What are the omnichannel challenges facing e-tailers opening stores?

Photo: Jordan Stead, Amazon
Nov 07, 2018

Knowledge@Wharton staff

Presented here for discussion is an excerpt of a current article published with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.

Most of the focus on omnichannel struggles has been traditional retailers trying to integrate with the online world. But, many online-first retailers opening up brick & mortar stores in recent years are facing their own unique challenges, according to Santiago Gallino, a Wharton professor of operations, information and decisions.

“The struggles that these new companies have, the companies that are opening the physical presence, is that they haven’t had the experience of doing that,” Mr. Gallino, who has done extensive research on omnichannel challenges, recently said in an interview with Knowledge@Wharton. “Running an operation in the real world is different than running an operation in the online world. But, I think they are young companies with smart people running them so they understand the challenges and are trying to overcome them.”

An initial assumption by many, he believes, is they can “learn as they go” in opening physical stores and they discount the experience that comes from running brick and mortar stores for years.

“In my experience, they very quickly find that there are some retail fundamentals that are still there,” said Mr. Gallino. “You still need to learn how to manage your inventory, your assortment, your staff, how to train them, how to have the right people in the right place.”

Still, an advantage is online-first retailers open stores gradually. The professor said, “They’re opening five, then 10, then 15 stores, so they are learning as they go. The challenge for the traditional retailers is that they already have more than 300, 500, thousands of stores and need to adjust all at once. So, I think that there is a little bit of advantage in the flexibility of the online-first retailer and more of an opportunity of learn as you go.”

Overall, Mr. Gallino believes the term, omnichannel, continues to evolve as buy online/pick up and other integrated services are expanded. He expects retailers will have to further adapt to consumers’ expectations as omnichannel evolves. Mr. Gallino stated, “I think that we are going to see a lot of changes going forward.”

DISCUSSION QUESTIONS: How are omnichannel challenges different for online natives integrating new physical stores versus traditional brick & mortars integrating online operations? What advice do you have for e-tailers entering physical retail?

Please practice The RetailWire Golden Rule when submitting your comments.
"Those e-tailers who are taking the leap would do well to garner some experienced store operations talent before they open too many stores."
"The physical manifestation of the digital world’s idealized retail brands could be an extremely powerful way to extend their reach, share of mind and loyalty."
"The biggest challenge for the online retailer entering the physical retail world is to understand and accept the limitations of the physical world."

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21 Comments on "What are the omnichannel challenges facing e-tailers opening stores?"

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Cathy Hotka

If there was one message coming out of the Store Operations Council meeting this September, it was that operational details matter, and online retailers won’t be aware of them unless they hire seasoned store operators. Seemingly minor questions like how to package picked merchandise and where to put it before delivery or pickup may sound simple, but aren’t. It will be exciting to watch them tackle the learning curve.

Chris Petersen, PhD.

Online retailers will find that when you build physical space, it doesn’t necessarily mean they will come and continue to come back. Physical retail has to be relevant and resonate with customers, especially the store experience. Online natives face the unique challenge that customers will have high expectations that the quality of the brand’s online experience will transfer to the store. While curated physical inventory is a unique challenge in stores, the best advice for online natives is to focus on the customer experience more than the products.

Dave Bruno

The answer is embedded in the question: the challenges are in fact being “omnichannel.” As we write about here every single day, success in brick-and-mortar is much more complex than simply hanging out a shingle. For online-first retailers to succeed, they must carefully consider not only the brick-and-mortar experience, but how the physical and digital experiences work together to enhance and enrich the holistic brand experience. Online-first brands will quickly discover that creating a digital brand experience that connects with shoppers is so much easier than doing so in the physical world. Digital experiences are relatively inexpensive to execute, and marketers can be extremely adaptive as they watch how consumers respond. Physical experiences are expensive, experience data is less detailed and consistent, execution requires training and coaching live people. Change management in the stores is more expensive and slower than changing digital experiences. Other than that, opening stores is a piece of cake!

Bob Amster

Operating a number of stores is more complex than operating a number of fulfillment centers. Store operations, human resources, store maintenance, inventory replenishment, visual merchandising and in-store information systems are the difference between running an e-tail operation and running an omnichannel operation. Those e-tailers who are taking the leap would do well to garner some experienced store operations talent before they open too many stores, lest they accidentally damage the online brand because of missteps in the street-store venture.

Ray Riley

Spot on Bob.

Charles Dimov

Starting omnichannel retail is challenging from either direction. Pure-play e-commerce retailers have to learn how to process, store, take orders, and fulfill orders in a way that balances inventories that can be in various locations. As highlighted, most of these are taking a gradual approach of five, 10, 15+ stores opened and unified. A big advantage is the ability to grow into it and tie in both online and physical right away.

