Professor Heinemann, you’ve been following developments in the field of stationary retail for many years. Where does retail stand in terms of digitization?
When I’m asked a question like this, I always point out that there’s no such thing as “retail”, but you have to differentiate. Retail is diverse, and you have to distinguish between FMCG (Fast Moving Consumer Goods), including food and non-food products. The world looks very different in this respect. In terms of growth rates, the topic of “online” has currently taken off in the food sector but still at a low level. It will be a few years before online plays a major role. This means that digitization is currently more of a non-food topic, and a distinction must be made here between different product groups. For example, the topic of online books and media is relatively advanced. This area already had a near-death experience a few years ago, and today we can see that even small booksellers no longer fear digitization.
This is actually a question of order – the merchandise groups that were offered first by Amazon are also the ones that are furthest along. In second place is the electronics merchandise group (MediaMarkt, Saturn, etc.). One exception to this development is the “fashion” group, which is lagging far behind in Germany. Many local fashion retailers have missed out on digitization. Nevertheless, I would advise many local fashion retailers who have survived to date not to take off now, but to consider whether an online store really still makes sense, or whether a digital shop window with lower online marketing spend and no sales pressure would not make more sense.
I believe that customer orientation is defined digitally today. But stationary retail is currently not sufficiently equipped for this. 76% of stationary retailers don’t even have an inventory management system.
In general, you have to differentiate strongly between the industries. Coincidentally, there was an article in the Rheinische Post today where I was quoted on this subject regarding whether the development will continue like this. The answer is yes. I think it will remain in double digits for the next few years, but the product groups are shifting. The first product groups are reaching their limits, – you can also see that in the growth rates – books / media have now also only had single-digit growth. But this sector also already has an online share of 50%. This is roughly the saturation point. It is estimated that the ratio will settle in the 50/50 range.
The electronics and fashion sectors will find themselves in a similar situation. The biggest change is currently taking place in product groups with a relatively low online share. These include DIY stores (Hornbach is a positive exception), furniture and food. These are very large merchandise groups with gigantic potential in terms of volume alone. In summary, it can be said that the degree of digitization is developing very differently depending on the merchandise group.
In an article in Internet World magazine from March 2021 on the of the point of sale, you mention ‘pseudo-digitization’. What is the state of digitization in retail?
Digitization doesn’t stop behind the store entrance. When retailers decide to digitize and set up digital fitting rooms, for example, the fundamental question is the overall concept. Online retailers are showing how stationary retail can be reinvented. For example, Amazon Books and Whole Foods is now renamed Amazon Fresh. The innovative D2C providers in the U.S. have shown how an interesting overall concept could look like. The store itself is only one component of the overall multichannel structure. Real digital innovations are not necessarily visible to customers in stationary retail.
I believe the new stationary retail will be app-based. An app that enables stationary customers to shop contactless, quickly, independently, without having to ask anyone, without having to stand in line anywhere, and stationary. Online retailers are already demonstrating this.
Our study on digitization in retail distinguishes between different dimensions in the area of digitally supported customer experience at the POS, such as entertainment, store navigation, product information, payment, and loyalty. Which topics are crucial for stationary retail?
The foundation of future retail lies in customer data-based operations. This involves customer data that first has to be collected. Very few stationary retailers have understood this and already collect this data with customer cards. The central topics for stationary retailers are also CRM and customer data. Even if there is no online store yet, customer data should be used to enable personalized customer experiences. However, the topic of online stores is always associated with investments.
If a retailer has been successful in the stationary market, it begs the question: What role does the online store play? Is it perhaps more of a digital shop window and the customer still comes into the store? In this case, the goal may not be to achieve a 50% online share but to cleverly play out personalized customer data. The starting point is the customer data. Everything else should be built around the customer data. Customers who come to the store with their smartphones always bring the Internet with them.
This means that stationary purchasing can be digitized. Stationary and digital seem to b contradictory terms, but they’re not.
