The Retail Store of the Future

NEW YORK (MainStreet) — The Internet killed the music business, ruined the newspaper industry and has effectively brought the whole publishing world to its knees, and for years, there has been speculation that it would do the same to bricks-and-mortar retail stores, as consumers began to flock online for their shopping needs.

These fears reached a fever pitch in recent months as major retailers like Blockbuster and Borders, once thought to be powerhouses in the industry, have been forced into bankruptcy largely due to competition they faced from online services like Netflix and Amazon. But even with these setbacks, rumors of the death of the bricks-and-mortar store may be vastly overstated.

“Way back when the Internet first started up, lots of people were calling me asking what we will do with all the empty retail stores,” said Mike Gatti, executive director of the Retail Advertising and Marketing Association, a division of the National Retail Federation. And now, more than a decade since the first major retailers set up shop online, bricks-and-mortar stores are still here, and many continue to thrive.

Of course, that doesn’t mean it’s business as usual for retail shops around the country. Each year, more and more consumers venture online to do their shopping, lured by new websites and smartphone apps that make it easier than ever before to spot deals, compare prices, research products and ultimately make a purchase while on the go or from the comfort of their own home. In 2010, online sales increased by nearly 10% from the previous year, far outpacing the retail industry’s overall growth.

Just because more people shop online though doesn’t mean they’ll completely stop shopping at stores. Indeed, for most retail sectors, a physical store can serve a fundamentally different function, giving consumers the ability to see, taste and touch the products in a way that is impossible online. The challenge for retailers in the future, according to industry analysts, will be to figure out a way to play up the strengths of the bricks-and-mortar store while figuring out ways to incorporate new technology into the experience.

“Everyone is saying the store is dead, but I say long live the store,” said Lisa Gomez, a senior manager who studies the retail section at Deloitte, a consulting firm. “The physical store is going to remain central to the shopping experience, but the walls are coming down. Customers are going to want an updated, unique experience in stores and retailers will need to figure out what exactly they want and how to give it to them.”

Already, big and small retailers in the U.S. and abroad are beginning to adapt to changing consumer demands by adopting new technologies to make their stores stand out even in the face of online competition.

Many stores like Staples (Stock Quote: SPLS) and JCPenney (Stock Quote: JCP) have introduced Internet-enabled kiosks in their stores in recent years to help consumers research the products, and Kraft (Stock Quote: KFT) is working on a special kiosk that goes one step further and actually offers customers suggestions about what they should make for their next meal.

Barnes & Noble (Stock Quote: BKS), now the last of the major bookstore chains, has tried to embrace the online world by putting Wi-Fi in all of its stores and encouraging customers with e-readers to sample digital books in the store. And Disney (Stock Quote: DIS), perhaps the most ambitious of all, is in the process of overhauling every one of its stores to incorporate interactive video screens and mobile payment options that let consumers pay simply by swiping their phone at the register.

“I didn’t want to build a store for 2011, I wanted to build a store for 2015 and beyond,” said Jim Fielding, president of Disney Stores Worldwide. “The pace of technology changes is speeding up and we wanted to have a brick and mortar store that embraced how consumers are going to shop in the future.”

As striking as these changes may be, they are only the beginning. For physical retail stores to succeed in the future, many will need to undergo a fundamental makeover not just in the technology that they use but in their overall customer service strategy as well.

The End of the ‘One Size Fits All’ Approach

The two big words in retail’s future will likely be “customer customization.” Going forward, retailers must begin to tailor products to the demands of individual customers, in the same way that popular e-commerce sites like Amazon currently target customers based on purchase history.

“The ‘one size fits all’ approach won’t work anymore,” Deloitte’s Gomez said. “Retailers need to determine what will create value for the specific customer.”

While bricks-and-mortar stores may not be able to do this quite as easily as a website can, they nonetheless have several tools at their disposal. Nigel Fenwick, the vice president and principal analyst at Forrester Research, points to the example of Tesco, a major shopping chain in Europe similar to Wal-Mart, which has begun to use loyalty cards to track customers’ shopping histories in order to recommend related products and services.

At the same time, retailers can take advantage of social networks to get a more accurate sense of overall customer feedback and even respond to individual customer demands.

