? Over the past ten years, e-commerce has built overwhelming advantage. But there are four retail functions where physical stores still have a chance at shaping superior experiences: ultraconvenience, product touch and feel, immersive exploration, and personal, trusted advice. eployed effectively across these four functions, The “retail apocalypse,” as many have dubbed the precipi- emerging technologies such as augmented and tous decline of brick-and-mortar stores over the past de- Dvirtual reality could allow physical commerce to cade, has primarily been driven by one colossal, disruptive flourish. But stores must employ these tools within a specif- event: the rise of e-commerce. Over the past 26 years, one ic strategic context—or the advantages will be short-lived. category after another succumbed to digital retail, in an order predestined by their underlying economics. First it To determine whether maintaining a physical presence was books, audio, and video media—where inventory still makes sense, retailers must go back to first princi- complexity is overwhelming for the consumer and costly ples. If it does, they must prioritize one or two of the four for the retailer. Then it was branded and commodity elec- functions that can allow their stores to create unique and tronics, household items, and everyday apparel—where the defensible value. convenience of comprehensive choice, online search, com- parison, and user ratings outweighs the lack of touch and feel. Now it is increasingly convenience goods, such as The Retail Apocalypse health and beauty items, and staples such as groceries. The extraordinary success of e-commerce pioneers such as The long decline of physical retail is painfully evident. Amazon showcases the model’s disruptive power. In the 23 While the pandemic exacerbated matters, store closures years between 1997 and 2020, Amazon created $640 billion were mounting even before the outbreak, with a record more in shareholder value than the rest of the US retail 10,000 stores shuttering in in the US alone in 2019. (See industry put together. Exhibit 1.) When all the tallying is done, the 2020 numbers are likely to be more dire. European retailers are also In the face of the retail apocalypse, are there safe harbors? struggling. The German cosmetics company Douglas an- What are the competitively defensible functions of physical nounced it would shut down 20% of its physical stores in retail, the ones where the consumer experience offered in Europe by 2022. Inditex SA will close 16% of its outlets and the physical store is sustainably superior? Attending to that shift toward selling online. And Gap is considering depart- question can help retailers regain strategic momentum. ing Europe altogether over the next 12 months. BOSTON CONSULTING GROUP | BCG HENDERSON INSTITUTE 1 Exhibit 1 - US Store Closings Reached Record Highs in 2019 Numb ores 10,000 8,000 6,000 4,000 2,000 0 2012 2013 2014 2015 2016 2017 2018 2019 Tot or es Tot or enings Sources: Quartz website; Coresight Research; BCG Henderson Institute. Note: 2019 figures are YTD as of December 13, 2020. The Central Strategy Question proved, the online experience became steadily richer, more interactive, and better customized. And the proliferation of At its most elemental, retail delivers seven basic functions, smartphones and apps made the online experience more though the relative importance of each one varies enor- omnipresent and instantaneous. As a result, the online mously. (See Exhibit 2.) E-commerce has established fun- catalog today is orders of magnitude more efficient and damental advantage in three of the seven: navigable than the in-store experience. Payments. In the mid-nineties, there was widespread Inventory. With some important exceptions, online retail- consumer concern that online transactions were insecure. ers enjoy greater economies of scale and improved turn- But that fear was quickly allayed through HTTPS encryp- over relative to their physical equivalents because they can tion and bank credit-card guarantees. Since then, contact- centralize inventory in distribution centers. The larger less and digital payment use has soared. these retailers become, the greater the economies, espe- cially with the introduction of automated warehouse tech- Navigation. From the outset, HTML linked to online nologies and robotics. databases presented an array of choices that were more comprehensive, up to date, and searchable than any paper catalog or merchandise layout. As screen resolution, band- width, browser technology, and search algorithms im- 2 RETAIL APOCALYPSE Exhibit 2 - The Seven Basic Functions of Retail Payments Established e-commerce advantage Navigation over physical retail Inventory Ultraconvenience Pro eel Not dominated by e-commerce at least not yet Immersiv ation P e Source: BCG Henderson Institute. But there are four other functions that e-commerce does Personal and trusted advice. The guidance and valida- not dominate, at least not yet. These are the areas where tion we receive from a knowledgeable salesperson can help physical stores can still build and sustain competitive us feel that we are making the right purchase decision: we advantage (see Exhibit 3): like to feel known and understood. Ultraconvenience. This is the reason we want to grab a These functions can harness new, enabling technologies bottle of wine on the way to a dinner or snacks on the way such as artificial intelligence, augmented reality (AR) and home: to minimize the end-to-end time between craving a virtual reality (VR), 5G communications, and 3D printing to product and getting it. breathe new life into brick-and-mortar experiences. But the same technologies may also be implemented within Product touch and feel. Touch and feel is why we want to e-commerce, perhaps giving the physical domain yet an- sniff perfumes, try on tailored fashions, or test-drive cars other advantage. It is in these four functions, as arbitrated before we buy them: because for these products sensory by new technologies, that the fate of physical retail will be qualities matter, and we want to physically experience decided. For some, they may be four “horsemen” riding to them before buying. the rescue; for others, they are the final four horsemen of the retail apocalypse. Immersive exploration. Entertainment and social appeal are reason enough to visit some stores, independent of any products we purchase: we enjoy the feeling of losing our- selves in an Apple or Disney store. BOSTON CONSULTING GROUP | BCG HENDERSON INSTITUTE 3 Exhibit 3 - Physical Stores Can Compete in Four Functions Ultraconvenience Product touch Immersive Personal and and feel exploration trusted advice Source that can fulfill basic Direct sensory encounter with Brand ecosystem that nurtures Guidance and validation from needs and supply immediate products before buying a community of afficionados a knowledgeable source gratification Examples include: Examples include: Examples include: Examples include: Grocery stores, coffee shops, Cosmetics, fashion, luxury, Strong brands, such as Nike, Apple, Insurance, banking, telco, and hardware stores that sell frequently automotive that sells goods with and Lego, that shape experiences innovative retailers that sell complex purchased commodity items high emotional appeal beyond the transactional products and create “intelligent” experiences Source: BCG Henderson Institute. To survive and prosper, retailers need to focus their brick- Delivery for most other goods is also getting faster. and-mortar establishments on one or two of these four Amazon’s delivery speed has doubled since 2012. Across functions, choosing those where—with the aid of the retail spectrum,
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