Will physical and digital retail operations perform better on their own?

Source: macys.com
Oct 20, 2021

The lure of high valuation, standalone digital businesses is leading some retailers in a new strategic direction.

While most sales come through stores, online is accelerating because of shopping trends begun at the onset of the pandemic. The challenges of operating a growing and profitable omnichannel business, however, have some seeing a windfall in retailers spinning off online operations.

A Wall Street Journal reported earlier this week on plans by the Hudson’s Bay Company to split Saks Fifth Avenue physical and digital retail businesses into two units. The digital unit, which is preparing for an initial public offering, will be known as Saks going forward. The company expects Saks to be valued at $6 billion.

The activist investor Jana Partners, which has taken a stake in Macy’s, Inc., is pushing for the retailer to follow the Saks’ example. Jana Partners sent a letter to Macy’s board last week urging it to spin off the online business, which generates about $8 billion in annual revenues, according to another Journal report.

In a lot of ways, this approach contradicts both expert advice and retailer investments to weave physical and online into unified shopping experiences.

“Headless commerce,” which leverages application programming interfaces (APIs) to reap the benefits of bringing together loosely coupled processes, has become the e-commerce architecture du jour. It has added flexibility for retailers and consumer-direct brands to separate considerations for consumer-facing experiences from back-end processes like order management. Before, these were monolithic with no choices.

The same logic applies to the separation of physical and digital businesses. Practicing “headless retail” should enable both online and physical operations to flourish independently, given their distinct strengths and assets.

The pandemic rewards those who move fastest, and the ability of a digital business to keep pace with shoppers without the financial, technical and cultural constraints of the legacy business will help achieve that.

Newly isolated physical businesses will also need to step up their games and similarly leverage APIs to orchestrate more competitive face-to-face retail.

While we can expect newly pure-play banners to collaborate as unified entities, the fact they will operate independently opens possibilities with the broader retail community. New forms of partnerships and alliances are likely to spring up. Testing and learning will increase as each looks to leverage APIs to access all manner of technologies to deliver more unique, compelling and seamless experiences.

DISCUSSION QUESTIONS: Are retailers’ sales and profit objectives more likely to be achieved by separating physical and digital operations or by taking a unified approach? Will more companies look to unify operations or do you see more following the lead of Saks?

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"Aside from department stores, this separation of physical and digital will cause more problems than it solves."

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19 Comments on "Will physical and digital retail operations perform better on their own?"

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Paula Rosenblum

I don’t even see how this has become a conversation. Saks is somewhat unique, owned by a company that went on an acquisition spree and doesn’t really operate all that well.

For all retailers for the long haul, there’s far more efficiency in unified companies. It’s what consumers expect and you’d have to twist yourself into a retail pretzel to make this work seamlessly for shoppers.

Bob Amster

Well, I am glad I am not alone!

Ananda Chakravarty

Paula is spot on. Customers don’t care about the operation, only about what and how they’re buying. Separate operations means separate sourcing and buying, separate quality of service, separate administrative SG&A, separate leadership, and separate (and usually conflicting) goals and objectives. There are better ways to spin off companies and non-performing units than by splitting down digital and physical operations.

This is a move in the wrong direction at the behest of an activist investor looking to gain value — so financially they can exit with a profit. This is not operational improvement or long-term sustainability as a business.

Liza Amlani

A bold move and a HUGE mistake for this retailer. As successful retailers are blurring the lines of “channel” and dramatically shifting towards #omni, Hudson’s Bay Company is doing the exact opposite.

Separating physical and digital, knowing that customers include both channels during their shopping journeys, will confuse the customer and alienate them altogether.

The focus should be customer-centricity and an aligned merchandising strategy to increase footfall.

Bob Amster

I can’t believe that after espousing unified commerce for the last two or three years, and omnichannel commerce before that, and multichannel before that, that the industry is having this conversation. I believe that the move by HBC with Saks was 90 percent financially motivated. If a retailer separates e-commerce from stores, it must maintain the systems integration that present one face to the consumer. It’s doable, but not easily as two separate companies. Think “back to silos.”

Chuck Ehredt

Most businesses perform best when optimized for their environment. The physical store and online platforms are quite different, so require different skills, staffing, and quite a few of the technologies. Of course, common systems for inventory management should be used, but I do believe companies will perform better by separating the teams – and possibly the companies.

Neil Saunders

This needs to be seen for what it is: a financial move that provides some a short-term gain for investors and others. There is very little commercial logic to the move and despite the fact some have attempted to place a veneer of commerciality on splitting apart businesses, none of the arguments advanced are convincing. We have seen these games played so many times, with property divisions being split off, Sears creating different groups and it always ends in the same way: some people doing very well at the expense of the long-term health of the business.

