Economies around the world are still recovering from the COVID-19 crisis, and businesses are beginning to disentangle long-term trends from pandemic-specific shifts. Retailers and vertically integrated brands are not exempt from this process. Amid the steady rise of e-commerce and changing consumer behaviors and expectations, many retailers are beginning to consider the future role of their brick-and-mortar stores.
Consumer data show that in-store shopping is here to stay, but it will function differently than in the past and will require new mindsets and capabilities. Especially through offering online-to-offline (O2O) services as well as acting as strategic assets in the race for same-day delivery,1 physical stores should play an important role in the future network of an omnichannel player. This integration can happen in many ways, but we see three broad archetypes: stores can maintain their current layouts, fully transform into dark stores,2 or become a hybrid of the two. When choosing among these archetypes, companies will have to consider a broad range of questions across consumer, infrastructure, and store operations, accompanied by rethinking economics.
While the purpose and layout of brick-and-mortar stores will vary from one company to the next, four universal steps will help retailers and vertically integrated brands begin the process of optimizing their physical footprint. They should get up to speed on market and consumer trends, assess their in-store capability gaps, and start small while also planning for a longer-term, holistic transformation journey. Omnichannel players that can do this successfully will be well placed to thrive in, or even shape, the fast-evolving consumer environment.
Physical store sales during the pandemic
Even before the pandemic, e-commerce had been on the rise for several years. The global health crisis not only accelerated this process but also showed that online sales are likely here to stay. By April 2021, more than a year after the start of the pandemic, total retail trade had nearly reached its pre-COVID-19 level, but the share by channel had shifted; online orders (internet and mail) were 28 percent greater than they had been before the pandemic.3 Depending on the shopping category, the percentage of consumers who purchase most or all products online has grown by 45 to 100 percent during the pandemic.4 Even as consumers go back to physical stores, online penetration was about 30 percent higher in August 2021 than pre-COVID-19.5
This does not spell the end of in-store shopping, however. The benefits of physical stores go beyond their share of sales. With about 60 to 70 percent of consumers across categories researching and shopping both in stores and online, omnichannel shopping is clearly ascendant.6 Looking at overall brick-and-mortar store sales trends solely by channel ignores the role physical stores may play in the consumer journey of omnichannel shoppers who go on to purchase through another channel.
When asked about the role of physical stores, senior executives from ten of the largest North American retailers reported that during the pandemic they had seen significantly higher e-commerce growth in sales areas with a physical presence compared with those without any brick-and-mortar stores.7 In particular, brand presence has a significant halo effect on e-commerce sales.
Clearly, physical stores still have a crucial role to play in omnichannel networks. However, the optimal configuration will be unique to each player and environment.
Defining the future role of the physical store in an omnichannel network
Given this shift in consumer behavior, retailers and vertically integrated brands need to take a holistic view of the benefits of having a physical presence. Online and offline channels are no longer substitutes or competitors. Instead, they are increasingly complementary; online channels provide convenience to consumers, but offline channels offer important opportunities for consumer engagement, brand building, and pickup.
Clearly, physical stores still have a crucial role to play in omnichannel networks. However, the optimal configuration will be unique to each player and environment.
Omnichannel players can choose from three main approaches when reconfiguring their stores (Exhibit 1). Archetype 1 retains the current layout of the physical store, with online picking and pickup services layered on top. Archetype 2 repurposes a portion of the floor layout for order pickup. Finally, archetype 3 involves a full transformation of the retail space into a dark store.
Planning the store transformation along three key dimensions
When deciding among the three broad archetypes—and making more detailed decisions about layout and omnichannel supply chain integration—players should consider a number of questions along three key dimensions: consumer, infrastructure, and store operations, accompanied by a fundamental shift in the players’ economic mindset.
The optimal archetype choice will depend on how omnichannel players address consumer behaviors and preferences around both online orders and in-store experience.
What consumers are buying—and how: The physical size and weight of individual items and overall orders will be an important determinant of overall store layout. Unlike cosmetics and groceries, for example, big and heavy products such as furniture or sporting equipment would not be compatible with archetype 1 or even archetype 2 stores, where the infrastructure would not be able to accommodate the order-preparation logistics of these bulky items. Players that sell furniture, for example, should expect to do more delivery and might therefore consider having a small number of archetype 1 showrooms and a number of archetype 3 dark stores to optimize the order-dispatching process.