My advice is, don’t underestimate the journey. Be ready for change and don’t approach it expecting physical retail to be the same as online. In many ways they are similar conceptually. Amazon learned this the hard way, in the early days of taking over Whole Foods. There were weeks of empty shelves plastered all over the media. As a small player — you can’t afford this. Remember the old phrase: Retail is detail. And details count!

Neil Saunders

There are certainly lessons that online retailers need to learn about the physical realm; Amazon’s fashion outlet in London, which makes a lot of errors, is a prime example. However, I would also argue that this lack of prior knowledge can sometimes be a good thing. Companies like Apple, Warby Parker, etc. have helped reshape physical retailing in their segments with new and innovative thinking — mainly because they were not encumbered with expectations and old ways of thinking.

Adrian Weidmann

Opening a small number of stores, learning, implementing, and optimizing is far more cost-effective than trying to convert a large number of physical stores. This iterative advantage held by online retailers making the transition to physical stores allows them to test, measure, and optimize their value proposition and shopper experience as they grow — each successful change propelling growth. There is less exposure and risk working through an iterative process. An existing store has an embedded status quo and a culture that can be very difficult to change.

The best advice (reminder) I could provide is that retail is a consignment business. If you embrace that as truth and design your process, workflow and embrace the enabling technologies to support that truth — you will be successful. The workflows and enabling technologies that you would implement will allow you to function in an omnichannel world while increasing efficiency, eliminating out-of-stocks, and providing your customer with a far better experience.

Brandon Rael

The reverse engineering of digital native retailers opening physical locations is truly an interesting development. Especially as several of them, including Warby Parker, Amazon in their variety of formats, Bonobos, and others have aspirations of opening a significant number of stores. With the size and scale of opening physical locations, digital native companies will encounter similar challenges that traditional brick-and-mortar companies have faced.

The omnichannel challenges for the digital native companies, are how do you effectively and profitably open physical stores, and translate the “seamless” connected mobile/desktop experience, without taking on significant inventory ownership, long-term leases, and operational inefficiencies? There will be plenty of trial and error and it will be interesting to see how things play out.

All customer-facing companies have come to the conclusion that physical retail is here to stay, and is such a critical part of the customer experience. As Doug Stephens has pointed out, stores are no longer places to sell product — they’re places to distribute experiences, and build connections with the community.

Art Suriano

As stated in the article, the e-tailers have to learn the brick-and-mortar business which is not easy. Both online, and brick-and-mortar have challenges facing them every day, but the key to brick-and-mortar success comes from the in-store experience which is very different from the online experience. With in-store, it is all about the design, merchandising and most importantly engagement with well-trained store associates. So the new brick-and-mortar business has to learn how to “wow” their customers while in the store. Moreover, they have to figure out how to get the customers in the store by driving them through their website along with successful advertising. However, when a retailer does everything correctly, the rewards for a well-balanced omnichannel business significantly outweigh all the challenges and obstacles one will face. For both the existing brick-and-mortar chain with the online presence and the e-tailer opening physical locations, omnichannel delivery is the future for all retail and those that master the concept will be the big winners.

Ben Ball

I found it quite interesting that Professor Gallino differentiates between the online world and the “real world,” most likely using “real world” and “physical world” interchangeably. It may be more useful to accept that the “real world” now had two parallel universes, the online and the physical. The biggest challenge for the online retailer entering the physical retail world is to understand and accept the limitations of the physical world. Limitations that largely do not exist in the online ecosystem. The online world accommodates virtually unlimited inventory that is constantly available to every shopper with a connected device and a credit card. It is much more difficult to get the right 10,000 items in front of the right shopper in the right place and time. And then do that in up to three or four thousand locations.

Susan O'Neal
6 months 16 days ago

The physical manifestation of the digital world’s idealized retail brands could be an extremely powerful way to extend their reach, share of mind and loyalty. That said, it’s also highly risky — doing it poorly might have a “Wizard of Oz” effect, and bring the whole brand down. My advice — go and grow slowly at first, make sure the physical manifestation of your brand is evolved from but not exactly like your online brand and once you know it works, hire people who know how to scale it efficiently and consistently.

David Naumann

There is a huge risk with the “learn as you go” approach. Once you disappoint customers, it is difficult to win them back.

Bringing in talent from companies that are successful may be a worthwhile investment to help do it right the first time.

