The Phygital Frontier

COVID-19 accelerated digital and eCommerce adoption by at least 10 years. The retail industry has been slow to unite physical and digital (“phygital”) channels and was put to the test during the shutdown. Not surprisingly, those retailers with agile infrastructure and omnichannel technologies fared the best. This article unpacks the forces at play and the consumer-focused technology offerings that worked.

COVID Crisis

As I write this article, the United States is 130+ days into the first wave of the COVID-19 pandemic. The majority of brick and mortar stores have reopened with health and safety restrictions in place. Retail executives are operating in a new paradigm as virus hot spots re-emerge in the southeast, forcing a second wave of store closures.

When the shelter-in-place orders went into effect, the proverbial music stopped on the retail rally.

Government-mandated store closures for all but “essential retail”, resulted in massive pileups of seasonal store inventory. 

At the same time, online sales surged as consumers were sequestered-at-home and stocked up on essential products weather the shutdown. 

As noted in Figure 1: Retail Ecommerce Sales in the US, prior to the pandemic, eCommerce sales were 11% of total retail sales. Given the acceleration of eCommerce during COVID, forecasters are predicting unprecedented growth in online sales (+18%) and market share (14.5%) by year-end 2020.

Figure 1

Source: eMarketer.com

Throughout the pandemic, most retailers have struggled to adapt to the sudden shift in channel demand. The majority of traditional companies lack the responsive supply chains, scalable technology stacks, and agile organizational structures required for such rapid pivots.  

For years, the retailing industry has neglected to keep pace with innovation. In addition to legacy systems, most companies are hampered by the historical separation of brick and mortar and eCommerce divisions. As mobile penetration and digitally-savvy consumers collided, the demands for more seamless retailing options forced retailers to invest or die.

COVID-19 has ushered in the forces to cause a decade worth of transformation in 4 short months. New customer expectations of fast and convenient home delivery and contactless in-store or curbside pickup have forced the convergence of physical and digital “phygital” channels.

Trailblazing retailers like Walmart and Best Buy began investing in phygital operations in the early 2000s. At the time, these efforts were mostly an attempt to keep pace with Amazon’s meteoric rise. After years of losing marketing share to the online juggernaut, brands finally realized that their brick and mortar stores, when well-designed and appropriately stocked, were a key competitive advantage.

Only when the tide goes out do you discover who's been swimming naked.

Warren Buffett

When we look for bright spots in the retail landscape during COVID, it’s no surprise that the retailers who performed best, were those that invested in and perfected their omnichannel transformation well in advance of this downturn. 

The companies that funded IT and data analytics roadmaps and prioritized scalable agile operations, unified omnichannel commerce (defined below in Figure 2: Omnichannel Retailing), and end-to-end enterprise resource planning are the clear winners of today.

Figure 2

Source: Forrester Research

Tale of Two Categories

Tailwind Categories

Further complicating matters is the bifurcation in retail based on the type of goods retailers carry. In the first camp are those brands that sold a high percentage of “essential goods” (e.g. groceries, pharmacies, hardware) and were able to keep both brick and mortar and online stores open during the pause. 

Also in this group are businesses who were forced to close their physical stores, but were fortunate that the lion share of their products saw surges in demand during COVID (e.g. at-home fitness, office furniture, health and wellness, baking goods and alcohol). 

For the aforementioned companies, the pandemic has been a winning lottery ticket. Despite the 13% drop in overall consumer spending in April, many of these large and niche brands recorded Cyber Monday-like sales.

Even the brands that lacked omnichannel capabilities were able to squeeze out impressive gains, in spite of online stock-outs and website performance issues.

Furthermore, the digital leaders in this category enjoyed sizable market share gains and goodwill as they supported communities during this devastating period. We will explore more on this tailwind group later.

Headwind Categories

The second group of retailers was not so fortunate. These mostly traditional brands have large brick and mortar fleets and sell a high percentage of non-essential goods like apparel and arts and crafts. Many of these companies lacked advanced omnichannel infrastructures and thus were relegated to selling their goods online. 

So while sales for tailwind categories were up year-over-year, the retailers in this headwind category saw precipitous sales declines of 60-80% during this period. Several of the prominent retailers falling into this segment are among the 20+ retailers that have been forced into bankruptcy so far in 2020 (see Figure 3: Retail Bankruptcies Rage on in 2020).

Figure 3

Source: Yahoo Finance

Tech Stars

While the essential workers and medical teams were the undisputed heroes of the pandemic (7 pm applause please!), special recognition is also deserved for the operations and technology teams who kept retailers and headquarters running. 

