The Retailer’s Dilemma

This is an excerpt from the book “The Future of Retail” by Elias Amash, Chapter 2: Innovation in the Retail Experience

As a result of competition, retailers are finding that they need to do more to earn the same (and sometimes less). Normally the potential to earn more than the wholesale cost is what drives retailers to do more. However, retailers sometimes incur heavier production costs for a less than proportional increase in revenue. This is what is being referred to as the “Retailer’s Dilemma”. Typical components of this dilemma include:

Free delivery

Not so long ago a customer who preferred delivery to their doorstep would incur an extra cost, but this trend has undergone significant revisions. Competition is so stiff that customers prefer a retailer who is willing to deliver at no extra cost. A crystal clear example is how many retailers on platforms like Amazon or eBay, are offering free delivery to areas as far as Africa, without a surcharge on the product. This decision takes a major cut into margins but is necessary to make any margins at all. Amazon and EBay count on making smaller margins off a larger number of customers to break even.

Faster delivery for smaller or no additional costs

Free delivery may not be an incentive enough to spur a purchasing decision but it’s still part of the “Retailer’s Dilemma” and has to be considered to be competitive. Often a consumer will prefer a retailer who can make a faster delivery — sometimes on the same day. In a recent survey conducted by McKinsey in Germany, France, Sweden, and the UK, 50% of respondents indicated that they would be willing to pay same-day delivery costs of EUR 6 to 7 for a EUR 59 purchase.

Amazon, arguably the world’s largest ecommerce company, has already heavily invested in same-day delivery. The same-day delivery project is already operational in major cities in the United States and bound to grow in the coming years. Amazon’s Prime Air drone delivery is expected to reduce delivery costs on Amazon significantly, to about $1 for the majority of parcels. Amazon founder and CEO Jeff Bezos has said that 86 percent of Amazon deliveries are under the 5-pound weight limit that a commercial drone could reasonably carry. It is no surprise that other big players like Walmart and Alibaba have same-day delivery plans high up on their agendas.

Virtual everything

Technologies like virtual reality (VR), augmented reality (AR), and artificial intelligence (AI) are also part of the “Retailer’s Dilemma” and will all also dramatically change the retail shopping experience — both on and offline.

Many scoffed at the idea that one day the “virtual” experience would one day play a pivotal role in our daily lives. They dismissed the rise of VR applications as a “gamer’s” fantasy. VR still is very much a gamer’s fantasy but AR, which blends elements of virtual or non-real images with real objects and locations, is a far cry from that. Whereas VR completely immerses the user into a different world and surroundings, AR blends elements of an imaginary world with that of the real world, thereby giving a “what if” vision. The latter is easier to apply to existing sectors other than games, and its applications are already in use in the educational, military, health and retail sectors.

Major advantages of augmented reality (ar) in the retail industry include:

  • AR reduces product returns, since customers interact with product in 3D prior to making purchases. This can greatly improve conversion rates in clothing, home goods, toy, and even home improvement stores.
  • AR better combines the brick and mortar shopping experience with online shopping.
  • AR improves brand recognition for shoppers.
  • AR engenders trust and confidence in the retailer by the shopper.