Jeff Sward

At least today there is the advantage of the opportunity to learn from the pioneers — the new retail models that have emerged. Do I open with inventory, and put myself in the position of managing that inventory location by location? Or do I open a showroom and operate out of pooled inventory, where the odds of an out-of-stock situation are greatly diminished? Presentation techniques can be vastly different in a showroom versus a “store.” Which means storytelling and the experience of shopping can be very different. Most important is going in eyes open to LEARNING. The whole rule book is being rewritten every day. No matter what model you open with tomorrow, adapting to customer preferences and emerging competitive models will probably lead to an evolved model a year from tomorrow.

Bill Friend

My best advice for e-retailers looking to crossover to the physical space is to bring in brick-and-mortar experts to help with the effort. You don’t want to lose what makes you unique to the shopper, but you need to understand that the fulfillment process is dramatically different in the real world and digital retailers need to adjust their go-to-market strategies accordingly. Also, delivering an in-store experience that is compelling and tied closely with the online side of the business is critical.

Andrew Blatherwick
Traditional retailers have worked hard to understand the online business and overcome the challenges of running a multi-channel business. Now that we see the e-retailers going the other way and opening physical stores, this is not going to be easy for them either. In fact I believe it will be far harder for them to understand and master traditional retail than moving in the other direction. The discipline, supply chain challenges and people management of store staff are all very tough new skills to learn. Just the fact of getting the inventory right is totally different in traditional retail. You cannot just pull the item off the site, you have space for it in store and customers expect to be able to see and purchase it. Managing ordering from or for a number of stores takes their technology skills into a new area, they will have to get up to speed very quickly. Yes, they are growing slowly but customer expectation is there based on their online brand — they risk damaging that if they… Read more »
Ricardo Belmar

There are challenges in both directions. While established brick and mortar retailers have issues with moving mountains to bring change to hundreds or thousands of stores, online retailers have a steep learning curve to understand store operations — which differ greatly from online e-commerce operations!

There’s a reason why e-tailers move slowly to open stores and learn as they go — operating at scale is one of the main skills they won’t have right away unless they bring in experienced store ops personnel to help them. At the same time, the advantage they have is that there is no legacy structure holding them back that must be accommodated and adapted as established brick and mortar retailers must contend with.

Cate Trotter

Thinking about omnichannel from the perspective of an online-first business going offline is an interesting one. As noted above there is a benefit from starting small, with just a few stores, especially if you are learning as you go.

I think the other thing to consider is that quite a few online-first retailers are using/have used pop-ups as a way to bridge moving into physical retail. There’s a lot that can be learnt from these experiences as well, as Amazon’s recent Fashion pop-up in London shows. Pop-ups give retailers room to experiment and to learn, without necessarily having to get it totally right.

The important thing to remember is that experience matters more and more to customers so online-first retailers can’t just rely on fudging their way through — the more physical retail experience they can tap into, the better.

Kai Clarke
Nascent etailers who are opening up their first retail stores need to truly understand the differences between running an e-tail only model, and the added issues facing traditional brick and mortar retailers, as well as combining these into an omnichannel model. One is the immediate impact of returns and allowances on cash flow and inventory (there are no more “the check is in the mail delays to hide behind). Another is keeping a physical store clean, merchandised, properly staffed and easily promoted. Keeping the physical customer happy requires even more sensitivity and a customer service department that is experienced and trained with the right skills to ensure that customer retention is high. These are just a few of the issues which all retailers are familiar with, in addition to the merging of retail systems that record and report physical store inventory damage, shrink, OOS, improperly promoted and stocked inventory, etc. Having a team which is familiar, trained, and comfortable in the omnichannel world is perhaps one of the greatest immediate issues these e-tailers must face… Read more »
Craig Sundstrom

(1) The human element: both in dealing with people one-on-one and hiring people who can do that. Admittedly this is – or should be – obvious, but that doesn’t mean companies won’t overlook its importance.

(2) Free Shipping: well, not shipping really, but rather the lack of it as being a selling point (and by extension all the other things like delivery windows that don’t matter in a store). “In stock” inventory matters more, ‘cuz someone is likely to want to take the item with them, and if you don’t have it they will go somewhere else.

(3) Price, OTOH, I think will matter somewhat less, since it’s not as easy to physically shop multiple stores; few will drive all over town for small savings…that’s the theory, anyway.

Jeff Miller

The biggest difference in many of these cases is what the actual goals of the stores are. For some, they are marketing and branding and may or may not need to turn a profit in the long term as standalone businesses. That will change as they scale and they will run into many of the same challenges of all retail.

"Those e-tailers who are taking the leap would do well to garner some experienced store operations talent before they open too many stores."
"The physical manifestation of the digital world’s idealized retail brands could be an extremely powerful way to extend their reach, share of mind and loyalty."
"The biggest challenge for the online retailer entering the physical retail world is to understand and accept the limitations of the physical world."

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