Innovative Retail Technologies

JUL-AUG 2017

Innovative Retail Technologies (formerly Integrated Solutions For Retailers) is the premier source for innovative yet pragmatic technology solutions in the retail industry.

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Inconvenient Truths About E-Commerce And Omni-Channel Retail W hen reading many articles and industry analysts' proclama- tions, it's easy to feel as though e-commerce has become the dominant way people shop and that on- line shopping is taking over most of retail. But it's simply not true. While there can be no question of e- commerce's continued growing impor- tance and its frequently disruptive nature — particularly in categories like books, games, and music where product can be delivered digitally — brick-and-mortar retail will be with us for a long, long time. It's important to separate fact from fiction. Here are what I believe to be a few important, albeit inconvenient, truths about e-commerce and retail's omni- channel future. Physical retail will continue to domi- nate in most categories. Estimates vary, but brick-and-mortar retail still accounts for nearly 90 percent of all sales, while yielding just over 100 basis points of share per year. While e-commerce will certainly continue to grow substantially, shopping in physical stores will remain the dominant form of commerce for the foreseeable future in just about any sec- tor where products cannot be digitally downloaded. Pure-play retail is dying. Scott Gal- loway at L2 lays this out better than I do, but it's becoming ever more obvious that the vast majority of e-commerce-only business models are unsustainable, owing primarily to high cost of building a brand online, uneconomical customer acquisi- tion costs, and high supply chain costs, particularly in categories where product returns are high and shipping is free both ways. We've seen several recent high profile write-downs or acquisitions at less than the cumulative invested capital. More are surely on the way. A great deal of e-commerce growth is now merely a channel shift among omni-channel traditional brands. Year over year, growth of e-commerce will likely continue in the low teens for at least the next several years, far outstripping overall industry growth. But once we take Amazon out of the equation, much of this comes from large retail brands, (e.g., Macy's, Nordstrom, Walmart), transfer- ring business from their physical stores to their improving digital channels. Much of e-commerce remains unprof- itable and economically unsustainable. Let's remember that until recently, Ama- zon has never consistently demonstrated an ability to make money outside of its web service business. Let's remember that virtually none of the massively funded pure-plays has ever turned a profit, and a number of them have closed down or been sold. Let's remember that traditional brands are spending mightily to improve their omni-channel capabilities while be- ing lucky to achieve flat overall sales. Let's remember that many retailers experience such high returns and supply chain costs that a large percentage of e-commerce transactions are profit-proof. Let's remem- ber that just about every omni-channel retailer has had to cut prices and offer free shipping to try to keep pace with upstart competitors who are often subsidized by what is starting to look more and more like irrational investment. While consolida- tion and a few more high-profile flame- outs or write-downs need to occur before more rationality enters the marketplace, it's clearly only a matter of time. Of course, even while accepting these truths, many brands find themselves in a real bind. And it is difficult to predict and count on the vicissitudes of either the public or venture capital markets. But The future of retail will not be evenly distributed and, to be sure, physical store shopping will be different. BY STEVE DENNIS I PRESIDENT AND FOUNDER SAGEBERRY CONSULTING, LLC Jul-Aug 2017 26 Most omni-channel brands report that 50 to 70 percent of trips to a brick-and-mortar location are influenced by one or more digital interactions. What's Next

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