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How Retailers Will Survive In The Amazon Era

Hire a service designer, for starters.

Photo: Halfdark/Getty Images

There’s no way around it—the past year has been rough for retail. Even the stalwarts have taken a hit: Nordstrom had a terrible run on NASDAQ; Macy's cratered, with its stock ending 2015 40% down for the year; and Walmart is shutting down over 250 stores nationwide. Why so much bad news, so fast?

Well, there are a few incidental reasons, such as an economy that has people saving instead of spending, and an unseasonably warm Q4 that kept families away from seasonal purchases, like a new space heater or down jacket. But, it’s also about a little company in Seattle called Amazon, which is steadily eating the world of retail. And when we say eating, we mean in one bite; according to The Motley Fool, about one of every three product searches begins at Amazon.

Just think about what this means for other retailers. A third of their potential customers are starting at their competitors’ front door, leaving them clamoring for scraps and losing costly acquisition dollars (and margin) to the likes of Google and, increasingly, Facebook. And as Amazon enhances Prime, their base of customers grows and becomes increasingly loyal.

Owen Price/Getty Images


Not For Lack Of Trying

It’s not as if other retailers have been asleep at the wheel. For years, they’ve been investing heavily in online, developing their experiences and logistics to compete and be multi-channel leaders. However, with costly staff and marketing programs, as well as cloud infrastructure and platform investments, the costs to play are enormous and the revenue projections to cover such investments are commensurate. So while leaders like Nordstrom have seen significant growth in online sales, such growth isn’t sufficiently offsetting the stagnancy of in-store sales.

In these conditions, what does the future hold for retailers large and small? The tea leaves point to three major developments.


Creative Lab via Shutterstock


Only the Fortress Shall Survive

Forced to reduce costs and shift more business online, traditional retailers will continue to shutter doors, leaving a handful of flagship stores in key "fortress" retail hubs like Bellevue Square in the Seattle area, South Coast Plaza in Southern California, and Michigan Avenue in Chicago. While a lethal mix of flagging sales, as well as real estate and staffing costs are the most obvious drivers, there are other factors at play—some macro-economic, some logistic, some brand.

Changing demographics are a key driver here, as big cities are booming. We're seeing the reversal of suburban flight and the closing of stores. With fewer locations, merchants will have an easier time operating efficiently, in turn making for better in-store experiences with improved point-of-sale capabilities, enhanced digital displays, and other innovations. These flagship stores will become galleries to market their brands in major metro areas and a means to connect to local communities—the Apple Genius Bar being one example, Capital One’s new cafe concept another.

Continued investment will also include enhancement of multi-channel offerings like pick-up-at-store and return-to-store. These more logistically driven activities will increasingly be monetized thanks to a powerful combination of personalization and location-aware messaging. Those shirts didn’t work? We have an alternative. Picking up a dress? How about these shoes to go with it? Such enhanced retail experiences will become a primary way in which retailers compete with Amazon, but they will be limited to those in larger markets. Power shoppers of means who live in smaller markets will step up their retail travel, making multiple retail-driven trips per year. And mixed-use fortress centers that have built-in entertainment, dining, and lodging options, will reap the most reward.

In talking with Howard McQuaid, Senior Vice President of Leasing for Kemper Development, shopping center owners are far more than just landlords. They are increasingly in the happiness business:

Today’s consumer is looking for so much more than just product fulfillment. We are in the happiness fulfillment business and strive to curate a variety of synergistic businesses and experiences that collectively enhance the visits by our guests. Last year The Bellevue Collection drew over 23 million footfalls, many from hundreds of miles away. We believe that those environments that can provide the best experience in multiple categories of real estate hold a distinct advantage over single use properties. Our shopper comes to us for one reason, say shopping, and stays for dinner, maybe a movie . . . and at times even stays the night.

Flickr user kennejima

The Rise of Service Design

As these multi-channel dynamics become commonplace among retailers, the service design discipline will not only become commonplace, it will increase its sphere of influence. Not to be confused with UX design, information architecture, or even user experience design as defined today, the service designer is a hybrid role that bridges the online and offline gap. Part researcher and part digital strategist, the role of the service designer will even expand to include aspects of traditional architecture.

With the in-store experience becoming an extension of the digital we can expect to see changes to store layouts, point-of-sale technology, way-finding, and more. Such changes won’t happen successfully without someone who understands the implications of the complete customer journey from pixels to parking. This role will oversee a team of designers across different fields and will draw from a variety of disciplines, but will have its taproot in consumer research. Charged with more than just conversion gains, they’ll also be accountable to customer loyalty and brand regard.

The key to success according to Chris Risdon, the design director for Capital One Labs, is understanding behavior:

It isn’t about segments, nor channels, but about behavior. Researching, understanding, and designing to support your customers’ desired behavior is the key. They want to buy, but they also want to try, they want to return, they want to do all of these behaviors across time and spanning different touchpoints. Everything you do, as a retailer, should be focused on augmenting their desire to complete behaviors they already want to do.

Flickr user Renato Mitra

Alliances Will Form

What do you do when facing a vastly stronger competitor? You team up. Like the Associated Grocers Cooperatives of the early 1900s, we'll see informal alliances grow among business that are like-minded, but not competitive. Why? Because even retailers with vastly different customers and products face similar challenges, and they will look for mutually beneficial arrangements to help with common challenges such as:

  • Sales attribution—how do you measure and attribute sales in a multi-channel and multi-device world?
  • Software solutions—should you build in-house or outsource? Which vendors are best? From CRM and analytics to search technologies and cloud hosting, there are hundreds of choices to make.
  • Logistics—who's best to partner in shipping, warehousing, and inventory controls? Is it best to work with someone on third-party logistics or build your own?

According to Nathan Decker, director of e-commerce for Evo, this problem is particularly acute for small to mid-size players who lack the size to amass experts in all the required areas:

The breadth of knowledge necessary to master e-commerce is staggering. Professionals need to navigate complex data and computational analysis, have negotiation savvy, be competent in logistics, information technology, data and finance. It’s impossible for a single person to go deep in every area which is why partnerships with complementary businesses are so valuable. Where we are long on expertise and experience, we help others and vice versa. Learning can accelerate years in a single conversation.

Flickr user Michael Fraley

What’s Old Is New. Again.

The future of retail is part of a broader story of course. The first wave of e-commerce drove out the traditional retailer, as Seattle companies like Blue Nile and Amazon played a pivotal role in shutting down or severely curtailing many businesses, from Barnes & Noble to family jewelers. This second wave, oft cited as the "bricks & clicks" model, showed many traditional retailers rushing to catch up; integrating their physical stores with their new online investments. Now, we’re in the thick of the third wave—"pure-play" etailers who were born on the web expanding into the physical world. Blue Nile, Warby Parker, Indochino, and even now Amazon are experimenting to varying degrees with retail stores.

What’s next for the fourth wave? There's little argument that the potential for further store contraction is high. The more challenging questions surround the dimensions on which businesses will compete. One thing is for sure—retailers will need to continue to adapt their playbooks, because Amazon and the changes it has created are here to stay.

Related: I Lived With The Amazon Dash Button—Here's What I Discovered

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