In the late 1980s and early 1990s, the undisputed disrupters in the retail industry were “category killers”: large retailers such as Home Depot, Best Buy, and MediaMarkt that carried a deep assortment of goods within a specific product category. By offering consumers a high level of selection, pricing, and convenience, these retailers were able to take huge shares from department stores and independents. Today, omnichannel retailers—indeed, some of the same companies that were significant innovators in the category-killer era—see pure-play, digital-native retailers as an existential threat.
There is reason to believe, however, that some omnichannel retailers in Europe and North America may be positioned to undergo a renaissance soon. In this article, we aim to shed light on the interplay between online and offline channels and the vast opportunities for retailers that manage these channels and their interplay correctly.
Dawn of the era of the omnichannel category killer
Fifteen years ago, most consumers were inexperienced in e-commerce, and finding the best price was their primary reason for shopping online. In that context, online consumers were predominantly seeking trusted interactions as well as the convenience of one-stop shopping. This behavior in the past contributed to the growing consumer preference toward “one-for-everything” general merchandise retailers such as Amazon over more focused category destinations.
Our recent research, however, indicates that consumer expectations are dramatically changing (see sidebar, “About the research”). While price and convenience are still primary considerations, customers are increasingly weighing them against a demand for competence in specific categories and customer experience. This dynamic is especially true for categories that are highly fragmented or in which advice to customers plays a large role in sales—such as furniture, do-it-yourself (DIY), apparel, pet care, and even more concentrated categories such as consumer electronics.
This trend could be a huge opportunity for the brick-and-mortar giants of the past to become destinations blending the best of offline and online propositions and to differentiate themselves from Amazon, online marketplaces, and other pure-digital players. We believe brick-and-mortar retailers can now position themselves as winners in the coming decade by making a quantum leap from being an offline brand with an online presence to becoming a retailer with a truly omnichannel go-to-market model.
Omnichannel: Everyone talks about it, few really do it
There’s no question: during the COVID-19 pandemic, online shopping has become an even more important way for consumers to access and purchase retail goods and services. In mere months, the penetration of e-commerce in the United States grew an amount that would have taken ten years before COVID-19.
In Europe, capital markets currently value online retail up to five times higher than brick-and-mortar retail, and many executives recognize their seemingly small online business has value equal to or greater than their brick-and-mortar business.
While there is hardly a retail executive who would not describe online or omnichannel as a top priority, few retailers are substantially reallocating investments—marketing spending aside—away from their historical core. Even fewer retailers have moved beyond isolated e-commerce operations and truly shifted to an online-led, omnichannel go-to-market model.
One reason why so many retailers are still driving omnichannel with at least one foot on the brake is likely the lack of transparency about the tremendous benefits to the offline business from the online business, and vice versa. This interconnectedness reinforces the huge opportunity that omnichannel offers brick-and-mortar retail.
The true revenue performance of a retailer’s online channel can be understated by up to 100 percent, or even more if not accounting for the influence online has on offline.
Why true omnichannel integration means embracing the store
Putting a retailer’s online activity at the center does not mean online takes precedence over offline. The brick-and-mortar business will remain a critical element for winners in omnichannel. For many—at least in the midterm—it will be the more profitable part of the business. However, a retailer’s online presence (including its website, app, email, and social media) will be the single most important portal to start interacting with consumers. In a world in which 80 percent of consumers, on average, make their retail brand or purchase decisions online and omnichannel customers purchase up to 70 percent more often their offline-only peers, the impact of the online channel on offline cannot be overstated.
This is why it will be essential for e-commerce leaders to take a much broader view of omnichannel. Today, many optimize only for their channel. But capturing the full potential of omnichannel requires a cross-channel perspective and transparency to measure and manage channel interplay. Although most retailers struggle to attain this transparency, there are ways to build the bridge and assess both online and offline conversion.
McKinsey has developed a survey-based approach to gain full transparency.
These insights can help retailers measure omnichannel conversion—not only of online purchases but also of offline purchases directly triggered by a recent online visit. The results vary by category and geography. For example, in nonfood the ratio ranges from 0.5 to 1.0, meaning for every customer converted through online channels, a retailer can expect to see up to the same volume of incremental offline purchases. In other words, the true revenue performance of a retailer’s online channel can be understated by up to 100 percent, or even more if not accounting for the influence online has on offline.
A look at hard-goods retail in Europe reinforces this dynamic (Exhibit 1). Retailer 1, which has a high-performing e-commerce team, clearly leads the three retailers in online conversions. From an omnichannel perspective, however, retailer 2 is doing significantly better, because it is much more successful in bringing online customers into the store, giving it the highest omnichannel conversion rate. This transparency not only changes the perspective on a retailer’s performance but also suggests different strategies for adapting the online user experience and operations.
The example above shows how substantially e-commerce leaders can increase their channel leverage if they fully embrace the online store. Another reason for doing so is the power that stores can give an omnichannel play online: players such as Amazon have built an outstanding brand based on customer experience. However, omnichannel retailers can take advantage of their historical strengths—particularly their brand equity and physical presence, both of which are hard to replicate. This is specifically true for nonfood category killers, which can build on their trusted category expertise.
An example for this omnichannel advantage becomes apparent when you compare the ability of brick-and-mortar and pure-online retail to attract online customers organically; that is, reaching consumers without investing in paid traffic channels. In most categories, brick-and-mortar retailers typically achieve an organic traffic share nearly twice that of pure players (Exhibit 2). As a result, brick-and-mortar players can spend significantly less on marketing to reach the same number of consumers. With marketing costs accounting for 10 to 15 percent of the online business, this advantage translates into increased profits of up to 5 percent of sales. Thus, the brick-and-mortar operations, which in general are perceived to be at a disadvantage on costs compared with pure play, can create substantial upsides for incumbent retailers.
