First the good news: the peak season for retailers was strong overall. Sales rose 4 percent versus 2015 to $658.3 billion as an expanding economy prompted sales that were greater than the 3.6 percent rise that the National Retail Federation expected. Now the bad news: the peak season for retailers was strong overall. In other words, the gains weren't evenly distributed.
A post-holiday study from the International Council of Shopping Centers (ICSC), for instance, found that of those who bought items online from a retailer with a physical location and picked up in-store, 61 percent made an additional purchase in person (that was true for 75 percent of millennials). Some 77 percent of millennials also said that it was important to buy online from stores that have a physical presence.
And while Amazon continues to monopolize headlines, the report provided further proof that consumers prefer retailers that have a strong online presence and brick-and-mortar. For instance, a little more than half of consumers waited until the days leading to Christmas to finish their shopping. Clearly, being able to buy in-store or pick up an online order at a local store continues to hold appeal for such shoppers.
Nevertheless, Macy's still plans to shutter about 100 stores this year, roughly 15 percent of its total, and Sears is planning to shutter more than 30 Sears and Kmart stores this year as well. Steven Barr, retail consumer leader for PwC, told USA Today that, "This was a fantastic shopping season, but for many department store and apparel retailers, this was a very challenging holiday." Barr added that he anticipates "significant numbers" of store closures among such retailers.
On the other hand, Amazon called the 2016 holiday season its best ever and said it shipped one billion items worldwide this year. That came as Amazon began experimenting with brick-and-mortar locations. In particular, Amazon Go, a grocery store, will let customers grab items off shelves and leave without checking out but instead pay via a mobile app.
Amazon wasn't the only retailer to have a good holiday season. Retailers including T.J.Maxx, Ulta, Lululemon, and Best Buy also logged strong sales during peak season, though it's possible that such sales came at the expense of profitability; with sales so cut-throat, retailers had no choice but to drastically slash prices to compete.
Amazon can afford to take a hit in profitability if it continues to wipe out its brick-and-mortar competitors. Others, like Macy's, face a tough situation in which online competition continues to eat into sales and its own online sales have been relatively slow to pick up the slack. Macy's online sales grew in double digits in 2016, but overall sales fell 2.2 percent during the holiday season. As such, traditional retailers like Macy's find themselves in a similar situation to newspapers like the New York Times that continue to grow digital sales but not enough to offset declines in their traditional business (in the Times's case, print sales).
Some retailers realize what they're up against and are taking steps to make their operations more omnichannel friendly. For instance, Hudson's Bay Company launched a robotic distribution center in November that can fulfill an order in 15 minutes, a fraction of what it was a few years ago. HBC's new warehouse features sixteen 200-foot-long aisles, stores more than one million units of inventory, and can process about 4,200 customer orders per hour. Cost: $44 million. Best Buy has had success embracing showrooming and promising to match prices that consumers get on Amazon. Best Buy also cut its shipment time to be on par with Amazon. As a result, the retailer's sales grew in the third quarter.
Those aren't the only ways that retailers managed to even the score in 2016. Many also embraced ship-from-store as a method of maximizing brick-and-mortar square footage and increasing online selection. Others found success by embracing or countering showrooming and webrooming. However, Amazon continued to raise the stakes during the year with Echo, a device that was not only a huge seller during the holiday season, but also provided another beachhead for the retailer within consumers' homes. The device and Amazon's Alexa voice-control system also provide an invaluable stream of new data (albeit with some challenges) to round out Amazon's already extensive consumer database. As we look ahead to 2017, it's clear that the retail battle will be fought via voice interfaces and AI-based infrastructures. To survive, retailers will need to offer such accouterments as well but also ensure that their brick-and-mortar locations are fun and a source of entertainment for consumers.
The groundswell of ship-from-store intensified in 2016 as retailers realized that embracing such strategies was central to their survival. In particular, Toys "R" Us is one of many retailers that implemented a ship-from-store program this holiday season. During 2015's peak season, the retailer had launched a "sales prevention" program in which it had to pull some deals to prevent shoppers from ordering items online that might not show up before Christmas.
Attempting to avoid a similar situation this year, Toys "R" Us turned nearly all of its 870 stores into distribution centers. Such stores were jammed with merchandise late into the season to accommodate online orders. To ensure that shipping was carried out, the chain also offered better wages and bonuses to recruit seasonal workers in their eCommerce operation.
Toys "R" Us wasn't the only retailer to employ ship-from-store. Lululemon also expanded its ship-from-store program before the holidays and Target expanded its program to 1,000 stores—about 55 percent of its total—in preparation for the holidays. CEO John Mulligan told analysts that ship-from-store is ultimately good for Target's bottom line: "This [ship-from-store] capability reduces shipping times given the proximity of these stores to the vast majority of the U.S. population," he told analysts, according to a transcript from Seeking Alpha. "With that proximity to guests, we also save on shipping, helping to relieve the pressure from shipping growth in our P&L [profit and loss statement]. It also allows us to balance our inventory across our store and network, maintaining in stock [goods] while reducing markdowns in store locations with heavy inventory."
