Why Brick & Mortar Retail Is More Relevant Than Ever Especially After Covid-19?8 November 2020
With the Covid pandemic, there have been a lot of new challenges to the original thesis for the Optimistic Case For Brick-And-Mortar Retail. With eCommerce soaring in share, the easy thesis is that eCommerce is the future of retail. However, as Steve Dennis, often points out to me, it is not all that helpful to think of them as separate channels and the secret to Remarkable Retail is that the channels are harmonized together. And a variety of data support that the Covid shift in behavior including eCommerce growth has actually reinforced the importance of physical stores. Thanks to Neil Saunders and the team at Global Data for the new insights that help us understand what’s really happening with brick-and-mortar retail.
The Covid Rise Of eCommerce Benefited Brick-and-Mortar Retailers Not Pure Plays Or Amazon
Source: GlobalData 2020
The eCommerce growth, certainly during Q2, was impressive. It has since normalized in Q3 and will grow again in Q4 with holiday shopping before normalizing in 2021, with a roughly 3% increase in share instead of its normal 1-1.5% YoY increase according to a variety of research projections I have seen. What’s most interesting is to see who has gained the most, and it is in fact those with brick-and-mortar retail presences, showing the power of physical retail in brand customer loyalty and a harmonized approach. Brick-and-mortar has 17-36% increases in brand impact compared to online or mobile. In fact, brick-and-mortar retailers took eCommerce share from Amazon! How about that?
More eCommerce Is Being Delivered By Local Brick-and-Mortar Than Ever Before
What’s also interesting is that after Covid, 7-8% more of online deliveries are being delivered locally, in part because of the trend thereof making it possible, but also because of the launch of Buy Online Pickup In Store (BOPIS) and new local delivery options like Instacart, Postmates, and Shipt. Meaning the store plays a more central role than ever, including the ability to offer SKUs that wouldn’t be offered in a central nationwide strategy, something that Walmart recently announced with its latest lab stores.
This has a lot to do with the costs and profit margins, especially in categories like grocery with razor thin margins. Those who predict big pure play eCommerce in these categories tend not to understand the true costs in enabling that model. That’s why where physical retail’s involvement in eCommerce in grocery is over 60%, instead of the 42% you see in the graph above.
Brick-and-Mortar Continues To Be The Key To Retail Profitability
The diagram above makes the case pretty clear on why online grocery needs local options for profitability. In-store is the only profitable model for grocery, except for fully automated micro-fulfillment centers. Home delivery is never profitable, except with micro-fulfillment AND a $7 delivery fee, which many shoppers will not tolerate. In fact, there are very few profitable eCommerce businesses. Many retailers treat eCommerce as a necessary loss leader, hoping that at some point there will be both new economies of scale AND technological innovation to reduce costs. With shipping costs increasing and the USPS even less reliable, pure play eCommerce is becoming more challenging.
Omnichannel shoppers spend 7x as much as eCommerce only, brick-and-mortar has a lower cost of acquisition and drives online sales lifts, return rates are lower, etc. etc. For a deeper analysis of why brick-and-mortar is the key to profitable economics, read The Bright Case For Brick-and-Mortar Retail.
Consumer Preferences For Brick-and-Mortar Retail Are Resilient
And while the economics for brick-and-mortar retail solidly beat eCommerce in profitability and for most scale as well, what drives the economics is fundamentally how consumers like to shop. 3 of the 4 top reasons that shoppers go to physical retail are “Social Interaction”, “Going Out”, “Ability To Search And Feel Products”, which are not replicable online. What that means is that physical retail is not going away. Far from it. While eCommerce erodes 1-1.5% each year, brick-and-mortar retail still commands 75-89% of the market.