Physical stores' surprising comeback in the pandemic

In the midst of the COVID-19 pandemic, while most physical retailers were scrambling to avoid bankruptcy, remarkably, one company recorded its best performance ever and a few others returned to positive numbers.

Guess what? The most digitally sophisticated companies were the winners. We know that the pandemic has accelerated digitalization by an order of magnitude; the surprise this year was that the physical store became digital’s best ally to create consumer excellence.

The most successful retailers are rapidly learning how to combine the benefits of physical and digital.

Major US retailer Target enjoyed its best ever quarter in Q2 2020, with a sales increase of 24.3 percent and digital sales soaring 195 percent. It won market share from all of its physical competitors thanks to the integration of physical and digital — the omnichannel.

Target discovered that multi-channel consumers spend four times as much as store-only consumers, and 10 times more than digital-only consumers.

Through that period, more than three-quarters of their online sales were fulfilled by their stores, a combination of digital and physical that required seamless supply chain coordination.

A few years ago, the big surprise was that digital consumers were still going to physical stores, if they could choose to do so, to collect their online purchases. When “Click & Collect” was launched, it shocked the industry to realize how many consumers preferred that option.

For example, Adidas launched this service in Moscow in 2014 and expected just 10 orders per week. In fact, it got 1,000 orders per week and was forced to stop the initiative because its supply chain couldn’t cope. Two years later, Adidas became a master of those capabilities. The learning at that time was that it required considerable IT and supply chain strength to be able to deliver omnichannel.

Software companies such as Shopify or Magento make it fast, cheap and easy for retailers to start their journey into omnichannel with their SaaS offer (Software as a Service), under which retailers only pay per transaction.

Get supply chain right

The biggest challenge today in omnichannel — and something that has been exacerbated during the pandemic — is getting the supply chain right. In particular, this means ensuring that the shop plays an integral part in the supply chain to deliver to, and handle returns from, customers.

If this is not achieved, most potential revenues are lost. Statistics show that around 80 percent of consumers that return a product to a store spend the refund in store and, as data from Target implies, an omnichannel consumer can spend 10 times more than a digital-only consumer. Thus, most of the revenues are realized by integrating physical stores in the whole process.

As a result, the development of omnichannel requires a company-wide transformation that includes most of the organization’s functions and that can’t succeed if only one area is in the lead.

Typically, companies have an e-commerce initiative that is separated to some degree from the rest of the organization. That’s not omnichannel and the numbers show that this kind of initiative underdelivers by a factor of 10 with respect to a full omnichannel operation.

Through 2020, it has become very clear that consumers expect omnichannel, that its profitability is very high, that software companies (SaaS)  supporting it have substantially increased their offer and that logistics companies are stepping up to deliver omni-chain capabilities.

Carlos Cordon is a professor of strategy and supply chain management. Copyright: IMD.