There's no question that the Internet has fundamentally changed the retail industry. With the rapid growth of Amazon.com (NASDAQ:AMZN) and other online retailers, traditional brick-and-mortar retailers have had varying degrees of difficulty competing with the convenience and low prices that the Internet enables.
While the growth of e-commerce has been a major trend in the retail industry for the past two decades, there are three other megatrends playing out right now that could have equally vast implications for the retail industry at large.
The rise of the omnichannel retailer
While online-only retailers have certain advantages over brick-and-mortar retailers -- mainly freedom from the fixed costs associated with operating stores -- brick-and-mortar retail isn't going away. The retailers that ultimately survive and thrive will need to have a presence both physical and online, with a tight integration between the two.
This omnichannel approach is best exemplified by the transformation that consumer electronics retailer Best Buy (NYSE:BBY) has gone through during the past few years. After years of its e-commerce business being little more than an afterthought, the company took major steps to tightly couple its e-commerce operations with its physical stores.
Whereas dedicated distribution centers were the sole source of products for online orders in the past, Best Buy has implemented a ship-from-store program across all of its stores. This allowed stores themselves to ship online orders directly, vastly increasing the availability of products.
The stores, which have been suffering from weak traffic for the past few years, now feed into the online business. And with Best Buy offering conveniences like same-day pickup of online orders at its stores, the online business feeds back into the stores.
Retailers can't just build stores and assume that customers will come running anymore. At the same time, online-only retailers can't offer conveniences like in-store pick-up and returns. Combining the two models, giving customers the best of both worlds, is the future of retail.
Amazon's Prime membership program has changed the way that people view online shipping. With Prime promising unlimited free two-day shipping on all orders for an annual fee, online retailers unable to match this shipping speed have undoubtedly suffered.
But the thirst for faster delivery of online orders has made even Prime seem slow. The explosion of smartphones has enabled a new class of services, where orders are placed through a website or a mobile application, and someone else does the shopping, delivering the item on the same day. Companies like Instacart and Favor, as well as many others, allow customers to get nearly anything delivered very quickly.
Amazon has its own same-day delivery service in certain cities -- Prime Now -- which works in the same way, except that products are delivered directly from Amazon's warehouses. This should give Amazon a cost advantage. However, services that require no physical infrastructure should be able to scale more rapidly, as well as enter areas where building a distribution center doesn't make sense.
This trend benefits brick-and-mortar retailers just as much as Amazon, because it basically allows stores to offer same-day delivery through third-party services. Stores could even partner with these services -- in the same way that Whole Foods has partnered with Instacart -- to make the process more efficient. The main weakness of brick-and-mortar retail -- that you have to actually go to the store -- is disappearing.
According to Shopify, last year marked the first time that the majority of e-commerce traffic came from mobile devices instead of PCs. Having an easy-to-use, responsive mobile application has become critical for all retailers engaged in e-commerce, and falling short could result in lost sales.
Beyond shopping through a mobile app, the fact that nearly everyone has a smartphone these days opens up a range of possibilities for brick-and-mortar retailers. Many stores already track their customers using the signals from smartphones, gaining insights that would have otherwise been impossible to attain. And in the same way that some websites are capable of offering shoppers customized offers, brick-and-mortar retailers could do the same through customers' smart phones in an effort to make a sale.
Some companies, like Starbucks (NASDAQ:SBUX), already use mobile applications to great effect. The Starbucks app allows customers to pay for their orders using their smartphones, and it replaces the typical punch-card loyalty system by keeping track of rewards. At the end of 2014, the Starbucks app had 13 million active users, and payments through the app accounted for an astounding 16% of all transactions.
Retailers that take advantage of the widespread adoption of smartphones to offer superior service and convenience to their customers will have a major advantage, especially among younger customers who are increasingly glued to their smartphones.