The last Saturday before Christmas is the busiest day of the year for Germany’s retail trade: this year an estimated 8.6 million consumers stormed into the country’s shops, spending an estimated €1 billion, or $1.09 billion. A study from the Center for Retail Research predicts turnover in the holiday season – the six weeks running up to December 31 – will reach €74.1 billion. When online purchases are included, that represents an increase of 2.3 percent on the previous year.
But Germany’s retail trade knows strong figures are no cause for complacency. Many of the country’s retailers have their backs to the wall. According to the study, only online retail turnover is actually growing. For most bricks-and-mortar stores, sales have been declining for years. In short, digitalization will be fatal for many of them. According to the IFH – the Institute for Retail Research, based at Cologne University – around 45,000 shops in Germany will close by 2020, about 10% of the total. The retail trade in many small rural towns could be completely wiped out.
The challenges facing retail are huge. “In the next 5 years, retail will see more changes than in the last 50,” is the prediction from Kai Hudetz, head of the IFH. The Institute says that by 2020, as much as half of all sales in fashion and consumer electronics could take place online.
The biggest winner from the retail revolution has been U.S. online giant Amazon. According to the EHI Retail Institute, a German retail research group, the 100 biggest German online retailers will, on average, see growth of an impressive 10 percent in the past year. But Amazon.de is ahead of them, with turnover up 13.6 percent in the same period.
“Retailers can feel Amazon and Zalando breathing down their necks. It will force them to constantly up their game.”
To bring customers back into the shops, many traders are turning to a much closer integration of traditional retail with their online business. At the heart of this strategy are new digital features that can offer customers an unprecedented shopping experience. The fashion chain Burberry is introducing interactive mirrors inside changing rooms. The German media chain Media-Saturn is using robots on its shopfloor, as well as providing customers with virtual reality glasses to give an overview of the range of consumer goods on offer.
“Retailers can feel Amazon and Zalando breathing down their necks. It will force them to constantly up their game,” said Mr. Hudetz, the retail expert. But this also means that retailers lacking the will or the money to invest in digital will almost certainly disappear in the brave new world of shopping.
Retailers are already experimenting with the future of shopping, trying to blend personal service with technology to attract customers. Here’s one idea: when customers drive into the store’s parking garage, their license plates are scanned. If they’re regulars, they get free parking. Another innovation is a smartphone app that greets the customer by name and shows him vegetarian options in the restaurant: it already knows he doesn’t eat meat. An update tells him his favorite clothes store has trousers which will go perfectly with the shirt he bought on his last visit.
He enters the store and a coupon immediately appears on his phone: 20 percent off. A sales assistant has already laid out a pair of the trousers in his size. The trousers send a signal to the mirror in the changing room: it informs him where and how the item was produced. Standing in front of the mirror, the customer can use interactive features to try the trousers in different colors: there are 50 to choose from.
The trousers, like the day’s other purchases, are sent to the service center where staff place them in the trunk of his car, using a special code to open it. Perishable foodstuffs will be delivered by drone to his home later that evening: they are sent from a local supermarket, ensuring the food remains perfectly frozen at all times.
Welcome to the world of shopping, 2020-style. “New developments in digitization are currently being trialled in stores. This is not science fiction: it will become normality for customers in the next few years,” said Mr. Hudetz of the IFH.
For years now, developments in retail have all gone in one direction: more and more offline stores closing, while online turnover powers ahead with double-digit growth. And the trend will continue. Surveys show that almost half of all customers have cut back on offline purchases because they are buying more online.
At first, traditional retail reacted to customers’ disloyalty with the anger and defiance of a jilted lover. Retailers refused to offer wireless internet, hoping to prevent customers from comparison shopping online. Manufacturers boycotted online marketplaces, anxious that they might lose control of distribution.
But by now, even downtown retailers have gotten the message: digitization is more of an opportunity than a threat. But only if you use it right. If you do, the clever linking of real-world retail with online business can offer customers the best of both worlds: the comfort and choice of online shopping, but also the chance to touch the merchandise, to get personally tailored advice and to speak to a real human being when there’s a problem.
