Brick-and-mortar retailing is outgrowing digital retailing.

Here is what is by far the most important take-away from this year’s National Retail Federation (NRF) meeting: According to Forrester, the projected growth rate for pure digital in 2018 is $48 billion, but the projected growth rate of in-store purchases that begin digitally is $69 billion:

Purchases involving Brick-and-Mortar stores outgrew pure digital retailing in 2017 and are projected to outgrow pure digital retailing again in 2018.

Don’t be deceived by the hype:

• Yes, digital retailing’s growth rate is greater—but on a far lower base.
• Yes, you want your share of the digital growth—but in ways that your customers want to be served by digital, integrated with physical shopping experiences.
• Yes, 10,168 brick and mortar stores closed in 2017—but 14,248 stores opened. (Forbes, Sep. 2017)

We are witnessing the genius of capitalism: what Joseph Schumpeter called, “creative destruction.” Resources are being taken from non-productive retailing and invested in the new, innovative, brick-and-mortar concepts. The real issue is there are retailers that don’t have any relevance in the market. They’re searching for relevance, don’t have a good digital or physical experience, and they’re not fulfilling anybody’s needs, so they’re going away.

We are being called upon to practice “entrepreneurial retailing.” Recall J.B. Say’s definition: “The entrepreneur shifts economic resources out of an area of lower and into and area of higher productivity and greater yield.” And Peter Drucker’s definition of entrepreneurship: “Innovation is the specific tool of entrepreneurship, the means by which they exploit change as an opportunity…”

The old model of brick-and-mortar retailing was based on physical distribution of a wide assortment of products. And while there are many customers who still patronize brick-and-mortar stores for these reasons—distribution of a wide assortment—brick-and-mortar stores are no longer the only choice available to consumers. Some customers prefer digital channels to meet their physical-distribution needs. Brick-and-mortar retailers must innovate and create new strategies that go beyond physical distribution and expand the customer needs they address.

Kim Whitler of the Darden School at University of Virginia has observed: “For brick-and-mortar to win, it’s not just being relevant, it’s understanding their target customer and figuring out how to create unique value that can only be served through a physical location. The process is to identify how to create unique value for consumers and then to understand what the role—if any—of brick-and-mortar is in delivering that value. The problem is that many brick-and-mortar-centric retailers focus on how to make the physical relevant. This is a problem because they are product rather than consumer centric.”

Fortunately, brick-and-mortar retailing is capable of delivering valuable services and entertaining experiences that digital just can’t match. There’s a reason so many buyers-journeys begin digitally but are completed in-store.

John Deighton of Harvard Business School says retailers need to be “creating customer experiences…. Why? Because invoking a customer experience, by which we mean the sense of having encountered something out of the ordinary, needing to be made sense of, something fun, is deeply rewarding.” Deighton cites examples of brick-and-mortar retailers that are succeeding by creating stories that bring the in-store customer experience to life. 

Story telling

Take lululemon: There’s a complete backstory to every in-store retail experience. Deighton observes, “In the past few years, the athleisure trend has exploded, and Lululemon has responded by doubling down on creation of content for their community of followers. The retail brand has over two million followers on Instagram, over 18 million video views on YouTube, and regularly publishes original content that educates their community on topics that relate to yoga, travel, nutrition, and their products. Kiehls and Sephora have moved in the direction of content marketing.”

Or American Girl: Studies show customers visit the store in groups of three: Grandma who wants to be remembered for giving her granddaughter an extravagant, overpriced experience. Mother who wants to preserve her daughter’s innocence a few more years. And the daughter who want a beautiful doll. Powerful shared experiences that the brick-and-mortar experience delivers.

Completing the buyers journey

As Rogers and Hammerstein wrote: “The farmer and the cowman should be friends.” The digital retail experience starts the search process efficiently. But it is complemented by the in-store experience to complete the sale.

Digital retailing has much to teach brick-and-mortar retailing about how to discern who the customer is and how best to serve her.

At this year’s NRF show, Wipro and Harte Hanks offered brick-and-mortar retailers a service that senses the customer’s cell phone and identifies who she is when she enters the store. All the typical digital retailing analysis can be brought to bear on understanding who she is and what she values.

