Traditional retailers have no reasons to worry. Ecommerce is still only 15% of all retail. Even Amazon is opening physical stores… I hear that more often than you would believe. And, until only recently, it was almost possible to believe it.
However, the emergence of Covid 19 has only accelerated of what was already on the way – the demise of offline retail.
Why are offline retailers threatened by ecommerce?
It’s very easy to mock the threat of ecommerce to traditional, offline retail and my eMBA professors never fail to do it. Ecommerce is, after all, still only 15% of total retail and this percentage hasn’t changed a lot in the past few years. In China, often considered to be at the forefront of the ecommerce transition, it’s even less, between 13 and 14%.
However, if I was an offline retailer, I would have at least opened en ecommerce site a long time ago. Why? Because of Blockbuster.
Your asset is your liability
Blockbuster was the unquestionable leader in its vertical, DVD rental. There was a Blockbuster store in every American city and the brand recognition was as strong as McDonald’s. When consumer behavior suddenly started changing with the advent of Netflix, at the time also offering DVD rental but via a disruptive online subscription model, Blockbusters’s biggest asset – the physical stores – suddenly became its biggest liability.
The same is sadly happening to offline retail. Only a few years ago, a premium retail spot in the city center would be a prized trophy for a retailer. It’s enough for sales to drop just a little bit, just by, say 15%, for this retail spot to become just slightly unprofitable. The margins in retail are notoriously thin. The cost of a prime retail spot doesn’t budge with a drop in sales. The rest is as simple as doing the maths.
How is Covid 19 accelerating the shift?
The long-term impact will come under two forms.
For some retailers who were already struggling to make ends meet, this will be the last straw. After a poor Q3 and a poor Q4, they were only staying adrift hoping for a strong Q1 or a strong Q2. All these hopes are now gone due to the sharp decline in foot traffic. In line with some of the airlines, some retailers will not recover.
Change in habits
In his book The Power of Habits, Charles Duhigg famously states that habits are formed by three steps:
In case of shopping, the cue would be the trigger to buy something new, such as a changing season (I need new clothes for summer) or a need (I have run out of milk). The reward is, obviously, the pleasure we feel when we interact with our new purchase. The routine is the act of going to the store to purchase the product.
According to Duhigg, a way of changing a habit for good is to change the routine. If the habit you want to change is smoking, you need to leave the trigger and the reward intact and only to change the routine. If what triggers your cigarette is your morning coffee, don’t change it. If the reward is the feeling of alertness that comes from smoking a cigarette, find an alternative way of procuring it. If the trigger and the reward remain unchanged, it’s very easy to change the routine.
In case of shopping, with the stores being closed, we are now in the process of changing the routine. The trigger (I want/need something) and the reward (I’ve just bought something) are as they were. Conclusion – our habits are about to change and will have no incentive to change back once Covid-19 is over.
What should you do?
The most frequent advice from consultants working with physical retailers is not to worry and bet on experience. In the current context this is obviously impossible.
If you haven’t already, there is one thing you can do: bet on your online presence. Now.