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Comment: How traditional retailers can compete with pureplay showrooms

With online pureplays using showrooms as a cost-effective way to enter the physical domain, the wider consumer trend of showrooming here to stay. Traditional retailers will therefore face increasingly stiff competition on price and service. Responding through measures that enable growth at lower capital intensity, targeted promotions and impeccable customer service will be necessary if traditional retailers are to avoid market share erosion in the long term.

A new breed of online-only shops using showrooms as a pillar of their expansion strategy is burgeoning off the back of the rising consumer trend of ‘showrooming’.  This phenomenon, owing its fast growth to the rapid proliferation of mobile devices, is defined as consumers’ increasing tendency to visit retail stores to examine products, use their devices to compare prices and then purchase the products through e-commerce sites. 

Placing this consumer behaviour at the heart of its business model,  Bonobos in the US which started in 2007 as an online-only men’s clothing retailer, has now opened so-called ‘guideshops’ in 17 US cities, including prime high-street locations like lower Fifth Avenue in New York, where it sits alongside established brands such as Zara and Gap. These guideshops allow customers to check the fit and feel of items and get advice from shop assistants before ordering products online. Made.com in the UK is another example of this operating model, which liberates the physical retail space from its distribution channel function, turning it into a facility solely designed for inspiration and advice while delegating all stock-keeping activity to one central warehouse. Critical to boosting the visibility of its offer, showrooms played an important role in supporting Made.com’s fast growth across the UK – through store openings in London, West Yorkshire and Liverpool – and recently in Europe.

The emergence of this new low-cost operating model poses a significant competitive threat to conventional retailers today as an increasing number of ‘showrooming’ consumers value the benefits of face-to-face service in central locations but are unwilling to pay more for it. Verdict’s March 2016 survey of 10,000 online shoppers concluded 41.7% of online purchases from multichannel retailers were browsed instore prior to the online transaction, representing a 2.3 percentage point increase over previous year. Moreover, 52.7% of showroomed purchases were browsed at a high street store as opposed to a store in a retail park (30.9%) or a shopping centre (16.4%). More importantly, when asked what would have made them more likely to complete their purchase instore rather than online, 23.7% of participants rated the store’s ability to match the cheapest online price as key, with a further 21.7% citing better customer service.  Just 11.6% of those interviewed identified stock availability as a critical factor.

These stats highlight the increasingly challenging nature of the new competition for conventional retailers as non-transactional showrooms enable online pureplays to avoid the costs linked to running large stores, and therefore offer lower prices. Additionally, on the service front, showrooms allow online pureplays to upend their propositions through better focusing on helping customers to find the items they like rather than stock keeping.

While showrooming is here to stay and online pureplays tapping into this consumer trend benefit from an easily scalable business model due to the low cost of opening showrooms compared to stores, traditional retailers can adjust the 4Ps of their marketing mix to respond effectively to the rising competitive threat. Place is the key battleground for retailers and the online channel needs investment more than ever as easy to use websites, product range and speed of delivery rank, alongside price, among the top four reasons for repeat purchasing online, according to the Verdict’s e-retail survey.

While omnichannel continues to define traditional retailers’ strategies, brands should target future growth at lower capital intensity, especially in non-food sectors which are most conducive to online, such as clothing & footwear and electricals. In so doing, they will prioritise investment in prime stores over peripheral outlets, creating ‘destinations’ that boost consumer dwell time and consequently instore spend.  Zara parent Inditex provides a good example of this, with the company reportedly planning to prioritise investment in flagships stores in major cities such as New York City,  Soho and London Oxford Street during 2016, while reducing its overall retail space growth target (to 6-8% from a previous target of 8-10%) over the next several years.

Price remains the area where store-based retailers cannot beat online pureplays. However, with free-wifi becoming a key amenity offered by bricks-and-mortar retailers, and instore technologies like beacons helping retailers to personalise marketing communications, relevant promotions and discounts can be delivered to target consumers’ mobile devices as they enter stores to boost sales.

Finally, product and promotion will also play central roles in mitigating the competitive threat created by online pureplays. Verdict’s e-retail survey shows a third of online consumers find physical shopping better than internet shopping in regards to trust in the retailer. This presents a significant opportunity for traditional retailers and should be a focus of marketing activities. Moreover, top-notch service instore is an absolute must, with sufficient numbers of trained staff available on the shop floor to help customers throughout the day and act as effective brand ambassadors rather than spending time restocking the shelves.

Duygu Hardman is an associate analyst of food and grocery at Verdict. This article was first published on Verdict's website here