The learning also goes the other way—from brick-and-mortar to digital retailing.

Whitler observes: ““There seems to be some arrogance oftentimes within the digital realm….The website [involves] coding [which is] one-dimensionally complex. Brick-and-mortar retailing involves many dimensions of complexity.”

“[When I was at] David’s Bridal…. we sourced the material, we created the designs and we manufactured the garments, we shipped them and made sure they were in the right location at the right time for women to try on, and then had to customize them for weddings. We had to think about pricing versus local, national, and digital competitors. We had to manage integrated communications in-store, through our associates, our call center, and marketing materials. How do we modernize the stores—create enhanced in-store experiences that interacted with the digital experience to create a seamless journey that brought joy to brides….The complexity of Brick-and-Mortar was far greater when you add in the hourly labor / physical location-related challenges.”

Brick-and-mortar is the hard part

At the NRF show, Wipro presented a channel-integrating innovation that enhances the in-store customer experience through digital technology. It’s an app that the customer can put on their phone to capture their on-line shopping history. When they go to the store, the app directs them to the products they searched.

This app would also enable a customer to try a garment on, find it’s the wrong size, and have a sales person find the right size and bring it to the changing room. No need to get dressed, go out and search, and perhaps not find the right size. Similarly, other store locations can be contacted and if they have the right size, asked to hold it or send it to the customer.

To pull this off, the retailer needs not only digital expertise, but also, the inventory accuracy and store design discipline of the physical stores. The tough parts are the brick-and-mortar logistical skills and execution.

In general, the trend we saw at NRF is linking digital customer information to the physical behavior in the store.

Customer-focused innovation in brick and mortar retailing

Drucker says the defining characteristic of the entrepreneur is that she is opportunity focused. She starts with the customer and looks for the unmet need. Then she applies the unique capabilities of the brick-and-mortar, story telling and service delivery capabilities, to meet the need.

In order to work, innovation must always be focused on meeting a customer need. What we see again and again is “what we can do” innovation. We start with customer need, but soon internal considerations turn the idea inside out. Structural barriers, cultural norms, IT limitations—internal barriers doom the innovation from its start.

No one owns the customer

In a related issue, at NRF we heard retailers tell us that in their organizations no one “owns” the customer. Each siloed department is responsible for a piece of the relationship, but no one is ultimately responsible for the customer’s total experience. What results is a Frankenstein relationship solution.

We heard that some organizations give the role of owning the customer to the CMO, but then don’t accompany the responsibility with the authority over all aspects of service delivery. Again, doomed to fail.

Digital retailers linking to brick-and-mortar

At NRF we also heard of digital retailers imitating brick-and-mortar retailers in learning from their customers’ behavior—on-line.

For example, if a customer walked into a physical pet store, the sales person would start a conversation and soon discern whether the customer was a pet owner or buying a gift for a friend who is a pet owner.

Chewy.com can approximate this conversation by differentiating between a first-time digital visitor buying pet supplies or an upscale pet gift. They look at the patterns of on-line searching behavior to tell the difference.

Don’t forget brick-and-mortar

All the issues we heard discussed are modalities of the overall insight: Don’t forget brick-and-mortar. Whether it’s integrating digital and physical retailing, customer driven brick-and-mortar innovations, or technological enhancements of the physical shopping experience—brick-and-mortar remains a vital part of retail growth strategy.

Pay attention to the data which show: the largest dollar growth in the retail marketplace is a buyer’s journey that begins digital, but ends physical.

As Whitler sums it up, “Throw away the idea that you have either brick-and-mortar or digital. Start with your customers. Figure out how you can create value for them, and then figure out where the right location is as a retailer.”

Dr. Karl Hellman is Managing Director of Consentric Marketing. Karl is the author of The Customer Learning Curve (with Ardis Burst, 2004) and his clients include best-in-class companies such as JP Morgan Chase, Wells Fargo, UPS, and Coca Cola.

Frank Grillo is the CMO of Harte Hanks. He is a passionate advocate for bringing the human back into marketing by better understanding and facilitating customer journeys.