Consumer order preferences also require analysis. We see two main factors to consider: the number of daily orders to be processed at the focal store and the average number of items per consumer basket. For example, retailers whose consumer baskets are heterogeneous in size and weight of items—such as home and garden stores or generalist sport retailers—would need to complete a detailed analysis to ensure a few products are not jeopardizing overall experience and profitability.
Consumer experience inside the store: Managing consumer experience in archetype 1 stores can be challenging. Having just one queue to serve both offline consumers and those who buy online for pick up in store or return their online orders will inevitably lead to longer wait times for both, risking undercutting consumer satisfaction. The shopping experience of traditional walk-in consumers can also be negatively affected by the “warehouse feeling” of sharing the aisles with picking staff. Two ways to avoid or minimize this clash are shifting picking activities to before store openings or quiet footfall periods, and sending more orders to stores with lower in-store sales. Retailers and vertically integrated brands should be aware of a tipping point—as measured by benefits to both online efficiency and in-store consumer experience—to transition to an archetype 2 store that caters to online and offline consumers separately. Many factors contribute to the consumer experience, including store size, layout, average online-order basket size, and consumer in-store expectations. Players need to find creative ways to understand how these factors play out in their stores. For example, a mystery-shopping exercise can help retailers see their stores from the consumer’s perspective.
Target last-mile delivery speed: Maximum delivery speed depends on the proximity of stores to consumers and the availability of last-mile delivery infrastructure. Consumer expectations of delivery speed may vary by location, which will affect the optimal archetype of any store. In rural areas, for example, consumers may be more accustomed to waiting longer for deliveries and traveling to one central location to fulfill all of their shopping needs. In this case, the ideal scenario may be an archetype 2 store in a shopping center with good traffic connections. This location creates a convenient and stress-free journey for consumers who want to shop in store while allowing the retailer to optimize parts of the store layout for order picking. In urban areas, where shoppers may expect delivery in less than 24 hours, it can be beneficial to choose an archetype 3 store optimized for fast order picking and dispatching. Understanding where speed matters will pave the way for a segmented approach regarding delivery-speed promises and solves the speed dilemma of ever-faster omnichannel order fulfillment.
Players can ask themselves the following questions about consumer journey and experience:
- How can we keep omnichannel processes from disrupting the shopping experience for consumers in the store? Can it be done within the existing layout, or does there need to be a degree of physical separation?
- What are the priorities of our online and offline consumers? Are they contradictory, or can we cater to both at the same time? How can we make the in-store experience feel like a continuation of online or mobile, and vice versa?
- What are consumer expectations regarding last-mile delivery speed? Do they expect to receive their products immediately, or might they accept delivery times of more than a day? What role does delivery pricing play here, such as price differentiation between next-day and same-day delivery?
The choice of archetype for any given store will depend on its current overall footprint, store layout, IT capabilities, and financial position.
Density of stores and local last-mile network: Where store density is high, there may be advantages to closing a store completely and transforming it into a dark store (archetype 3). Consumers can switch to a different store with relatively little inconvenience, and the additional dark-store capacity may offer significant benefits. However, retailers should also consider the density of competitors’ store networks, as closing a store in an area with a direct competitor can lead to consumer churn.
As an increasing number of retailers aspire to complete the end-to-end click-to-ship delivery in two hours or less, the local fulfillment locations need to be picked thoughtfully because the drive to the farthest consumer supplied by a given location must not exceed 90 minutes.
However, some retailers may not be able to set up a local last-mile network on their own with given resources, or cannot fulfill deliveries themselves. In this case a strong set of last-mile partners that allow for seamless processes are required to fill the remaining white spots on their distribution map.
Store layout, fixtures, and signage: Not all stores are suitable for each archetype. Companies will need to consider the amenities each store currently offers, as well as the layout and square footage required to provide the level of consumer service for each type of service offering. During the pandemic, for example, forced store shutdowns meant archetype 1 stores could simply use the front registers or main checkout locations of physical stores as online pickup locations. This approach might lead to longer wait times in a postpandemic world, however, necessitating a dedicated and clearly indicated in-store collection-and-return area.
