Amazon Killer: The Physical Store?

By Matt Pillar, chief editor

Omni-channel retailers are playing defense against showrooming by further integrating their channels, and the physical store is taking center stage. Online retail sales growth has long been outpacing that of physical store sales, but I’m not sure we would have guessed five years ago that this would drive omni-channel retailers to such drastic but effective measures as taking online orders without payment and allowing customers to pay cash upon pickup at the store. It’s a risk that’s been paying off for Walmart, which has leveraged the strategy to tap into what is incorrectly assumed an endangered type of shopper – the one who’s still not comfortable making an online transaction. In fact, Walmart says the service accounts for 2% of its total sales. For perspective, consider that 2% of Walmart sales equates to about $8.8 billion. The brilliant risk behind taking cash for online orders further bridges the channel gap for customers by enabling a payment medium in a channel that’s not conducive to cash transactions.

The move by Walmart is but one example of a major shift in the physical store’s role in modern retailing. Remember Brand Names’ ahead-of-its-time order via catalog, pickup in store concept of the 1970s and 80s? It’s a model that’s been resurrected by en-vogue retailer The Container Store in this new age of the omni-channel consumer, complete with a handful of locations where customers can pick up their online orders in a drive-thru, without getting out of their vehicles. It sounds radical, but anyone who’s ever purchased beer at one of Pennsylvania’s state-run drive-thru beer distributors knows it’s a simple and time-tested customer convenience. Sears has also tested the drive-thru concept to accommodate returns and exchanges of merchandise purchased online, giving customers a speedier and more convenient option than shipping their returns. Of course, drive-thru retail concepts only work for specific segments and formats. But, where they will work, these throwback innovations will not only build brick-and-mortar relevance, they will create a powerful customer convenience advantage that I’m not sure the likes of Amazon will be able to match without physical stores, no matter how inexpensive their product or how great the shipping offer.

The theory of omni-channel consumer centricity is simple, but the execution requires a significant systems integration investment of time, skill, and money. Primarily, it requires a dedication to the dismantling of channel-specific silos. Take Nordstrom, for example. Since combining its store and online inventories a few years back, Nordstrom is now able to let consumers browse, and more importantly buy, store-level inventory online. It was, and continues to be, an expensive initiative. The company committed 13% of its 2009 capital expenditures to IT infrastructure and will bump that to 30%, or $140 million, in 2012. But, the very day it launched its integrated online/store-level inventory visibility and omni-channel purchase feature, the number of purchases made after a customer searched for an item at Nordstrom.com doubled. This is an incredible service for its omni-channel customers, and one that’s simply impossible to offer when business units, systems, and data are channel-specific.

Forrester predicts total online retail sales will hit $250 billion by 2014. The share of retail sales conducted online might hit 10% within a couple of years, but as online sales climb so will the relevance of the evolving physical store.