Fundamental Thinking

The New Retail: Why the Future of Shopping Will Be a Story of Bits and Bricks

In-store apps and “digitized” brick-and-mortar stores point to a future where online and offline shopping is highly integrated.


Key Takeaways

  • Retailers of all stripes are converging on a similar sales strategy, where inventory and customer data are shared between online and offline channels.

  • This “omnichannel” strategy helps retailers distribute inventory and advertise more efficiently—so they can sell more goods and have less excess stock to discount. It also benefits shoppers, who can buy items online and return them in a store, or buy in a store and return via mail.

  • The integration of online and offline shopping is also taking place within physical stores. Adopting an approach some observers have dubbed “New Retail,” some brick-and-mortar retailers are now offering mobile apps and digital displays to enhance the in-store shopping experience. Product videos, reviews, real-time item locators, and augmented reality tools allow customers to interact with products in the physical and virtual worlds simultaneously.

  • Implementing these changes is complex, costly, and takes time. Home Depot, Alibaba, Sephora, and other retailers that have embraced these strategies early should be able to maintain their leads over rivals that have yet to do so, at least in the short term.

  • Companies providing the needed back-end software solutions, such as SAP and Salesforce.com, could see increased sales from retailers as these strategies become more widespread.



Harding Loevner Consumer Discretionary Analyst Maria Lernerman, CFA and Information Technology Analyst Chris Mack, CFA explain the increasing integration between online and offline shopping, and explore how this shift could affect retail and software businesses. The transcript, lightly edited for clarity, follows.

Maria Lernerman: It’s not news that retail has been evolving. Both brick-and-mortar retailers and traditionally online-only retailers are converging to an “omnichannel” model, which means you have stores, you have online, and then customer and inventory data is shared across those channels so customers have a seamless search, order, pickup, and return experience.

“New Retail” takes omnichannel a step further—it’s omnichannel plus digitizing and automating stores and creating a more engaging shopping experience.

Let me give you an example of how digitizing stores and bringing content into the stores improves customer engagement. When consumers are shopping at Home Depot, they can use their app to see more product information, reviews, and content like buying guides and project videos. Also, the augmented reality features in the app allow shoppers to see items like appliances and furniture in their homes.

Another benefit is better advertising efficiency. In the case of Sephora, which is a global cosmetics retailer owned by LVMH, they do a very good job creating a complete customer profile. It includes online browsing, both online and in-store purchase history, and in-store interactions with the sales staff. That allows them to personalize content and better target advertising messages.

Chris Mack: Understanding how retail businesses navigate this shift in terms of their ability to manage some of these changes is really important to understanding how well they could extend their duration of growth as they are encountering new entrants and increasing rivalry in the form of e-commerce companies enabled by technology. Their ability to embrace these changes to be able to offer consumers a competitive offering is critical to them sustaining their competitive advantage over a long period of time.

A major part of the shift for retailing businesses in general is to invest more aggressively in technology to enable some of the changes. SAP is one of the key IT vendors that's helping retailers transform their business. In particular, they're strong in inventory management as well as all things enterprise-resource-planning related, going into supply chains as well. They've innovated with a new database called "HANA," which is a real-time database that accelerates the speed in terms of transactions in managing their inventory as well as order processing.

ML: I think that often new technologies get commoditized and I think that new retail technologies will as well and more retailers will be able to do them. But I think the implementation is quite complex because you need to align systems and stores and merchandising and logistics. Because of that complexity, I think that retailers that are investing now and are getting a jump start on the competition might be able to maintain their lead.


Contributors

Analysts Maria Lernerman, CFA and Chris Mack, CFA contributed research and viewpoints to this article.

Disclosures

The “Fundamental Thinking” series presents the perspectives of Harding Loevner’s analysts on a range of investment topics, highlighting our fundamental research and providing insight into how we approach quality growth investing. For more detailed information regarding particular investment strategies, please visit our website, www.hardingloevner.com. Any statements made by employees of Harding Loevner are solely their own and do not necessarily express or relate to the views or opinions of Harding Loevner.

Any discussion of specific securities is not a recommendation to purchase or sell a particular security. Non-performance based criteria have been used to select the securities identified. It should not be assumed that investment in the securities identified has been or will be profitable. To request a complete list of holdings for the past year, please contact Harding Loevner.

There is no guarantee that any investment strategy will meet its objective. Past performance does not guarantee future results.

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