Retail's Rallying Cry Against Amazon: Convert Stores to Fulfillment Centers
A couple weeks ago, I wrote a post for this blog that suggested that, in the midst of daily headlines announcing new rounds of retail store closures, that perhaps it was time to re-think this contraction strategy. I suggested that perhaps it is time instead for a complete re-think of what we expect from the retail store.
That initial post generated a lot of feedback on my various social channels. And while most commenters tended to agree with me, they typically expressed one caveat. Most commenters told me that while they agree that we do need to re-think the role of the store, they also believe the industry is "over-stored," and they insisted that some contraction is, as a rule, a healthy strategy.
Amazon's Insatiable Appetite
So, if the thought leaders say contraction is healthy, why do I recommend the re-think?
Because…Amazon.
The world's largest online retailer now manages over 140 distribution centers, 18 of which they opened in the third quarter of 2016. Sorting centers? They have 25 of those. They operate a fleet of 40 cargo jets and thousands of tractor-trailers. Over 40% of the US population can now take advantage of same-day delivery options.
Shall I go on?
No need. Clearly, Amazon's insatiable appetite for fulfillment capability expansion is a central part of their strategy for continued growth. Which raises a question: does it seem odd to you that, when faced with relentlessly aggressive expansion from the competition, many retailers are aggressively contracting?
I have no military experience, and while I haven't played RiskTM in a long time, I still remember the basic principles of the game, and I have to say, this contraction strategy definitely seems like an odd battle plan to me.
Retail Rarely Rolls Over
Look, I understand that there are forces at work here that make this much more than a simple strategy debate. Debt, for one, is an issue for many retailers. Debt is a tenacious burden, and closing stores is one way to free up large chunks of capital for debt reduction. And, as many commenters on my previous post indicated, limited and careful contraction is probably a good thing. No doubt, careful contraction can be a healthy strategy for reducing expenses and managing debt-related challenges.
However, I have to say that the rampant contraction that we are witnessing makes me extremely nervous. The more stores we close, the more it feels like we are capitulating to Amazon. With every store we close, we are ceding control of critical territory to Amazon's advancing armies…without a fight. Throughout the centuries of our existence, retail has never been good at rolling over, and I don't believe we should be doing so now.
Because stores are our most reliable outposts of competitive advantage. It seems short-sighted to close locations that are not living up to (outdated) sales benchmarks against last year…or the year before that. Even in the face of lackluster comp sales reports, we should exercise extreme caution when closing stores. When we close a store we are immediately exposing that territory to unchallenged frontal assault from Amazon's armies.
Caring Less for Comp Sales
But it doesn't matter what I think or what other thought leaders may believe. What really matters is what the analysts of Wall Street believe. Because if they continue to hold stores accountable to outdated metrics that fail to consider the true value of the store, then retailers will struggle to justify any strategy that recommends "holding down the fort" in many store locations.
At long last, however, I believe Wall Street may, in fact, be shifting. They appear to be reevaluating their heretofore steadfast insistence that comp sales benchmarks are the most important measure of a store's health and vitality.
So…why do I think Wall Street attitudes are changing? For starters, I participated in an intriguing discussion about this very topic with Nikki Baird of Retail Systems Research during our Store Readiness Webinar last week. I asked Nikki (who also believes that we must re-think what we expect of our stores) if she thought Wall Street would ever come around to this way of thinking. Not only did she think they would eventually come around, but she told me that in fact many had already begun to think differently.
As it happens, the week prior to our webinar, Nikki moderated a panel discussion between Wall Street analysts that cover retail. During the conversation, she had the opportunity to explore this very topic. The analysts she interviewed were, in her words, "bullish on the evolving role of the store." These analysts now understand that we need to think of the store as so much more than just a selling engine. Service, fulfillment and returns are extremely important parts of the shopping journey, and these analysts told Nikki that they are open to evaluating the role – and continued existence – of each store in this new light.
The Most Important Role?
So perhaps the big, bad battleship that is Wall Street is slowly turning. And perhaps if the street does indeed adapt, then perhaps retailers will be more comfortable rethinking the role of the store. Perhaps we will begin evaluating the performance of the store based on its role as a showroom, as a service center, as a return center and, perhaps most importantly, as a fulfillment center.
Because I believe that the store's most important role (today, anyway) may be that of fulfillment center. The retail industry has been under constant competitive pressure from Amazon for more than a decade. Their pursuit of new territories to fuel their growth is relentless. To combat these pressures, we must consider leveraging as many stores as we can as fulfillment centers. Right now, I believe this is the single most effective way to put the pressure on them.
By keeping stores open and – importantly – by expanding each store's role as a fulfillment option, we can compel Amazon to keep investing billions every year in an attempt to match our geographic reach. As a bonus, we can put this pressure on them without new capital investment. Let me say that again: by merely keeping our stores open and changing the way we evaluate their value to the enterprise, we can put pressure on Amazon for a change.
Which feels to me like an acceptable level of risk.
Editor's Note:
We will be discussing this issue in depth as part of the Executive Track during Engage 2017, our annual client conference, being held May 1-4 in Hollywood, Florida. If you are a senior retail executive and would like to join dozens of other senior executives in our "Strategies for Growth in the Age of Amazon" Executive Workshop, send me an email at dbruno@aptos.com.
