May 10, 2018: Toys R Us is the world’s largest dedicated toy and juvenile products retail. It is the largest toy-centered retailer and the second largest overall toy retailer in the United States. Toys R Us Inc. is an American toy retailer
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Chris Walton | Source: www.forbes.com, August 2019


One of the prevailing fallacies within the industry right now is that it is easier for a physical retailer to learn digital retailing than it is for a digital retailer to learn physical retailing. It is an enticing argument to make — physical stores make up a larger proportion of sales than e-commerce, there is an intuitive side to in-store merchandising, store supply chains take time to build, etc. — but the overall arguments are ones of a priori hindsight.

Looking into the crystal ball though, the industry will soon see that it is FAR easier for digitally native brands to get physical than vice versa. So, Walmart, Macy’s, Kroger, et al., if you are listening, be afraid.

Be very afraid.

There are five reasons why going from digital to physical will be easier than going in the opposite direction over the long-term.

The five key reasons are:

#1 – There is more “margin” for error in physical stores

As Rob Lowe used to say in Parks and Recreation, physical stores literally have more margin for error than e-commerce.

Physical stores are awash with margin relative to e-commerce for one simple reason — shipping costs. While e-commerce retailers carry the burden of delivering products to consumers on consumers’ own schedules, physical stores have always benefited from a Field of Dreams “if you build it, they will come” laziness.

For centuries, stores were the only game in town, and, as a result, consumers made a bargain with the devil that, in exchange for limited-option convenience, they would willingly act as default warehouse pickers and quasi-third-party-like delivery agents to get the goods to their homes.

For the past two decades, since the rise of Amazon, this phenomenon enabled retailers in a manner similar to how helicopter parents enable their children. Then the days came when Amazon purchased Whole Foods, later announced one-day shipping, and all of a sudden the helicopter parent of mistaken confidence was gone. Retailers finally realized they had no choice but to up their speed and convenience games.

The “pop-up” store trend is simply the empirical evidence that the digitally-native brands already get the punchline to this joke as well — that stores are flush with margin and that it is time to take economic advantage of this fact, by way of the people who still come to them to shop and by way of the fat of in-store operations still left to be trimmed, which leads to the next point.

#2 – Outdated supply chains and operations

The smart enginerds of e-commerce, of which Mr. Bezos is Exhibit A, likely see how old line, legacy bricks-and-mortar retail operations are constructed and salivate like Pavlovian dogs at the opportunities they present.

As alluded to previously, speed and convenience are now required pillars of brand differentiation. Before e-commerce, all retailers had to concern themselves with was brand, assortment, and price. Now, with the changing expectations of consumers, fueled especially by Millennials and Generation Z, these three concepts are no longer enough. Retailers now need to serve their customers on demand.

This new reality means that supply chains need to work at the piece level across all aspects of a retail operation, both from e-commerce fulfillment centers but also from localized distribution points as well, whether via micro-fulfillment centers or through third-party relationships.

Legacy retail operations are not set up this way. They are a rinse and repeat model predicated on consumers giving over their margin and their time to do the tasks (i.e. picking and transporting) that smart consumers realize they no longer need to do.

Legacy bricks-and-mortar operations are about picking and packing by the carton, for one consolidated selling point, which is a far different setup than what is required for meeting the needs and psychology of today’s modern consumers.

Digitally-native brands, however, can go build their own stores, fresh from the ground up, in their own piece-picking image, similar to how God created the world.

#3 —  Digital talent is hard to come by

Ask yourself one key question, “10 years out, will it be easier to hire a digital retail expert or a physical one?” If you think it will be the former, it may be time for you to take your head out of the sand.

Acquiring the talent to wire both the front-end and back-end systems to deliver on the new and always evolving modern day consumer’s expectations is far harder than the days of yesteryear when retailers could go on campus and simply hire a litany of liberal arts majors and people who “get fashion.”

Subjective skills are a dime a dozen and already being replaced by technology. Social media, like Moneyball theory in baseball, will soon indicate what trends are happening with better accuracy and frequency than even the best of the best “merchant princes” ever could, for knowing how to connect an order management system to a front-end adaptive and modular e-commerce design and how to assort product across multiple points of distribution takes a hell of an amount of training and skill.

“Growing up in stores” is no longer enough. Neither is a college degree in liberal arts nor an Ivy League M.B.A. The future requires real, on-the-job technical education and a willingness to hand over absolute trust to engineering experts who know more about how to think and solve problems of far greater complexity than deciding what grommet to sew into a pair of relaxed fit khakis.

