In RSR’s 2016 benchmark on the state of Omnichannel retailing (Retailers’ Omnichannel Blind Spot: Digital, August 2016), we commented that, “…<the Omnichannel challenge>… appears to be an industry issue, not one based on retail performance. When it comes to understanding the role that digital has in shaping business challenges, retailers, whether large or small, high-performing or low, reveal a breath-taking level of naiveté about the role of digital in an Omnichannel strategy. ” In our soon-to-be-published update, it’s clear that retailers have moved from naiveté to alarm. Last year’s survey respondents seemed optimistic, giving top priority to understanding consumers’ new shopping behaviors and offering a consistent experience across channels. But in the 2017 study, the mood seems panicky; retailers’ top concerns are that they can’t keep up with consumer expectations and behaviors in the digital space, and that they can’t compete profitably with online competitors because of their cost structure.

Retail appears to be headed for a crisis, as recent industry performance highlights. As companies closed the books on 2016, many reported overall revenue increases that seemed stable if not stellar. While the industry achieved a greater than 3% top line growth rate in 2016 (according to U.S. Census Bureau statistics), and the National Retail Federation reported that holiday (November & December) sales grew 4% YOY (year-over-year), that overall statistic masks more troubling signs for traditional retailers. General merchandise store sales for the same period fell 1.5% and department store sales decreased by 7%. And even through overall online holiday sales grew more (12.6%), online mega-retailer Amazon captured over 50% of that growth. Consumers’ “digital ” shopping expectations and behaviors are clearly underpinning the performance challenges that “traditional ” retailers are grappling with.

The question is, can those retailers meet consumers’ new expectations and still make a profit? So far, the answer seems to be “no ” or “not yet “. A recent survey of retail sponsored by ” JDA Software Group and PwC revealed that only 10% of 350 executives queried claimed to be able to make a profit while fulfilling Omnichannel demand.^. It’s apparent that retailers are coming to a do-or-die decision point; one way continues a downward cycle of weak results, while the other leads to a still uncertain future. CEOs are showing more willingness than ever to take the uncertain path to a hopefully brighter future; according to the same CEO study, 69% say that they plan to increase their investment in digital transformation over the next year.

Walmart Presses Its Brick-and-Mortar Advantage

In the new study, retailers cited the use of the digital channels to drive more traffic towards the stores as a top-3 objective. Over-performers, those retailers that RSR studies classify as “Retail Winners “, are already well on the way. In fact, the study shows that 32% of over-performers reported that one half or more of their store sales are influenced by the digital channels, compared to on 11% of all other retailers.

While the industry continues to try to find the balance between consumers’ online shopping behaviors and the need to drive business to the stores, store fulfillment of online orders seems to be gaining traction, even though many early adopters have struggled to make that option profitable. In one notable example, UK retailer John Lewis, one of the industry’s first to offer “click and collect ” in-store pickup of an online order (in 2008), began charging customers a £2 fee for orders less than £30 in 2015. At the time, John Lewis managing director Andy Street, said: “There is a huge logistical operation behind this system and quite frankly it’s unsustainable. We consider ourselves to be leaders and we want to take the lead on this. ”

While the overwhelming concern among retailers in the new study’s results is that all the efforts to enable an Omnichannel selling environment are not generating profitable sales, every retailer said that there is at least some opportunity to improve the profitability of the fulfillment process. But the weight given to that opportunity highlights are certain amount of fatalism among average and under-performers. Whereas 80% of winners consider this a major opportunity, less than one-half of non-winners see it.

Well, Walmart clearly considers itself to be a Winner, and it wants to stay that way. Last week, the Arkansas-based retail giant announced that will offer discounts on thousands of online-only items, but only if customers pick them up at one of its stores rather than having them shipped to their homes. Walmart will make the discount available on approximately 10,000 items starting April 19th, but will expand the offer to more than 1 million items by the end of June. Walmart needs to offer more than just a lower price to make this work (for example, the service has to be fast, convenient, and most of all, reliable), but the tactic is a clear indication that while the company wants its customers to take advantage of its digital channel, it still believes in its brick-and-mortar advantage over Amazon.

And that’s the point: “landed ” retailers have a strategic advantage over the pureplay mega-aggregators when it comes to Omnichannel. Walmart isn’t the only retailer that offers “click & collect ” fulfillment of course, but it may be the first to offer the consumer a price incentive to use the option. Perhaps the retailer wants to emphasize the store as the fulfillment point because it believes an old truism that if customers enjoy the store shopping experience, the longer they will stay, and the longer they stay the more they will purchase. Whatever the rationale, the sheer volume of Walmart’s business is likely to push click & collect to the forefront of consumers’ baseline expectations for all retailers. And that further emphasizes what the new RSR study calls out as “retail’s existential challenge “.

RSR Recommends

Retailers have some real work to do to meet that challenge. It’s as big, if not bigger, than the challenge of Walmart in the early 2000’s. It seems odd, after at least seven years of retailers trying to respond to consumers’ increasingly digitally enabled shopping behaviors, to say that companies are still in the early days of offering an integrated digital/physical shopping environment that works for consumers and is profitable for the retailer, but that in fact is the case. Frankly, incrementally chipping away at old processes and the systems that support them isn’t working. Retailers must move faster, spend more on tech and employees, carefully think through implications to their merchandising, marketing, store and supply chain processes, and at the same time, get out of the Amazon price war. Without these steps, they will continue their downward spiral into oblivion.

In the forthcoming report on the state of Omnichannel, RSR makes several recommendations, including these:

• While the traditional store is in dire need of an update, it remains retailers’ best opportunity to differentiate from pure play mega-aggregators, if they will only seize the opportunity. Further, particularly in the apparel sector, driving traffic to stores can help minimize “the returns problem ” and cut back on the need for sophisticated reverse logistics

• It is critical for retailers to measure the value of customers’ cross-channel shopping behaviors. Does activity = sales & profits?

• Retailers MUST harmonize the selling channels into one cohesive selling environment, execute with greater precision, and build a stronger bond with consumers around the re-vitalized experience. For many retailers, this will require real and significant expenditures on technology. There’s just no way around it – it’s time to push forward.

EDITOR’S NOTE: Look for our announcement of RSR’s the new report, Omnichannel Retailing 2017: Retail’s Existential Challenge, in your e-mail Inbox and on the RSR website in May!