Why Omnichannel Retailers Face a Steep Learning Curve

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Wharton's Santiago Gallino discusses his research on retailers making the transition to being truly omnichannel.

When Sears filed for bankruptcy recently, many placed part of the blame on the iconic retailer’s failure to effectively integrate its online presence with physical stores. Omnichannel retailing has quickly become the industry standard as online-first operations open physical shops and brick-and-mortar chains try to better navigate the digital world. But many companies on either side still struggle to get the balance right. That learning curve is the focus of research by Santiago Gallino, a Wharton professor of operations, information and decisions. His research on the topic includes, “Offline Experiences and Value Creation in Omnichannel Retail,” and “Offline Showrooms in Omnichannel Retail: Demand and Operational Benefits,” which were both co-authored with former Wharton marketing professor David Bell and Harvard Business School professor Antonio Moreno, and “Integration of Online and Offline Channels in Retail: The Impact of Sharing Reliable Inventory Availability Information,” which was co-authored with Moreno. Gallino recently spoke to Knowledge@Wharton about the integration challenges for omnichannel retailers.

An edited transcript of the conversation follows.

Knowledge@Wharton: The term omnichannel has evolved over the years. It used to mean a brick-and-mortar with a website. What would you say it means today?

Santiago Gallino: I agree that the term has evolved, mainly driven by the fact that the customers have evolved. If you think of the customers today, they don’t see two independent companies, one running in a brick-and-mortar setting and the other one in an online setting. We see retail companies as one entity. That is why retailers should aspire to be one unique company facing the customer, either when the customer interacts with the online part of the business or the brick-and-mortar part.

Knowledge@Wharton: There are brick-and-mortar retailers that are trying to beef up and integrate their online operations. At the same time, there are a lot of online-first retailers that have been opening up brick-and-mortar stores in recent years. What are the unique struggles that each one faces?

“Running an operation in the real world is different than running an operation in the online world.”

Gallino: It’s a very interesting phenomenon, the fact that online-first retailers are now starting to develop a physical presence. When I first started looking at the issue of omnichannel retail, most of the focus was on the struggles that traditional retailers were having in trying to integrate with the online world, with the assumption that eventually the brick-and-mortar stores were going to die or fade away. Now, we see a lot of digital-native brands that are opening a physical presence. 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. 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.

For the traditional retailers, I think they have also realized that you cannot run your online component of the business as you used to run the brick-and-mortar part. I think that this adjustment is happening both ways.

Knowledge@Wharton: Your research looks at how interactions with both online and offline channels impact customer behavior, and you found that it does have some pretty big impacts. Could you describe those?

Gallino: We looked at what is happening with these initiatives that retailers were trying to implement to integrate the two channels. For example, we have looked at what happened when a company starts to offer buy online/pick up in store. That is very prevalent now.

One of the things that we noticed is that, of course, there are customers who use the option. But the fact that the retailer discloses the inventory information and where the customer can get the products in the brick-and-mortar stores is driving customers to the stores before closing the transaction online. So, customers are using the information component of the online business to then drive to the store and pick up the item without necessarily closing the transaction online.

“A lesson that is key for the companies is the idea that you cannot evaluate actions that you make in one channel only in that channel.”

In the opposite direction, now we see many original online retailers starting to open showrooms where you can go visit, touch the product, but when you want to close the transaction you need to do it online. Basically, the customer is going to the store to experience the product, experience the interaction with the retailer, but the actual transaction will still be online.

Knowledge@Wharton: Given these changes in how customers are interacting with brands, what are the lessons here for the companies?

Gallino: I think a lesson that is key for the companies is the idea that you cannot evaluate actions that you make in one channel only in that channel. Going back to my example of the buy online/pick up in store, if you are the manager of the online part of the business and you start offering buy online/pick up in store, you will completely miss the fact that now there are customers going to directly find the product in the store. This is telling you that, when you make an action in an omnichannel context, it needs to be evaluated in an omnichannel fashion. You need to think of the impact that these particular actions can have on your operation, meaning online plus brick-and-mortar, not just the channel or the part of the business where you took the action.

Knowledge@Wharton: To use the example of buy online/pick up in store, if you’ve got that person now coming to your store, it creates an opportunity for you.

Gallino: Absolutely, and we do find that in our research. When someone goes to pick up something in the store, they end up buying more stuff that they were not originally planning to buy. They don’t go to the store simply to pick up the item, but they buy additional things. Again, this speaks to the fact that retailers need to consider the implications of the action more broadly and not only in the channel that they’re thinking about.

The second issue that is important to consider when retailers are planning and deciding what to do next is to be aware that today, customers are omnichannel. This idea that you can understand your own company and your business as two separate sections, the online and the brick-and-mortar, is no longer sustainable because customers don’t think of the retailer that way. If something I buy from a retailer online arrives home and I don’t like it, I can drive to the store and try to return it. And if the retailer is not offering this option, it will be awkward for me because I actually bought it from you. You are one company, so if the answer is, “Oh, you bought this online. We don’t accept the returns,” that is signaling to the customer that you haven’t understood yet that we are in an omnichannel context.

Knowledge@Wharton: 2017 was defined by retail closures, and there have been a lot more of them in 2018. But we’ve also seen some retailers posting pretty strong earnings news recently. Do you feel like that’s simply a reflection of increased consumer spending, or is there also a pattern here that some of the retailers are getting rewarded for doing it right?

Gallino: Yes, I think that last thing is what is going on. I think there are retailers that, unfortunately, were not able to adjust and to adapt for different reasons, and now they’re closing. Others had the ability to transform themselves, to put emphasis where customers are seeing value, and that is making them strive. Best Buy is an example of a retailer that everybody thought was going to be going through some rough patches. In fact, I think they’ve been working hard and understood the value of their physical presence and trying to leverage that when they put their offerings on the online world.

“This idea that you can understand your own company and your business as two separate sections, the online and the brick-and-mortar, it is no longer sustainable because customers don’t think of the retailer that way.”

Companies have reacted differently. Unfortunately, some of them failed. But I think there are many retailers that have been able to adapt, transform and are going to be healthy in the long run.

Knowledge@Wharton: A lot of what is written about omnichannel focuses on brick-and-mortar retailers trying to move into the digital world and sometimes not doing a great job. But do you see in the trend of online-first retailers trying to move into the physical world any warning signs for them?

Gallino: Yes, I think so. I think that many of these online-first retailers are jumping into the physical world with the assumption that they can learn as they go and that the experience from retailers that have been running their businesses for many years is not so relevant.

In my experience, they very quickly find that there are some retail fundamentals that are still there. 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. All of those things are not trivial. You can design and think of an offering now in the physical world that is attractive, is more engaging, has high touch with the customer, and that’s all good. But you need to have the fundamentals right. I think that that’s what the online-first retailers are learning when they’re trying to grow in the physical world.

The advantage is that most of them are doing this gradually. 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.

Knowledge@Wharton: What are some future lines for your research?

Gallino: The focus of my research going forward is still going to be very much around the omnichannel experience. I don’t think that we are there yet. I think that we are going to see a lot of changes going forward. I am eager to be following those changes and trying to do research about that. My sense is that the retail industry is not stable at this point, so the transformation is still going on. That is exciting because if there are changes and transformations and challenges, those are great conditions for good research.

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