Fast, integrated IT systems and inventory transparency: Archetypes 1 and 2 require highly accurate inventory. Daily stock updates will not be sufficient when online and offline consumers buy from the same stock. Instead, accurate inventory levels must be available in real time to prevent omnichannel players from selling the same product twice. Alternatively, retailers could separate online and offline stock, but this approach would lead to higher stock levels and require additional storage capacity. Another option is segmenting between same-day and next-day store-pickup orders—with the latter picked centrally and shipped to the store overnight with the store deliveries—to reduce the number of orders accessing the store stock.
Some players are also reserving shares of total inventory for offline sales to prevent online purchases from emptying stores, especially during promotions and flash product campaigns. Rewarding physical visits to a store through product availability will be critical to maintaining in-store consumer satisfaction.
Capital availability: Limitations on capital expenditures may be a determining factor in how to integrate the stores into the fulfillment network. For example, archetype 3 might be the best option for a retailer that needs an urban distribution center but has limited available capital.
Retailers can consider the following questions about infrastructure:
- How dense is the current store network, and how are the main competitors in each region positioned? Does the local fulfillment network allow for end-to-end click-to-ship delivery within two hours or less, and do we have a strong set of last-mile partners that allow for seamless processes? Does the store layout allow for in-store click-and-collect points? How much space is needed for omnichannel stock holding?
- Do we have, or are we prepared to develop, the in-store IT systems (such as ordering and inventory management) needed to support omnichannel? If not, do we have space for separate offline and online inventory pools?
- How much capital can we invest in omnichannel?
3. Store operations
The choice of archetype will also depend on assortment size, costs per order, and target delivery speeds.
Assortment size against operational considerations: The larger the online assortment an archetype 1 store offers, the more difficult it is to handle end-to-end fulfillment—from order picking to shipping and returning. In general, archetype 1 stores are only successful with online assortments of less than approximately 1,000 SKUs. Operational inefficiencies can become a significant challenge at higher numbers. But even comparatively small assortments can lead to challenges in areas such as receiving incoming deliveries into the back rooms of stores. In addition, department stores increasingly need to compete with the broader assortments offered by pure-online players such as Alibaba and Amazon. Companies may be able to capture significant advantages by converting some stores into archetypes 2 or 3.
Costs per order and target delivery speeds: Costs per order tend to be highest for archetype 1 stores. Service employees, who generally have higher wages than logistics staff, have to conduct in-store pickup, and in-store consumer traffic leads to space constraints that prevent optimized store layouts. The average time for archetype 1 order picking can exceed 15 minutes, whereas grocery retailers using archetype 3 sometimes promise a maximum of ten minutes between consumer purchases and order handover. To handle this shorter window, retailers must be able to complete their order picking in significantly less time. In general, the larger the number of incoming online orders per day—and the larger the number of items per basket—the greater the potential for efficiency savings by switching from archetype 1 to archetype 2 or 3 (see sidebar, “Managing costs per order”). In-store fulfillment is more expensive with regards to pick-and-pack operations than orders fulfilled from distribution centers; on the other hand, costs for returning orders at physical stores are lower compared with the cost to return orders by mail. Therefore, they should never be looked at separately, but jointly as part of the end-to-end omnichannel network design with a clear link to consumer benefits.
Employee upskilling for in-store excellence: Sufficiently trained, equipped, and incentivized store staff is key for seamless in-store fulfillment processes. From order picking on the sales floor to manual order packing and decisions about size and shape of packaging materials, the operation costs are mainly driven by labor wages, stressing the importance of improved productivity and best pick-and-pack processes.
Typical questions on store operations include the following:
- What is the volume for omnichannel fulfillment? How many SKUs need to be available in the online store stock?
- What are the costs per order in each store and for each archetype?
- Are full-time-equivalent workers shared between omnichannel and in-store operations, or do these operations have separate teams? How will roles and store staffing levels need to change to account for omnichannel? What level of training is necessary to optimize store productivity?