I believe that customer orientation is defined digitally today. But stationary retail is currently not sufficiently equipped for this. 76% of stationary retailers don’t even have an inventory management system. I believe that the providers of local online marketplaces claim that an inventory management system is not needed, but at the same time, they want to display availability… how is that supposed to work? Here, the basics must first be fulfilled in order to establish the interfaces for digitization.
Thank you for bringing up the topic of local online marketplaces, which we at eStrategy Consulting have also examined as part of a study. In times of lockdown, many cities are currently looking at how they can support stationary retail. What is your attitude to these initiatives?
There are over 100 initiatives, and I find that a true regional marketplace, purely city-based, contradicts the basic idea of a marketplace and therefore cannot work because it is purely about reach. All city-based online marketplaces have failed or will fail in the future. The next step is a cross-city activity, as is being done with the Atalanta platform, for example. This step may well make sense. But you have to keep in mind that the target revenue usually has to be invested upfront. The ratio is about 1:1.
Different! The development has accelerated dramatically because of Corona. What was expected in 10 years is happening right now. However, I see rapid development as an opportunity.
This is the hurdle that causes problems. When broken down to a regional marketplace and a possible fair-share online turnover that should be achieved, we are quickly talking about double-digit million sums that have to be invested in medium-sized cities. Often, there are not enough resources to realistically implement this. To this day, I have never seen a business plan, a calculated, detailed business plan for a regional online marketplace that works. And the revenue question is usually taboo.
Another keyword was the small, owner-managed retailers, which usually belong to an association group. Due to their decentralized organizational structure, these groups, in particular, have major problems when it comes to digitization. They were once infrastructure providers for their members. Is this task increasingly being taken over by Amazon or another player?
I keep finding that buying groups are a purely opportunistic event. These associated groups are organized decentrally, i.e., democratically, and this usually leads to suboptimal compromises. Similar to the cities, there is usually a lack of willingness to invest. The supervisory boards and advisory councils of the associated groups are often made up of retailers who tend to have a digital allergy. I think the associated groups need to reinvent themselves. Zalando has already connected around 4,000 European retailers to its own platform with Connected Retail. All they have to do is pull the lever to become an associated group, because central regulation is really trivial.
But that’s the only thing a buying group can still live off today – central regulation. To take something from the suppliers and then pay it out to the members and act as if it were a service provided by the network group is complete nonsense. The condition that is deducted at the front is then missing in the end. In all likelihood, the topic of connected retail will also take place in other sectors along the lines of the Zalando model, and the platform operator will then take over the function of the associated groups.
Many of the owner-operated retail stores still seem to be at the very beginning in terms of digitization. Some of the big chain stores are struggling for traction in the digital transformation and fighting for market share, while Amazon, for example, keeps taking steps into stationary retail. Our final question to you is: What will stationary retail look like in 5 or 10 years?
Different! The development has accelerated dramatically because of Corona. What was expected in 10 years is happening right now. However, I see rapid development as an opportunity. I think in the future, there will be significantly fewer stores in cities. Therefore, cities will have to decide whether they can leave the stores empty or use them for other purposes. There will be fewer cities that try to position themselves as shopping cities because that will induce more vacancies. The larger the city, the fewer problems there will be in retaining retail. However, fraying in outlying locations seems possible. That’s where a city has to watch out. This could lead to a concentration of retail distributed over a few streets.
The relocation of retailers could also become an issue. In general, however, there will be significantly fewer local stores. Small retailers in particular, will be affected. Instead, there will be significantly more mono-label stores, and many cities will no longer allow cars in the city center. If public transportation is not massively upgraded in the process, retail will also come under pressure from the side. Furthermore, there is the question of what will happen to shopping centers. A shopping center in the city center, for example, only makes the problem worse.
The online share, on the other hand, will continue to grow. Zalando wants to triple the gross merchandise volume (GMV) on its platform by 2025. Behind this, however, is also a high proportion of connected retail, through which local retailers will then also sell. Stationary retail needs to reinvent itself and become more independent of stationary sales because there are cost problems. More flexible rents, flexible opening hours, smaller stores, more showrooms need to be thought about in order to be present despite lower costs. There are also interesting concepts like Retail as Service, where it’s all about the customer experience. But even that won’t save the cities.
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