“Bricks-and-mortar stores are not dinosaurs. They will continue to exist, and with good reason. But they have to make radical changes if they want to survive,” said Gerd Bovensiepen, a trade expert and a partner with the analysts KPMG.
Karl Reinitzhuber is one person already dealing directly with the future of shopping. As head of German operations for Unibail-Rodamco, Europe’s most important property developer, he is planning the firm’s largest ever project, in Hamburg’s newly developed HafenCity district. Here seven building complexes will be built by 2021, at a cost of €860 million. The southern “Überseequartier” will offer space for apartments and offices, but its centerpiece will be 85,000 square meters of new shopping space. At a stroke, the retail space in the area will increase by a quarter. And although online shopping continues to grow, Mr. Reinitzhuber has not cut back on the retail space. Quite the contrary.
Early plans for the new development, put together by a Dutch-French investment consortium, foresaw considerably less retail acreage. But the consortium’s plans collapsed in the financial crisis. For four years, development at the site has been at a standstill, providing time for a rethink.
“People are going to shop online no matter what. But in the Überseequartier, we are going to offer them something they can’t find on the Internet,” said Mr. Reinitzhuber. He wants to build something which can offer truly memorable experiences. The multiplex cinema planned for the site seems pretty standard, as is the cruise ship terminal. But unlike most shopping centers, the newly built neighborhood will be open to the skies. So it will have a decidedly urban feel, but glass roofs and cleverly placed entrance will give protection from the blustery local weather.
“Bricks-and-mortar stores are not dinosaurs. But they have to make radical changes if they want to survive.”
Inside the shopping area, a mixture of large and small shops will tempt visitors. In this, it is more like a classic downtown area than a shopping center. But this mix only works if it is done on a large enough scale, otherwise customers will stay away, as has happened in other parts of the Hafencity district, which is still under construction.
So the future of shopping, by 2021, may in some ways be a throwback. A market square with regional fruit and a fishmarket is unlikely to command the highest rents. But these features will draw in customers from surrounding areas, coming by bike or with the newly built subway line.
“Retailers and city planners from across Europe are watching this project very carefully,” said Mr. Reinitzhuber.
HafenCity may be the visible part of the new world of shopping experience. But other radical innovations are happening in ways not yet visible to shoppers, and in places where you might not have expected them. The German fashion chain Adler has a terminally uncool reputation: it almost went bust a few years back. But it’s now putting so-called RFID chips in all its merchandise. With the help of these tiny transmitter-labels, every single article can be given an electronic identifier. Now sweaters and pants can automatically send out a signal to indicate that there is a gap on the shelf that needs filling.
At the same time, smart labels can be the basis for new services: Adler is experimenting with intelligent mirrors for its changing rooms. These recognize what a customer is trying on, and then make suggestions for other items of clothing which could go with it.
U.S. fashion chain Kohl’s is carrying out similar experiments. In its “Connected Fitting Room,” the computer doesn’t stop at purchase suggestions: here, a touchscreen allows the customer to order items to be brought to the fitting room.
But the real pet project of Lothar Schäfer, the head of Adler, is robots. The company has already successfully tested inventory robots, which patrol the store at night to check stock levels. But his ideas go further. “Why shouldn’t a robot some day bring the customer clothing in the right size?” he asked. “We have reached a point where retail robots can really start to add value,” agreed Martin Wild, Chief Digital Officer at Media-Saturn.
There is a positive side-effect to this use of technology: staff are freed from menial tasks, giving them time to provide far better service to the customer. Media-Saturn have found something similar from electronic price tags they have just introduced: two employees per store were previously needed to exchange price tags all day long. Now these are free to directly help customers.
And that is an urgent necessity. A survey undertaken by KPMG for their study “The Future of Bricks-and-Mortar Retailing” showed that the number 1 wish of shoppers is for well-informed shop assistants. Almost 41 percent of those questioned said that would prompt them to visit stores more frequently.
That is not a small matter for retailers. “Because information can now be so easily accessed, consumers aren’t just better informed, they are also much more demanding about the advice given by sales personnel,” said the KMPG report. So future customers will expect more than just information. They will want comprehensive and personalized advice.
