Wharton's Barbara Kahn and Columbia's Mark A. Cohen discuss the U.S. retail outlook for 2018.

Initial market reports indicate the 2017 holiday season was a lucrative one for American retailers, with sales increasing 5% over the previous year. Online sales were up around 18%, according to early reports, and consumer spending reached numbers not seen since 2011. Despite smooth sailing through the holidays, it was a turbulent 2017 for many retailers and there is still plenty of choppy water ahead as brands try to adjust to rapidly changing consumer behavior. Wharton marketing professor Barbara Kahn joined Mark A. Cohen, director of retail studies and adjunct professor at Columbia University Graduate School of Business, on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111 to discuss the retail outlook for 2018. (Listen to the full podcast using the player at the top of this page.)

The following are five key points from their conversation.

Strong holiday sales were boosted by weather, timing

While the final numbers on holiday sales won’t be known for a few more weeks, things are looking undeniably good for retailers across the spectrum, especially those with a strong online presence.

“This was a tremendous reversal from the lagging trend of much of 2017 going into the holiday,” Cohen said.

Both Cohen and Kahn noted that the biggest sales surge came in the days right before Christmas, which fell on a Monday. The sales uptick likely was helped by having a weekend just before the holiday and relatively good weather across the country, encouraging shoppers to visit physical stores for last-minute deals.

“I’m a big believer in physical stores, so I always like to see good news of people enjoying the experience or the shopping aspects of the physical stores,” Kahn said.

For the most successful retailers, it’s all about #winning

The professors think the big retail winners in 2017 will see continued success in the coming year because they recognize changing shopping behaviors and are working to turn the ship around, rather than ignore the trends. Conversely, retail losers will probably keep steering into the iceberg in 2018.

“For sure, the convenience of online shopping is here, and we are seeing changes in shopping behavior. But a lot of the better retailers are trying to adapt to this changing world and make their physical stores something that people want to visit,” Kahn said. “So, I think you see a lot of excitement. For example, there’s a new Zara store built in a Miami mall, and that place is hopping with people. Stores that can do something that makes the experiential aspect of shopping exciting will still encourage traffic.”

“This was a tremendous reversal from the lagging trend of much of 2017 going into the holiday.”–Mark A. Cohen

Cohen said brick-and-mortar retailers who have moved toward what Kahn is talking about will reap the benefits of those investments and ideas.

“Unfortunately, the folks who were struggling in 2017, who may have had a good if not a great holiday, are likely to struggle again in 2018 because the fundamental behavior of the customer isn’t going to change,” he said. “The online business continues to expand at the expense of brick and mortar, and the level of promotion that continues to step up is truly unsustainable for many of the legacy retailers who are engaging in it.”

Cohen was referring to the high-low pricing of revolving sales that many retailers with physical stores have come to rely on. He called the strategy a “trap” of their own making.

“I think it’s great to see the holiday pop the way it did,” he said. “But it doesn’t change the fundamental paradigm shifts that the business has been exhibiting.”

Retailers need to be storytellers

Sears, which Cohen described as “a dying retailer on its very last legs,” took an unusual approach to the holiday season in its decision to spend zero dollars on advertising. Cohen questioned the wisdom of that move.

“The rationale that [Sears CEO Edward] Lampert seems to have used in putting all of his eggs in a digital marketing basket is all well and good intellectually, except it just didn’t work and it won’t work,” he said. “It’s not just that they withdrew from traditional holiday marketing, it’s that they don’t have a story to tell, and their website is third-rate relative to everyone who surrounds them.”

Kahn agreed, saying that retailers who don’t have a story to tell could face extinction in the coming years.

“Story means what the brand means, what the experience means. It’s the reason to go into the store,” she said. “With Zara, the story is fast fashion. There’s always something new. The story for Amazon is complete customer convenience. They eliminate all pain points.”

“I think it’s great to see the holiday pop the way it did. But it doesn’t change the fundamental paradigm shifts that the business has been exhibiting.”–Mark A. Cohen

Cohen defines storytelling a little differently. He said it’s about satisfying customer wants, not needs.

“Storytelling, storyboarding is a fundamental tenet of creating assortments that form an impression in customers’ mind’s eye that suggest that if they go to a particular retailer, they are going to be successful,” he said. “Storyboarding also suggests the opportunity to take advantage of new and engaging products sight unseen until the consumer opens the website or enters the store.”

He said traditional retail storytelling can be found in the way stores are laid out, from the fixtures to the lighting. “It’s considered analogous to opening up a book, beginning with the preface and moving in chapter by chapter.”

The word for 2018 is ‘omni-channel’

Kahn disagrees with Cohen that there is a fundamental shift in shopping behavior from offline to online. The two are merging into what she calls the “omni-channel experience,” meaning shoppers are engaging all their senses and using all the outlets available to them.

“I think the retailers that are winning understand that it’s an omni-channel experience, that it’s not one or the other,” she said. “Retailers that get it — like Bonobos and Warby Parker, who are using their physical stores to fuel online shopping — get that people like to go both ways, from one channel to the other. It’s about really understanding the merging of that shopping behavior. It’s those retailers that I think are going to win in 2018.”

She thinks consumers understand that, too. “They shop online or browse online. They pick up in the store. A lot of the better retailers understand that people just think of it as one seamless experience. ”

Technology will play an even bigger role

As retailers move into the future, online algorithms will improve to better anticipate consumer preferences and shape a more personalized shopping experience. But the more interesting story is about how virtual and augmented reality will affect shopping.

“Story means what the brand means, what the experience means. It’s the reason to go into the store.”–Barbara Kahn

“If you think mobile has really changed shopping because people are looking at their phone and making decisions off that tiny little screen, imagine what shopping might be like if, instead of looking on your phone, you’re looking in virtual reality?” Kahn said. She used a camping tent as an example. If a shopper can use a digital device to virtually walk around the tent or see it from the inside, that’s an enriching shopping experience.

“I agree with Barbara that omni-channel is the wave of the future, but it’s not all or nothing,” Cohen said. “At the end of the day, most of the retail business will continue to be brick and mortar for the foreseeable future. But the onset of technology is almost all going into online. Augmented reality, virtual reality is almost all being invested in by online players and will be presented by online players. There are a few progressive legacy retailers, like Zara, who are taking advantage of this sort of opportunity.”

Kahn countered by pointing out that even Costco is offering online order and delivery.

“People expect some kind of connection with online,” she said. “But I agree that stores aren’t going away, and a lot of the traditional shopping will still be done in the store, especially in food and apparel. Customers want to see the product, they want to touch the product, and that will matter. But again, there’s this need for convenience. I don’t think it’s either/or. I think it’s just a new world of shopping behavior.”