“Retailers are getting closer and closer to one-to-one marketing because of social media,” Gatti said. And the closer they get to this reality, the better the stores will be able to give each consumer what they really want and keep their customers coming back for more.

Retail Stores Will Get Smaller and More Efficient

As stores get better at matching the products they offer to the products their consumers actually want, it will eventually allow many retailers to reduce the size of their stores while remaining equally or even more productive and profitable than with a larger space.

“As stores begin to customize products more, the supply chain will get tighter and quicker, which means they won’t need as much inventory or square footage to store that inventory,” Gomez said.

At first blush, the idea of shrinking stores in size may seem like the ultimate sign that they are in a weaker position, but according to experts, bigger isn’t always better. A smaller store may not only function more efficiently, but can also be more attractive to customers.

“For a long time, stores kept getting bigger and bigger, thinking that more products meant more satisfied customers, but the problem is that stores became so big, they were actually hard to navigate,” said Raymond Burke, professor of marketing and chairman of Indiana University’s Center for Education and Research in Retailing.

In fact, this year, both Wal-Mart (Stock Quote: WMT) and Target (Stock Quote: TGT) plan to introduce dozens of smaller stores in cities around the country, and as part of this the two chains intend to customize the products offered to the local communities. And if recent history is any judge, once Wal-Mart does something, other retailers tend to follow.

Turning the Shopping Experience Into an Event

In the coming decade, the struggle – and the opportunity – for many retailers will be to find ways to emphasize the differences between the bricks-and-mortar experience and the online experience.

“Retail is becoming less about stacking boxes high and selling items at the right price and more about building an engaging experience for the customer,” said Fenwick, the Forrester analyst. “The store has to add some value to the customer’s overall purchase, whether it be through in-store entertainment options or interactions with the staff.”

Fenwick points to retailers like Disney and Apple (Stock Quote: AAPL) that have fashioned their stores in a way that allows consumers to entertain themselves with products in the store, as well as screening rooms that play films and host events, not to mention give customers access to a knowledgeable staff. If you want to get expertise on an Apple product, you have little choice but to go to the Genius bar in the store; the Internet just won’t cut it. This in turn makes the store itself more of a destination, and less of an errand.

Retailers don’t necessarily need to invest mountains of money into new technology in order to turn their stores into a destination. Burke highlights the example of Gallery Furniture, a store based in Houston, that has attracted customers by offering free food, jewelry exhibits, movie screenings and more.

“People will drive for miles to get there because it’s a fun place, and the store’s inventory turns over much quicker than a typical furniture store,” Burke said.

24/7 Customer Service

It’s always been the case that a store can live or die by the quality of its customer service, but the rise of e-commerce options has changed the consumer’s expectation of what good service is.

“The expectation of the consumer today is they can buy the product they want at the time they want it and get the information they need whenever they need it,” Burke said.

No, that doesn’t mean retailers must stay in their shops 24 hours a day, but it does require stores to start thinking outside the box. For starters, more retailers may begin to follow the example of companies like Best Buy (Stock Quote: BBY), which has launched a special Twitter account called the Twelpforce to answer customer questions and resolve complaints at all hours of the day.

Then there’s the example of Ralph Lauren, which has come up with an innovative way to meet customer demands even after store hours. In 2007, the company debuted a touch screen window at one of its London locations, so that consumers can quite literally window shop by browsing through products displayed on the screen and reserving items they want. In this way, customers can keep shopping even after the store’s staff has gone home.

One German company is now working on a way to make the interactive shop window a feature that can be used at other stores as well.

Focusing More on Exclusivity

Ultimately, even if retailers make their bricks-and-mortar stores into exciting destinations and provide quality customer service, all this guarantees is that customers will choose to stop by the store to waste a few minutes before going elsewhere. To get customers to make a purchase in the store rather than look for the same product elsewhere online, stores may need to begin offering some items that are unique to the physical store.

“More than ever before, stores, and the products they sell, must offer consumers a status story,” said Henry Mason, head of research and analysis at Trendwatching.com, a firm that analyzes global consumer trends. This could mean private label options that aren’t available elsewhere, or a jazzed up version of an existing product online that can only be found in the store. In this way, retailers not only provide an added incentive for consumers to make their way to the store, but any consumer who purchases these products becomes a walking advertisement for the bricks-and-mortar store.

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