Why it still requires an ‘online-first’ mindset
Successful omnichannel not only means shifting online operations from a pure-online mindset to an omnichannel approach. Retailers should also rethink their brick-and-mortar operations in the same way. After all, consumer perception of the brick-and-mortar proposition to a large extent determines the entire omnichannel proposition.
The importance of the brick-and-mortar proposition can be underpinned by a consumer-backed methodology that quantifies the impact of online and offline attributes on the overall omnichannel perception compared with the competition. Our analysis shows that the lion’s share of differences in omnichannel perception can be explained by broader aspects of the entire business. Factors that contribute to online user experience are relatively less important. For instance, in a comparison of DIY retailers in a large European market, 70 to 80 percent of the purchase decision resided in non-e-commerce areas such as pricing, assortment, store proximity, or after-sales service.
Since these areas are typically out of reach for an e-commerce team in an omnichannel organization, retailers often fail to capture the largest online growth opportunities. To be successful both online and offline, they must truly let the online tail wag the dog—that is, expand beyond direct online-only levers (digital media and user experience, for example) and adopt a truly omnichannel (and online-led) go-to-market strategy with respect to marketing, pricing, assortment, and in-store experience.
Building on McKinsey’s experience with more than 1,000 omnichannel projects in retail in the past decade, we have developed a methodology for retailers to capture the full omnichannel potential.
How to become a true omnichannel winner
Retailers that have courageously transformed their businesses into omnichannel enterprises are the best argument for other retailers to take such action. Best Buy, for example, went from being a declining business in financial distress ten years ago to becoming a growing and highly successful US consumer-electronics retailer today, due in large part to an omnichannel transformation. Nike has focused heavily on its omnichannel transformation and has seen e-commerce sales surge, making up more than 30 percent of its overall business with a goal to achieve 50 percent.
Decathlon has doubled its share of online sales every year since 2019, reaching close to 30 percent in 2021. The company has fully switched to an omnichannel way of thinking, leveraging its strong network of stores while expanding its online business. The company launched its marketplace in ten countries in just nine months, increasing its offer through third-party partners. Hornbach, the third-largest DIY brick-and-mortar player in Germany, fully adapted its go-to-market to an online-first omnichannel model—becoming the largest online omnichannel player by far and growing this channel above 80 percent within the past 12 months.
Nordstrom has maintained a strong position in a category rife with bankruptcy by betting on omnichannel. Long before its peers did, the department store rolled out curbside pickup and guaranteed consistent pricing across digital and physical channels. The customer experience and financial benefits have been mutually reinforcing, as Nordstrom CFO Anne Bramman noted in 2020: “The economics of serving customers are greatly enhanced by having combined digital and physical assets in a given market.”
Building on McKinsey’s experience with more than 1,000 omnichannel projects in retail in the past decade, we have developed a methodology for retailers to capture the full omnichannel potential. This assessment gauges performance from end to end—not only from the attraction and conversion of new customers through the engagement of existing customers but also from online to offline and vice versa. In our experience, a scan of the full operations of the retailer often reveals potential value that is three to five times greater compared with the retailer’s online plan. Capturing this potential truly requires a CEO-led transformation across the entire organization. Capturing the full omnichannel value creation potential typically builds on four best practices:
- Invest boldly to get the basics right. Excellence in omnichannel experience starts with a compelling online user experience. A substantial investment in capabilities, especially around technology, is needed to get there. The majority of retailers devote less than 1.5 percent of revenue to tech talent and technology, but true omnichannel leaders invest double that or more. Raising the level of investment on tech—and on digital capabilities in general—is one of the most important enablers to compete with pure-online retailers on the basics. These include performance media and search-engine optimization to drive traffic, seamless user experience and online category-management basics, and customer relationship management to support continued engagement.
- Make the go-to-market radically “online first.” Optimize the levers that have an impact on e-commerce but often sit outside its control: a company’s online and offline go-to-market strategies both need to be devised using an online-first mindset. In other words, if a high-low pricing and promotion strategy is not viable against online competition, the strategy needs to be redesigned for the entire business. This is the biggest cultural shift for retailers by far, as they have to rethink their core strategies—pricing, assortment, and marketing, which are often fully tailored to a pure-offline model—and rigorously adopt these strategies to be competitive online, where 60 to 90 percent of customers make the call whether they consider the retail banner at all, be it online or offline.
- Embrace the store (omnichannel accountability). Online is not a stand-alone business but rather the number-one portal to all channels, and it needs to be steered and measured with a dual mission to increase the online and offline business. Providing incentives for channel leaders to maximize omnichannel performance is critical to unlocking its full potential. This approach should be implemented both by putting hard targets in place and having executives role-model the required collaboration across channel lines. Senior leaders should also clearly articulate the mutually reinforcing roles of each channel.
- Take full advantage of the brick-and-mortar essence. The foundation of a brick-and-mortar retailer—that is, brand trust, interaction with people, and physical accessibility—is the primary differentiator of its online channel from those of purely digital players. Retailers need to fully capitalize on this advantage by fixing the typical cross-channel disconnects along the customer journey and understanding where in the journey the omnichannel capability specifically differentiates from what a pure-online player can offer.
In five years, we expect that describing e-commerce as the tail of the retailer dog will be quite inaccurate indeed. Retailers are acting quickly, and now is the time to use a rigorous online-first mindset to rethink their overall business and let the e-commerce tail wag the omnichannel-retailer dog. Those that do, we believe, will play a dominant role in the industry and could find themselves being referred to in the future as the new league of omnichannel category killers.