How retailers are blending physical and online commerce

Retail commerce continues to evolve, combining both brick-and-mortar and online elements. The goal for retailers is an integrated process that gives consumers a seamless experience and allows companies to capture the greatest benefits across both physical and digital operations. So far, no retailer has achieved full integration, but most are headed down the path. Many retailers with physical locations have built online businesses, and online retailers are increasingly opening brick-and-mortar outlets to strengthen their brands and engage with customers in person.

To capture the maximum benefit, however, companies will need to rethink their processes and redesign integrated retail in new ways, with new technologies. This is a big transformation. It involves not only a deep understanding of a company’s value proposition to customers, but also a long-term strategy, given the investment of time and resources needed to digitize the diverse variety of processes needed to run the operations.

Physical retail is here to stay

Nearly 90% of retail sales still take place in brick-and-mortar stores. Yet much of the industry’s future growth will come from online commerce, which allows companies to use customer data to learn far more about customers and meet their needs more quickly and effectively than can be done through traditional means. For this reason, many companies are now considering or launching hybrid business models. For example, some retailers have rolled out click-and-collect offerings that connect back-end inventory with logistics solutions. Others offer loyalty programs that enable them to develop a single, comprehensive view of individual customers and to gather data on their shopping behaviors and preferences.

Recently, some online-only brands have started opening physical locations. Perhaps the best-known example of this trend is Amazon, which has begun experimenting with physical stores in the categories where it has the highest online penetration (books) and which recently acquired the Whole Foods Market chain. Some may think that the Whole Foods deal is about winning in the grocery segment alone, given the massive size of the market and the frequency of customer visits. At a more strategic level, however, the deal underscores the potential of a truly hybrid, offline-online retailer. For example, Amazon can potentially use Whole Foods stores to gain greater insights about customers and tailor online offerings for them in a more personalized way. The physical stores also offer local distribution points for faster delivery or more convenient pickup points for non-grocery items.

A spectrum of roles for stores

There is a clear role for physical stores in the retail universe. However, the role they play within an integrated retail experience changes depending on the category.

Functional. On one end of the spectrum, physical stores serve a functional role, such as providing after-sales service or serving as a staging point for last-mile delivery. This applies in categories where the products are standardized (such as electronics, books, and nonperishable grocery products) or where speedy delivery is imperative (such as the delivery of prepared food).


Experiential. At the other end of the spectrum are stores that serve a more experiential or inspirational role—for example, in-home furnishings or lifestyle and fashion department stores. Because these stores sell nonstandard categories of products, the browsing and consultation elements are crucial to customers. Shoppers are less focused on efficiency and more on an in-store experience that is personalized and engaging.

Hybrid. Grocery stores fall somewhere in the middle of the spectrum. Some grocery products, such as packaged goods, are standardized, while others, such as fresh and prepared foods, are more experiential and involve time-sensitive delivery. 

In-Store Experience. The average retail store is much smaller than a traditional grocer and is located in an urban neighborhood. The majority of standard items are stocked in a warehouse adjacent to the store, freeing floor space in stores for fresh products. Locations may include onsite dining in a restaurant-like setting.

Delivery. Each retail store is an offline grocer and a fulfillment center, driven by a powerful analytics system. Each store serves its local community, making it possible to deliver online orders within a three-kilometer radius in 30 minutes. Advanced data analytics drives the assortment of products in stores, to ensure that the company is meeting customer demands.

Digitized Customer Interactions. Most customers are store members and interact with the retailer—from preordering to payment—through a mobile app, even while they are shopping in a store. This allows retailers to develop richer insights into its customers and to better personalize both offers and the assortment of goods for each location and each individual.

The redesign of integrated retail

In all cases, for example, retailers gain richer customer insights by digitally capturing customer interactions. And executives consistently speak about the imperative to begin digitizing the full breadth of offline experiences. Forward thinking retailers are taking the following actions:

Plan for the long haul. There is no quick fix, and technology gimmicks are not enough. Developing a truly integrated business model that combines the best aspects of online and offline commerce is a fundamental change in business strategy that requires a multiyear vision and significant investment.

Lead from the top. Setting up the initiative as an isolated digital project led by the CIO is a guarantee of failure. Rather, success requires the direct involvement and oversight of the CEO, along with all functional leaders—CMO, CFO, and the heads of business units—serving as champions for change in their respective areas.


Expect the real work to happen below the surface. Many companies get drawn in by consumer-facing technologies, the most attractive and visible aspects of digitalization. But they’re just the beginning. A real transformation requires digitizing every process—not only customer-facing aspects but also all the internal processes by which most of the work gets done at companies, including such mundane tasks as tracing invoices back to suppliers. (Of course, in addition to processes, companies need the right systems architecture and data.) Every process that is not digitized and linked to other functions in the company represents a missed opportunity to gather insights, better serve the customer, and operate more efficiently.

Partner with external firms to build more comprehensive data sets. Even the most advanced companies simply won’t be able to generate enough insights about real-time consumer behavior and digital consumption habits on their own. Instead, they will need to find partners—likely social media companies, at least for the next several years, or syndicated research firms, such as AC Nielsen—that can offer richer information not only about current customers but about potential customers.

Invest heavily in digital and analytics talent. Given the importance of analytics, companies can’t simply hire one or two people and ask them to start tinkering. Rather, they need to invest in building digital and analytics. Almost half of Hema’s employees, for example, are engineers.

In an increasingly digital world, companies need to find the right business model—one that lets them capture the full advantages of both online commerce and physical retail. Digitization helps retailers serve customers both offline and online. This is welcome news for the companies that are still working on developing integrated retail, because making these changes is not optional. As the retail industry evolves, retailers will need to evolve as well.

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