‘There aren’t store customers or online customers – there are just customers who are more empowered than ever to shop on their terms.’
Erik Nordstrom, Co-President of Nordstrom, 201712
In this age of ubiquitous connectivity, the consumer is king. Retailers have been challenged to cater to these ‘always on’ and connected consumers since the introduction of e-commerce, accessible through increasingly portable computing devices. The ability to shop on a mobile phone while sitting on a train or waiting for the dentist has empowered consumers with a whole new level of convenience and accessibility, while also bridging the divide between physical and digital retail which we will discuss further in the next chapter.
Another technological development that has transformed the way we shop includes payment, enabled via online banking and mobile wallets. PayPal, which saves time and adds extra security on entering payment information, introduced consumers to online payments in the same way that contactless cards are paving the way for other mobile payment schemes instore.
And the advent of mobile has only served to accelerate the growth of e-commerce retailers including Amazon. Additional technology developments, fuelled by the demand for more immersive and portable experiences, have included mobile-optimized websites, apps, and larger devices such as tablets, with bigger touchscreens to interact with them on and wearables. And security is also evolving from the use of myriad forgettable passwords, to single-sign-on access via Google, Facebook, etc, two-factor authentication, and biometric fingerprint and facial recognition.
Likewise, retail has evolved in its use of these technology advances to make the online shopping experience as simple as possible. Amazon’s ‘click to buy’ patent revolutionized online checkout, while brands are working out how to make social shopping pay, with shoppable pins on Pinterest and WeChat’s app-within-app payments dominance in China as notable early successes. But in future the quest for ease and convenience, driven by customer expectations set by online, will advance beyond mobile and touchscreen technology. We can already see this happening now, with Connected Home heating and lighting systems, as well as auto- and simplified replenishment via voice.
These technological improvements, which have put billions of products right at shoppers’ fingertips, have been matched by similar advances in fulfilment. Lead times are getting shorter as online retailers look to replicate the sense of immediacy that was once reserved for bricks and mortar retailers. Today, customers expect shipping to be fast, reliable and free.
The result of all of this? Online shopping has become utterly effortless. Mobile commerce in particular is booming and is poised for impressive future growth. By 2021, global m-commerce sales are expected to more than double to reach US $3.6 trillion, accounting for an astounding 73 per cent of the global e-commerce market.13
This shift is naturally also reflected in the retail rankings. In 2012, the top five global retailers – Walmart, Carrefour, Kroger, Seven & I and Costco – were all predominantly bricks and mortar-based retailers. By 2017, three of the top five were primarily online players – Alibaba, Amazon and JD.com – and by 2022 the authors are predicting that, after decades at the top, Walmart will finally be knocked from its throne as Alibaba becomes the world’s largest retailer, with Amazon a close second.
Bricks and mortar retailers must ensure they can appease today’s super-charged shopper who enters their store with heightened, and at times conflicting, expectations. On one hand, customers are demanding ultra-convenience, a frictionless shopping experience, transparency and instant gratification. But on the other hand, they also expect the environment in which they shop to be hyper-personalized and, increasingly, experiential.
The future is certainly fewer but more impactful stores: we expect retailers to continue rightsizing – while simultaneously investing in the store experience – as they adjust to this new reality of shifting spending patterns. Those retailers lacking the agility to re-engineer themselves for today’s modern consumer will find themselves with no choice but to shutter stores.
Like the phrase ‘retail apocalypse’, the ‘Amazon Effect’ is also effective clickbait for many retail articles today. Stores closing? It’s the Amazon Effect. Retailers investing online? The Amazon Effect. Acquisitions, bankruptcies, redundancies… These days, we can find a way to link, however tenuously, most retail developments to the Seattle-based behemoth.
Nonetheless, the notion of being ‘Amazoned’ is very real for some. In 2018, Shira Ovide of Bloomberg wrote, ‘Other companies become verbs because of their products: to Google or to Xerox. Amazon became a verb because of the damage it can inflict on other companies. To be Amazoned means to have your business crushed because the company got into your industry.’14
When the actual product can be delivered digitally – think music, video, games, books – and e-commerce penetration nears the 50 per cent mark, there is little hope for the physical space selling those goods. ‘Category killers’, highly focused retailers that are typically dominant in one product category, were naturally the first casualties of e-commerce. The likes of Blockbuster, Circuit City, CompUSA and, more recently, Toys R Us have been consigned to the pages of the history books. Many of these companies went from being the disruptor to the disrupted, a stark reminder of the danger of complacency.
