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THE FUTURE OF BRICK-AND-MORTAR STORES IS LOCAL: AMAZON PERFECTS THE LOGISTICS OF RETAILING

30 Jul

By Kishore Jethanandani

Brick-and-mortar retailing co-existed with e-commerce for the last decade or so.  Now Amazon’s gloves are off as it were and it is poised to tear up the very foundations of brick-and-mortar retailing as we have known it for so long.

Amazon’s giant size warehouses, stacked with racks reaching right up to the ceiling, use every inch of space possible for cost reduction.  Computer-aided inventory management keeps track of merchandise and assists in retrieving products largely without human effort with the help of robots[i]. It has already invested in six fulfillment centers and 12 more will be built in 2012[ii]. The capital investments will be recouped by serving third-party retailers who already account for 40% of Amazon’s sales.

Delivery time is reduced with cloud computing[iii] that has the ability to communicate with robots on the floor of warehouses. When an order is placed, robots receive instructions to pick goods from racks and move them to junctions where they can be placed on carousels for transfer to loading points where trucks receive them for shipment to their destination. The entire cycle from order placement to dispatch is automated for same day delivery.

Brick-and-mortar stores, by contrast, are caught in a time warp. A great deal of the energy of store managers is lost in the tedium of inventory management leaving much less time for customer service. Each store owns its own inventory and is often left with excess inventory when demand falls short or is stocked-out in times of unexpected surge in demand. Customers spend inordinate amounts of time to find products lost in the clutter. Newly launched products or unique products for niche markets that are more likely to earn higher margins go unsold as they are hard to discover.

The stores look only a shade better than drab warehouses stocked with merchandise. In an age of mobile phones, video and social networking, retail stores managements are oblivious to the role content could play in whetting the appetite of their customers.

Amazon has found a way to eat the lunch of local retail stores with its mobile application for comparative shopping. Customers are offered monetary incentives to visit and view merchandise at brick-and-mortar stores and compare prices at Amazon’s online store. The ace card in Amazon’s hand is same-day delivery.  Customers have very little incentive to purchase at retail stores if they can instead buy at lower prices from Amazon and have their order delivered the same day.

Brick-and-mortar stores have been jolted into changing their business models or risk their very survival. Macy and Nordstrom[iv], for example, have upgraded their on-line channel that now provides information on available merchandise in any of their stores and ships orders from the nearest store where the products are available. While these changes will lower costs of inventory management, brick-and-mortar stores have no way to match the operating efficiency of Amazon’s new warehouses.

Retail stores are exploring alternative options to remain competitive. The current chorus is to leverage mobile devices and applications to enhance the experience[v] of retailing. New technologies like augmented reality present several ways that will make the experience of shopping more joyful. Customers of clothing, for example, can try multiple alternative designs rapidly in augmented reality saving them the effort of changing repeatedly in dressing rooms. Ikea has an augmented reality application that allows customers to view how furnishings will appear in the environment of their homes. Customers using near-field capable phones can send messages to call for customer service. Shopping would be more convenient if customers could receive notifications about their turn to return goods rather than wait in a queue.  Mobile phones can also provide guides to the available choice of merchandise and where to find it, offer currently available discount coupons and more.

Mobile technology sure will contribute a delightful experience of shopping[vi]. Customers are still likely to opt to purchase from Amazon. Worse, retail stores could invest in new technologies in their stores and end up benefiting Amazon.

The one sure way of countering Amazon’s competitive advantage is to provide an alternative to commoditization in retail shopping. Retail stores could acquire a unique personality with goods and services reflecting the culture and tastes of their location. Out here in San Francisco, I am startled by attendance at the “Fair” trade festivals. The large crowds who throng at such festivals are hungry for the variety of merchandise from all over the world sourced from exotic communities such as craftsmen in the Amazon jungle. Retail stores could enhance the experience with augmented reality with imagery and videos that allow customers to vicariously live the experience of the communities who supply the merchandise.

Another striking example I have observed is the Dutch village in Southern California which attracts legions of visitors. The stores in the village exhibit traditional European apparel, furnishings and artifacts produced by the immigrants who settled in the vicinity. The restaurants all serve European food. The tourists look at the village as not only a shopping destination but also a place for entertainment and leisure and spend more time than they would at a mall. Again, technology could easily enhance the experience with content, information and imagery. Consumers could relate with obscure products and enjoy them a great deal more with augmented reality, video and commentary.

Retail stores could turn the tables on Amazon by using its fulfillment centers and focus on product innovation with related content development and technology to offer a rewarding experience for cus


[i] “Amazon’s Kiva Robot Acquisition is Bullish for Both Amazon and American Jobs”,

http://www.forbes.com/sites/markpmills/2012/03/23/amazons-kiva-robot-acquisition-is-bullish-for-both-amazon-and-american-jobs/

[ii] “Amazon Gains As It Improves Distribution Network”, By Danielle Kucera – Jul 27, 2012,

[iii] “Amazon steps up competition in cloud services”, by Paul Demery, Internet Retailer, March 13th 2012

http://www.internetretailer.com/2012/03/13/amazon-steps-competition-cloud-services

[iv] “Nordstrom Links Online Inventory to Real World”, by Stephanie Clifford, New York Times, August 23rd 2010

[v] “Malls’ New Pitch: Come for the Experience”, by Stephanie Clifford, New York Times, July 17th 2012

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Posted by on July 30, 2012 in Business

 

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