FUTURE OF BIG BOX RETAIL: NAVIGATING CHALLENGES AND EMBRACING CHANGE

Take a full read on my view on the challenges and opportunities for big box retailers. What do you think?

Big box retail has long been a cornerstone of American and European shopping culture, specifically category killers like Home Depot, Lowe, IKEA, Best Buy, Media Markt and Sears growing into dominance in the 80’s and 90’s of the last century.  However, in recent years, this model has faced unprecedented challenges, with two main drivers: Changing consumer behavior “pushing” big box retailer into the omnichannel direction, while at the same time, the need to maintain an extensive store footprint with a declining share of retail spent off-line. A fundamental precondition for navigating these dynamics is competence and scale enabling retailers to make the necessary investments in technology, real estate and brand visibility.

Under Pressure from Rising Real Estate Costs

One of the most pressing challenges for big box retailers is the continuous rise in real estate costs while at the same time, its revenue is split between store- and e-commerce- sales channels. Two major trends impacting the big box retailer’s agenda today:

·  E-commerce sales grew from a 0,80% share of sales in 2000 to 16% share in Q2 2024 (source: Marketplace Pulse). The growth rate is decreasing but still substantial:  from a 25%-35% YoY growth in the 2000 – 2010 period , now declining to 5%-10% YoY growth in the last 5 years (source Fred). With this growth trend, it is likely that online sales will exceed 25% share of retail sales by 2030. In essence it means the physical store sales lost 25% of their revenue, which obviously impacts store economics.   

·  Soaring real estate costs: Most household-name big box retail concepts we know today were founded in the 1960 – 1980 period and really started scaling in the 1970 – 2000 period to reach their dominant presence. From 1980 to 2020 commercial real estate prices went up 4,2X, outstripping the Consumer Price Index (CPI) which increased 3,7X in the same time-frame. In modern times, from 2000 – 2024 commercial real estate prices went up 18% more than the CPI index (213% vs 180%) (Source: Fred).

The above means that every new established store is, in relative terms, more expensive than during the big box retail scaling period (1970’-2000’) while also losing out on 15%-25% of its revenue as sales shifted to another sales channel. Retailers are feeling the financial pressure investing into new sales channels and omnichannel customer journeys while at the same time being confronted with higher relative real estate costs.

To adapt, big box retailers will need to rethink their real estate strategies: Many are already exploring mixed-use developments, store-formats and store-size adaptions as well as finding new ways of sharing high fixed costs of retail destinations. The essential retail question, “customer accessibility and brand presence”, is back on the table in a new way: Keep in mind that consumer’s willingness to travel “far” to a retail destination can nowadays not be taken for granted anymore. A “day out” to big box IKEA sounded obvious in the last century, but not anymore.

Essentially the big box retail destination cannot be “too small”, otherwise there is no differentiation with competition. At the same time, it cannot to be “too big” due to costs, site availability and “too big primary market area’s” balancing long travel distances vs. value for time. This dilemma triggers format adaptions powered by innovations in logistics and application of technology in the customer journeys.  Retailers operating at scale are best positioned to attract favorable site leases or purchase conditions as well as leveraging technology options.  

 Omnichannel: A Must, Not an Option

In an era dominated by convenience, adopting an omnichannel approach has become essential. Today’s consumers expect a seamless shopping experience—one that integrates physical and digital platforms. Those operating under the assumption that a strong brick-and-mortar presence alone is sufficient are at risk of obsolescence. Only retail business models with superior competitive advantages (e.g. the by far lowest cost products in a category) could have a chance in the new omnichannel world.

About two thirds of retailers have “some kind” of omnichannel strategy (source Harvard Business Review) investing in “click & collect”, “on-off-line (O2O)” marketing capabilities, mobile apps and same day deliveries, amongst others. In the back-end investments are geared towards inventory- and order management solutions, customer service and advanced analytics. Retailers with a solid omnichannel approach achieve an average customer retention rate of 89%, compared to 33% for those with weak omnichannel approaches. This stark contrast underscores the importance of having an omnichannel strategy combined with high quality execution.

A successful omnichannel approach requires (source McKinsey & Co.):

1. Invest to get basics right: get compelling customer journeys in place in an omnichannel setting.

2. Make “Go-to-market strategy “on-line first”: assume on-line interaction with the consumer is the No 1 entry point for all consumers to the brand to all sales channels. 

3. Measure and incentivize business success across sales channels, not stand alone per sales channel.

4. Take full advantage of the physical store presence: brand trust, interact with people and physical accessibility, as differentiator of the pure online players. Of course, an inspirational store experience is a precondition.

However, to make these investments and to fully realize the benefits of an omnichannel model, a foundation of scale is necessary as fixed costs are high. The average retailer spends around 1,5% of its revenue on technology and related talents, while the more successful omnichannel retailers spend 3,0%+ of revenue. Yet, a successful $10 billion revenue retailer with 3% technology and development budget has a clear advantage over its peer with $1 billion sales allocating 1,5% as investments: 20 x more budget funding omnichannel development.

Physical Presence: Essential for Brand Building

While digital presence is vital, the physical store remains an irreplaceable asset in the brand building toolbox. Fast growing e-commerce sales channels have clear advantages like “convenience” and “choice” for the consumers, however experience of shopping—feeling fabric textures, testing products, and engaging with knowledgeable staff—cannot (easily) be replicated online. Furthermore, maintaining visibility in prime locations reinforces brand identity and enhances consumer trust.

Brands that recognize the value of physical presence are finding innovative ways to create engaging environments which go beyond mere transactions. Strong arguments in favor of a physical retail presence are:

·  Experience & loyalty: The most important role of physical retail in omnichannel world according to “retail executives” is Providing an in-person experience component into the consumer journey (42%), Increase conversion of potential customers (38%), Driving customer loyalty and repeat purchase (31%) and Driving overall brand awareness (28%) (source E-marketer)

· Conversion: Higher conversion probability and instant gratification from a consumer perspective as 31% of shoppers who made in-store discovery purchased right away, compared to 19% on e-commerce platforms and 10% on brand sites.

In order to keep physical destinations vibrant and interesting, big box retailers must focus on transforming their stores into destinations that offer more than just products. This emphasis on brand experience can significantly enhance customer retention and leads to increased foot traffic—an essential counter to the struggles presented by rising real estate costs and online competition.

There is also a very strong financial argument to have a substantial physical store presence next to a strong e-commerce presence: There are obvious synergies in the retail core operating processes for both sales channels in marketing, logistics, technology, administration and loyalty. Sharing these costs across sales channels at scale can make the difference between financial success and repetitive losses.   

Conclusion

The future of big box retail is undoubtedly complex—fraught with challenges yet rich with opportunities. As rising real estate costs impose limits on traditional models, adopting omnichannel strategies will become increasingly mandatory for survival. Recognizing the value of physical presence will remain essential for brand building and generating economies of scale to make those to make meaningful investments.

In essence the big box retailer must leverage the physical store and distribution infrastructure while building up the omnichannel customer journeys. It requires innovation within the historical core competences of the big box retailers (marketing, logistics, operations, real estate) while at the same integrating new core competences in technology, data, loyalty and digital marketing.

Jaap Doornbos - November 2024