How Consumer Behavior Trends Determine Online Retail Success | Santiago Gallino

Professor Santiago Gallino discusses how retailers can succeed through changing times.

Wharton’s Santiago Gallino talks about consumer behavior trends and what it takes for retailers to stand out in an increasingly competitive, omnichannel marketplace. This episode is part of a series on “Holiday Retail.”

How Are Retail and Consumer Behavior Trends Changing?

Dan Loney: With all the new technology, it feels like we’re in a process right now where retail has really changed a lot, for the betterment of the public, I think.

Santiago Gallino: Yes, I agree. And I think this is not new to retail. Retail, if you think of it as an industry, is constantly evolving. What is new, and probably what you’re pointing to, is the pace. The changes that we’re seeing in the retail industry require the companies and the consumers to keep up, to stay relevant, and be successful.

Loney: You talk about two aspects there, one being the consumer, the other being the company. Let me start with the consumer, because right now the expectation of the consumer is better, faster, and the experience has to be as good as possible.

Gallino: Yes. I think that’s probably what is driving most of the changes. I think that the consumer expectations are as high as ever. This is in part because companies have been making a lot of changes that benefit consumers. I think we’re at an interesting point because retailers now need to look back and make sure they’re able to make a profit while fulfilling those expectations, and sometimes exceeding those expectations. If you focus on online retailing, there was a lot of effort to get things faster. More assortment. Free returns. All of these things are great for consumers. They’re very happy. But we are starting to see that some retailers are struggling to see how they can sustain some of these things. I think it’s interesting, what’s going to happen next in terms of keeping the consumer happy, keeping them engaged, but also being aware of, what is the bottom line of the business?

Loney: How has that changed the overall mindset of the company in terms of delivering all of that?

Gallino: I think that today the companies need to be smarter about the different offerings that they give to consumers. Like you were mentioning, these high expectations can be composed of a lot of different parts. Some of those parts are essential to the consumer, and some are nice to have.

In recent years, one thing that we’ve seen from retailers is that they also became more sophisticated in their analytics capability. The way they mine into the data that consumers are providing to them, to be able to make these [decisions]. What are those things that need to happen? And what are those things where they can be a little bit sloppy or relax the standards and still have the customer being happy, and they are able to make a profit out of it?

Technological Developments in Retail

Loney: From a technological standpoint, we’ve made great leaps in the last two decades or so. But it still feels like we have a long way to go. There will be more advancements, AI being maybe the next one, as we move forward over the next few decades.

Gallino: I think it’s a moving target, right? The transition to online retailing happened many years ago. But now, more than 40% of the transactions happen from smartphones. And that put another stress into, how do I interact with the consumer? Now he’s seeing my assortment, interacting with my company, in a smaller screen, on-the-go while commuting. Which is something that is different from what the online experience was maybe five, 10 years ago.

Loney: When you think about the operational side, then you have to focus on the website, the accessibility of all the different products that people are looking for, the speed at which that website takes you through that process. Because if the consumer doesn’t have that optimum experience, then you’re potentially talking about lost consumer, lost revenue to the company longer term.

Gallino: That’s right. In fact, we worked with some colleagues on a paper that actually looks at that. We found that a 10% slowdown on website speed can cause 4% lower sales and 2% reduction in conversion. It’s interesting. But connecting to what I was mentioning before, we also look at how that impact of speed is different in the different steps of the customer journey. It’s not the same if you have a slowdown when you land on the page, when you are searching for the product, compared to when the website slows down at the checkout point. In fact, at the checkout point, slowdowns are much more damaging to the customer experience. And this is what I was mentioning, that the company needs to be smart. Because it’s not that you can say, “Well, in the real world, I want to make my whole website be faster and more efficient.” Sometimes that can be too expensive. So, being smart about where to put your investment and where to put the focus can be critical.

Loney: What about the delivery after that purchase is made? That’s been a big focus of a lot of companies. Amazon is probably the one that has made the biggest investments in terms of making sure that last mile is vital.

Gallino: I think that’s an interesting question. Because I think that many retailers, for the last few years, have been chasing Amazon in this effort. Amazon has been amazing at achieving that customer service, sometimes exceeding expectations, in terms of delivery speed. But my experience and my research show that it is not a blank policy that should apply to all product categories or even to all customer circumstances. There are some customers that are more planning in their purchases, so they’re happy to wait two, three, four days. On the operational side, that has a huge impact. It’s not the same cost, not the same stress to the supply chain to deliver something the next hour, the next day, then a week from now. Sometimes the same customer is willing to change one or the other. Now, we are seeing retailers offering those options. The customer expressed the option, and with that, I think it’s an opportunity for a win-win.

Loney: It’s part of the reason why we’ve also seen companies push out the length of where they want to see that consumer think about holiday shopping. In many cases, it’s into early October.

Gallino: Yes, indeed. The holidays put a stress test to all the operations. In terms of the delivery options, and also in the store execution. Some of the peak in stress on the online basis is because many retailers start to stock out in the physical stores. Customers that are looking for a particular doll or a particular toy for their kids, they really stress out and start to put those orders online. I think that, in part, is a manifestation of this challenge that retailers have to have a coordinated strategy both online and in stores.

