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Is Omni-Channel the Solution to All Retail Issues?

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The face of retailing has changed from traditional brick-and-mortar stores to omni-channel, which has become the order of the day. Though this may sound simple, but the evolution from operating a brick-and-mortar store to engaging customers through omni-channel capabilities is a challenge in itself.

For traditional retailers, adopting the omni-channel approach has proven to be a costly affair. It requires retailers to develop and maintain multiple supply chains – both for delivery to home and stores, support networks and inventory pools. While the big names in the retail sector have managed to cope, matching these and many other requirements for the omni-channel growth is becoming difficult for small traditional retailers.

The small firms have to go a long way in establishing efficiencies in routine store operations and then selectively invest its accumulated savings in the capabilities required for omni-channel, including consolidated inventory systems, a hassle-free digital experience for consumers and big data analytics.

Just jumping onto omni-channel and boosting online capabilities -- without the required backing from distribution and inventory systems -- may prove fatal for these retailers. Though today some retailers are highlighting solid eCommerce growth numbers, most are still lagging and losing market share to Inc. (AMZN - Free Report) and other pure-play online retailers.

A close look at the scenario of brick-and-mortar retailing reveals that maximum mall-based retailers, particularly apparel and department stores, are in rough waters largely due to soft store and mall traffic trends, volatile consumer spending and a competitive retail landscape. In a bid to stay ahead of the curve, these retailers are heavily investing in eCommerce and omni-channel functionalities. At the same time, they remain focused on optimizing store fleet and cutting the brick-and-mortar store count. Also, these companies have taken up an aggressive remodeling of stores to attract traffic.

Mall-based retailer J. C. Penney Co. Inc. (JCP - Free Report) recently revealed plans to close about 138 stores in Mar 2017, while Sears Holdings Corp. is looking to shutter 42 Sears locations. Department store chain Macy’s Inc. (M - Free Report) has been aggressively closing stores to stabilize its brick-and-mortar business. Leading apparel chain American Eagle Outfitters Inc. (AEO - Free Report) which plans to shut down 25–40 stores in fiscal 2017, recently adopted an aggressive approach to store closures, planning to accelerate the same in the future.

Additionally, Bebe Stores Inc. has opted to shut down all its brick-and -mortar stores and serve customers by re-launching its eCommerce platform as well as international brick-and-mortar stores. Abercrombie & Fitch Co. (ANF - Free Report) plans to shut down 60 stores in the U.S on the basis of lease expirations, while sporting goods retailer DICK’S Sporting Goods Inc. (DKS - Free Report) has announced plans to slow down its store growth plan.

Not only this, but players in the sector have also been hit hard by major economic challenges like a strong U.S. dollar, volatile commodity costs and global uncertainty. The volatility in U.S. dollar has been hurting retailers with worldwide operations.

This clearly shows that the Retail-Wholesale sector is no longer a bed of roses. Some issues troubling the retail industry are elaborated below:

Online vs. Offline Issue: The rise of omni-channel retailing has heightened consumer expectations and simultaneously problems for retailers. Today, retailers must provide a blend of online and offline experience to engage customers. Moreover, along with an impressive product assortment, pricing, shipping, returns and promotional offerings, it is necessary to introduce personalized customer services in order to satisfy consumers.

Further, there are other problems in the brick-and-mortar store format that need individual attention, like deciding a store layout, fixing places for products and promotions, making a quick test of ideas and arriving at the best decision and implementing it across multiple stores. However, fixing problems in the online world is easier as data expedites the process of finding problems and solutions which engineers solve in no time.

Also, the overhead cost of operating a physical store is a lot higher than that of managing a website. Hence, online retailers sell products at lower costs. While physical stores indulge in lowering prices to match up, this can ultimately weigh on their bottom lines. This is one of the reasons why the retail industry is usually referred to as an Amazon-dominated space.

On the other side of the coin, pure-play online retailers also face challenges in converting a browsing customer into a buyer. Additionally, these companies incur huge logistics costs in shipping products to customers as well as returns.

