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At a time when many bricks-and-mortar retailers are going bust, one might question the value that physical stores still bring. But new research from Wharton and Harvard shows that digital retailers opening physical stores can reap valuable benefits.
The research paper, “Customer Supercharging in Experience-centric Channels,” discovered that digital-first retailers that open no-inventory, showroom-only physical stores see appreciably higher sales and much lower rates of returns from customers who visit. Moreover, these customers shop in more categories and are less likely to return higher-end items they ordered.
The paper’s authors are Santiago Gallino, Wharton professor of operations, information and decisions, former Wharton marketing professor David Bell, now with Idea Farm Ventures, and Antonio Moreno, professor of business administration at Harvard. Gallino recently spoke to Knowledge@Wharton about their findings.
An edited transcript of the conversation follows.
Knowledge@Wharton: It’s no secret that offline retailers are struggling, especially as they face competition from digital retailers such as Amazon. But your paper shows that digital retailers opening physical stores can gain a lot of value. Can you explain?
Santiago Gallino: Yes. What we thought was an interesting issue to explore is exactly what you are pointing to — that although we tend to think that online retail is taking over the industry, when we walk around the street, we see that there are still plenty of retail stores and retail businesses that are thriving.
We can get the wrong impression that because the landscape is changing, that means the brick-and-mortar presence is going to disappear. Our paper sheds some light on reasons why that might not be the case.
Knowledge@Wharton: Your paper also mentions the “supercharged consumer.” Can you tell me who this is?
Gallino: Yes. So the way we thought about this is similar to what can happen if you think of human interactions. If you start to connect with someone through Facebook, first you chat, then you get a text message and eventually you make a phone call. … You get together for a coffee, and you see each other. … So all of this improves the relationship, making you closer to each other.
This is a good parallel for what we are thinking when we say that a customer can be supercharged with a visit to a store. Today, many companies have a very strong online presence. Customers interact with them there, and that is all fine. However, if you think of how they can develop a deeper relationship with a company, physical contact … still adds a lot of value.
“Those customers who visit a physical store … they return fewer products.”
Knowledge@Wharton: Basically, what you’re saying is that with the addition of a showroom, digital retailers can actually get more out of that consumer — interact more with them and just have a richer relationship overall.
Gallino: Yes, that’s correct. From the retailer’s perspective, they can learn more about the customer. They can see who is [shopping] with the customer when he’s buying the product. They can understand and see what types of questions they have in mind, what other products they tend to see — and that’s all valuable and rich information when you want to please the customer and make them come back again.
From the customer’s point of view, it’s the same thing. Nowadays, we all are comfortable with navigating a website, understanding what products are offered, but we also think, “It would be nice if I could actually touch this product. It would be nice if I could ask a well-informed sales associate a question, or point me towards another option if the product is out of stock.” I think that those interactions can happen better in a physical context, and companies are looking into that and using that as a tool to have more contact with their customers.
Knowledge@Wharton: How did you collect your data? What kinds of people or stores did you survey? What kinds of hypotheses did you start out with?
Gallino: Our main hypothesis was to try to explore and understand whether this ‘supercharging’ phenomenon was happening, what is its magnitude, and how we could actually measure it. We were fortunate enough to partner with a digital retail [apparel] brand that opened physical showrooms.
They were very open and shared with us every transaction they observed over a long period of time. And the advantage of having a closed ecosystem is that we were able to track customers over time in a very precise way. And so with that transactional level data at the individual customer level, we were able to study what happened for those customers that originated the transactions online but later on moved and decided to visit the physical store.
Knowledge@Wharton: What were your findings?
Gallino: We were able to support the hypothesis of a supercharging effect. It turns out that those customers who visit a physical store — after that visit, they return fewer products. … They buy more, and not only are they spending more dollars, but they are also purchasing more expensive products.
For example, if a customer bought casual shirts, [after a visit to a store] he would move into buying dress shirts. If he bought just khakis and casual pants before, he will move into buying suits and coats — products that are more involved in the purchase process but also have a higher margin for the retailer. And all this comes with the added benefit that the customer will tend to return less, which as we know is a very big hassle for retailers.
Knowledge@Wharton: Is it possible to quantify some of your findings as well?
Gallino: These supercharged customers will spend up to 60% more on average on a particular order. They also show up at a higher velocity, so the time between purchases is reduced by 28%. And they tend to buy 20% more categories, so they will expand [their purchases] into new categories. And finally, it’s interesting to see that they also return fewer of the more expensive items — which I think is a double win from the retailer’s perspective.
