Retail Strategy for the 2020s: Brick-and-Mortar and E-Commerce
August 19, 2019 | By Ryan Sheets
When is a storefront more than just a storefront? In today’s e-commerce dominated world, such a question seems odd doesn’t it? We often think in terms of a brick-and-mortar store being less than a store, as a place where we go to get the stuff we cannot get online from Amazon, Netflix, eBay, Groupon, or one of the other sites we depend on. It seems that hardly a quarter goes by where a major retailer isn’t announcing another round of store closures, the local mall losing another anchor store (malls? yes, they still exist, albeit barely), or a flagging giant of yesteryear finally declares bankruptcy. It’s no surprise, then, that the dominant narrative is that brick-and-mortar stores are places we visit because we have to go there to purchase what we cannot get online.
Recent research from Gonca Soysal, Alejandro Zetner, and Eric Zheng complicates this digital-dominant narrative. In “Physical Stores in the Digital Age: How Store Closures Affect Consumer Churn,” they pursue an answer to a simple, yet important, question: “to what extent do consumers derive value from having the option to use physical stores for their transaction?” Their research demonstrates the relationship between store closures and the consumer churn rate in a contractural retail environment.
Likewise, retailers have sought to challenge – or reframe – this digital dominant narrative by adopting an omni-channel strategy to retain and grow market share. The ability to touch, feel, and try out products prior to purchase and picking up products purchased online remain two key ways retailers such as Target and Walmart have responded to the pressures of e-commerce. Another approach, taken by retailers as varied as JC Penney’s, Office Depot, and Best Buy, has been to diminish their store presence and invest heavily in online, particularly mobile, platforms.
The managerial implications for their research abound. If you want to know how you can better predict churn rates and understand the extent of consumer loyalty you can expect, keep reading.
“Physical Stores in the Digital Age” examines a leading video rental company that closed a large number of brick-and-mortar stores. This company also offered monthly DVD-by-mail subscription plans to compete with Netflix; as with Netflix, subscribers did not have to pay postage in addition to the flat subscription fee. Since the time period of their research (October 2009 – April 2010) occurred prior to on-demand video streaming increasing in popularity, competition from streaming services such as Hulu, Netflix, YouTube TV, or Amazon Prime Video wasn’t a factor. The focal company of the study also had a unique differentiator from its competition: customers with a monthly subscription plan could return DVDs by mail or to exchange it at the physical store for another film. Stores typically a rotation of 2,000 DVD titles compared to the over 100,000 titles available online.
When stores closed, customers lost the instant gratification that came from not having to wait for a DVD in the mail as well as the option to browse DVD boxes, buy concessions, and ask store staff for recommendations. You’d obviously expect the rate of customers who use the subscription to drop significantly, right? Subscribers have lost the convenience of using the physical store to get a movie and will now have to wait several days for the DVD to be delivered via mail. The company is radically changing how consumers interact with products and services while also creating barriers to using said services. The consumer churn rate would be astronomical!
That’s not what happened, though, at least not entirely.
While closures increased the consumer churn rate for heavy users of physical stores by 50%, the increase in churn rate for light users was “materially insignificant.” Keep in mind that over this time period, the company closed 557 stores, 15.8% of its total number of stores. Given the number of stores closed, a “materially insignificant” increase in the churn rate becomes quite significant! For the light users of physical stores, “the closure of physical stores is less likely to have brought the actual number of DVD rentals below the desired number of DVD rentals.” Light users, simply put, didn’t see a brick-and-mortar store adding much value to them. For heavy users, its is a different story entirely. Heavy users valued the brick-and-mortor stores so much that they parted ways with the company instead of switching to online usage. In short, there is a lot of heterogeneity in terms of how much consumers value brick-and-mortar stores. Some consumers value them a great deal, whereas some don't really care.
Another significant finding was how time affected the churn rate: after the first two months of the store closure, the churn rate "decreases to less than half" and "the effect fades away three months following the month of the store closure." Consumers who highly value brick-and-mortar stores immediately leave. Consumers who are happy with online-only usage, will likely remain loyal to the product. The trick is having a product or service consumers can continue to engage with over that time period. The focal company indeed had such a product: its mail subscription service.
The closure of a physical store actually generated a slight increase in the monthly number of DVDs rented online for light users of physical stores. While a 1.9% increase might not sound like much, any increase when 15.8% of your stores have been shuttered is a good thing. Also, heavy users of physical stores who decided to stay with the company only experienced a 2.5% decline in online rentals. Given their reliance on physical stores, this slight decline demonstrates the time it takes consumers to adjust to changes in how they use a given product or service.
How this affects you as a manager
No manager or leader ever wants to close a location. That much is obvious, but given the continued growth of e-commerce, leadership teams are having to make hard choices about what channels best reach which customers. If you better know how your consumers value physical storefronts, you can better predict the churn rate that will accompany a given store closure. This information will allow for a strong cost-benefit analysis to “assess the convenience of closing a physical store location or when designing strategies seeking to mitigate consumers’ responses to store closures.” As a result, you’ll have a better grasp on how much consumer loyalty you can expect immediately following and in the months after a store closing.
If your products and services are currently online only, this study challenges you to consider if a physical presence would benefit your business. A DVD has almost no product uncertainty – consumers don’t need to touch and feel it nor do they tend to worry about its material quality or any other special characteristics. After all, every single DVD on market is shaped like every other DVD on the market. Other items, however, carry with them more product uncertainty. If the product uncertainty for your items is high or could increase over time, having a storefront or kiosk where customers can try out and touch your products might be worth considering. If you’re looking to increase demand and brand awareness, a physical location of some sort may help fuel those increases.
As the researchers state, “managers are grappling with the implications of omni-channel business strategies … [and] are experimenting with different and even conflicting channel strategies.” While it is too early to tell what channel strategies will succeed over the next few years, their research helps better understand what ways brick-and-mortar stores contribute to consumer loyalty.
Story by Ryan Sheets; based on research by Soysal, Zetner, and Zheng