There has long been talk of the demise of brick and mortar retail, but recent moves by online retail giants tell a different story.
Amazon and Alibaba built their businesses eschewing brick and mortar, yet they recently decided to flip the script and introduce physical locations. Both companies have made moves to become hybrid-commerce companies – combining the best of eCommerce with the best of physical stores.
So what does this mean for the retail industry? What are Amazon and Alibaba doing differently in their approaches to brick and mortar and how, if at all, will this affect traditional retailers and the retail landscape as a whole?
Amazon Tests the Waters
In 1995, Amazon.com rang the death knell for the traditional booksellers when it made its first online book sale. In 1998 and 1999 it expanded into CD’s, DVD’s, toys and electronics, ultimately driving Borders, Blockbuster and RadioShack into the abyss. Fast-forward to November 2015, when Amazon announced it would be opening brick and mortar bookstores. After successful rollouts in Seattle, Oregon and California, Amazon is looking east to New York, New Jersey and Massachusetts for the next round of openings.
With the rise of Amazon and other pure-play eCommerce companies, there was a lot of doom and gloom talk about how showrooming was eating into the profits of retailers, and that there was nothing they could do to combat the impact. In reality, although online sales continue to grow, they still accounted for less than 9% of total retail sales globally in 2016. With the threat of showrooming waning, retailers began to face a new challenge: webrooming. This practice entails researching products online, then purchasing in-store. Customers visit websites such as Walmart, Amazon, and Best Buy to research products, and then visit local stores to buy the items. This poses a threat to retailers if people webroom on their sites but purchase at a competitor’s store.
So why would Amazon open bookstores in the first place, after two decades of training consumers to buy online, when they benefited the most from showrooming?
Blurred Lines: Showrooming and Webrooming
For all intents and purposes, Amazon’s physical stores are effectively showrooms. The stores are using books as the “entry drug” to bring an educated, somewhat affluent stream of customers in store who are then exposed to additional offerings such as Echo, Fire TV, Kindle and the Fire tablet.
Jeff Bezos has not gone on record stating why they are making this move but Amazon CFO Brian Olsavsky did give one clue. “We think bookstores … are a great way for customers to engage with our devices, to see them, touch and play with them, and become fans, so we see a lot of value in that,” Olsavsky said during a recent earnings call.
Indeed, the bookstores can easily become an extension of Amazon’s existing logistics footprint, a convenient spot for consumers to pick up or drop off orders and returns. After all, Amazon has been successful with college stores, building pick-up and return outlets in at least 11 universities in the US.
Alibaba Jumps into the Deep End
On the opposite end of the spectrum is Alibaba. Rather than take a step-wise, showroom approach to the move to brick and mortar, they went head first with acquisitions that give them an immediate footprint in the physical space. In a letter from CEO Daniel Zhang to shareholders, he stated that the company is planning to integrate physical stores into its operations in an effort to overcome the “tremendous challenges” inherent in pure-play eCommerce.
“The most important opportunity on the horizon is not growing online sales in isolation but rather helping traditional retailers upgrade into a brand new retail model,” Zhang wrote. “The consumer retail industry as a whole is experiencing a radical disruption driven by digital transformation.”
To wit, the eCommerce giant announced a strategic partnership with Bailian Group, one of the largest retailers in the world in terms of store count, as part of its efforts to seize a bigger share of the physical retail market. Bailian has 4,700 outlets in 200 cities, which include convenience stores, supermarkets and pharmacies. It also spent $4.6 billion on a minority stake in appliances retailer Suning Commerce Group, is leading a $2.6 billion bid to take department store and shopping mall operator Intime Retail Group private and has bought a stake in grocery chain Sanjiang Shopping Club.
Amazon and Alibaba Don’t Pose a Real Threat – Yet
While some are sounding the alarms for traditional retailers to put up a fight for their territory, there is no need to panic. Amazon and Alibaba’s respective moves into brick and mortar are still in the experimental phase as they determine their strategies, particularly around product selection for their retail locations. Retailers still have a leg up on big online commerce players as they have more experience in the day-to-day operations of running a successful store.
However, this is not a time for retailers to sit idly by while these two eCommerce giants perfect their approach. If anything, this only further validates the need for all retailers to adopt a hybrid-commerce strategy. Bob Hetu, Retail Research Director at Gartner, has identified this as a critical success factor for retailers. “As retailers migrate beyond multichannel to a unified commerce model, customer expectations also are evolving. Customers expect consistency and flexibility when shopping across and between channels because ultimately they are shopping a brand,” he wrote. “Disparities between channels will no longer be tolerated by the customer; instead, such disparities will cause customers to choose retailers who can support a truly unified experience.” 1
My take: Amazon and Alibaba always seem to be one step ahead in the game of retail. Traditional retailers should be anticipating where these online giants are going next or they will face some very choppy waters.
1 Gartner, Transforming From Multichannel to Unified Retail Commerce Primer for 2017, January 2017