March 20, 2013, 12:21 PM

The Flaw in Omnichannel Retailing

Retail chains like the strategy, but it's limiting their potential in e-commerce.

I saw this headline the other day in Shop.org SmartBrief: “Saks makes shift from multichannel to omnichannel.” As is the case with this newsletter, a digest of e-commerce stories that originate from other publications, the SmartBrief headline linked to an original article in Marketing Daily, which reported on a presentation by Saks CEO Stephen Sadove at a Wall Street investment conference.

“I can’t say enough about the growth at saks.com,” Sadove was quoted as saying in discussing his company’s investment in an omnichannel strategy. “There’s so much integration between store and online sales that we can’t report the numbers separately, they just don’t make sense because we are moving inventory from one to another all the time.”

What amuses me is that neither the story nor Sadove explain what omnichannel merchandising means and how it differs from the now discredited multichannel strategy from which it emerged. Nor did either analyze whether omnichannel strategies are really effective in helping the retail chains compete in the e-commerce space.

I suspect the reason for the oversight is that there is no meaningful difference between multichannel and omnichannel retailing, except that the latter is a trendy rebranding of a chain strategy that failed miserably after it was adopted a decade ago.  Some retail experts explain that multichannel retailing means integrating the web and the store to the point that shoppers use both channels at different times, whereas omnichannel retailing means taking that integration to the point that shoppers use both channels at the same time. That distinction was made in a 2009 study by IDC’s Global Retail Insights research unit, which we reported in a web story dated Sept. 9, 2009.  This study, which is the first time we quoted anyone using the omnichannel term, concluded that multichannel shoppers spent 15% to 30% more with store retailers than the single channel shoppers, and that omnichannel shoppers spent 15% to 30% more than their multichannel brethren.

And so the omnichannel strategy was born, and retail store chains have since talked omni, not multi, when referring to their integration of web and store retailing. The technical distinction between the two has since been lost, however, and omnichannel now means anything that involves integrating web and store shopping experiences, whether those occur separately or concurrently. But here’s the problem with both of terms: They reflect a retail strategy directed at the store shopper who sometimes uses the web rather than at the web shopper who prefers shopping online rather than in stores. The latter group is the driving force in e-commerce—indeed, the growth driver in all of retailing.

Nonetheless, multichannel or omnichannel retailing is a very appealing concept to chain store CEOs, because it means that the stores that make up their company’s primary investment are still the center of the shopping experience, only now that experience is assisted by the web. The chain’s web store is subservient to the physical store, much like a wholly-owned but completely dependent subsidiary. The web does the bidding of the bosses who run the chain, rather than meeting the unique needs of the growing number of shoppers who rely primarily on the web and who demand that web stores meet the performance standards that are unique to the e-retailing and which have been set by the leaders of the e-commerce business—the web-only merchants like Amazon and others who pioneered e-retailing.

Every April, when we publish the Top 500 Guide, which ranks the 500 largest e-retailing operations in the U.S., we report that web-only merchants grew faster—often twice as fast—than e-retail operations of the store chains. As a result, web-only merchants every year take a larger share of the burgeoning online retailing market, which in turn is slowly chipping away at the market share that retail stores enjoy in retailing.

There is little doubt that a good web site helps bolster a chain’s total retail sales, but how much faster would those chains be growing if they tried a dual-path strategy, one that treated their web site as a stand-alone business managed separately from the store by a CEO and management team focused totally on maximizing web sales? The chains would still integrate the web site into the store shopping experience as they do now, but the web store would focus on meeting the needs of the web-centric shopper, using the store’s brand for greater exposure.

This strategy would allow the chains to optimize the opportunity they have with the web channel and compete more effectively with web-only merchants who as a group run rings around store-controlled web sites. This dual-path strategy would also respond to the undeniable financial reality of retailing in the Internet age. Shoppers in general are becoming more dependent on and attuned to the web and less dependent on and attuned to store retailing. E-retailing in the U.S. last year grew at 16% compared to 5% for stores. That wasn’t an anomaly; it reflects a trend that goes back to the mid-1990s.

Saks is a good case in point when it comes to revealing the weaknesses of an omnichannel strategy. True, its total retail sales last year grew by 5% to $3.15 billion, and they might have been a smidge higher were it not for Hurricane Sandy. But there’s good reason why CEO Sadove argues that “it no longer makes sense” to report separately numbers for the store and web channels, as it did until last year. In the 2013 edition of its Top 500 Guide, Internet Retailer is estimating that Saks.com sales last year grew 20% to nearly $900 million, which means that the stores were a drag on the company’s overall performance.

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