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March 9, 2016


Omni-channel Retail Paradox: the Curse of Digital

by Ravi Kalakota

Everyone knows that the retail industry is being transformed by digital, analytics and big data. Winning requires continual data-driven experimentation and transformation.  

Shortened time from idea-to-app is a constant challenge.

Evidence of this “digital disruption” by category are mounting every day. Wal-Mart closes 269 stores as it retools portfolio to compete with online natives like Macy’s said that it will shutter over 36 stores as store traffic declines faster than expected, and Finish Line said that it would close 150 stores by 2020.  Gap,  J.Crew,  American Apparel, Sears and Kmart are all facing similar headwinds.

Starbucks CEO Howard Schultz laid out his thoughts on the future prospects for retail business, “three years ago we began to envision that there would be a seismic change in consumer behavior, and that seismic change was due in large part to e-commerce, omni-channel and smartphone shopping.”

It’s fascinating to watch retailers trying to shift tech/platform strategies to deal with digital disintermediation, showrooming, asset-light models, physical-to-digital channel integration, mobile shoppers, same-day delivery/fulfillment, programmatic targeting, online native models and now the new buzz.. virtual and augmented reality.

Several retailers have invested in Big Data and Hadoop platforms to mine massive volumes of structured transactional,   operational data and unstructured data—web logs, clickstream data, geo-location data, social interactions and sensor data.

While most retailers understand the mega-shift and seems to know what to do….they are unable to execute consistently or effectively. A talent gap in many cases. A platform gap in others. Others are hindered by legacy IT systems or don’t have the necessary technology capabilities in place.

I think the digital induced pain is going to get worse in 2016 and 2017.  Consumers will continue to diversify their retail activity across channels in search of the best value, forcing retailers to spread out their digital investments.  This puts additional stress on execution and leadership.

Analog to digital transformation

Analog to digital transformation (the mega-theme for the past 20 years) is forcing many companies to continuously rethink their digital operating and execution model.


However, digital transformation has not been an easy road for most retailers.

In order stay relevant, retailers are being forced to do two conflicting things:

  1. Cannibalize the brick-and-mortar business before competition does,  and
  2. Invest heavily in digital platforms while near-term profits are elusive.

Consider the case of Nordstrom to illustrate this multi-channel transformation leadership dilemma.

  • Nordstrom reported disappointing earnings (Feb 2016). Comparable sales for the fourth quarter for full-line and outlet stores decreased 3%.
  • Nordstrom’s inventory increased a whopping 12%, a sign that Nordstrom shoppers aren’t clearing the shelves. A visit to Nordstrom Rack, their lower price outlet where product goes to die or sell confirms this.

Nordstrom, like other retailers, is moving aggressively from analog to digital operating model but they are not immune to the e-commerce curse:  constant investments into core platforms (e-commerce, fulfillment, service) to compete but no profits in the near term.

Nordstrom, like other retailers,  has to invest heavily in e-commerce to avoid digital disintermediation.  According to CFO Michael Koppel, part of what’s dragging down the company’s profits is its attempt to keep up with online retailers like Amazon or fast fashion powerhouses like Zara. “E-commerce now represents over 20% of our sales, a notable increase from 8% five years ago.

“This business model has a high variable cost structure driven by fulfillment and marketing costs in addition to ongoing technology investments. With our increased investments to gain market share along with the changing business model, expenses in recent years have grown faster than sales.”  In fiscal 2010, Nordstrom’s retail operating margin was 11.5%. By fiscal 2015, that was down to 6.9%.

The margins are further eroded from aggressive promotions to maintain market share, shipping costs, returns and over-stock clearance.

Besides retail category disruption, is putting even more pressure on retailer margin by building its own delivery network. is building out its own cargo operations to avoid fulfillment delays from carriers such as UPS, which have struggled to keep up with the rapid growth of e-commerce. Also, returns being a big part of e-commerce requires a sophisticated reverse supply chain.

In this hypercompetitive world, delivering an engaging Customer Experience is not any longer a strategic approach to achieve some of the retailers business objectives but a mere survival necessity.  Koppel said: “In evolving with our customers, we made significant investments to enable customers to shop in multiple ways. This has resulted in market share gains, but also structural changes to our operating costs.”

Digital Conundrum/Nightmare for Leadership

DigitalRoadmapGrowing array of retail channels and increasingly connected consumers has changed the landscape. The shift from e-commerce -> multi-channel digital is obviously causing execution nightmares everywhere.

Nordstrom isn’t alone. Other retail executives who have also highlighted the impact online operations have had on their business.

According to Michael Kors CEO John Idol:

“Unfortunately today, e-commerce generates a lower operating profit for us than four-wall brick-and-mortar. We think over time that will reverse itself, but, as you know, when the consumer requires free delivery, free return, wonderful packaging, plus there’s a new trend that people are buying multiple sizes of things to try them out at home and then return them, that all is a negative headwind for us.”

Anticipate and shaping the needs of today’s and tomorrow’s customer is extremely hard.

Situation @ Nordstrom is similar to what is going on at every retailer’s boardroom (e.g., Macy’s, Kors,  Saks etc.).  This is a major industry challenge as millennials, who have become the dominant force in retail sales, do much of their shopping online, forcing brick-and-mortar retailers to bulk up their online presence.

In summary, retail is a tough business requiring continuous experience experimentation. Identifying and removing items that aren’t profitable to sell online is a non-stop activity.

Retail has high fixed costs, high working capital intensity, fickle customers, and low barriers to entry. And for an industry that already has its share of “profit” problems, the need to build out an online presence adds expenses, logistical complications, and additional pressure on the business.

The strategic challenge is how to stay relevant and interesting.  At the same time, not do crazy moves like Sears, J.C.P that made the brand irrelevant quickly by alienating customers.  


I would love to hear from you about strategies that actually work.  I also would like to hear about world-class firms that have successfully made the shift to digital.

Additional Resources:

  1. Digital 101
  2. Digital Architecture 101
  3. Digital Integrator Model – How to Execute Transformation
  4. Digital Personas and “A Day in the Life Of” —
  5. Mobile Marketing Engagement – Path to Purchase –
  6. Digital Transformation
  7. Big Data Use Cases
  8. See Mobile Marketing Automation for more insights into Mobile Geo-Fencing and Targeting. Mobile ads are rapidly overtaking desktop ad spending in all categories—display ads, search, social media and video
  9. Omni-channel Use Case
  10. Amazon to Lease 20 Boeing 767s to Build Its Own Delivery Network
  11. Elements of Digital Business…. Dion Hinchcliffe and Steve Mann..

What is Digital Business? Is it E-Commerce, the Collaborative Economy, or APIs? Yes.


Transformation of Retail Data Infrastructure

Hadoop for Retail

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