I am impressed with how many citizens – young, middle-age, and old – now use their smart phones to do their shopping. They not only use their phone in the store to do comparison pricing. More of them are not going to stores to do their shopping. They’re simply becoming addicted to online shopping.
Today, online transactions constitute about 10 percent of total retail sales in the U.S. But the rate of online buying is growing much faster than in-store purchasing. Early shoppers usually use only to buy books and movies, move up to buying paper goods, then appliances, then clothing, and eventually furniture and high-consideration products.
It’s been a bleak period for U.S. shopping centers, malls and store-based retailers in 2017. J.C. Penney is planning to close 130-140 locations. Sears is planning to close 108 Kmart and 42 Sears stores. Macy’s plans to close 100 stores and add another 68 later. Regional electronics chain H. H. Gregg has decided to close 88 stores and three distribution centers as part of its just-filed Chapter 11. Abercrombie & Fitch plans to close approximately 60 stores in the U.S. during its fiscal 2017. The Limited began closing all 250 of its retail stores, with 4,000 people expected to lose their jobs. And Toys R Us is expected to close stores after the holiday season.
Is this a real threat to the future of retail stores and jobs? Not according to the Bureau of Labor Statistics (U.S. Department of Labor). This is their estimate. “Job Outlook: Overall employment of retail sales workers is projected to grow 2 percent from 2016 to 2026, slower than the average for all occupations. Despite the low projected employment growth there should still be plenty of job opportunities over the next ten years since many workers leave this occupation each year.”
Is the Labor Department ignorant of the fact that we are living through the 4th Industrial Revolution? First there was the steam engine, later electricity, then computers, and now smart phones and the Internet and the Internet of Things. Has the Labor Department ignored the growing trend of online shopping?
We saw the early signs of online shopping with the buying of books. A book seller, Barnes and Noble, enjoyed brilliant in-store sales for about 10 years. Along came Amazon to carry a much larger inventory of books and sell them by mail initially and then by Kindle downloading. This was the end of Barnes and Noble’s heydays and it certainly ended their main competitor, the Borders book stores. Amazon then went further and started to sell everything online, clothing, furniture, office supplies, household products, and so on.
Today a growing number of customers prefer to buy everything online. Going to a store involves getting into a car, parking, physical walking, standing in line. Isn’t it easier to stay at home and select the desired product online and get it delivered without this hassle? Online merchants are increasing their speed of delivery. Also they will accept returns and in some cases absorb the cost of returns.
If this trend continues, the number of stores will decrease over time. This can be a serious problem. Today, 4,854,300 store clerks are at work serving customers and accepting payments, according to the Bureau of Labor Statistics. If the number of retail positions are cut in half, where will the ex-employees find new jobs? Will they find online jobs at Amazon’s distribution centers? Does a sales clerk want to work at a distribution center instead of in a store? And will the number of new online jobs meet the number of lost sales employee jobs in stores?
This type of disruption to a large number of jobs is not limited to stores. Today over 2 million men drive trucks to deliver goods. There is increasing talk about replacing them with driverless trucks. This is another example of potential job assassination.
What Can Stores Do to Survive?
The problem starts with the fact that we have too many stores, many of which are half empty. Just walk through a shopping mall and walk into JCPenney, Sears, and other stores. You will see clerks and maybe a few customers. There are so many clothing stores, so many restaurants, so many food stores. This alone means that a Darwinian process of the survival of the fittest will be operating to reduce the number of stores independent of online.
What are the options of the surviving stores?
- Make sure that your store offers online purchasing as well as in-store purchasing. More stores are adding online capabilities to keep their customers happy, build a larger database, and attract new customers. If in-store sales die, the store might survive on its online business.
- Start a loyalty program that gives points for in-store purchases. Stores would be smart to add a loyalty program to give an incentive for customers to return.
- Make the store more interesting to visit. Hire more engaging sales staffers who have expertise to offer regarding the merchandise. Fleet Feet Sports stores help its customers get the best advice on running and walking sports and the right shoes and practice regimes. Arrange better displays of merchandise. Get away from just hiring low cost sales employees who are bored with their job and with the customers.
- Offer more customized service. An increasing number of men and women are seeking stores that will customize their clothing needs. A store such as Paul Stuart will keep measurements of customers’ body sizes and carry interesting fabrics and skilled tailors. There are handbag stores that invite women to customize their own handbag, with the features and colors they want.
- Build community. Develop a group of customers who want to meet each other because of similar interests in some area such as clothing, watches, electronics, kitchen appliances. Golf-pro shops help introduce golf players to each other. They invite golf speakers and demonstrators, put on exhibitions and plan trips.