I think it’s important for those retailers to keep in mind that customers are omnichannel. In that sense, it is a fictitious effort to try to characterize a particular customer as an online customer or brick-and-mortar customer. We are all omnichannel. We walk in the store with our phone in hand. We leave the story empty-handed because we know that we can order when we are at home. Or the other way around. We are at home. We find something we like. We say, “I’m going to go to the store and check it out.” Retailers need to be aware of this because the customers will arrive to the store with a lot more experience and knowledge about the product, because they have been searching and finding information online before they arrive.

What’s the Future of Retail?

Loney: Is there potential for more disruption in retail as we move down the road?

Gallino: I think we haven’t seen all the disruption roll out. There are still retailers that will be able to navigate successfully, and to inform and convert. That’s always my hope. I like to see companies being able to reinvent themselves. Unfortunately, we’re going to see some more disruptions and some big players failing. This is the nature of retail. And this goes back to what we talked about at the beginning, that retail, by its own nature, is constantly evolving. That’s why it’s fun for me to do research on this industry.

Loney: What do you think it means for bricks-and-mortar in the retail sector? Because it does feel like they can stay viable, even with the online component.

Gallino: Absolutely. There are two parts of that. One is that finding customers online is getting more and more expensive. When the companies do the math, the physical store becomes an attractive and viable way to make your brand known to customers, have the opportunity to attract new customers, compared to what is these days more expensive — eyeballs on the internet.

The other part, what I think is the interesting component, is that brick-and-mortar has the opportunity to bring that experience to the customer that is possible, but harder, to do online. The retailers that have been successful these days are those that, in their own category, with their own constraints, have been able to bring that experiential component to the customer who wants to travel to the store because he likes to navigate the aisles and find those deals there, who likes to interact with the customers in the store, like peers buying and searching for products, and have that discovery exercise. Or simply because it’s much more efficient to go there, find what I want, and get out of there as soon as I can. The experience has different flavors, but I think that that experiential component is key these days.

Loney: But doesn’t it make it even more challenging when you think about this from a generational standpoint? The younger generations are digital, with bricks-and-mortar as a sidepiece, it feels like.

Gallino: That’s true. In talking to many retailers, they had pointed to something that I think is very interesting. The new generation is much more digital, much more invested in their online experience. For that reason, when they go to the store the human contact can have a huge impact. Because if you’re having a coffee with friends, you are more of an older generation. You constantly talk to people and interact. But the younger generation, maybe they have a handful of conversations with real people a day. And that’s why the impact of that conversation, if it’s well-planned and in a nice context in a store, can have a much better impact.

Loney: Is it a surprise, then, when you see some companies, Warby Parker being one, that start out online but bring in the bricks-and-mortar component a little bit later?

Gallino: No. To me, it makes complete sense. Many of those companies that started online, at the beginning they were arguing they will never go offline. There was no need for brick-and-mortar. But then they discovered that with the right strategy, they can combine the best of both worlds. Some of them have a ball with a physical presence that is like a showroom, so they don’t need to carry inventory because they want to have focus on the experiential component. Bonobos is an example. But Warby Parker, the same way. I think that it is not a competition between the two. It’s just to try to find the right balance and ultimately make a profitable proposition to the customers.

Loney: Doesn’t that also put a focus making sure they are as efficient as possible? Because it feels like we’re at a point right now where retailers, if they make a mistake, it’s very hard for them to come back from it.

Gallino: Absolutely. I was talking with a retailer yesterday, and we came to the conclusion that with all these changes, with all the innovation, it’s still true that retail is detail. This is something that was true 100 years ago, and it’s true today. And this is exactly your point. I think that execution is key. Because in many industries, the margins are big. Retail, with all these competitive forces, all the changes, tend to have very thin margins. So, it’s a story where details are key.

Loney: Where does retail have to go in the years ahead?

Gallino: I think that the years ahead should put a focus on these details. For many companies, there’s been a rush to offer everything to the customer without thinking, “Can we sustain this over time? Can we be profitable with this? Do customers really need all this that they’re asking?” Now that the retailers are extremely rich in data, they can be able to walk back and see, what are these details that they need to tweak to make the company successful?

Going forward, we’re going to see more of these changes that will tweak things in order to make the company more efficient and hopefully translate those efficiencies to the customers. One example is returns. I think that online returns are a pain point for any online retailer. And I think that it’s being very generous, the policy. But many companies are starting to revisit that and see how they can still keep customers happy but without being naïve about the whole process.

Loney: Are more companies finding those little areas where maybe they change the philosophy a bit and it helps their bottom line, but it doesn’t have any significant impact on the relationship with the consumer?

Gallino: Yes, I think so. One other area that I hope we see more changes is in staffing. If you think about the two main investments that retailers have, it’s their inventory— the assortment that they carry— and the people in the store. With this call for an experiential component, many retailers should rethink how they train, they retain, and they keep their own staff being able to provide that high experience that customers are expecting.