Prophets of e-tailing argue that it’s only a matter of time before the Internet annihilates most physical retailing. Yet some very savvy retailers have actually stepped up their investments in physical stores. Inditex of Spain, which owns the Zara fashion brand, opened 331 stores in 2013, and now has more than 6,460. Alibaba Group, the giant Chinese online merchant, recently invested $692 million for a 25% stake in department store operator Intime, which has 36 outlets in China. Even some retailers that once were e-commerce pure plays, such as Warby Parker, have added stores.
What could they possibly be thinking?
They might be thinking the same thing we are: Retailers that seamlessly integrate the best of both digital and physical worlds into a “digical” operation have a much brighter future, appealing to a broader range of customers and creating real economic advantages over retailers that try to pursue either one alone or both independently.
Related: Digital-Physical Mashups
E-commerce has big benefits: Rich data, attractive prices, easy shopping―anything at any time. But the advantages of physical stores haven’t disappeared: Personal interactions, the chance to feel and try merchandise, instant gratification. Most customers prefer to use both digital and physical channels. And people who use that combination of channels to research, try, order and pick up merchandise are far more satisfied and profitable, partly because they spend more. We estimate that they have 7.7 times the lifetime value, on average, as online-only customers.
Anything e-commerce companies can do, digical retailers can do better. Informative websites and helpful mobile apps? Yes. Prefer to talk to a real person? Step on in. Delivery to your home? Absolutely, and rapid delivery within a specific time slot from a nearby store is much more efficient than shipping from a distant warehouse. Need alterations? No problem. Want to exchange a product? Mail it or visit a store.
Customers know this intuitively and have been voting with their pocketbooks. E-commerce today accounts for less than 10% of total retail sales in most countries. Retailers with physical stores have captured half of those sales, so bricks-and-mortar retailers still control 95% of total volume. Digical retailers are often growing their e-commerce sales as rapidly as Amazon and are actually making money in the process.
Moreover, it turns out that e-tailers aren’t as cheap to run as most people think. Their economics resemble those of mail-order catalogs. Amazon has averaged only 1.3% in operating margins over the past three years, compared with 6% to 10% for department, discount and specialty stores. Retailers combining the best of both digital and physical worlds (think John Lewis, Nordstrom, Sephora and Apple) seem to deliver the strongest growth and the greatest profits.
Achieving that kind of performance requires innovation. Retailers need to apply digital technologies in stores as effectively as e-commerce companies do online. They can use digital technologies to improve in-store visual merchandising, help customers choose the type of service they prefer, speed checkout times, customize offers and provide virtual connections to global experts or trusted friends.
You can see some of the possibilities in the remarkable makeover of Burberry’s once-stodgy clothing brand. Under CEO Angela Ahrendts, Burberry targeted Millennial customers and spoke to them in their “mother tongue,” digital. Burberry developed digitally immersive physical experiences―live streaming of runway shows and digital mirrors that turn into screens displaying catwalk scenes―to help store customers feel like they are stepping from the physical world into a digical “Burberry World.” Store merchandise carries RFID tags, so a customer picking up an item can instantly see product information and marketing materials on the screen. This strategy contributed to a significant increase in the share price: From the time Ahrendts arrived in 2006 to early 2014, shortly before her departure this year to lead Apple’s retailing, Burberry’s stock more than tripled while the FTSE 100 index rose roughly 19%.
We don’t underestimate the magnitude of the changes that physical retailers must implement. But digical retailers will thrive over those that pursue either digital or physical alone. Customers have woven their digital and physical lives together so tightly that they can’t fathom why a company wouldn’t do the same. Perhaps this explains why Zara and Warby Parker are opening stores, and why Jeff Bezos has said that if Amazon can find the right idea, “we would love to open physical stores.”
Read more: Leading a "Digical" Transformation
--Written by Darrell Rigby, who leads Bain & Company’s Global Retail practice and is based in Boston, and Marc-André Kamel, who leads Bain’s Retail practice in Europe, the Middle East and Africa, and is based in Paris. Follow @BainInsights on Twitter.