Rethinking economics for shifting gears
Omnichannel retailers will need need not only an upgrade of their fulfillment networks, IT systems, and store operations but also a fundamentally different economic mindset for shifting gears. Many cases show that in the beginning, shipment costs may exceed $10 per order, and, while most consumers are not willing to bear these greater costs, for retailers it means operating online sales without profit or even in the red, at least for a period of time. Endurance and persistence combined with clear upside aspiration are crucial to master this holistic transition.
Reimagining the omnichannel in-store shopping experience
The omnichannel players that thrive in the future will be those that create inventive, efficient experiences for their consumers. Players across the globe have already begun to successfully deploy innovative strategies to integrate physical stores into their omnichannel networks.
A holistic transformation of a retailer’s store footprint
An international department store recently embarked on a holistic transformation of its store network to offer an optimized post-COVID-19 consumer shopping experience, both online and offline. Store leaders began with an examination of how to restructure their current network, focusing on the potential to use their stores to increase last-mile delivery speed while maintaining in-store consumer experience. As a result of this analysis, the retailer closed down some stores; those with time left on their leases functioned as archetype 3 dark stores in the interim. It then moved to optimize the remaining stores and created a plan to transition from the current footprint to the desired end state. Key steps included identifying the right assortment for online channel stock and improving in-store inventory-forecasting ability.
Optimizing store operations for consumer convenience
A leading European do-it-yourself retailer has started to transform its stores to “trade counters,” in which just 10 percent of the store is accessible to consumers and the remaining 90 percent is dedicated warehouse space. The stores are designed so that consumers can come in and retrieve products as fast as possible—the time from online order to pickup is just five minutes for all products in stock. This business model means stock records need to be updated in real time across all channels. Inventory and merchandising are set up in the same way for each floor, increasing efficiency for both consumers and staff.
Using digital technology to deliver an ‘Amazon-like’ in-store shopping experience
A US-based retailer of men’s apparel uses digital technologies to deliver a state-of-the-art shopping experience. Consumers can scan product tags with their smartphones to look up product details in real time, enabling them to select their size and have it sent automatically to the fitting room within 30 seconds. Consumers can also complete self-checkout at pay stations in the dressing rooms or throughout the store.
Launching a new digital concept store
A British catalog retailer has replaced traditional, laminated paper catalogs and stock checkers with a table of digital tablets. It also introduced dynamic, digital product and sales display screens and installed “fast track” 60-second collection points for online orders in stores. Staff have been upskilled to become fully enabled “navigators” who can help consumers make the most of the new digital tools.
Expanding omnichannel experiences beyond traditional stores
A leading beauty retailer uses digital self-service kiosks to support sales outside the traditional store environment, with availability in, for example, malls across the United States. These kiosks feature digital touch screens to guide consumers through the product selection-and-purchase process, often with an option to immediately share their experience on social media.
No one-size-fits-all concept will suit the needs of all omnichannel players or the demands of all consumers. However, four universal steps can help kick off a holistic assessment of physical stores and support the process of creating an integrated omnichannel fulfillment network:
- Get up to speed: A detailed analysis of market and consumer trends, and of the competitive environment, will help retailers size the prize and begin to answer critical questions.
- Assess in-store capability gaps: Players must understand both their existing in-store capabilities and those they need to support online sales. With this knowledge, they can determine the required levels of investment and the likely ROI of store transformations.
- Start small, balancing optimal assortment against operational considerations: Underdelivering on service promises will jeopardize consumer satisfaction and sales performance. Retailers and vertically integrated brands should start with the best-performing and most iconic SKUs before gradually increasing assortment size as capabilities develop.
- Take a holistic approach to upgrading stores and upskilling employees: A successful transformation journey means rethinking all aspects of store organization, including updating roles, upgrading infrastructure, and redefining what constitutes good performance. A robust change-management approach—involving both in-store and central-office roles—and a fundamentally different economic mindset will be crucial for success.
For many vertically integrated brands and traditional retailers, getting the role and layout of their physical stores right will be one of the keys to competing in the increasingly digital landscape. But rethinking store strategy is not just about rationalization or survival; innovative stores that are integrated into efficient omnichannel networks can be a crucial source of differentiation and can set retailers and vertically integrated brands up to thrive in the postpandemic world.