Bold Move #5: Ally with the enemy

December 02, 2016

Why unconventional partnerships are required

1. “How will we cope with the reduction of floor productivity (sales per store floor area) due to sales shifting online?”
2. “How can we increase the profitability of our (loss making?) online channel this year?”

One or both of these questions have been and will remain at the top of the list of conundrums to solve ASAP for CEOs of multichannel retailers. The answer to both of these questions may well be this: Ally with the enemy!

Compared with the shopping experience of 10 years ago, the modern-day shopper may seem spoiled. Shoppers are treated to pop-up stores, shop-in-shops, flagship stores, concept stores, multipurpose stores, and experience centers, a far cry from the more transactional locations that were the stores of yesteryear. And in a continued hunt to remove the disadvantages of online shopping, pure-play online retailers are offering ever more immersive online experiences, personalized content spread over an array of social media channels, same-day delivery, free returns, and 100-day trial periods.

But the shoppers are not spoiled by nature — they are being raised this way by retailers. The intensifying competition driven by increasingly scalable international business models enabled by technology will only set the expectations of shoppers higher and higher.

If a retailer is going it alone and not part of one of the few international “super retailers” like Zara parent Inditex, chances are that the retailer will not be able to keep up with the expectations of shoppers and pleasantly surprise them.

Floor productivity

Retailers are confronted with decreasing floor productivity due to the shift toward either their or other online channels. As explored in our previous blog Close 1 in 4 stores, part of the answer to deal with the reducing physical revenue is to make a bold move on the store footprint and shutter less profitable outlets. This doesn’t mean that the remaining stores can rest on their laurels. They need to actively adapt to the new role that shoppers are demanding from physical stores: to be a place of inspiration and a place where the discerning shopper wants to spend his or her time.

The relationship between retailers and their suppliers can by nature be quite transactional, often put under strain during the annual negotiations that have a strong focus on pricing and terms. Retailers like De Bijenkorf have stepped away from this confrontational relationship, letting their suppliers take over part of their core business: running the stores. By allowing true shop-in-shops, exclusive brands can present their wares in the way they deem best.

Traditional enemies of a retailer include all those other stores, cafes, or other locations fighting for your shoppers’ time and attention. Some fashion retailers are evolving as true multipurpose stores, incorporating services like coffee shops, hairdressers, and communal creative spaces and adding product categories such as personal beauty products and home decoration. This bundling of forces leads to a combination stronger than the sum of its parts: Not only is the store not required to intensify the fight for the shoppers’ time and attention, but it becomes a place where shoppers don’t just need to be, but want to be.

Online channels

So, question one has been addressed, but question two remains. Midsized and national retailers currently do not have the scale to run an efficient online business independently. One big factor is the cost involved in setting up and running the online distribution and returns system. With the inevitable standardization of same-day delivery, costs are expected to only increase in the coming years. Significant logistical scale is required to be able to offer products to consumers in a same-day fashion, and we believe that there will be room for only one or two players in the Dutch market to build up the logistical footprint and scale required to offer same-day delivery cost-effectively. Forming an alliance with another company — even one now seen as a competitor — will be required to continue to respond to the increasing expectations of online shoppers.

Also, with national and international pure-play online players trailblazing the possibilities of the online shopping experience by developing advanced algorithms to better predict specific shopper needs and using technology to provide the online shopper with a truly immersive experience, the war of “coding power” is becoming very expensive and difficult for national multichannel retailers to win. Also, as on the high street, the battle for shoppers’ online attention is intensifying — the cost of search engine advertising is becoming increasingly unsustainable, and achieving differentiation through search engine optimization is becoming ever more difficult in the advanced and crowded marketplace. Allying with a large e-commerce platform that excels at generating traffic could be the way forward.

Luxury jewelry shop Michael C. Fina, for example, even closed its store on Park Avenue in Manhattan and moved its entire sales effort online by partnering with Amazon after experiencing its store traffic fall by 80 percent and an unsustainably costly online operation. The partnership with Amazon cut shipping costs by 50 percent and decreased time before shipment from 72 to two hours. Other examples of companies joining Amazon include Morrisons, which will provide fresh food through its relationship with Amazon, and luxury fashion store Moda Operandi. In the Netherlands, introduced Plaza to enable other retailers to sell to shoppers; it is currently used by more than 20,000 retailers offering millions of products.

With Amazon slowly entering the Dutch market and the war between the big boys and Amazon expected to commence in the coming years, smaller retailers are well advised to pick their battles wisely. In times of change it is perhaps wise for smaller retailers to hold on to an age-old truth: If you can’t beat them, join them!

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Marc Hoogenberg

Partner, Strategy& Netherlands

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