Brick vs. Click

Ninjas. In addition to a line of well-designed pants, he had the ninjas—a team of spirited, young college grads who carefully explained to his online customers the wonders of the Belgian fabric, the benefits of the curved waist, the way the roomier cut in the thighs was likely to shrink in the wash. For four years, this was enough to drive sales. It lifted his company out of a duffel bag in a three-bedroom apartment on 17th Street in Manhattan and eased it into a crisp, white midtown office that reportedly logged $15 million in revenue a year ago. The ninjas were not invincible, though. Try as they might, they could not persuade everyone to give Bonobos’ free shipping and lifetime return policy a shot. Certain people would not budge, not until they had touched and felt the fabric for themselves. So Andy Dunn, the company’s CEO, installed a tiny showroom opposite the elevators in the reception area and offered one-on-one appointments with a female guide (the word stylist makes some men uncomfortable). What happened next was a revelation: In a matter of months, the 690-square-foot space was on track to generate $2 million in revenue.

This spring, Dunn took yet another bold step into the past, striking a deal with Nordstrom to put Bonobos’ clothes in 20 stores. Not long ago, it would have been heresy for the 33-year-old founder of an online startup to consider—much less agree to—aligning his brand with a 111-year-old brick-and-mortar merchant. (“When I’m in a retail store, I feel like my soul is getting sucked out of me,” Dunn told an interviewer in 2008.) But the fact that an industry heavyweight like Nordstrom, a company recently credited with $10.5 billion in annual sales, would entertain such a marriage with a fledgling men’s clothing line is no less remarkable. The department store chain did not simply agree to include Bonobos’ brightly colored chinos among its many offerings, it also took the lead role in a $16.4 million round of capital financing. Bottom line: It paid for an up-close look at Bonobos’ digital sales pitch. In fact, Nordstrom is so committed to expanding its own ecommerce footprint it has vowed to commit $1 billion—nearly one-third of its capital expenditure budget—to the cause in the next five years.

This is by no means an anomaly. The retail universe, it seems, has entered an era of cosmic change. The stars—old and new—are racing to realign, converging at the speed of light. Barnes & Noble has tied its future to a digital tablet. Wal-Mart dropped $300 million on mobile app creator Kosmix. Target quadrupled the number of items on sale in its online store. Meanwhile Best Buy is shrinking, literally renting the retail space in its big-box stores to outside interests. To understand the gravity of the moment, you need only look at what happened to those who hesitated to embrace the enemy—Circuit City, Borders, Linens ’N Things. Each is but a faint blip on the broad spectrum of history.

A decade ago, a company like Best Buy could safely chart a path to success with great prices and a wide selection of goods. Not anymore. That’s Amazon’s game, and nobody undercuts Amazon. Today you’ve got to offer something special: a unique shopping experience infused with expertise, convenience and excitement. You have to greet the customer on his or her own terms.

“People can interact with your products and your brands anywhere, anytime, anyplace—whether they’re standing in your store, on the street corner, whether they’re at home or looking at their computer at work,” says Kent Deverell, the CEO of Fluid, a company that specializes in expanding the reach of traditional merchants. Insiders call this “omnichannel retailing.”

For Andy Dunn, who grew up folding sweaters at Abercrombie & Fitch and peddling watches at Marshall Field’s, the shift in strategy was not a simple change of heart. It was based on cold, hard facts. He discovered two “lies” in Bonobos’ business plan, he says. One: His young customers were not as united as he thought in their affection for online shopping. Two: The cost of marketing a digital enterprise, coupled with the cost of free shipping, did not give him a distinct edge over his wholesale competitors. In the end, he saw an opportunity to introduce his brand to the broader audience at Nordstrom without doubling or tripling the markup on his pants like most fashion labels do.

For retailers like Nordstrom, the new landscape brings even greater challenges. Because their digital operations are often segregated from their in-store efforts, old-school companies are far less nimble. To catch up, they have to invest in unconventional leaders and new technology. J.C. Penney lured CEO Ron Johnson away from Apple. Walgreen’s paid $409 million to purchase online rival Drugstore.com. All the while, the frontrunners keep pushing ahead, integrating their channels in ever more thrilling ways. They let customers skip checkout lines, design their own sneakers, place their orders on cellphones and pick them up at a nearby location to avoid shipping fees.

