The 2008 global financial crisis, subsequent recession and squeeze on consumer spending have disrupted the retail industry and accelerated the structural upheaval that started in 1994 with the launch of online selling by Amazon. Cash-strapped customers began to appreciate the opportunity to check prices online before buying, and established brick-and-mortar businesses started to feel the competition from new online entrants that had no store estate overheads.
Wider access to technology has also continued to heighten the pressure. Routes to consumers are multiplying, and consumers have become increasingly hungry for data about the attributes and performance of the goods and services that they are considering. The web is an excellent vehicle for retailers to provide this, leading to substantial investment in technology to give rich information that is easily accessible and not overwhelming or confusing to potential customers.
Traditional retailers have started to adapt and launch transactional websites. For example, they have introduced “click and collect” services, whereby consumers order items online and then pick them up in-store. But a number of retailers view the rise of omni-channel retailing as a threat and have resisted transforming their system at scale, instead adapting existing tools and using work-arounds.
The imperative to invest in infrastructure is more acute as online sales account for an increasing share of retailers’ revenue. A number of businesses are remodelling their entire operational processes to meet customer needs efficiently and cost-effectively. For example, in the UK the latest John Lewis distribution facility seamlessly serves stores and customers directly at home. Argos have re-structured their entire inventory management and shipment activity and are using hub and spoke techniques in a highly innovative way, with larger “hub” stores carrying stocks of a wider range of items that can easily and quickly be shipped to smaller outlets for collection.
Outside the UK, Best Buy and Nordstrom are examples of best practice in the US. Both use integrated systems and tools to provide great service and a single customer view, recognising that most use several channels at some point in time.
Omni-channel has moved from being a “nice-to-have” to being at the core of retail businesses. This is a big change from five years ago, when online selling was a peripheral activity separate from a business’s core operation. Domino’s Pizza now take 70% of orders through the Internet, compared with 40% in 2011 and none in 2007. Success depends on making sure the interface is fast and easy to use, offering customers a seamless access to services.
Retailers who embrace the change to omni-channel by adapting their operating model have the opportunity to expand internationally. Online retailing does not recognise borders in the way that traditional shops do, as demonstrated by the success of ASOS, a British online fashion retailer, in countries such as China and the US. Those who fail to adapt could face a bumpy ride in the future.
This blog is part of a series managed by The Economist Intelligence Unit for HSBC Commercial Banking.
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