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Harvard Business School Professors Predict Retail Revolution

Sunday, March 01, 2015

Does bricks & mortar retail have a future in an e-commerce Internet of Things world? Harvard brains try to figure it out.

In their new book, Retail Revolution: Will Your Brick-and-Mortar Store Survive, Harvard Business School faculty members Rajiv Lal and José Alvarez and former HBS Research Associate Dan Greenberg explore the strategic options available to brick-and-mortar retailers in the age of eCommerce. "Based on our extensive research," said Prof. Lal, "there is an urgent need for rethinking the stores and taking immediate action, without which many chains will quickly enter zombie territory."

They present bold predictions for the future of retail: the end of the one-stop-shop, increasing levels of price transparency coupled with a flattening of overall prices, hard times for one-size-fits-all retailers, and two very different retail futures that will be dictated by whether Walmart or Amazon wins the battle for eCommerce. They also repudiate the common misconception that retail is a monolithic industry and introduce a framework that brick-and-mortar retailers can use to determine their store strategy in the face of the growing eCommerce threat.

Retail Revolution also explores the future of eCommerce. Whether Walmart or Amazon becomes the central online player will determine the future of retail. If Amazon wins, the focus of retail will be on convenience. Shoppers will rarely leave their home, and so much volume will be sucked out of stores that large numbers of retail operations, including supermarkets, will no longer be able to support their store base – to the detriment of low-income consumers.

In the price-focused Walmart future, Walmart will use supermarkets and dollar stores as eCommerce pickup points. Retailers can then cluster around these collection points in order to benefit from cross-traffic when customers arrive to pick up groceries and eCommerce orders. While other retailers have for years competed with Walmart, Walmart may become their saving grace in the future.

The authors also identify three challenges eCommerce poses for brick-and-mortar retailers, including fundamental shifts in core categories to digital content and distribution; clear advantages in cost, inventory, and selection on the part of online retail; and for retailers mostly protected from the eCommerce threats described in the first two challenges, the need to find ways to build more store defenses and leverage online activities to drive more traffic to brick-and-mortar operations.

Depending on which threats a brick-and-mortar retailer faces and the unique advantages it may possess relative to online retailers, physical stores have three possible solutions. First, they can "Wind Down" in a process that continuously rationalizes the organization and its store base to maximize the generation of cash. Or they can "Shrink and Transform the Box" to cut the costs of overly large stores and focus on the unique values that the store can deliver to customers and brands. A third solution is to "Enhance the Value of the Box" by providing in-store services and education, merchandising private-label products, bundling products for use in do-it-yourself projects, and using online tools to direct traffic to the more experiential brick-and-mortar channel.

The authors note that two of these solutions involve shutting down and/or shrinking stores--processes that have major consequences for the U.S. economy. Combined with the increased labor productivity of online retail, these actions will lead to decreased employment in the store-based retail sector, which, since it accounts for at 11 percent of jobs in this country, has long formed a large and fundamental piece of the American Dream and safety net. To make matters worse, increased numbers of blighted empty stores and a shrinking property tax base for municipalities are other likely outcomes. Finally, a growing increase in e-Commerce market share and the coming of Millennials as the primary consumer segment may also negatively impact the 27 percent of GDP for which retails sales are accountable.

About the Authors:

Rajiv Lal is the Stanley Roth, Sr. Professor of Retailing at Harvard Business School, where he has been responsible for the retailing curriculum and has served as course head of Marketing in the required first-year MBA curriculum. He currently co-chairs the Executive Education program on Building and Leading a Customer-Centric Organization.

José Alvarez is Senior Lecturer of Business Administration at Harvard Business School. He was previously president and CEO of Stop & Shop/Giant-Landover, a subsidiary of Royal Ahold, from 2006 to 2008. He has nearly twenty years of experience in retail management.

Dan Greenberg is a 2012 graduate of Harvard Business School. Before attending HBS, he was a consultant at The Lucas Group, advising retailers, wholesalers, and distributors on new market development, growth strategies, and supply chain optimization.

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