Borders, for example, used to be America’s second-largest bookstore chain. In a 2008 interview, transcribed on hedge fund manager Todd Sullivan’s site, CEO George Jones said, ‘I do not think that technology and self-service in our stores will even vaguely replace the fact that you can come into our stores and there is someone who greets you and is knowledgeable about books. That is and will always be a huge part of our business.’15 Borders went bust three years later.
What was once a competitive advantage for the category killer – a deep product assortment and large store network – ultimately led to its own demise. It’s no coincidence that Amazon started out selling books as this was a commodity category that early internet shoppers would feel comfortable buying online. It’s also important to understand that when Amazon was getting into books, there were three million books in print worldwide, far more than any bookstore could ever stock.16 Cue the beginning of the end for category killers.
Amazon’s very existence impacts every single retail business. They are hands down the most disruptive retailer in the Western world. No other retailer has been so effective at eliminating complacency and irrelevance in the sector, ultimately driving change for the benefit of the customer. But naturally, this means a future with less bricks and mortar retail space: 28 per cent of shoppers globally cite Amazon as the key reason for visiting physical stores less often.17
According to the International Council of Shopping Centers, the number of American shopping centres grew by 300 per cent – or more than twice as fast as the population – from 1970 to 2015.18 Today, with 23.5 square feet of retail space per person, the US is by far the most over-retailed country in the world. In fact, the US has 40 per cent more shopping space per capita than Canada, five times more than the UK and 10 times more than Germany.19 A retail apocalypse has long been looming.
The demise of the shopping centre has been exacerbated by the Great Recession and the growth of e-commerce. After all, the online marketplace is simply a modernized, digital version of the shopping mall – but open 24/7 and with infinite assortment.
However, the US retail sector was considered overstored well before the e-commerce boom. According to Bloomberg, this was the ‘result of investors pouring money into commercial real estate decades earlier as the suburbs boomed. All those buildings needed to be filled with stores, and that demand got the attention of venture capital. The result was the birth of the big-box era of massive stores in nearly every category – from office suppliers like Staples Inc. to pet retailers such as PetSmart Inc. and Petco Animal Supplies Inc.’20
Fast forward to 2019 and there is another important factor at play: consumers are simply buying fewer clothes. The Atlantic reported in 2017 that the apparel sector’s share of total US consumer spending has dropped by a whopping 20 per cent this century.21
So what’s driving this? First, discretionary spend is being diverted towards experiences, leaving shoppers with less money in their pockets to splash out on fashion. In the UK, Barclaycard data showed that spending on entertainment, in pubs and in restaurants all individually saw double-digit growth in 2017, while spending on women’s clothing dropped 3 per cent.22 New clothes are discretionary in the best of times, but the combination of squeezed disposable income and shifting consumer priorities have really dented the apparel sector.
Second, there has been a noticeable absence of any new must-have fashion trends. Skinny jeans have kept us going for the past decade. Third, we have an ageing population – women generally tend to buy fewer new clothes as they get older. This is one of the many problems faced by UK department store retailer Marks & Spencer, whose core customer sits in the 55-plus demographic. In fact, in 2016, CEO Steve Rowe said that 60 per cent of female shoppers are buying fewer clothes than they were compared to the decade before.23
There is also a growing awareness of recycling and sustainability among consumers, which is leading the fashion sector to aim for complete circularity. As more shoppers think twice before buying new, services such as H&M’s ‘Take Care’ in Germany are being introduced. The aim is to help shoppers extend the life of their clothes with free repairs and advice on getting stains out. Zara also has its #joinlife recycling programme. Great for consumers and of course for the planet – not so great for fashion sales.