New Payment Systems & Mobile Payment Solutions: With an increase in point-of-sale (POS) systems and online transactions, there has been a significant rise in the number of data breaches. Some of the instances include the ones at The Home Depot Inc. (HD - Free Report) , Target Corp. (TGT - Free Report) and Staples Inc. SPLS among others, which have heightened concerns regarding the security of consumers’ personal data.

As a result, retailers have introduced EMV cards and renovated their POS systems to accept various payment options including chip and pin cards, magnetic stripe cards and NRF payments. Further, there has been tremendous growth in mobile payment solutions including tap-and-pay or mobile wallets. It is clear that customers prefer to pay with cards or by using their mobile.

So retailers missing out on these payment options may end up being laggards. It has thus become necessary for retailers to adopt mobile payment solutions that suit them, from mobile POS systems, customized mobile payment apps like the Kohl’s Pay, and third-party solutions like Apple Inc.’s (AAPL - Free Report) Apple Pay. Speaking of third-party options, others that are noteworthy are Android Pay and Samsung Pay, which are expanding globally.

Customer Experience/Personalization: Today, customers are well-informed, thanks to increased access to online portals that provide every detail regarding products, ranging from price to reviews. This, along with the fact that every product has some or other alternative, makes it difficult for store personnel to convert an in-store sale.

Additionally, customers now have high expectations as they want the best product at a reasonable price, assured availability, speedy delivery and more. Moreover, customers look for a more personalized shopping experience that they can connect with.

Well, here we can give the example of Nike Inc. (NKE - Free Report) , which has been offering personalized services like customizes sneakers on customer request and the like. However, this kind of personalization is not possible for smaller firms, which can otherwise bank on ideas like targeting customers with a product tailored according to their preferences based on past purchases, or using location-based technology such as beacons to push personalized offers to customers’ mobile devices. These tactics may aid in satisfying customers’ sky-high expectations.

A Highly Promotional Environment: The retail industry is highly competitive. To counter competition, retailers resort to excessive and often unplanned promotions that can largely impact sales and erode margins. This is common during the holiday season, when retailers proffer huge discounts and offers to meet short-term top-line targets and steal share from competitors. However, increased use of such promotions comes at a price, usually strained margins, especially as consumers today are unwilling to pay the full price for products.

Maintaining Efficient Workforce: In the retail industry, where a salesperson is more like an asset than staff, recruiting disciplined workforce and maintaining productivity is very difficult. Retailers generally find it challenging to spot good staff in the first place, and even if they succeed in the process, retaining them becomes tedious.

Further, an improving economy has opened up more employment options and hence the pressure of maintaining a pleasant work environment with competitive wages and scheduling is high.

Efficient Supply Chain Management: This involves ensuring that the products reach stores on time. Maintaining an efficient flow has been a major challenge for retailers as disruption in supply of products due to miscommunication, changes in requirements or any unavoidable situation is common. This roils retailers’ business with empty racks and costs dollars.

An example of this situation is when a customer sees empty shelves after a promotional advertisement. While the customer will only be disappointed on not receiving the product, the retailer will be penalized for such an act and not be allowed to run the promotion further despite all the money spent on the advertisement.

Bottom Line

As you can see, it is not easy to survive the recent evolution in the retail space. Retailers vying to stay on should be ready to cover the shortcomings and treat the threats as opportunities.

In a nutshell, online retailing is a major growth driver in the retail industry. Retailers that balance physical and online presence are here to stay. Further, in brick-and-mortar stores, mobile payment solutions and in-store mobile devices like iPad to locate what customers need are becoming unavoidable. Additionally, this favors small stores with specialty merchandise compared to big outlets with varied assortments.

Altogether, retailers providing frictionless shopping experience — online or in stores — with seamless payment solutions are likely to stay in the market. On the other hand, retailers that have been slow to invest and still rely on traditional marketing methods are bound to suffer.

Check out our latest Retail Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy now.

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