From the sales associates who put their lives at risk to ensure consumers had the essentials to survive, to the tech professionals who pivoted on a dime to set up remote work capabilities. 

Underpinning life in this ‘new normal’ is the consistent and enabling presence of technology.

The stellar financial results cited above for tailwind brands were likely aided by frictionless shopping journeys that leveraged the best of human and automated interactions. 

In Figure 4: COVID-19 and Omnichannel Competitor Matrix, we analyzed a competitive set of select large and widely covered retailers. Evaluating each company based on penetration of COVID-friendly product categories versus digital maturity helped explain the duality in financial results. 

Figure 4

Source: Catalyst Consulting

By our estimates, visionary companies that embraced technology and funded innovation are at the head of the pack as we emerge from (or are still in) this crisis. 

One of the few silver linings in these dark times is that the retail CIOs and CTOs finally have a seat at the table! The retailing industry has been criticized for its lack of innovation, and we have the virus outbreak to thank for accelerating digital efforts within the industry. 

It has become appallingly obvious that our technology has exceeded our humanity.

Albert Einstein

Based on reviews of the retailers’ press releases and earnings reports, the COVID winners had a similar playbook for responding to this crisis: 1) analyze data, predict trends and in real-time shift their 2) inventory and supply chains 3) distribution strategies 4) human capital and 5) marketing dollars.  

The simplicity of the above statement completely masks the complexity involved in executing each of its tenets.

Underlying the seemingly auto-magical experience of buying a product online or in-app and having it delivered to your doorstep is a highly integrated and expensive technology architecture. Calling upon no less than five enterprise-level systems, omnichannel is the holy grail of phygital, and as such, is the most elusive in retail.

Figure 5

Source: Catalyst Consulting

The core enabling technologies that are required to successfully execute the five steps are as follows: 1) business analytics and real-time insights software, 2) enterprise resource management systems, 3) omnichannel order management platforms, 4) workforce management tools and 5) CRM solutions with a 360-degree view of customers and products with online and offline integrations.

I have classified seven common omnichannel use cases into Figure 5: Omnichannel Maturity Index to chart a brand’s linear journey to omnichannel from a customer’s point of view. While there is no one way to execute or deploy these feature sets, Figure 6: Omnichannel Technology Infrastructure provides a practitioner’s perspective on the complexity, level of investment, and potential business impact of each of these technology solutions.

In building out a roadmap to achieve omnichannel (see Figure 6), there are stepping-stones and phased customer offerings that can be addressed along the way. While it is rare to design a technology stack from scratch, as most of us inherit legacy systems and technical debt, it is useful to disaggregate the solutions to ensure you are getting the most out of the core systems you do have.

Below in Figure 6: Omnichannel Technology Infrastructure, I have broken down each phased omnichannel offering with an analysis of the underlying technology and organizational/consumer benefit.

Figure 6

Source: Catalyst Consulting

1. UNIFIED PRODUCT AND INVENTORY

Conversational Commerce (CC) is the first phygital solution. From a minimum viable product perspective, only a shared product catalog between the website and store associate device is necessary. Fully integrated cart capabilities between the website and mobile point of sale (mPOS) is an attractive add-on but are not required to unleash the power of this feature.

As the least advanced solution, this feature set is ideal for heritage brands with antiquated and non-integrated systems. Conversational commerce gives sales associates the ability to intercept website traffic and apply proven upsell techniques. The resulting increases in units per transaction, average unit retail, and conversion should yield an attractive return on investment. 

Another functionality that can be deployed to consumers as retailers take steps toward increased phygital offerings, is eShop Stores. Launching these capabilities allows retailers to test and iterate use cases that measure customer interest in-store inventory while shopping online. 

2. OMNICHANNEL INTEGRATED WEBSITE

The ability to reserve a product and/or make an in-store styling appointment (ROPIS), return an online purchase in-store (BORIS) or purchase an online item for contactless store pickup (Curbside Pickup) represent the next phase in omnichannel maturity.

As noted in Figure 6, the key component of these online-to-store offerings is having an enterprise-level and flexible front-end website that synchronizes via a real-time API layer with inventory, financial accounting, and mobile POS systems. 

I have been encouraged by the number of retailers who enhanced or optimized their tech stacks during COVID and deployed these mission-critical technologies to keep customers safe. 

As the gateway to omnichannel, deploying these technologies is typically painful for traditional retailers. However, the foundational benefits of establishing this synchronized platform hub is unparalleled. From this solid customer-centric infrastructure, retailers can bolt on a number of future-proof direct-to-consumer offerings.

3. OMNICHANNEL INTEGRATED WEBSITE

The final leg of the omnichannel journey, buy online ship from/to store (BOSS) and buy online pick up in-store (BOPIS) (also referred to as click and collect) is reserved for the winner’s circle.

