Traditional retail vs modern retail and e-commerce: fight or cooperation?

Traditional retail vs modern retail: Traditional retail is slowing down, while e-commerce is experiencing double-digit growth. Are the two situations related? And, above all, are these two sectors destined to cannibalize or will they find a new equilibrium?

In a nutshell, the situation sees a part of the sector showing low growth, foreshadowing the arrival of a future phase of stagnation, similar to that recorded in the American market a few years ago, which led to the closure of many large shopping centers.

On the other hand, there is a segment of the market that is showing continuous growth, which, for the moment, is not experiencing a crisis, and that is digital retail.

According to recent research, B2C e-commerce in Italy generated revenue of €41.5 billion in 2018, which represented 18% growth over the previous year. This data is confirmed by the Italian National Institute of Statistics, which showed an increase of 15.8% compared to January 2019. This double-digit growth suggests that, most likely, this sector will be the economic driving force in the future  (istat.it).

The forecasts are decidedly positive, both at the European and Italian level, which allows Italy to reduce the gap in digital consumption compared to other European countries.

 

The case has begun!

In the rest of Europe, digital retail has long been an established reality. In Great Britain, for example, about 9 out of 10 consumers buy on the internet, in Germany 8 out of 10, in France and Spain, 7 out of 10. In Italy, however, only 62% are digital customers. This number is expected to increase by (almost) 70% by 2023.

This is due to the fact that the habits of Italians are changing rapidly, and this includes the increased use of the internet, and especially mobile phones, to carry out many activities. This is demonstrated by the We Are Social report, created in collaboration with Hootsuite, which analyzes national and international social and digital data and trends related to the internet, mobile, and e-commerce (wearesocial.com).

In particular, it appears that Italians are increasingly becoming more connected by smartphones, since 92% of people have access to the internet (+11 million compared to January 2018) and most of them access it from a mobile device.

When it comes to e-commerce statistics, it turns out that 86% of Italians have searched online for at least one product or service to buy, while 75% have actually bought it, using any device, mobile, or fixed.

In addition, the value of the annual expenditure of users who purchased goods or services online has increased by 10% compared to last year, reaching $407, thus further increasing the total value of products and services purchased through an e-commerce platform ($15.63 billion, +13% compared to 2018).

All these figures speak for themselves: digital retail is growing and will continue to grow, and more Italians will start using digital tools to make purchases. At this point, however, a question arises: is this disruptive growth and, in general, is digital retail a threat to traditional retail?

 

Traditional retail vs modern retail: the real threat

The most immediate answer may be yes. It is, in fact, repeating the same pattern as when large shopping malls arrived on the market. The greater convenience and the novelty of having a wide variety of different products at one’s disposal were just some of the reasons that attracted consumers to large-scale distribution outlets, thus taking them away from small neighborhood shops.

It is no coincidence that, in the space of just 10 years, around 200,000 neighbourhood shops have closed. Both small retailers and large players move within a basically “zero sum” market: those who buy a kilo of apples from the neighborhood greengrocer do not buy it at the supermarket and vice versa.

The temptation, at this point, is to believe that the situation is substantially identical even now that Amazon, Alibaba, and other digital “shopping centres” have arrived on the market. But on closer inspection this is not the case, for at least three different reasons.

First of all, the incidence of digital retail is certainly relevant, but less than what is perceived. While some 270 million Americans are expected to make an online purchase this year, e-commerce accounted for only 10.5% of retail sales in the third quarter of 2019  (ilsole24ore.com). In the future, e-commerce will become more and more relevant, and it has become even more so given the current situation and its impact on traditional retail.

Secondly, e-commerce and “analog” retail are not equal in terms of the offering and the sales experience. For example, many goods cannot be purchased from e-commerce platforms such as Amazon: most food, fuel, cars, etc. In all of these areas, e-commerce plays a very marginal role. The same is true for some personal services, such as bars or restaurants, which require the physical presence of the customer, where, indeed, the physical presence is the very center of the experience.

Therefore, there is no “perfect substitutability” between digital retail and traditional retail, something that can be found more easily among other segments of the sector (such as small retailers and large-scale retailers). Amazon, for example, has recently opened Amazon Go Grocery, its first supermarket without checkouts where you can also buy meat, prepared meals, and fresh products.