Perry Kramer

The greatest long-term profit potential is 100 percent tied to having a unified approach to operations. There is no disputing that retailers have struggled to develop a unified commerce approach for many years. This is mostly because a true unified commerce experience is very complicated and continues be a moving target driven by innovation of new features and services. In the short term we may continue to see some retailers separate the digital channel for the quick wins and to defer the unified commerce struggle. This separate channel approach brings with it significant inventory and customer service challenges.

Cathy Hotka

Every single senior leader at the Store Operations Council talked about the importance of seamless integration between online and store. Moving backwards, with brightly defined channels, isn’t the future.

Dave Wendland

Articulated perfectly, Cathy Hotka.

David Spear

Amazon started online and has moved into physical while Walmart was pure physical and has moved online. Balancing both is absolutely necessary and critical to creating a seamless omni-experience for shoppers. I think Hudson’s Bay is making a very big mistake. They may want to embrace the “fail fast” model because they’ll need it.

Dave Wendland

This is indeed a conundrum. Like most other experts, I’ve advocated for alignment between physical and digital spaces to offer consumers consistent experiences. That said, tying an e-commerce engine to a lagging, outdated retail format may not be the answer.

Instead, I would encourage retailers to rethink their “physical plants” and reinvent them to not only become relevant with today’s shoppers, but also complementary to their digital operations.

Doug Garnett

We seems to swing between extremes – offered only the options of “entirely separate” or “entirely integrated.” Success will be found in between – with the right mix to offer value to your customers.

As to Saks as an all-digital spin off? An idea destined to fail. In case Hudson’s Bay didn’t notice, I will remind retail that the “all digital” startups are running as fast as they can to either get into stores or start their own.

Carol Spieckerman

Perhaps a better question is, “should everyone be in the online marketplace business?” as that appears to be the end game. From that perspective, brands like Saks have a shot at wicking off better brands and giving them the attention they believe they deserve in the digital space. As Amazon shovels more of its owned brands and those created by no-name brand factories onto its platform, it makes sense for brands to seek alternative digital distribution. However just as every brand can’t pull off a direct-to-consumer double-down, a la Nike, not every retail brand is suited to digital domination. Bricks-based retailers like Macy’s should be invested in integrating bricks and clicks rather than attempting middling spinoffs that only dilute the brand.

Melissa Minkow

I do think separating digital and physical works in the case of outdated retail models, like department stores. The current physical store just isn’t relevant to consumers anymore, but the online version is. With other types of retail models, this is the exact opposite of what we’ve advocated for. Aside from department stores, this separation of physical and digital will cause more problems than it solves.

Ryan Mathews

Let me take a contrarian point of view, at least for the exercise. Why not do two things well rather than one thing badly or in a mediocre way? Physical and digital systems are clearly different, and so they clearly optimize differently. That seems to be the Saks argument, and – on one level – it makes perfect sense. Where it breaks down is over the issue of brand. Operate two channels under distinct brand names? Maybe. Operate two channels separately under the same brand? Sounds like a formula for a train wreck. As to the near term future, I think we will see more companies still trying to unify operations.

Michael Day

More and more, with each passing day, the retail shopper is calling the shots and they want blended channel. The sales metrics show it and have for a long time: blended channel shoppers, pretty much across the retail landscape, spend more compared to single channel shoppers. If the future of retail success is indeed organizing around the customer, if the customer is now the channel, this silo move makes no sense at all. It also raises the question: why is Amazon trying so hard to get their physical retail GTM right so they can scale it, if not to augment their e-commerce success (and data mastery) and go after more market share via blended channel offerings?

Jeff Sward

I have no doubt that the financial guys could turn this into a short-term, one time jackpot. The question is, could the right merchant/e-commerce team turn it into a longer-term, bigger jackpot? So the problems are patience and talent. Those are not small problems. It’s tough to criticize the finance people for doing their job. They see value and a way to extract it. Why isn’t it easier to sell the longer-term, possibly larger value? How many retailers are we going to lose due to financial engineering? We know that brick-and-mortar plus e-commerce is the longer-term, stronger solution.

Nicola Kinsella

Does anyone remember Sports Authority? Their e-commerce business was separate and they got crushed when BORIS and BOPIS became popular. Dick’s on the other hand pivoted to unify their store and online experiences. If Saks were in a category that was moving more towards “digital first” then maybe it would make sense, but apparel is the wrong category.

"Aside from department stores, this separation of physical and digital will cause more problems than it solves."

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