Punchinello’s Chronicles

January 7, 2011

The Future Hybrid Retail Store

According to the news, 2010 was an excellent holiday shopping season. Really? Well, if you believe government statistics, then you’ll probably believe anything. In fact, retail companies were able to sell enough to keep the vultures away for just a little bit longer. Not all retail is in trouble, though, only the brick-and-mortar stores. Online shopping continues to grow in leaps an bounds.

We began to see the growth of e-commerce a number of years ago. At about the same time, Toys ‘R’ Us had a horrible year when they were unable to fulfill their online orders in time for Christmas. It almost drove the store out of business, although they did manage to survive. At the time, Amazon was starting to really grow, and since then has become a juggernaut in the world on online shopping.

Along came 2007-2008 and the so-called housing bubble fell apart. The real problem was the derivatives market, AIG, and so forth, but there’s little doubt that badly secured real estate loans were a major problem. Was it only individual housing? Was in only homes? Of course not! Commercial real estate is in as much trouble. The main difference is the amount of money involved.

Online shopping has been growing for nearly a decade now, and yet we continue to see shopping malls going up everywhere. We continue to see “Big Box” stores opening new locations, Wal Mart getting into super-stores, and strip malls everywhere. At least we did, until that housing bubble popped and we entered into the uh…recession.

  • The major problem with these brick-and-mortar stores is inventory. It costs a tremendous amount of money to keep many copies of each item in stock, in the back of every store.
  • The major problem for online shoppers is that they can’t pick up and feel an item.

The solution is a blending of the two types of shopping experience — a hybrid, sort of like a kiosk. We saw Dell, the computer company do something like this. They set up a computer in an airport, for example, where customers could browse the Dell Web site. They then would pick what they wanted, order the item, and it would be shipped to the customer’s home.

Gateway took it a bit farther, having a combination store-front and online Web site. Customers could see an item in the store, then order it online. Wal Mart has tried something like it, offering “ship to store” for good available online only, with tires for cars being a good example.

In some ways, we saw something similar with a company called Service Merchandise: There were others, but this one comes to mind. It was basically a mail-order store with a catalog, but they had a few stand-alone stores in various locations. You could order from the catalog and pick up your item at the store, or you could shop in the store.

Catalog shopping used to be a big thing for Sears, Montgomery Ward, J. C. Penney and other companies. Why not do the same thing, only in the other direction: have a physical “catalog” with no inventory?

Let’s say you want to order a frying pan from Bed, Bath & Beyond. Maybe they have it in stock, maybe not. Either way, you want to pick it up in your hand, feel the weight and balance, and all sorts of physical things. If you like it, you can buy one because each individual store has some number of that item stored in the back. Taking up room.

But suppose there was only one of that frying pan? Suppose it was the only example, with zero inventory anywhere in the back? That frying pan could be tethered to a shelf, or some other simple electronic security would ensure it didn’t leave the store. Customers could pick it up, test it, feel it, look at it in the real world, and not be limited to only pictures and descriptions. If you like that particular pan, you then can order it from a terminal kiosk and have it shipped either to your home or to that store.

The key would be that the in-store kiosk would only connect to the Bed, Bath & Beyond company. You might even get a small discount for your trouble of driving in to the store. We already see many stores with online connections to the company Web site, and if they don’t have it “in stock,” they can order it for you. How about if they never have it “in stock” in the store, and we know that ahead of time? That’d save us all a lot of frustration, right?

Think about it! Any given store (company) would immediately cut in half their entire physical space requirements, if not more. No more back rooms, no more shelves, no more inventory. Any company could maintain a single distribution center and warehouse, or perhaps have several regional centers. They already have that in order to send goods to their free-standing stores.

Each item in a given store would exist only as a single example. Even clothing would be a single unit. The only purpose would be to offer a customer the option of coming into the hybrid store to physically feel the fabric, look at the cut of the design and so forth. Customers know their sizes, and it’s not as cumbersome to return a poorly fitting clothing item. Actually; returns could be done at the brick-and-mortar hybrid location instead of using mail carriers.

These companies would naturally have a major online presence as well. Instead of hiring many sales clerks (associates), having managers and wondering if product knowledge was worth anything, that would all be taken care of online. Anyone could order whatever they wanted directly from the Web site, just as we do now. But if there were questions about physical characteristics, a hybrid store would offer that physical example.

Instead of wasting money on multiple sales people in store, none of whom know anything, and often aren’t available to actually help, why not spend the money instead on writers for the Web site? Hire more photographers so we can actually see ALL the products available from a big company? I’ll bet labor costs would still be drastically lower!

Think about how often you search for an item online, then wonder if it really is what you want. The next step is to go to some store in your area where you can find that item. You pick it up, turn it around, feel it, touch it, and decide it’s the right item. Then you go back and order it online because it’s a lot less expensive, even with the shipping costs. Who loses? The brick-and-mortar store where you went to physically handle the item. They still have to keep all that inventory, and “just-in-time” stocking is failing more and more often.

Meanwhile, suppose everyone went entirely to e-commerce. Imagine the massive increase in mailing back returns because something wasn’t quite right. Who bears the burden? The current online stores take advantage of the stand-alone stores, knowing that customers can test out a potential product before buying. Otherwise, a few people simply want the item immediately, and prefer shopping at a physical store.

I think we’re going to eventually see this kind of cost-cutting or better…cost-saving type of store. Commercial real estate is collapsing. The major banks are broke, tied up in knots with credit-default swaps, mortgage backed securities and all kinds of crazy financial derivatives. But the local and regional banks are about to go broke as all their commercial loans begin to fail. Have you been to a mall lately? How many stores are empty? What about strip malls, where only one store is open and the other spaces have closed?

We can’t sustain this kind of collapse in real estate. Banks often make more money on a foreclosure than in trying to work with a borrower. With the Federal Reserve just buying up every bad loan in sight, why should the bank lower their original mortgage amount or cut interest rates? “Notional Value” means the bank can sell a property to the Fed for whatever number they feel like making up. (Good thing we got rid of that nasty “mark to market” accounting nonsense!)

Strip mall owners can’t sell the property, can’t fill the empty store space, and can’t raise the rent on the single, remaining tenant. They all try to work something out with the bank, but can’t get off the ground or, in some instance, can’t even talk with a human being. The end result is that even more banks are near to failing.

At the same time, niche-market entrepreneurs can only afford to sell online. It would be wonderful if they could also have a physical store, but nobody can afford the rents. Why not bring everything together and solve most of the problems.

Hybrid stores would have a major impact on the bottom line for the Big Box companies. Labor costs would go down, storage and inventory would go down, and even replacement costs would disappear. The only time an item would change would be when it went out of production. Consolidation to a central warehouse would make everything simpler, much like Amazon or Hobby Lobby are doing; two very profitable companies.

The only thing that would disappear would be instant gratification. For the most part, you wouldn’t be able to just go to a store and buy something. On the other hand, more and more these days you can’t do that anyway! With Mall America and all these big retailers offering almost exactly the same limited choices, why are they surprised that more people shop online?

Try to buy summer clothes in the summer, or winter coats in winter! Not much chance anymore, what with orders having to be pre-defined half a year in advance in order to get shipments from China. When summer stock runs out, or a “hot” Christmas item sells out, too bad. So you shop online. Let’s just accept it as today’s reality and restructure the retail industry. Right?

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