The retail industry is in the early stages of a major transformation. Like other mature industries, the retail industry is characterized by significant overcapacity, increasing price competition, declining margins, continued consolidation, and external disruptive forces. There are 4 changes that must occur for health of the retail industry to be restored. We will summarize these changes and briefly discuss the implications for point of purchase displays.
1) Capacity Rationalization – The U.S. had over 4 times the amount of retail square feet per capita than other industrialized nations like France and Japan and over 5 times the per capita retail space than the U.K. In short, here in the U.S. we have a very significant over capacity problem which was created by relentless pressure to grow. Growth can only come from either increasing same-store sales or increasing the number of stores. Same store sales growth can only come from selling more units or by raising prices. Mature industries are generally characterized by increasingly intense price competition which creates an environment in which it is tough to raise prices. With that card not available to play, retail chains have attempted to grow primarily by adding new stores.
What needs to happen now is for that excess capacity to be wrung out of the industry. That is likely to happen in two ways: (1) reducing the number of stores, and (2) reducing the size of stores. The most likely scenario is that retail chains will shut down underperforming stores and also look to move toward smaller footprint stores as leases expire. We expect this to be a multi-year process which will occur at different rates and to different extents according to the various segments of the retail industry.
While it is difficult to predict the amount of capacity rationalization that is necessary to restore the industry to health, we expect something in the range of 30%-50% over the next 5-10 years. It is important to point out that some segments will continue to grow and add new stores, but on average the industry has no choice but to shrink.
2) Product Rationalization – Another byproduct of the industry’s drive for growth has been an unprecedented amount of product proliferation. This has occurred for 3 primary reasons: (1) As store footprints grew, there was more space that needed to be filled up with product. (2) Offering greater product choice was a key strategy aimed at increasing unit sales per store. (3) Brand marketers, who also faced pressure to grow, continued to innovate and come out with new products and product extensions- new flavors, new sizes, etc.
The fact is we don’t need 25 different choices of laundry detergents and or a dozen choices of bottled water, nor will stores have room for as much inventory as they have today. The smart stores will stock the most popular products and move the slower sellers online so they can continue to meet their customers’ needs. Product rationalization will not only impact the size of stores, but it will reduce the complexity in store operations while reducing labor requirements. Weeding out all but the best sellers will require strong discipline and execution.
3) Reinvent In-Store Service Models – To compete against online retailers, brick-and-mortar retailers will have to reinvent their service models. Shopping online has become incredibly easy and efficient. Search algorithms make it possible to find products quickly. Customer reviews provide relatively reliable and objective first-hand market research in a timely and easy-to-digest format. The checkout process is a snap since the online retailer usually already has credit card information and shipping/billing addresses. Free shipping is easy, fast, and reliable.
Contrast that to a recent trip to a physical store which started with me having to bring my own bags to the store so I could avoid the $.10 per bag fee at checkout. The search process was considerably harder in the store to find the items I wanted. I then had to stand in line an extra 5 minutes while the cashier took the time to collect all of the personal information of the shopper ahead of me so he could be put on the store’s mailing list. When it was my time to check out, the cashier asked the same question she always asks, “Did you find everything ok?.” The payment process was cumbersome since the credit card reader took nearly 30 seconds to read the chip in my card. The entire in-store shopping experience was frustrating and underwhelming.
In addition, despite shopping at the store every week, they know zero about my buying patterns. When I compare that to Amazon, it is a night and day difference. I can review my entire shopping history on Amazon with the push of a button. Amazon makes suggestions related to products I might like. I have lots of market research and product information at my fingertips to help me make an informed purchase decision. The bottom line is brick-and-mortar stores will have to seriously rethink their service models to be able to compete with the online shopping experience.
4) Accelerate Mobile Payment Systems – Many countries like China are quickly moving away from cash. In China paying for things on mobile phones is becoming the norm. In the U.S., ApplePay is a start, but adoption has been slow, and it is rare to see anyone in a store pay for anything with a mobile phone. This has to change. Retailers stand to be huge beneficiaries of online payment systems. It’s one of the key ways that will help them to compete with online shopping. Adopting and promoting mobile payment systems is an imperative for retailers who want to stay relevant and competitive.
So how will these changes affect point-of-purchase displays? We see a number of implications:
1) Demand for displays will decrease – With fewer stores and small formats, the demand for POP displays will inevitably decrease, and consolidation within the POP supplier base will be part of the retail industry’s rationalization process.
2) Smaller footprint displays will prevail – With smaller footprint stores and even greater focus on sales per square foot, smaller displays with narrow footprints will become much more commonplace.
3) Displays will provide greater educational content – POP displays will need to play a greater role in educating consumers as one of the key ways retailers can compete with the information available to consumers when they purchase online.