Why Mobile Shoppers Want Real-World Stores: Richard E. Wilson

a | A

Feb. 17 (Bloomberg) -- Mobile shopping is one of the most exciting new developments for retail in years, and “apps” that allow brick-and-mortar-store shoppers to check competing online prices have surged in popularity.

While actual mobile-shopping purchase transactions accounted for only 2 percent of e-commerce sales in 2011, the Kellogg Shopper Index -- a fall survey of 1,400 consumers -- found that more than half of in-store shoppers report having occasionally used their Internet-enabled mobile devices as a price-comparison tool while in stores.

That number is certain to grow. Yet the spread of mobile price shopping may end up doing more harm than good.

For one thing, mobile shopping makes it far easier for parasitic retailers to “free ride” on full-service, brick-and-mortar stores. It works like this: A potential customer goes to Best Buy to look for stereo headphones, tries on various models, and pumps a salesperson for details. Having settled on a product, the would-be customer checks prices online using a smart mobile device. The headphones are available for 40 percent less at an online retailer, which can profitably offer such a steep discount because it makes virtually no investment in real estate, demonstration inventory, expert salespeople, or merchandising promotions.

Product Innovations

Best Buy isn’t the only one to lose out -- the maker of the headphones does, too. High-touch retailers such as Best Buy are the proving ground for product innovations that many consumers crave. Ten years ago, how many people would have plunked down $4,000 for an early high-definition television, solely on the basis of its description on an Internet site? Most consumers want a direct experience of the product that can be obtained only in a store.

Unchecked free riding deprives stores of the revenue and profit margins their economic models require. To remain alive, most stores respond by cutting prices, which means that they then have to eliminate services -- and perhaps even go out of business -- and there will be nowhere for consumers to get a direct experience of products.

That would be calamitous for manufacturers and retailers of all stripes. The Kellogg Shopper Index finds that, for all their reliance on advanced technologies, mobile shoppers are more likely to prefer browsing in their local stores to online education. It found, for example, that as the holiday season approached in late 2011, mobile shoppers still expected to spend a considerable share of their transaction dollars in physical stores. In a recent study by Leo Burnett Group, 60 percent of respondents said they were unwilling to sacrifice the quality of their total shopping experience -- before, during and after the sale -- for a lower price.

For these reasons, brick-and-mortar stores shouldn’t be written off prematurely, especially by branded manufacturers. To fight back, here is what they should do:

-- Grant high-touch retailers “favored nation” status as partners who support their end-customer strategies.

Manufacturers need to develop an optimal channels system that accords retailers appropriate benefits and protections, and makes separate concessions to other channels. This is the tactic adopted by the premium outdoor- and garden-equipment maker Stihl Inc. Even after turning its back on retail channels that drive considerable unit volume, the company achieved greater market share and profit growth than its competitors during the recent economic recession. This was possible partly by following a retail distribution strategy that favors loyal, high-touch, brand-reinforcing specialty channels over national discounters with inadequate service levels.

-- Make sure that customers gravitate toward a retail channel experience that’s right for them and sustainable in the marketplace.

That requires a four-step process: Understanding what customer segments need; designing each retail channel to give its target segment the service outputs and shopping experiences customers desire; and ensuring that these service outputs aren’t interchangeable between retail models. Finally, branded manufacturers need to make sure that each retail partner gets the basics of its offering right: for brick-and-mortar stores, that means keeping adequate inventory, making returns easy, training and compensating sales people to help shoppers effectively, and providing after-sales repairs and support.

-- Structure the right economic incentives for different types of retailers. It is far less costly for an online operation to provide access to a vast assortment of products, buyer recommendations, and touch-screen transactions than it is for a brick-and-mortar retailer to pay for real estate; store personnel and training; demonstration displays; local inventory; and repair services.

There is no reason to provide the same shopping experience to all customers. In its landmark Leegin Creative Leather Products Inc. v. PSKS Inc. ruling, the U.S. Supreme Court agreed that branded-product manufacturers could set minimum prices across channels, so long as they were needed to support services that customers desired and that maximized their number of choices. Equal treatment means low-price channels will eventually outcompete higher-cost channels, even if those out outlets are crucial to a brand’s strategy.

-- Integrate mobile advertising. The lag between when an advertisement is seen or heard and when a consumer might actually be in a store or thinking about a purchase is shrinking. Mobile lets the brand advertiser hit consumers closer to their actual shopping behavior. That means messages have to be tailored by channel.

-- Make disciplined channel-policy choices. Branded-product manufacturers have at least four options to bring more discipline to their retail channel system’s marketing programs and policies: resale price maintenance, or RPM; exclusive retailer relationships; exiting unattractive channels; or creating distinct product lines for specific channels. Any of these alternatives can create a more level retail playing field and prevent free-riding discounters from destroying markets.

Still, this is easier said than done. RPM initiatives must be legally and competitively defensible. Exclusives and the cutting off of some channels necessarily may raise fears of significant loss of market access. Lower-quality product lines for lower-value channels create risks for brand perception and equity.

But allowing cross-channel conflicts isn’t a viable long-term option for branded manufacturers. Lax channel discipline has engendered rampant free riding and threatens the very outlets that do the most to uphold manufacturing brands. Over time, allowing retailers to maul each other hurts the manufacturer. Sooner or later, brand deterioration will cancel out short-term revenue gains.

Mobile price shopping is simply an instrument. A smart device can accelerate cross-channel destruction and brand deterioration, to the detriment of consumers. Or it can be a force for good, encouraging consumers to make decisions based not just on price, but on very real differences in benefits, such as the experiential value of side-by-side physical comparisons; live product demonstrations; expert advice and training; and after-sales repair and maintenance.

To ensure that optimal, brand-reinforcing retail channels are in place, product manufacturers will have to do more to help the retailers that sell their products. That means building genuine value-delivery systems for targeted consumers, and collaborating with downstream retail partners to define and execute effective routes to market for each product category. Most of all, it requires manufacturers to have the discipline to tell mobile free riders, not quite “No, you can’t have any,” but “Yes, but on very different terms.”

(Richard E. Wilson is clinical associate professor of marketing and associate director of the Center for Global Marketing Practice at the Kellogg School of Management, Northwestern University. The opinions expressed are his own.)

Read more opinion online from Bloomberg View.

To contact the writer of this article: r-wilson3@kellogg.northwestern.edu

To contact the editor responsible for this article: Max Berley at mberley@bloomberg.net