Though peak season sales figures aren't in yet for those retailers, ship-from-store has proven to be a successful strategy for other retailers. In particular, GameStop has tripled its online assortment by shipping from stores.
Now that about 80 percent of Americans have smartphones and consumers spend more time on their mobile devices than on desktop, it's no surprise that many expect businesses to provide a seamless connection between their mobile interface and other touchpoints, including brick-and-mortar and desktop.
According to Statista, US retail mobile commerce sales had a breakthrough year in 2015, reaching $80.94 billion, and mCommerce sales are expected to reach $206.53 billion by 2018. While at one time mobile meant "tablets" and it was assumed that consumers made such purchases while sitting at home on their couches with an iPad in their lap, retail executives say that consumers are increasingly comfortable about making purchases on their phones while out and about.
This means that more than ever, if a consumer visits a retail store and can't find what she's looking for at the price she's looking for, she'll just buy it on her phone. Such showrooming was once seen as a major menace to retailers since it reduced their locations to showrooms for items that consumers would buy elsewhere—clearly a losing strategy in the long-term.
As we have seen, though, there are ways that retailers can fight back against such incursions. As mentioned, Best Buy has extended its price-match guarantee to online, a key move since retailers have traditionally offered such guarantees only to other brick-and-mortar retailers. Another strategy is to make the in-store experience special by offering exclusive experiences. Sephora, for example, offers an iPad application that's available only at Sephora brick-and-mortar locations that provides product reviews and personal shopping histories that can't be found anywhere else.
Similarly, Burberry has made its retail locations a one-of-a-kind experience replete with interactive signage and digital mirrors that offer videos about the item the consumer is interested in and pairing recommendations.
Such retailers realize that shopping is increasingly seen as a form of entertainment. To lure such consumers, some malls have taken to hiring comedians to perform and offering trampoline parks. Others have focused on making their stores an experience. Wegmans, for example, recreates the feeling of shopping on a city street within its huge stores and Trader Joe's offers exclusive products in-store that consumers can't buy online. While fulfillment and mobile interfaces are important, retailers that overlook the entertainment aspect will find themselves on the wrong end of the equation.
Just as retailers tried to catch up to Amazon, the company once again upped the stakes with Echo. Though released in late 2015, the product caught on in 2016. Before Christmas, it was already in four million US homes. Then Amazon announced it was the company's best-selling product during the holiday season.
For competing retailers, Echo/Alexa is particularly insidious because it makes it so easy for consumers to order and reorder from Amazon. It is almost as if Amazon couldn't wait for Internet of Things devices to take hold and took matters into its own hands with both Echo and Dash, a suite of stick-on, Internet-connected devices that let consumers reorder Bounty paper towels and Ziploc bags.
As consumers get more comfortable with voice control, Alexa will gain power. However, Amazon faces some competition from Google Home and home automation products from Apple and Microsoft that are just starting to trickle into the market. The good news for retailers is that Alexa doesn't have a stronghold in smartphones, where Apple's Siri and Google's voice-control systems still have the edge. In each case, there's an argument to be made for instilling brand loyalty, since the retailers who win in a voice-controlled environment will be those that consumers already know and like. While a consumer might say "check Best Buy for GE dishwashers," if he merely asks for dishwashers, the control will shift to Google, Apple, and Amazon, which get to choose which retail storefront to call up. (In Amazon's case, that's a no-brainer.)
While voice control is the most consumer-facing aspect of AI right now, it is beginning to impact retail the way it is in other businesses. For instance, 1-800-Flowers.com has an AI-powered gift concierge that will help make queries like "What should I get my mother?" more effective with follow-up questions like what the occasion is and what she's liked before. AI is also fueling bots that interact with consumers using natural language, much like an informed sales associate.
To be sure, it's still early days for such technologies, but AI is improving exponentially, so even over the course of a year, retailers and consumers are likely to notice some positive changes.
What Didn't Happen in 2016
Of course, it's also worthwhile looking at what didn't happen in 2016. In particular, some hyped technologies failed to make their mark. Despite Facebook's backing, for instance, virtual reality failed to take off during the year and predictions of consumers using VR headsets to simulate in-store experiences never materialized. Similarly, despite the huge success of Pokemon Go, augmented reality hasn't yet made its mark.
That's not to say that neither will be a big deal in 2017. Other technologies with potential in the coming year include social shopping, perhaps fueled by Instagram's new live video feature that could bring back flash sales, and personalized retargeting, which could help retailers salvage those abandoned shopping carts that can be so frustrating.
While none of these technologies are likely to provide a huge change on their own, a well-executed omnichannel strategy will continue to be retailers' best hedge against competition from Amazon in 2017. As a study released in January 2017 illustrated, consumers like and appreciate having access to multiple touchpoints from a retailer. That's heartening news, and further proof that retailers who don't figure out omnichannel will soon find themselves in deeper trouble in 2017.