The Future of Retail Is Still In-Store

The pandemic has forced retailers to reinvent their strategies to meet changing consumer behaviors. Goldman Sachs analysts found many businesses from 2019 through COVID were direct-to-consumers.

But the post-pandemic economic backdrop has changed to become more constructive for retail growth. Inflation is lower than last year; household income and wages have improved. The US economy is expected to grow moderately as the Federal Reserve ponders rate cuts this year. Consumer demand is strong as reflected by strong retail sales numbers. Retailers may finally be in the position to exert more control over their businesses.

“I think we're going to be in the first year of micro influence where we'll be back to retail of old where the actions that each company takes will be more important to how they perform than the action of the economy, the actions of COVID, the actions of consumers writ large,” said Tim Ingrassia, co-chairman of Goldman Sachs Global Mergers & Acquisitions, on the Goldman Sachs Exchanges podcast, recorded on January 29th and February 9th.

What retailers discovered about what their customers want may be surprising. Even though the ongoing narrative is that the pandemic has “killed” the brick-and-mortar, retailers believe customers want to come back to the stores, and there is power in having a strong network of stores.

“I think some of it is retail 101, the store experience is really important […]. Customers want to be delighted, customers want to be engaged in the store,” said Vishaal Rana, managing director of Goldman Sachs Cross Markets Consumer Retail Group, on the podcast.

“Customers want service in the store; customers may want access to information directly in the store,” he added.

The omnichannel experience starts in store

For one chain store in the beauty sector, the human connection and added in-store experience is what motivate their customers. Their research found an overwhelming preference to shop in a physical environment because of that human connection and all the other things that come along with it – the discovery aspects, the touch and feel and smell, the tactile elements of the beauty category.

Beauty customers are also emotionally driven – they care about how they show up, how they feel and express themselves to the world. That’s why services and experiences in-store can add more value than just direct-to-consumer, such as full-service hair salons, brow services, makeup, and skincare. These services would not otherwise be available if the goods are only delivered to the customers’ doorstep.

But that doesn’t mean stores are abandoning their digital efforts. Just as the pandemic has changed our shopping habits, retailers are reinventing ways to create an omnichannel experience to boost consumer engagement and spend – but it still starts with the physical store.

For instance, the CEO of the beauty chain told Goldman Sachs on the podcast that if they could convince a customer shopping in-store to connect with their online website, their spend goes up over 2.5 times. If they download their app, it could lead to three times more spend.

The digital omnichannel approach helps add the human connection, which in the end, all supports the physical store.

The challenges facing retail in a post-pandemic world

Ingrassia explained there are three things facing the retailer – customer ability, consumer sentiment, and consumer actions. However, he noted they might not always agree with one another.

Consumer sentiment data has been improving over the past months, as with wages and income, but customers are still cautious and selective on their spending, and their consumer actions are to be seen.

Besides trying to obtain information on customer behavior, retailers are also faced with questions about logistics. E-commerce created logistics centers everywhere, and competitors who can offer faster deliveries are at an advantage.

“And maybe you've got the better product, but maybe the consumer doesn't want to wait an extra 24 hours,” said Rana. “How do I figure out my network in a better way so I can behave similar to some of our larger tech-enabled competitors, but also provide what is unique to our banner?”

The challenge going forward for retailers on efficiency is increasingly the cost of logistics and technology. In fact, the cost of technology will become a defining characteristic of which companies can afford those investments and which can’t.