Lastly, workplaces are more casual today, which is resulting in shoppers ditching their blazers and suit jackets in favour of a more blended wardrobe. Charles Tyrwhitt founder Nick Wheeler has openly expressed his frustration with ties going out of fashion: ‘It’s the only bloody product that has a decent margin.’24
The reduced consumer demand for new clothes is particularly worrying for shopping malls given that 70 per cent of their square footage was traditionally dedicated to apparel. Today, it’s more like 50 per cent25 and we expect that figure to continue to decline over time. The ideal modern mall, according to Sandeep Mathrani, CEO of shopping centre operator GGP, in a 2017 Bloomberg interview, would be built around a department store, a supermarket, an Apple store, a Tesla store, and businesses that started out online, such as Warby Parker.26 We’d argue that an Amazon returns area should also be part of the mix, but more on that later.
According to Cushman and Wakefield, mall visits dropped by 50 per cent between 2010 and 2013 and have been in decline ever since.27 However, it’s important to call out here that higher-end ‘A malls’, those primarily located in urban or touristy areas, are bucking this trend. In fact, just 20 per cent of malls make up nearly three-quarters of mall sales.28 For these top-performing shopping centres, reinvention will be the primary requirement for future-proofing their businesses. For everyone else, rationalization is inevitable: between 20 and 25 per cent of US malls are expected to close by 2022.29
Of course, it’s not just malls that are overspaced and lacking relevance today. Following the demise of the category killer, we believe that out-of-town superstores and department stores are the most at-risk retail formats today. Despite the many differences between these two formats, the original premise of both department stores and superstores is the same: one-stop shopping. In the past, it made sense to dedicate 100,000-plus square feet of retail space to these ‘palaces of consumption’, aggregating a significant number of brands under one roof. Macy’s famously boasts about its 2.5 million-square-foot flagship New York store being the ‘World’s Largest Store’ – it does cover an entire city block – while in Europe some Carrefour and Tesco hypermarkets were so massive that employees used to wear roller skates to get around. Piling it high may have worked in the past; today, however, with Amazon alone stocking millions of Prime-eligible products, the idea that a bricks and mortar retailer can still offer ‘everything under one roof’ becomes laughable.
But retail moves fast. It was only a couple of decades ago that Walmart was banking on its Supercenter concept as the future of retail. And let’s not forget, for its time, it was incredibly innovative. No longer did shoppers have to visit multiple speciality retailers; the convenience of one-stop shopping and low prices was a winning combination. Back in 1997, then CEO of Walmart David Glass predicted: ‘I believe Supercenters will be to the next decade what discount stores were to the last.’ It’s worth pointing out that at the time Walmart, like most retailers, were only just beginning to explore ‘futuristic ideas [such] as Internet shopping.’30
Glass was certainly right with his predictions (although we’re pretty sure Bezos could update that claim with e-commerce being to the following decade what superstores were to the previous one). From 1996–2016, Walmart opened an average of 156 Supercenters each year. The majority of these openings were conversions of existing discount stores as opposed to new builds; however, this was the most significant food retailing conversion process in US history. Walmart was able to bring its winning formula of low prices and wide grocery assortment to previously underserved areas.
Back in 2012, Natalie and esteemed retail analyst and co-author Bryan Roberts predicted that Walmart would reach saturation with its Supercenter format by 2020.31 This was based on three factors: discount conversion opportunities drying up, slow population growth and the cannibalization of bricks and mortar sales by online retail.
Today, the superstore concept is at serious risk of becoming obsolete in many parts of the world. After two decades of opening hundreds of big-box stores annually, in 2017, Walmart US opened less than 40.32 We have yet to see a net decline in store numbers, but we stand by our previous claim that the format will reach saturation in the very near future.
The ‘death of the hypermarket’ is far more pronounced in markets such as the UK where the retail sector is more heavily influenced by online and discount channels which pose the largest threat to superstores. According to the Office for National Statistics, at the time of writing in 2018, e-commerce made up 17 per cent of total retail sales33 in the UK, nearly double the US figure.34 Meanwhile, Aldi and Lidl alone account for 12 per cent of the grocery sector,35 according to Kantar. The explosive growth in these two channels over the past decade has led to titanic shifts in shopping behaviour and expectations, the most significant of which has been the death of the weekly shop.