The Business of Fashion
Agenda-setting intelligence, analysis and advice for the global fashion community.
Agenda-setting intelligence, analysis and advice for the global fashion community.
This article first appeared in The State of Fashion: Technology, an in-depth report co-published by BoF and McKinsey & Company.
The rules of physical retail are changing. Pressure on the economics of operating stores has been mounting, particularly since more and more consumers began embracing the convenience — and safety — of e-commerce during the Covid-19 pandemic.
But physical retail is far from dead. A 2020 survey of European consumers showed that 60 percent of respondents wanted to see or touch products in-person before buying, while 50 percent shopped in stores so they can take items home immediately. As pandemic restrictions subside, the percentage of customers shopping online is expected to fall 3 percentage points from 2021 levels across key markets, including Europe, the US and China. This presents an opportunity for players to reshape the role of stores in their overall retail mix.
Engagement with in-store technology can lead customers to spend up to four times longer shopping than customers who simply browse. But what is the right mix of technologies to attract customers to stores, and keep them engaged when they arrive?
Experiments with in-store technologies such as magic mirrors, connected hangers and interactive holograms were once touted in the industry as a solution to declining footfall and store engagement. These have largely failed to make a meaningful impact on in-store conversion rates while requiring hefty installation costs. Instead, fashion executives should direct investment towards in-store technologies that specifically address operational pain points and fit seamlessly into the customer journey.
For example, 20 percent of customers are dissatisfied with online delivery and returns. Mobile-based technologies that tailor and streamline the in-store experience and micro-fulfilment technologies that incorporate stores into distribution networks could help address these challenges.
Brands can adapt mobile-based technology to the expectations of two distinct consumer profiles: the shopper seeking convenience and the shopper seeking experience.
For the convenience-driven shopper, mobile apps can combine digital and physical shopping experiences in an efficient end-to-end journey. Fast-fashion retailer Zara’s customer app, for example, allows shoppers to book fitting rooms, see available stock, find products on the shop floor and join a virtual queue to complete a purchase. The user experience of such apps needs to work seamlessly within the customer journey, and the technology can build on existing backend software, such as inventory management and point-of-sale software.
Fashion executives should direct investment towards in-store technologies that specifically address operational pain points and fit seamlessly into the customer journey.
Meanwhile, for customers seeking experiences, social connections and entertainment from stores, mobile apps can help personalise visits. Nike’s House of Innovation stores in New York, Shanghai and Paris aim to showcase the brand’s storytelling. In New York, interactive AR challenges let customers surface animations and product information by scanning QR codes located on the shop floor. The in-store experience is particularly attractive for luxury players whose customers expect brand immersion within stores. In its Shenzhen “social retail” store, Burberry encourages customers to interact on a WeChat mini-programme, post photos and access benefits such as “secret items” at the in-store café.
These technologies also offer brands significant data insights into customers even if they do not make a purchase, through scanned product tags or tracking items taken into fitting rooms. Store associates can have apps designed for them, so that they can use this customer data and improve workflow management, such as requesting stock for a customer to be brought to the shop floor quickly.
How brands leverage available mobile technology depends on their strategic priorities. In the mass market, a high proportion of sales may already be generated through e-commerce apps. Here, a brand could develop an “in-store” mode to bolt onto an existing app. In the luxury segment, e-commerce apps commonly account for less than 10 percent of sales, which means it will be more challenging to encourage customers to adopt app-based behaviours.
A customer’s in-store experience is not the only aspect of shopping in a physical store that can benefit from a digital upgrade. Leading players are also adopting technologies that allow stores to become micro-fulfilment centres. By using stores to fulfil online orders, brands can maintain appropriate stock levels across distribution and store networks and enable fast delivery. Conversion rates are around 50 percent higher with same-day delivery compared with two days.
Some mass-market players such as Target are repurposing space within physical store networks to create micro-fulfilment centres, helping them to adapt to quick commerce and ultra-fast delivery expectations. This is often through buy online, pick up in store (BOPIS) models or buy online, ship from store (BOSFS), where the order is sent from a store where all items are in stock. However, to date, most players have not gone digital. Typically, keeping track of stock is done manually and in-store stock is not integrated into overall e-commerce stock.
Stock optimisation technologies can help speed up and automate a store’s value chain. For example, fast-fashion giant Inditex uses RFID product tags that feed into a single inventory system. This gives visibility into stock levels across channels, allowing for online order fulfilment from store stock. This visibility has reduced the time required for store associates to take a store inventory by 88 percent.
Cloud computing is an increasingly viable enabler of micro-fulfilment centres. By running IT infrastructure in the cloud, brands can centralise their technology capabilities and collaboration, and run data analytics in real time across store networks, regardless of where they are located.
For mass-market executives looking to leverage these emerging technologies, we identify three types of fulfilment models:
The cost savings on shipping alone can be substantial with micro-fulfilment models. In 2019, Brian Cornell, chief executive of Target Corp, said that when one of its stores fulfils an online order, it costs around 40 percent less than shipping from a distribution centre to a customer. When customers order online and pick up in store, about 90 percent of the cost is saved.
But without technology that can streamline the fulfilment process, from order allocation to packing, a brand will likely need either high-value orders or a boutique model with low levels of in-store traffic to justify manual in-store fulfilment.
Therefore, automation can play an important role across all types of fulfilment models to help brands maximise cost savings. Brands can use stock optimisation software, which incorporates all stock across their store and distribution networks; last mile optimisation software, which boosts the efficiency of allocating order delivery routes; employee task management solutions; and fully robotic set-ups that include robotic grids and arms for picking, packing and storing stock.
When deciding which stores to use for e-commerce fulfilment and what fulfilment model to pursue, executives should consider the brand’s size, store density and e-commerce activity, as well as physical store locations and customer demand. For instance, luxury brands will probably not devote retail space exclusively to fulfilling orders because of the high costs of their stores’ prime locations. Instead, they will focus on stock optimisation algorithms to predict the best location from which to fulfil an order and pick and pack manually — something mass-market players simply cannot afford to do. For mass-market brands, automated e-commerce order fulfilment can make financial sense if order volume is high enough and in a dense, urban area — even more so if customers are paying a premium for faster delivery.
However, regardless of order volume, using inventory optimisation software to help predict the number of items returned to stores is a promising use case given that approximately 30 to 40 percent of e-commerce sales are returned.