Companies like Douglas, Burberry and Media-Saturn are already giving sales assistants tablets to directly give customers technical details or information on product availability. “The sales assistant can explain how a product is used, or how it can be networked with other products,” explained Pieter Haas, a senior executive at Media-Saturn.
Digitization opens the way to highly personalized sales advice. Shops can build customer profiles, keeping track of favorite brands, preferred sizing and even, for example, allergies to certain cosmetics. They can also keep data on the electronic goods the customer already owns: to ensure, for example, a newly bought smartphone will be fully compatible.
Many retail businesses are already working to use the huge amount of information they already have on customers. They want to use big data to make more bespoke offers, both online and in store. “Businesses don’t have hours anymore to put together the perfect offer, customers expect it in seconds,” said Wolf Lichtenstein, CEO in Germany of SAS, the market leader in data crunching software.
The U.S. mayonnaise manufacturer Hellmann’s has been testing data capabilities in real-world environments. In recent trials, the company equipped a supermarket chain with special software that analyzed the other goods in the shopping carts of customers buying Hellmann’s. Based on that data, it printed tailor-made recipes on their shopping receipts. Inside of just three months, sales of Hellmann’s products jumped 40 percent.
“Retail battles of the future will be fought on the terrain of data analysis,” said Mr. Lichtenstein. Apart from data protection laws, there is only one limit: when customers start to feel they are being too closely tracked, it can give them the creeps. No matter what technical capacities are available, retailers have to respect the customer as a person, warned Mr. Lichtenstein: “The trouble with data analysis is that customers can come to feel insulted or even threatened.”
Retailers of the future will address customers directly as individuals, combining this with entertainment value and perfect product presentation.
To present their product, future retailers will not even need the merchandise in store. Via large wall-mounted displays, or on handheld tablets, customers will admire shoes, suits or bags in perfect 3-D visuals; they will be able to manipulate and modify them to perfectly suit their wishes. The advantage for retailers: they need less stock on site and can have smaller stores. “It is going to make shopping an experience again,” emphasized Sascha André Lanninger.
Mr. Lanninger heads the lifestyle business in the Munich software firm 3D-Excite, a pioneer of three-dimensional representation. The company grew on the basis of its business in automotive and aircraft manufacturing. In those fields, companies offer thousands of versions of cars and jet planes. Only a tiny fraction can be displayed in the showroom. Now they want to show the retail business how to make good use of stunning 3-D displays.
3D-Excite has developed a scanner no larger than a kitchen stove. Companies can use it to scan in their materials. So a bag manufacturer can enter details of the various kinds of leather it uses: then all the versions of its bags can appear on screen with astonishing realism.
“The revolution will begin in 2016,” emphasized Roberto Schettler, the head of 3D-Excite: “3-D images will become standard equipment in the retail business.” According to experts, this is just the beginning. “In two years, we’ll at last see the breakthrough of virtual reality glasses,” said Mr. Lanninger. These will allow customers to walk through virtual shops and touch virtual products.
But the breakthrough is already beginning, and not always in big cities. In the small German city of Pulheim, an “innovation store” is showcasing many new retail techniques. Here, the paint manufacturer Alpina has built a futuristic “holodeck,” which allows 3-D simulations of possible paint schemes for customer’s homes.
Bitter competition will accelerate this revolution in retail. Online retail is not going away; none of these companies can forget about Amazon and Zalando. That forces them to continually improve, said Mr. Hudetz of the IFH retail research unit. Novelty value wears off fast: yesterday’s thrills become today’s standard equipment.
Retailers will try out many strategies and technologies. Not everything will work. Adidas has already tested interactive shop windows, which have touchscreens allowing customers to examine and order sports apparel. Some might question if that has widespread appeal.
But Mr. Hudetz has no doubt on one thing: “For the customer, the future will be fantastic.”
Florian Kolf leads a team of reporters covering retail and consumer issues for Handelsblatt. Joachim Hofer covers high-tech industry and the IT sector. Christoph Kapalschinski covers consumer goods, textiles and food. To contact the authors: email@example.com, firstname.lastname@example.org, email@example.com