“There are going to be some really compelling opportunities out there for retailers and brands that don’t think in a purist, religious way,” Dunn says in his New York office. “Customers get excited about an innovative experience. It’s one of the few—few—places where Amazon is vulnerable.” He pauses and smiles, letting the idea hang there in the air above the Kazakh rug. He knows how crazy it is to question Amazon’s might. Given the company’s reach and its well-publicized bullying tactics, it’s hard to envision a doomsday scenario. But it’s not inconceivable to think that one day soon a competitor might rise to challenge the goliath’s supremacy. Consider Macy’s, for example. The company’s flagship store is undergoing a four-year, $400 million high-tech makeover, and that’s just the tip of a sweeping multichannel battle plan. The retailer started building online fulfillment centers five years ago—in Tennessee, Arizona and Connecticut. This summer, it unveiled a fourth in Martinsburg, W.Va., a facility so large that the architects who designed it had to account for the curvature of the earth. The 1.3 million-square-foot complex is capable of shipping 250,000 packages a day. By year’s end, 292 of the 840 Macy’s and Bloomingdale’s stores nationwide will also be equipped to serve as distribution centers. These efforts are already paying dividends: In 2011, Macy’s online sales jumped 40 percent.

Amazon? Its sales climbed, too—by 41 percent. Investors, however, were disappointed by the 45 percent decline in profits. In February, the Internet was abuzz with reports that the company was planning to open a brick-and-mortar store in Seattle.

So what does the future of retail look like? Here are five things to keep in mind:

 

The Customer Is King

Molly Katchpole was a nobody—a part-time nanny and part-time employee at a political communications firm—when she learned in the fall of 2011 that Bank of America was going to charge her $5 a month for the privilege of using her debit card. Outraged by the idea, the 22-year-old Washington, D.C., resident launched an online petition to voice her dissent. Within a month, she had collected more than 300,000 signatures. Bank of America backed down. In December, Katchpole’s wireless carrier—Verizon—announced it would levy a $2 “convenience fee” on customers who elected to pay their bills online. With her second petition, Katchpole foiled those plans in just eight hours. In March, Time magazine listed her among its most influential people in the world.

Remember the days of take-it-or-leave-it retail? Well, they’re gone. Long gone. Lord & Taylor no longer reigns supreme. With a smartphone in hand, people like Katchpole can shop for the best price, the most convenient location, and the store with the friendliest and most knowledgeable staff. “Ten years ago,” says Fluid’s Deverell, “retailers could control what information was available about pricing, what information was available about the product, how a product was represented. The fact that I now have this computer in my hand when I walk into a store means those shackles are off.”

In an omnichannel world, consumers expect to be empowered with tools that make life easier. They want relevant offers, time-saving apps, a seamless and effortless shopping experience. They want to browse late at night while nestled in bed, shop for groceries in the train station, and refill prescriptions in 20 seconds or less. If you can help them accomplish those things, great. If not, prepare to be left behind.

 

Show Me the Merchandise

The people who buy things online often inspect the merchandise in stores before ordering. By one estimate, at least half admit to doing so. Another puts that figure at closer to two-thirds. Either way, it’s an alarming trend for the people who pay for the upkeep in those stores. Target executives were so troubled to find shoppers armed with Amazon’s Price Check app invading their aisles that they booted the Kindle from their stock.

Desperate times call for desperate measures. But all the outrage over “showrooming”—the phenomenon of browsing in-store then buying online—obscures one simple fact: In 2011, roughly 90 percent of all retail sales were recorded in brick-and-mortar stores. Despite the myriad commodities available at Amazon—everything from DVDs to diapers—the truth is most people prefer to purchase the bulk of their items in person. They want to see what they’re getting.