My favorite omnichannel capability is BOSS. As an advocate for sustainability, efficiency, and high return on investment, I find BOSS to be as revolutionary as just-in-time inventory.

The ability to pool inventory without sacrificing delivery times is ground-breaking. Yet again, we have Amazon to thank for pushing the boundaries on their regional distribution center strategy, which caused retailers to emulate that concept. Macy’s, Walmart, and Best Buy were among the first to use their brick and mortar stores as mini-fulfillment centers.

Enabling BOSS requires not only having all of the aforementioned non-consumer facing technologies but also integrating order management and sophisticated inventory planning systems. The significant investment of time and money combined with the pitfall laden path of tying together unwieldy backend systems is daunting. 

An important commonality between BOSS and BOPIS is the ability of in-store teams to master in-store fulfillment. The training and change management required to operationalize picking, packing, and shipping should not be discounted. Consumer service level agreements, whether stated or implied, do not lessen for either feature set, so enforcing compliance for this new offering is paramount.

In the end, BOSS is a true inventory optimizer and when deployed correctly can improve sell-through, gross profit, and keep inventory balances in line for superior return on invested capital. Another advantage of BOSS is while retailers wait for the return of footfall in stores, BOSS can be an effective way to align channel demand and inventory.

Nirvana in omnichannel retailing is BOPIS, a combination of eShop Store, ROPIS, Curbside, and BOSS. To give you a sense of the magnitude of this initiative, some large scale retailers have spent over $1 billion launching these omnichannel initiatives. 

BOPIS is the quadruple jump of phygital retail, and fittingly it was the star of shopping experiences during the pandemic. The ease, speed, and convenience of finding something online, and having that item in your possession within 1-2 hours is powerful.

Some savvy brands bolted on same-day home delivery options via Postmates, Instacart, etc. This combined BOPIS plus same-day delivery experience rivaled Amazon’s, especially at the start of the pandemic when many Prime delivery windows were extended.

The core technology for BOPIS is a front-end website with an intuitive user design that allows a shopper to search inventory availability by zip code or location. Often requiring custom development, this offering is expensive, but post-pandemic BOPIS is quickly becoming table stakes for digitally-savvy consumers. 

As noted in Figure 7: The Benefits of Omnichannel, the incremental revenue lift and enhanced loyalty from offering BOPIS are sizable. In addition to the financial benefits, organizations that successfully undergo digital transformation are poised for sustained future growth. All in, the pain experienced while pursuing omnichannel is worth it financially, and if not pursued, many retailers may experience the pain of bankruptcy. 

Figure 7

Source: Forrester Research

I’d be remiss if I didn’t mention that there are new technology vendors that are purpose-built to fill gaps in omnichannel architecture and unite discrete platforms to cobble together a BOPIS-like experience. It is highly likely in a few years new brands will be able to afford and quickly launch full-featured omnichannel solutions leveraging these upstart SaaS players. 

New digital native startups will likely bring about the final frontier of omnichannel retailing which will include more personalization via artificial intelligence and machine learning. Amazon and internet of things (IOT) manufacturers already offer consumers subscriptions for auto-replenishment of commodity goods. In many ways, Stitch Fix, Birchbox and Rent the Runway were trailblazers in this space, so expect an eventual converging of phygital, subscription, and rental models. 

In Summary

We all hope that it won’t take another exogenous shock, like a pandemic or natural disaster to force retailers to embrace innovation and experimentation. 

I am hopeful that the retail industry will heed the lessons and elect to continue the unsexy digital transformation work required to align with consumer expectations. 

In the interim, stay safe out there!

-Lockie

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Lockie Andrews is the CEO of Catalyst Consulting (www.catalystconsult.com), a boutique advisory firm to retail and consumer brands and technology companies, as well as venture capital and private equity funds. Lockie is also the Chief Digital Officer (CDO) and Chief Information Officer (CIO) of UNTUCKit, a digitally native brand located in New York City, and the 2020 awardee of The Lead Digital Icon award.

With 20+ years of general management experience, Lockie has assisted high growth companies (e.g. Nike, Lane Bryant, Limited Stores, ANINE BING, and various high growth startups) in diverse areas such as digital transformation, technology, analytics, digital marketing, revenue enhancement, and operational/financial improvement.

Lockie is a speaker, angel investor and sector lead for the HBS Alumni Angels of NYC, and the Co-VP of Programming for the HBS Club of New York. She is also the founder of the Black 100 Initiative, a non-profit focused on increasing board representation of Black executives in Fortune 1000 companies.