Oh, and then there is the problem of getting these same people to Cincinnati, Bentonville, etc. too, but that dead horse is well beaten enough already. No sense piling on here.

#4 — A culture of debt

Even if you assume a retailer has the right strategic intent and that its leaders want to make all the right moves — e.g. to rewire the supply chain, to hire the right people, to augment one’s digital capabilities, etc. — getting there is a damn near impossibility.

As of today, this phenomenon has a name. It is called the “Gennette Principle,” coined after Macy’s CEO Jeff Gennette, a CEO who is fighting the most uphill of all uphill battles — trying to keep Macy’s afloat.

While a CEO can have the best of intentions, a great education (Gennette was a Stanford English major), and even be an all-round nice guy, none of these credentials matter in the face of insurmountable odds and decades of architectural, technical, cultural, and consumer debt.

Physical stores are exactly that — “physical.” Rebuilding them, moving walls, and reshaping them is hard.

Really hard.

Same goes for technical systems which have been cobbled together and pieced together like band-aids on top of band-aids since the 1960s.

Same also goes for internal culture too. As the backwards bicycle example illustrates below, it is hard for people to rewire their brains to do something new when they are accustomed to doing things a certain way.

And, unfortunately, retail companies are led by people who grew up learning retail much before e-commerce was the phenomenon it is today. The biggest retail companies in the industry are led by people in their 40s and 50s, while, in contrast, cool startups tend to be led by cool, young people in their 20s and 30s.

The most important debt of all though is within the minds of consumers themselves. Consumers have expectations of what brand experiences should be. These expectations have generational complexities too. What Baby Boomers want is likely different from what Millennials want. Appealing to every generation within the same technologically-enabled way within a store runs the risk of appealing to one generation and angering another.

Digitally-native brands that attempt to go physical do not have this problem. Consumers have no preconceived notion of what a digitally-native brand’s stores should be like. That is the beauty of Amazon Go, for example. No one in the world knew what an Amazon convenience experience should be like, and yet Amazon had the license to be experimental with the Amazon Go concept because consumers expected it of Amazon and had no mental precognition of what the Go experience should or should not be.

Said another way, digitally-native retailers can grow and develop their physical retail experiences with and in partnership with their core customers. Existing physical retailers cannot. They are hamstrung by the albatross forever around their necks that is their oldest generation’s expectations (highfalutin literary allusion intended — see point #3).

#5 — History already proves it out

If it is so easy to go from physical to digital, why haven’t more retailers been able to do it? Why is the landscape littered with the bankruptcies, store closures, and dissolutions of some of the greatest brand names in American history?

Legacy retailers have had 20 years to transform themselves, and yet why hasn’t the industry seen significant progress? Or, is it that digital retail over this period of time, namely Amazon, has been quietly perfecting itself inside all this context?

You can count on one-hand the number of successful digitally native pure plays that have thrived for the long-term, because surviving the uphill battle of shipping economics in digital is hard. There are no fat margins in digital, so it is entirely possible that what does not kill digital players will only make them stronger and, therefore, better equipped to adapt and to prosper in the comfy, new environs of stores.

If it were so easy to go from physical to digital, it would have already happened, which is the scariest implication of all, and the major retailers who make up the bulk of the retail pie would not be quaking in their boots if the opposite weren’t true. Publicly they might dismiss the points above, but deep down, they know the majority of the industry is still 20 years behind the eight ball. What else could explain $3.0 billion acqui-hires (Marc Lore), purchases of niche one-store retail concepts out of Chelsea, NYC (Macy’s and Story), and large investments in overseas fulfillment tech (Kroger and Ocado)?

The threat is real. And, while the digital-first revolution is still in its infancy, the bellwether is coming soon.

The bellwether will be when some big VC tells some whipper snapper entrepreneur, sight unseen, “Here’s $100 million. Go reinvent Walmart, go reinvent Target, go reinvent IKEA, or go reinvent the modern grocery store, not in the image of what the world already knows but in the image of how Amazon and others who put data first would tackle the problem.” The mission will be one of fresh perspective, grounded in digital, as blue as the sky, and unchained by the debt of expectations.

When that day comes, look out. The industry will have reached its tipping point, and Amazon won’t be the only digital-first army amassing its troops on the borders of retail hubris.

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I am a leading expert and influencer in omnichannel retailing, with nearly 20 years of experience across nearly every discipline within retail. Currently, I am CEO and f…