Why the Retail Problem is Not E-Commerce vs. Brick and Mortar

By Jayne Scuncio June 18, 2018

This article was originally published by Teresa Rivas for Barron’s on June 18th under the title, “Retail Roundup: Asking the Right Question, Retail ‘Nightmares’.”

Last year, retail stocks were walloped as investors worried that e-commerce was taking over the world; this year the sector has climbed on evidence that brick-and-mortar stores aren’t going extinct. But stores–and investors–still aren’t asking the right questions.

“Retailers are mistakenly seeing the issue as e-commerce versus brick and mortar, but that’s not the problem,” says Tien Tzuo, chief executive of enterprise-software firm Zuora. “Online, in-store, it shouldn’t matter, it should all be blended: Consumers can shop wherever they want–it’s the retailers that build one-on-one relationship customers that will win.”

Tzuo tells Barron’s that the subscription model, like Amazon.com’s (AMZN) Amazon Prime, has already reshaped retail, and traditional stores simply haven’t realized it yet–to their own detriment. “Amazon isn’t successful just because it’s an e-commerce site, but because it knows how to think like its customers,” he says, noting that he can search his Amazon purchase history going back more than 20 years, while a retailer such as Walmart (WMT) has no data about the roughly 100 million customers that walk through its doors every week. This is a huge lost opportunity, he says. Instead of framing the state of the industry as an e-commerce versus physical-store issue, and spending big sums of money to acquire Jet.com and a stake in FlipKart, Walmart should instead create a universal Walmart ID, so it can collect data on its customers–the first step to establishing an omnichannel relationship.

Of course, this isn’t a radical concept–grocery stores have been tracking purchases with loyalty clubs for ages. But Tzuo says that while this was a great first step, many haven’t taken the next one–making the club ID usable on a grocer’s website, sending tailored coupons to a user’s email.

That said, Walmart and supermarkets aren’t alone as they struggle to connect with consumers: He’s hard pressed to name a large retailer that is getting it right. “There’s no Macy‘s (M) Prime, there’s no Walmart Prime.” Best Buy (BBY) is close, he says, as it’s trying to redefine the in-store experience and tracking consumers’ purchases, “probably because they were threatened the most by Amazon” early on. He also notes that Starbucks (SBUX) has worked to make its omnichannel experience seamless–encouraging consumers to order via an app–and connect all purchases back to a user’s ID. But the company’s also removed the ability to buy coffee beans from the Starbucks website, because it wants to drive store traffic, for the brand experience. “That’s the role of physical stores; not as shelf space, but as a place for retailers to build relationships with consumers over time,” says Tzuo.

The idea of building a relationship with a consumer is the reason some box-subscription companies thrive while others struggle. Tzuo cites the dichotomy of Blue Apron (APRN) and Stitch Fix (SFIX). With the former, he argues that while consumers have a great first experience they get bored over time, and it’s not clear if the company is competing with other food options or entertainment options. With the latter, the relationship that a shopper builds with a stylist leads to very strong repeat business.

Loop Capital’s Anthony Chukumba recently visited a number of discount and warehouse stores in the Los Angeles area.

He writes that dollar stores were all touting $1 items, and he was “pleasantly surprised” by the wide variety of items at Dollar Tree (DLTR), which he rates at Buy. (He has a Hold rating on Dollar General (DG)). He was also impressed with Five Below (FIVE)–one of the company”s first California locations–and its selection of goods, which included bluetooth speakers and wireless phone chargers.

Chukumba’s visit to Costco Wholesale (COST) reaffirmed his positive thesis on the stock, as he sees “big-ticket categories like…driving membership upgrades and Costco Visa card conversions,” while its e-commerce efforts and growth of the private Kirkland brand are making membership “stickier.” He notes that a regional Sam’s Club–owned by Walmart (WMT)–had slowed traffic, although it’s cut prices in what he sees as an attempt to change that.

Chukumba writes that the Smart & Final (SFS) location he visited was impressive, but the “promotional environment remains heated.” He found German supermarket Aldi’s pricing quite good as well, although the store’s traffic was “lackluster.”

Customer-feedback platform Usabilla released a report on “retail nightmares” that drive consumers away from brands today, and not surprisingly it found that in the age of Amazon, the biggest reason that shoppers don’t complete a purchase is shipping cost: 58% abandoned items in a cart because of shipping, and another 8% said that extended delivery time is a factor in deciding to not finish a purchase.

The report showed that 40% of shoppers surveyed said that unwanted ads were the biggest frustration when using their mobile phones; 53% said so when they were using a desktop.

While artificial intelligence chatbots are becoming a hot item, only 4% of shoppers said that they were the most helpful resource when researching products. The most helpful resource by far is customer reviews, with 44% saying the rely on others’ opinions in their research.

More than 60% of shoppers will leave an online store if they don’t like the website, and nearly half of shoppers have lied to a staff member in store to escape a conversation.

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