“These supercharged customers will spend up to 60% more on average on a particular order.”
Knowledge@Wharton: Those numbers are really astounding. What lessons can digital-first retailers take from your research?
Gallino: One main lesson here is that having a physical presence is very relevant. This is a big opportunity for digital retailers nowadays, because they have become really good at having beautiful websites. It’s very easy to check in and out of their online stores, and that’s all great. However, when they transition into the physical world, they sometimes overlook lessons that have been learned by traditional retailers. In my conversations with them, they realized that there are a lot of learning points they can take from traditional retailers when they are trying to make this transition into the physical world.
Knowledge@Wharton: But if digital-first retailers open physical stores, won’t it cost them a lot in overhead, make them increase their prices and defeat the purpose of being digital-first?
Gallino: That’s definitely a risk, and that’s why in our paper, we focus on one particular physical presence that I think is very attractive. That is the zero-inventory store. These are not traditional retail stores in the sense that there is no inventory for you to take home. This concept goes directly to your concern, because if I need to run a traditional store, carry inventory, handle a lot of different items – stock-outs can happen, and it’s expensive to have the inventory sitting in the store, anyway. If you move to a format that is completely or partially [inventory-less] but customers can still have the experience, then if you manage that well, you might get the best of both worlds.
Knowledge@Wharton: I get your explanation about the zero-inventory stores. When people go in, there’s nothing in stock, but people can actually see and touch the products on display and order at the store, and it will be shipped to them. But what about the people who like to browse, people who love to shop? Won’t you risk putting off those people?
Gallino: Yes, I think that’s a risk. An interesting finding of the paper was that … there were a lot of customers who were willing to go to a showroom knowing that they were not going to be able to take home their product that day. To me, that was surprising. At the same time, this doesn’t negate the fact that some customers are not happy with that setting. And so I think it’s a managerial call of choosing which problem you want to live with.
So knowing that you have a set of customers who are not going to come to the showroom because [there’s no product to take home] — that’s definitely possible. But the retailer can decide to use the money it is saving from not carrying inventory [and invest it in improving the customer experience by doing things such as rethinking] the layout of the store, having additional staffing in the store and adding nicer furniture.
“One main lesson here is that having a physical presence is very relevant.”
Knowledge@Wharton: Are there any lessons in your research for offline retailers — traditional retailers like department stores, as well as malls themselves?
Gallino: One big message is that the physical store is alive and doing well. The question is what do the stores need to look like? What kind of store will the customer want to visit and engage with today? It might not be what it looked like 10 years ago. And so the lesson for them is that some of these more creative solutions like the zero-inventory stores might be a good idea.
You can argue, ‘Well, maybe that’s something that they are not going to be comfortable doing,’ and that’s fine. But they don’t need to do it all the way. They can decide that for certain categories or products, they will move into more of a showroom concept. For other products, [or varieties of a product] they’re going to carry those in the store.
To be fair, this is something we’ve seen happening for many years now. What I would argue is that I don’t think this has been done in a more strategic and planned way. It’s more of a concept on how the business was run, but now this research presents the option of how — when you think carefully about the experience and how to engage with the customer and hopefully supercharge the customer — you can do that with new and old tools alike.
Knowledge@Wharton: Of course, traditional retailers have opened online stores. Do you think they get the same kind of supercharging effect as digital retailers that open showrooms?
Gallino: Many smart retailers have been able to leverage their online store in that way. It’s not just a place where you dump all the possible combinations of your apparel, but it’s a way to keep in touch and share experiences and share pictures and share stories about your products. If you think of the online store in that way, I can see that it is a very useful tool to supercharge customers, too.
Knowledge@Wharton: How is your research different from prior literature in this area? What’s new about your research?
Gallino: The interesting part that we were able to capture in the paper is to show the magnitude of these supercharging effects, … being able to quantify it and see the magnitude of the effects and all these things that we were discussing. … That is what is really new and interesting here, and I’m hoping that we can follow up with other projects that understand this phenomenon better.
Knowledge@Wharton: That sets me up perfectly for my last question, which is, how are you going to follow up this research?
Gallino: One issue that we would like to understand is how these effects apply to other retail categories, because I think it’s fair to note that apparel has its own characteristics. It would be interesting to understand how these effects are present or not when you think about electronics or when you think about other big, traditional retail categories that are also relevant.