The challenger: the showroom model
Traditional brick and mortar stores are inefficient and outdated… At least that’s what Andy Dunn, CEO of Bonobos would tell you. He believes that the showroom is a far better model for online retailers wanting to dip their toe into physical sales.
Digging into the financial figures begins to show that he might be onto something; Bonobos has increased revenue 20 times over in the past 7 years to $100 million and makes $3000 per square foot on average in their stores compared with Gap who average $450. It’s hard to ignore such impressive figures.
On the surface Bonobos’ stores look and function in similar way to familiar names like Topshop or Gap; customers are able to browse and try on clothing before purchasing. They then place an order and receive delivery of their goods the same or next day. It’s behind the scenes however, where the showroom model sets itself apart none more so than for merchandisers.
Stock management benefits of the showroom
A showroom retailer only needs to carry a fraction of the inventory that a traditional retailer would – technically a full spectrum of one of each product and color and size would suffice. Take Topshop for example, they might have 4,000 combinations of style, colour and size that they would need to stock in a traditional store (as well as all the extra SKUs), compared to just 200 variations in the showroom.
This approach avoids the costly infrastructure of complicted supply chains and point-of-sale systems needed to support physical stores. What’s more, having a centrally managed inventory allows merchandisers to react quickly to demand and fulfil customer orders more easily. In theory, this should lead to increased sales by reducing the frequency of stock-outs and a better margin by reducing the need for markdowns and the associated costs with misplaced inventory.
Backward supply chain movements also tend to be very costly, it’s cheaper and easier to mark the product down in the store, rather than move it to where the demand is. A showroom with reduced inventory requires a smaller overall footprint and a larger area to dedicate to sales, meaning lower real estate costs and more focus on the customer experience.
Conversely, merchandisers in traditional brick and mortar stores are essentially stocking stores based on a forecasted demand, which even with the best demand forecasting systems and capability will never be 100% accurate. On top of this, there is always buffer stock to cover unexpected increased demand which further increases store stock. Lastly, there is the “look” of the store; no customer would expect to see half full shelves even though for most retailers this is all the rates of sales really warrant. By keeping stock centralised, many of these challenges are overcome.
Simplified assortment and range planning
Assortment and range planning is also far simpler and cost efficient in the showroom. In traditional stores, merchandisers struggle to accurately predict what to hold in each store with the answer varying by factors such as geography and season. Although assortment in general has recently benefitted from the shift towards customer-centric analytics, in the showroom model there is far more opportunity to tailor the range depending on location and customer demographic. The simple fact that a merchandiser might be faced with assorting 5 showrooms instead of 50 stores makes decisions around placement, clustering and customisation far more straightforward.
Showroom stores also have far less systems complexity. All demand can be managed through an order management system instead of a traditional point of sale. Just like with online orders, this allows the retailer to capture more detailed customer information. Having all your measurements and style preferences saved on a retailer’s database not only means ease of purchase but also reduces the chance of returns.
A replacement for the traditional store?
The showroom model is only effective if retailers have the right supply chain set up to service it. With Amazon not so long ago introducing Prime Now, promising delivery of products within 2 hours, customers these days expect to receive their goods with shorter delivery times. To be truly competitive, showroom retailers therefore need reactive supply chains so a customer can purchase an item that morning and wear it that evening.
A hybrid model with a few larger stores that could carry stock and act as fulfillment centers could be the key for retailers like Bonobos to compete with the likes of Amazon. With technological advances like delivery drones perhaps we’re not too far from seeing items delivered before you even get home.
Although the benefits to back office functions like merchandising are clear to see, it’s a little early to say the demise of the traditional store is at hand. For most companies, the transformation would be too costly with complete overhaul of supply chain systems and technologies. That said, showrooms certainly offer an attractive next step for younger retailers who are more agile and can react quickly…