Take eyeglasses, for example. The folks at Warby Parker have been selling them online for more than two years. To convince the local skeptics in Philadelphia that their designer-like specs were up to snuff, the founders used to lay them out on a dining room table in their college apartment. When they moved their headquarters to New York City in 2010, they opened an office showroom, and in no time they had a four-week wait for appointments. Those appointments added nearly 1,000 new sales each month, which is why you now find hip boutiques featuring Warby Parker frames in Philadelphia; Boston; Columbus, Ohio; Portland, Ore.; San Francisco; and Los Angeles.

“I think the showroom model holds enormous promise,” Bonobos’ Dunn says. “In 500 to 1,000 square feet, you focus on service. You don’t have to carry inventory; you don’t have to deal with all the folding and craziness of retail stores. It’s not a browsing-driven experience with people walking in and out. It’s personal. You get 45 minutes of one-on-one attention. And the economics are just staggering: thousands of dollars per square foot. More like an Apple store than J. Crew. For us, there’s a 90-percent-plus conversion rate, an average order of more than $350.”

With numbers like those, big-box standards such as Best Buy would be smart to keep renting out floor space.

 

There’s a Michelangelo in Everyone

By now you have no doubt souped up your cellphone. You may have designed your own Chuck Taylors, too. Maybe even placed your own stamp on a Mini Cooper. But look around, and you’ll still be amazed by the number of products you can customize. Messenger bags from Timbuk2. Toolboxes from Sears. Oakley sunglasses. Jonathan Adler rugs. Kleenex tissue boxes. T-shirts, couches, linens, coffee mugs, draperies, boots, chocolate bars, business cards—there’s no limit, it seems, to what you can alter to express yourself. A British band known as the Kaiser Chiefs invited fans to personalize its latest album with 10 handpicked songs and a do-it-yourself cover.

According to Fluid’s Kent Deverell, there are plenty of reasons for this flood of creativity. For one, retailers get to charge a much higher margin for customized products. A pair of Reeboks that sells for $50 at Foot Locker can easily fetch $100 on the company’s custom shoes page. Because the end result is a one-of-a-kind product, you don’t have to worry about Amazon’s Price Shop app, either. Better yet, the moment a budding Basquiat completes his masterpiece, he wants to share it with friends. Reebok’s Custom Shoe Project site now features almost 3 million designs. “If you go online and you spend 20 minutes, a half an hour, designing a product, you’re much more committed to that product than if you spent five minutes in Quick Buy and got it off a shelf,” Deverell says.

Best of all, customization programs are a smart way to do market research. Simply add a new color or pattern to the available options, step back and see what happens. If users rush in to embrace it, you know what your product line should look like next season.

 

Keep It Local

The customer service reps call it My Macy’s. Jim Sluzewski, senior vice president for Macy’s corporate communications, refers to it as the company’s secret sauce. “It’s a strategy that allows us to tailor the assortments in each and every one of the 800 Macy’s stores to the customer who shops there,” he explains.

This is not a new idea, of course. Mom-and-pop shops have been catering to the needs of their neighbors for centuries. But given the sweep of Macy’s operation, thinking local requires a great deal of sophistication. If you’re the Sports Authority, you simply stock the merchandise of the local sports teams. If you’re Chipotle, you reach out to the local farmers. But how does a department store chain with more than 800 outlets sell you on its local ties?

For Macy’s, it starts with better intelligence. In the last four years, the company has hired 1,600 “professional merchants” and put them to work in 69 cities around the country. They are expected to live in the community, visit the Macy’s stores, talk to the customers and the sales associates, and get a clear sense of what the locals want. To date, they’ve offered nearly 50,000 suggestions a year.

In communities with growing Asian populations, the sizing profile is noticeably smaller. In Salt Lake City, a community with a large Mormon population, Macy’s stocks cookware made for big families. In Manhattan, where kitchens are tiny, the pots and pans are much smaller. The company still relies on buyers in New York City to oversee each product category. But those buyers now make more informed decisions. They know, for example, that stores frequented by nurses sell a lot of white hosiery, and that stores near evangelical churches get more calls for white dresses. In Italian neighborhoods, you get customers asking for pizzelle irons; neighborhoods with Scandinavian roots bring requests for krumkake grills. The residents of Boston and Manhattan share the same winter climate, but they prefer coats of different weights because one group drives to work and the other uses public transportation. Meeting those needs is a crucial part of the mission. “We want customers to walk into their local Macy’s store and say, ‘Somehow, Macy’s just gets me,’” Sluzewski says.