The third reason is that, on closer inspection, e-retail is not only a threat, it’s also an opportunity.

Digital retail will not necessarily be able to monopolize consumer purchases; on the contrary, in many ways you can imagine that, by integrating an e-commerce component into the retail business, many companies will see their revenues increase. Because, on closer inspection, the real “threat” for all retailers, but above all for large-scale retailers, is another: the gradual reduction of revenue margins.

 

The real risk is immobility

In fact, some recent surveys relating to large-scale Italian distribution have revealed a very interesting fact. If, in 2017, the aggregate turnover of major large-scale retail companies reached, €83 billion in net VAT (+4.4% per year and the most consistent commercial growth in recent years), on the other hand, the net operating margin fell by 5.5% (repubblica.it).

At the same time, discount retailers are growing, showing positive signs in practically all parameters (from average annual growth in sales to revenue margins), attracting an increasing number of customers, also thanks to the recent economic situation that is leading to fewer purchases.

In short, therefore, discounters are growing at a fast pace while large-scale retailers and small retailers are facing stagnant growth in some respects.

The origin of this, therefore, may not just be e-commerce, but a business model that should be revised in some areas. Several observers in the sector are convinced of this: in general, in order to remain competitive, traditional retailers must continue to innovate, and department stores, in particular, must do so at least once every 3-4 years in order to try to reverse the trend and return to gaining customers.

The question remains: how to do it?

 

Will digital save retail? 

It is essential, now more than ever, to make considered strategic choices in terms of the long-term results you want to achieve. In this sense, it is necessary to be guided by relevant data and trends.

From this point of view, the example of Amazon Go Grocery is enlightening. Companies can transform the business not necessarily by abandoning the physical dimension but enriching it with a digital component.

For many, the path is Phygital. This term signifies the fusion between the digital retail experience and the traditional retail experience into a third type of customer experience that is more complete and satisfying to one that, ideally, is able to guarantee the benefits of both.

A Phygital experience aims to develop three specific characteristics:

  1. Immediacy, since it is very important for a customer to know that a certain action will happen at a precise and predictable time
  2. Immersion, since the more a consumer feels an integral and active part of a shopping experience, the greater his or her satisfaction and the greater the likelihood that he or she will return to buy again;
  3. Interaction, given that the physical moment of the exchange is one of the most satisfying of any economic transaction.

The first two points are mainly related to the world of digital retail, while the third is typical of traditional retail and, indeed, in many ways is its strength, since it is very difficult for a completely online shopping experience to be as satisfying as the one in store.

 

The impact of sales

Combining these two experiential dimensions also allows you to put in place a number of mechanisms that can help increase sales. For example, integration between real and digital can make it possible to ship purchases to in-store customers and offer additional services within the e-commerce platform or at the point of sale.

Among other things, ensuring a perfectly integrated customer experience also increases the conversion rate of customers (those who are interested in a purchase and those who, in fact, buy), as you can attract consumers along two different routes, both upstream (from the store to e-commerce) and downstream (from e-commerce to the store).

It should not be forgotten that making the shopping experience more digital would allow all retailers to collect a large amount of data about customers, which at the moment can only be done by retailers moving in the digital field.

In this way, it could provide the customer with a truly immersive experience, starting from the personal device and arriving without interruption to the point of sale, where the customer is welcomed in-store by the representative who knows he or she is coming and is prepared to show them relevant offers.

In this climate of greater attention to the customer it’s certainly easier to implement one of the two strategies mentioned above, aiming to generate a possible additional sale (upselling) when the consumer is already in the store to purchase or collect an item pre-ordered online (dropship).

 

There are many examples

Even if it is just the beginning, there are already several examples of large companies that are trying this integration.

Amazon is one example. Alibaba, the Chinese e-commerce giant, has also opened its own physical store, where every customer enters by checking in with their smartphone and getting information about the different products through a QR Code.

Many supermarkets are also going digital. Italian supermarket chains like Esselunga or Conad are increasingly implementing an online shopping delivery service.

While some of these examples are still, in some respects, “rudimentary”, it does indicate that retailers of all sizes are increasingly combining in-store with e-commerce.