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Physical vs Online: Less profitability, More competitiveness.
August 13, 2020
Physical vs Online: Less profitability, More competitiveness.

The retail preparation for the “new normal” is one of the central themes of the next management challenges.

Almost 70% of retailers express their intention to invest less in physical space than they had done until the pandemic entered. The fact that we live in a period of uncertainty contributes to this resistance, but it is above all the change in consumer behavior, which is increasingly digital, the main cause of this management option. It is that 75% of these retailers consider it imperative to invest in the digital area, as a way of survival and affirmation of their brands and businesses.

Indeed, we live in a time of great acceleration in the activity of e-commerce, which will surely affect the balance between sales in the physical and online space. Retailers believe that these will grow 15% to 20% in the very short term, with a tendency to assert themselves as the main option of choice in longer periods. It is, therefore, a trend that will affect countless stores in multiple sectors of activity.

The bad news lies in the fact that the online margins are significantly lower than the margins practiced in physical space, thus contributing to a compression of the absolute margin released in each business. Imagine a business that has its sales divided as follows: 90% in physical store with margins of 30% and 10% online with margins of 10%. If these increase to 20%, reducing the contribution of physical sales to 80%, the overall business margin will fall by around 2%.

This simulation will naturally be more severe in cases where there is a greater propensity for online shopping to increase significantly. A weight of 40% of online sales to those who only sold in physical space can contribute to a margin drop of around 8%, which, quite naturally, prevents the release of cash to cover the company’s fixed costs.

There is only one way to compensate for this abrupt drop in the margin, which consists of increasing the productivity of the fixed cost structure by more than 20%, through the introduction of simpler operations, better negotiation with suppliers, flexibility of the commercial teams and, above all, everything, the role they play in interacting with customers.

Before this scenario happens, those responsible for retail stores should take the field, in order to fine tune their value proposition and design the effective contribution that physical space can represent in the future, making it a pleasant place, to which it becomes desirable to return.

The main way, therefore, is to invest in an integrated way in an omnichannel strategy. As we have already seen, the main reason for facing this challenge head on is not to be found in the profitability of the operation, but in competitiveness, since that is where customers move. For this, it is necessary to know particularly well, and better and better, the preferences of consumers and provide a unique experience in the store, with unique products and unique service. Some measures will involve creating unrepeatable moments, exclusive launches and unique offers.

But it is good to remember that in order to develop an integrated omnichannel strategy, it is imperative to add value in both purchase channels, complementing them, that is, acting perfectly in a new BOPIS journey (by online pick-up in store).

Finally, for this to be striking and distinctive, it is time to adequately prepare employees, educating and training them to manage a customer, both present and absent. So yes, we will move from store centricity or product centricity, to customer centricity.


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