- Decide to be a “showroom” for the goods that are offered. Ralph Lauren, the clothier, opened an expensive store and restaurant in Chicago’s downtown and said that he is not interested in making money so much as building the Ralph Lauren brand. Tesla dealerships are opened in shopping malls basically to show Tesla cars to passer bys. Some furniture stores in the Chicago’s Merchandise Mart are established to display the merchandise to persons who need to physically see and experience the merchandise. These stores don’t sell but they help customers know where to buy an item they are interested in. Many shoppers go to Best Buy to see the merchandise and end up buying elsewhere for lower prices even though Best Buy does not want to perform as a showroom.
- Decide to be a “depot” where online customers can pick up the merchandise. A large chain store may set up small physical stores in different locations where ordered merchandise might be picked up by customers. Amazon might put Amazon Lockers in its newly acquired Whole Foods stores where Amazon customers can pick up goods held for them. Customers often phone Barnes and Noble and order a hard copy book to be held for them until their next visit to Barnes and Noble.
Even though online sales will continue to grow as a percentage of total retail sales, there will always be some stores prized by their customers who will continue to patronize them. Store owners and managers simply have to decide on their target customers, what these customers need, want and expect, and then figure out how to offer them superior value.
When Should Retailers Agree to Lower Prices?
Smart phones pose a new threat to store-based retailers. The customer may be in an appliance store and get interested in buying a Samsung TV set of a certain size. The retailer’s price is $1,799. The customer first decides to look up the competitor’s price on his smart phone for the same Samsung TV set. The customer finds the competitor is charging $1,749, a savings of $50. The customer shows this to the sales clerk and says that he would buy the store’s Samsung TV product for $1,749. The store clerk normally replies that he does not have the authority to lower the price. Or the store clerk might call the store manager to deal with this customer. The store manager may also say no. Or the store manager might offer to match the competitor’s lower price. If the manager matches the competitor’s price, he makes the sale at a lower margin and takes the risk of the word getting out that this store will give a discount. If the manager sticks to the state prices, the customer leaves the store and the store loses the sales and may even not see that customer come back again.
Price bargaining will inevitably increase in the age of smart phones. The same problem has been facing hotels. I walk in late at night to reserve a room. The hotel’s price is $190. I say to the clerk that I will pay $100. It is late at night and there is no prospect of another room seeker coming in. The hotel’s cost of renting the room and cleaning the room is $15. The hotel can make $85 by renting the room ($100-$15) or it can decide to leave the room empty that evening. It seems to me that $85 is better for the hotel owner than $0. What should the hotel’s policy be?
What is very clear is that all retail establishments need to establish a policy on how to handle this problem. The retailer must develop a policy and train his staff on how to handle this challenge.
Three polices are possible:
The first is to stick to no discounts from the stated price. This is the easiest policy to implement. It works best if the industry members all agree to charge the standard price. The standard price is usually enforced by the manufacturers controlling the standard price. However, if the competitors are able to set their own price, the “say no” policy is not likely to work and therefore not likely last.
The second policy is to always agree to match the shown price of a competitor. The retailer may offer to match or not fully match given that buying it now will save the customer some travel and effort. The retailer can also describe his store’s service quality and benefits as superior to his competitors.
The third possible policy is to train the salespeople on how to tell whether on a case by case basis whether to not match, partially match or fully match in each situation. Here are the main factors.
- If overall demand for the retailer is strong, reject the offer and stick to the stated price.
- If overall demand for the retailer is weak, offer a partial or full match.
- If the customer’s chore in going to the competitor involves a lot of travel or effort, the customer is likely to pay the stated price or accept a very small discount.
- If the customer looks likely to buy from you more times, offer a small discount plan to the customer.
This problem of retailers facing customers who want a lower price will grow in frequency and intensity over time in this Age of the Smart Phone. Be sure to establish your company’s policy and communicate it effectively to your sales staff.
Ultimately this problem will be solved by the rise of new information intermediaries to help price-sensitive consumers find sellers offering the lowest cost products and services. We have seen this operate in the hotel business where price-sensitive hotel seekers can turn to Priceline, Trip Advisor, Kayak, or Expedia to identity the lowest price hotels for a given quality and service level. This will reduce the number of customers who come to your premises interested in pressuring you to reduce your stated price.
Philip Kotler is the “father of modern marketing.” He is the S.C. Johnson & Son Distinguished Professor of International Marketing at the Kellogg School of Management at Northwestern University. He was voted the first Leader in Marketing Thought by the American Marketing Association and named The Founder of Modern Marketing Management in the Handbook of Management Thinking. Professor Kotler holds major awards including the American Marketing Association’s (AMA) Distinguished Marketing Educator Award and Distinguished Educator Award from The Academy of Marketing Science. The Sales and Marketing Executives International (SMEI) named him Marketer of the Year and the American Marketing Association described him as “the most influential marketer of all time.” He is in the Thinkers50 Hall of Fame, and is featured as a “guru” in the Economist. Sign up for his newsletter >>