Pureplays face critical strategic decisions and omnichannel retailers have a window of opportunity, believes OC&C Strategy Consultants’ Matt Coode
In 2014, Wayfair made a scathing assessment about the future for physical stores in selling home and furniture.
Stores can’t offer enough choice, they’re too expensive and why would you ever leave your home if you could buy from the comfort of your (Wayfair) sofa?
By 2019, when Wayfair was opening its first physical store in Massachusetts, that position had clearly softened. In August 2022, as it announced $378m (£328m) of losses for the quarter in a market where 75% of homewares spend was still passing through physical channels, it must have realised that it had called it wrong.
It’s not just Wayfair. Over the past year, digital-only retail models have experienced real growing pains.
In aggregate, they have lost market share, found their customer mousetraps less effective and, in the case of some, lost their shine with investors – few more starkly than Shopify. Temporarily the most valuable public company in Canada, it is now worth 80% less than it was nine months ago.
With this reality check, many investors have ripped up a valuation playbook that used to fixate on monthly active user growth and a ‘take a punt on the next Amazon’ mentality in favour of a more considered view of customer profitability – arguably a sensible move.
“Ultimately, consumers like physical stores more than many thought and they were reminded of that throughout the pandemic”
So what has been the catalyst to put pressure on the pureplay model?
Ultimately, consumers like physical stores more than many thought, and they were reminded of that throughout the pandemic.
According to primary consumer research conducted by OC&C, 80% of consumers said they were actively excited about going back to physical shopping, and 65% said they were exhausted by navigating too many choices online.
More than half said they couldn’t actively find what they wanted to buy online, so they were waiting for stores to reopen to get it.
This ‘draw of the store’ has reset the addressable market ceiling for digital-only models, leaving many optimised to make money at a scale they will likely never reach.
This realisation has led to the economic advantages of being digital-only eroding for many players.
Omnichannel retailers have harnessed their stores to deliver lower cost of customer acquisition and cheaper fulfilment and returns handling, while pureplays have had to start raising the cost to customers to make their orders profitable.
“Digital-only models won’t run rampant over the industry as predicted and the door is now firmly open for the resurgence of retail that combines physical and digital channels”
It was recently described by The Atlantic in the US as “the end of the millennial lifestyle subsidy” as everyone from Netflix to Uber to DoorDash ramped up their charges to shift focus to making money over building scale.
Don’t take any of this as an obituary of the pureplay model. Many have built strong, sustainable and profitable fortresses.
However, digital-only models won’t run rampant over the industry as Wayfair predicted eight years ago and the door is now firmly open for the resurgence of retail that combines physical and digital channels.
For the pureplays, this sets up a critical strategic decision about how they profitably grow over the next few years.
“For the omnichannel retailers, this sets the stopwatch running on a window of opportunity to assert the advantages of their models before the next wave of disruption starts”
Expect to see many redefine themselves as they expand their category footprint, explore how to leverage their traffic as media or crack the code on how to act as harmonised retailers that serve more of their customer needs across channels.
For the current omnichannel retailers, this sets the stopwatch running on a window of opportunity to assert the advantages of their models before the next wave of disruption starts – and to have the conviction to continue investing for long-term growth in a tough and unforgiving market.
Wayfair has made the perils of fortune-telling in retail very clear, but it is safe to say that the next two years will set the tone for the next chapter of channel evolution in the global retail sector – and it is highly likely that the UK will live right at the vanguard.
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