Save the Big Boxes – 3 Steps to Restoring Balance in Retail

Consumer electronics are a passion of mine. I am very selective for my own technology purchases, but I like to follow and research what is going on with all of the latest gadgets. It does not take long for a person following consumer electronics to realize physical retailers are struggling against online competitors. I wondered if it has to be that way?

Here are some basic attributes of the current competitive landscape:

Physical Retailer
Online Retailer
Always collects taxes Often do not collect taxes
Provides demo models No demo models
Sales floor staff No sales floor staff
Store-level inventory, power, insurance costs No stores

 

There are more, but you get the basic picture. The online retailers have all of the advantages right now. The only downside is that they have to either charge shoppers a shipping fee or build the cost into their prices. Physical retailers don’t have to ship products individually, but they still have to get them to the stores, so any differences in cost would not outweigh the other advantages of the online retailers.

Considering the inherent disadvantages of physical retailers, why don’t we just let them die?

Well, it’s these same disadvantages that enable the physical retailers to provide customers value that the online merchants cannot. Physical retailers offer salespeople, products for demo, and a tactile experience that online merchants cannot. The problem is that the physical retailers have not been able to charge higher prices to compensate for the added costs of these value-added aspects.

Unless the customer really can’t wait to get that latest toy, they will go check it out at the big box, and then come home and order it from an online merchant for $50 less. Why wouldn’t they? All the customers are doing is acting in their own self-interests.

When a customer visits a physical store, the online merchant gets a sale due in part to the physical retailer’s value-add to the sales process. And for their efforts in this sale, the physical retailer gets…nothing!

Is there a way to correct this imbalance while allowing all of the players (customer, product makers, online retailer, and physical retailers) to continue to act only in their own self-interests?

Yes! And it can be accomplished in 3 basic steps:

1. Product producers raise wholesale prices to all retailers

This would lower the sales margins for all retailers (assuming prices to consumers remain the same). It would also increase the pool of funds available to the product producer to pay their sales partners. So to encourage retailers to continue to sell their products, the product producers would pay commissions to all those that contribute to the sales process.

Perhaps these product creators begin to contribute X percent commission to sales, and Y percent to sales assists. Then, because advice comes in different flavors, the quality of sales assists could be quantified further. Online merchants list reviews provided by previous buyers or third-party critics, as well as the typically-detailed information supplied by product producers. Say those virtual interactions are worth less than the interactions in physical stores between shoppers and products, and between shoppers and salespeople.

The idea is that a profit-seeking product producer has an interest in seeing both physical and online merchants support the sales process – and the producer has the ability to analyze their data to figure out what kind of mix would be optimal. But that leads us to the next critical step.
 
2. Retailers must capture data on shoppers utilizing sales-related services, not just on sales 

Data from non-sale interactions at physical stores rarely get captured. It is time that it did. Why not remove the suspicion and guilt tied to the current situation of “try it out at the store and buy it cheaper online?” As a consumer, wouldn’t you be willing to share your name so that the person who helped you decide gets credit for it? Would you take a free survey? Would you take a paid survey? I would.

Physical retailers could capture a name and phone number, plus an interaction type and a product category. They could send that information to product manufacturers, and if their product gets purchased by that person from any outlet, the physical retailer gets a piece of the action. The customer doesn’t have to do anything different other than provide some information – and most people would think that is a reasonable price to have carte blanche access to all the advice and demos that they want.

3. Product producers match purchasers to these value-add merchants and pay commissions for the sales assists

By thinking of the physical retailers as an extended sales team instead of simply a deficient retail channel, and by linking data from that sales value-adds to the ultimate seller, product producers will be able to optimize the process. Without this, product makers might soon lose one of their allies in an increasingly-digital world: the physical retailers.  

Much of the analysis around the demise of physical retailers has centered on actions they themselves can take to respond to the competitive threats of online merchants. This new hypothesis is that the true catalyst of change should be product makers. If they seek profit-maximizing sales and distribution channels, product producers should actively combat the imbalance created by overcompensating online retailers at the expense of physical retailers in today’s hybrid value chain.

Physical retailers should adjust their business models by driving their strategy from the unique services they can provide to the end consumers. Retail sales no longer differentiate physical and online stores, but one-on-one advice, physical product demos, and other customized services do. Maybe the end consumer will not reach into their pockets directly to pay for these services, but if these are adding value to the process – somebody will be willing to pay for them.

Capitalism demands it – and data will enable it.

Anthony J. Algmin is a Manager in the Business Intelligence Practice at West Monroe Partners.

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Phone: 312-602-4000
Email: marketing@westmonroepartners.com
222 W. Adams
Chicago, IL 60606
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