Are physical stores a relic of the past? We delve into the hidden power of physical stores and discuss how bricks-and-mortar can boost brands in Australia.
Did you know that despite the undeniable growth in ecommerce in recent years, well over 80% of all retail sales occur in a physical store, and 65% of Australian consumers still prefer shopping in physical stores for personal interaction? What is the actual value of your physical stores? If you are thinking about opening or closing stores, you might want to reconsider your approach.
In the evolving world of Australian retail, the growth in online shopping over recent years has caused some retailers to question the worth of a physical store presence. Australian retailers of all sizes have put the brakes on bricks-and-mortar expansion in recent years, with some, like Sanity, trading an entire network of physical stores for e-commerce capabilities. These closures are often driven by the view that the importance of the physical store is diminishing. As we delve deeper, we see that perhaps in-store sales are dropping compared to online sales, creating an impression that the store isn’t contributing significantly to revenue.
But to counter this, many pure play brands are successfully opening their first physical stores with impressive early results. So what gives?
However, when we zoom out and look at the physical store's role as a key touchpoint in an omnichannel world, it tells a very different story. This perspective transforms the way retailers should approach opening and closing stores. For instance, Bunnings Warehouse, a leading Australian retailer, successfully implemented an omnichannel approach by integrating their in-store and online experiences, leading to a 20% increase in online sales while maintaining strong in-store performance.
The notion that a customer’s phone should not be used to look at the brand’s website or app while they are in the store to help them shop or pickup where they left off - or that a store can be used to prime a future ecom transaction is what’s holding many retailers back.
Many retailers have long held an assumption that when a retail store in any location closes, the online sales of that location must be increasing. The thought process is simple: if people can't get products in the store, they'll go online instead. As a result, the retailer is still generating sales revenue but without all the overheads of a physical store. However, a study by the International Council of Shopping Centers, published in December 2023, suggests this assumption is flawed.
The study, encompassing 69 retailers and over 2,100 stores in the United States and Canada, revealed a surprising trend: when a retail store closes, the online sales of that retailer in that location also decrease. On the flip side, we see that across nearly all categories, online sales increase following the opening of a store. This shows that opening a physical store location is a reliable indicator that shoppers will increase their online purchases in addition to shopping in the new store. For apparel brands, for example, a store opening drives an average 11.6% increase in online sales in that area, while a store closing drives a 19.4% decrease in online sales.
The halo effect extends beyond mere sales numbers; it also influences the average basket size. Opening a physical store increases a shopper's average online basket. These findings quantify the pivotal role physical stores play for omnichannel customers, which should be a cornerstone in any decision about opening and closing stores. Echoing this sentiment, another compelling example is The Iconic, an Australian online fashion retailer, which introduced a 'Try Before You Buy' service, blending the convenience of online shopping with the assurance of physical retail.
In rethinking the opening and closing of stores, it's essential to understand the traditional models retailers use when considering the relationship between e-commerce and physical stores: E-commerce and stores are treated as separate channels; E-commerce is viewed as a large store in the store network; E-commerce is treated as an internal and external component of all stores. Of these, Model 3 is more likely to allow for the effectiveness and growth of one to positively affect the other.
When retailers use models 1 and 2 to approach the opening and closing of physical stores, they often fall into the trap of calculating the value of a store in terms of "sales per square metre." This approach, however, does not see the whole picture. It assumes the store can only influence sales within its footprint in time (opening hours) and space (the stock it can hold to sell now). When the doors close for the night, the store's influence on sales is perceived to end.
Yet, the insights from the ICSC study above show us the far-reaching impact of physical stores on online sales. Physical stores do not act in isolation; they are more than just points of sale. Rather, they can be thought of as a new type of media, building brand awareness and emotional connections, akin to ads. But unlike watching a 15-second ad on YouTube, stores can drive web traffic by delivering compelling personalised experiences to the customer. These experiences may not result in immediate or location-specific transactions, but they build brand awareness and connection that eventually leads to a sale – either online or in-store.
Consider the multitude of customers who set foot in a single store location each year and are exposed to your products and brands. Now, juxtapose this with the cost of targeting the same number of customers through a comparable media experience. Viewing a physical store as an opportunity for customers to build a relationship with a brand, whether through engaging with brand representatives or being inspired by the products, allows us to understand the store's actual value in a new light.
This perspective is an insight that every retailer should incorporate into their performance metrics when planning for store openings and closings. Supporting this view, research from the University of Sydney Business School (2022) highlights the critical role of customer experience in omnichannel retail, suggesting that a seamless experience can boost customer loyalty by 30%.
The opportunity for retailers is to update their in store retailing techniques to better capture data for customers that don’t shop so they can take their in store experience with them to inform a future, potentially online, purchase.
We’ve considered the value of a store in qualitative terms, but how can retailers ensure a physical store will influence sales at every point where customers shop? Putting strategies in place to ensure a store can generate revenue 24/7 will help justify an ongoing investment in physical stores.
One effective strategy is endless aisle, the concept of ordering items online for shoppers who visit a physical store. With an endless aisle, shoppers can visit a physical store and order out-of-stock items that aren't available to take away on the spot but can be shipped to the customer later. This approach, also known as "buy in-store, ship to customer," is a great way to sell your entire product range without carrying stock for each item at every store location. Instead, you can keep stock in your warehouse or larger store locations. Smaller stores in your network can thus deliver more value without needing a bigger footprint.
This omnichannel strategy also has the benefit of reducing returns. E-commerce channels often see significantly higher return rates than physical stores, one of the reasons being that online shoppers can't interact with the product before buying it. The endless aisle overcomes this problem by allowing customers to see a product in-store before committing to the purchase.
Another strategy to generate more revenue is through clienteling. Clienteling is a technique used by retailers, or specifically retail sales associates, to establish meaningful long-term relationships with customers. A clienteling platform like Omneo provides in-store staff with real-time information about the customer they're serving, enabling a more personalised 1:1 customer experience. Product lists – such as saved items, wish lists, returned items, etc. – can be integrated into the clienteling platform to give insights into the customers’ history and purchase behaviour, predicting potential future purchases. Armed with a 360-degree view of the customer through omnichannel software plus real-time POS data, retail associates can suggest items customers want while checking real-time stock levels with confidence.
Sales associates can also add store visit information into lists along with staff-curated personal recommendations, enabling you to generate an 'abandoned cart for stores' workflow that improves the chances of each store visit converting – even if it's not in the physical store.
Stores can also link customers to store teams or individual sales associates, so that all future sales by those customers are credited to the store team directly, rather than only the channel or location that processes the sale.
The decision to open and close stores should depend on more than in-store sales figures. By not only appreciating the value of physical stores in an omnichannel retail structure but embracing it, you can provide customers with a memorable brand experience that will build loyalty that transcends channels.
Contact us today to learn how Omneo can help you maximise the power of clienteling for your physical and online stores.