 

The Genius Bar

If you want a clear picture of where the world is headed, take a stroll up Fifth Avenue in Manhattan. Start at the venerable landmark Sak’s, stride past the thumping beats at H&M and Uniqlo, pause just a moment at the black velvet ropes outside Hollister to admire the young couple modeling in the window: a chiseled, shirtless Tarzan in a red swimsuit and a raven-haired goddess in a navy blue T-shirt and a tiny white bikini bottom. Keep moving. Don’t stop until you get to the three-story glass cube at the top of the avenue, the one that announces the Apple Store.

This is the cathedral of modern retail, a temple created by the high priest of consumer behavior, Ron Johnson. (He put Target on the map with a tea kettle designed by Michael Graves, and he is now hard at work raising J.C. Penney from the dead, a task that has clearly put his powers to the test.) Descend the stairs at the Apple Store and take a look around. What you find will amaze you. I’m not talking about the merchandise. You know plenty about that, I’m sure. I’m talking about the customers—a variety of ages and cultures all in one store. Behold the power of the Apple experience. Instead of aisle upon aisle of merchandise, the store has great big tables that display a few laptops or tablets. Instead of ninjas, it has geniuses and product experts who encourage you to play with the gadgets, learn how they work, dress them up in a style that suits your personality and your needs. Because they don’t work on commission, the folks on the floor are less inclined to sell you something you don’t need. When you’re ready to buy, you take out your credit card, and they complete the transaction right there on the spot. No checkout lines. No fuss.

Before you leave, take one last look around the store. You’ll notice that something is missing. The “On Sale” signs. Apple doesn’t quibble over price.

Dave Nixon, the digital strategy expert for Interbrand Design Forum, loves to talk about the local hardware store in the place where he grew up, the one-stoplight town of Bellbrook, Ohio. The shop was owned by a man named Mr. Penewit, and when the boyhood Nixon showed up at the door on Saturday mornings with his father, Mr. Penewit always greeted them by name. He’d tousle Nixon’s hair and give him a toy to sit and play with while his father shopped. Far more than a merchant, Mr. Penewit was a trusted adviser. If he sold you the lumber for a shed, odds are good he’d swing by the house before day’s end to lend a hand in the construction.

Even though he oversees digital strategy for Interbrand, Nixon is no less inspired by those sepia-toned memories. When used correctly, he says, technology can break down the barriers between consumers and merchants, restore some of that rarefied one-on-one attention. It has the power to engage the customer at what he calls “the zero moment of truth,” the very instant when he discovers he has a need. This is the true strength of omnichannel retail.

Online retailers have been collecting data on customer preferences for years to enhance their potential for personalized attention. Physical retailers are now scrambling to do the same, in some cases screening security camera footage to figure out what goes through a man’s head when he’s browsing for boxers. Some are looking into grocery carts that monitor your every step, too. The most practical solution, however, lies right there at your side: your smartphone. Whole Foods can give you an app that allows you to magically reorder your grocery list to reflect what’s in each aisle. If you’re strolling the street in San Francisco and it starts to rain, The North Face can text you an instant coupon for 20 percent off rain jackets at the shop one block away. That’s the mark of a magnificently rewarding, genuinely seamless experience.

“If they empower me with tools, there’s a chance I might price-shop them,” Nixon says of the tendency to use technology to comparison-browse. “But if they’re giving me relevant offers—not marketing against me—the brand is going to win.” Because an experience based on the customer’s individual needs—in the moment—is something priceless.

It all goes back to that local hardware store. “At the end of the day,” Nixon says, “my dad never questioned Mr. Penewit on the cost of his nails.”

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