Consumer and Retail Practice

Omnichannel: It’s time

for the online tail to wag
the retail dog
Nonfood retailers, specifically the incumbent category killers,
can regain their former strength if they embrace full omnichannel
integration and adopt an “online-first” mindset.

by Philipp Kluge, Markus Schmid, Elizabeth Silliman, and Cyrielle Villepelet

© d3sign/Getty Images

December 2021
 In the late 1980s and early 1990s, the undisputed
disrupters in the retail industry were “category
killers”: large retailers such as Home Depot,
Best Buy, and MediaMarkt that carried a deep
assortment of goods within a specific product cate­
gory. By offering consumers a high level of
selec­tion, pricing, and convenience, these retailers
were able to take huge shares from department
stores and indepen­dents. Today, omnichannel
retailers—indeed, some of the same companies that
were significant innovators in the category-killer
era—see pure-play, digital-native retailers as an
existential threat.
There is reason to believe, however, that some
omnichannel retailers in Europe and North America
may be positioned to undergo a renaissance soon.
In this article, we aim to shed light on the interplay
between online and offline channels and the
vast opportunities for retailers that manage these
channels and their interplay correctly.
Dawn of the era of the omnichannel
category killer
Fifteen years ago, most consumers were
inexperienced in e-commerce, and finding the best
price was their primary reason for shopping
online. In that context, online consumers were
About the research
With OmniNEXT, McKinsey has developed a holistic approach
to assess the full omnichannel potential for store-based
retail. The approach builds around category-specific bench­
marking and a large-scale consumer survey, in which
shopping behavior is assessed in depth for a specific category.
In each geographical region, the research features more than
1,000 respondents per category. In this article we share results
of the first broader applications of OmniNEXT from 2021,
conducted in Germany for various categories including home
and furniture, consumer electronics, and do-it-yourself (DIY).
1
“Five Fifty: The quickening,” McKinsey Quarterly, July 28, 2020, McKinsey.com.
2 Omnichannel: It’s time for the online tail to wag the retail dog
predominantly seeking trusted interactions as
well as the convenience of one-stop shopping. This
behavior in the past contributed to the growing
consumer preference toward “one-for-everything”
general merchandise retailers such as Amazon over
more focused category destinations.
Our recent research, however, indicates that
consumer expectations are dramatically changing
(see sidebar, “About the research”). While price
and convenience are still primary considerations,
customers are increasingly weighing them against a
demand for competence in specific categories
and customer experience. This dynamic is especially
true for categories that are highly fragmented
or in which advice to customers plays a large role in
sales—such as furniture, do-it-yourself (DIY),
apparel, pet care, and even more concentrated
categories such as consumer electronics.
This trend could be a huge opportunity for the
brick-and-mortar giants of the past to become
destinations blending the best of offline and
online propositions and to differentiate themselves
from Amazon, online marketplaces, and other
pure-digital players. We believe brick-and-mortar
retailers can now position themselves as winners
in the coming decade by making a quantum leap
from being an offline brand with an online presence
to becoming a retailer with a truly omnichannel
go-to-market model.
Omnichannel: Everyone talks about it,
few really do it
There’s no question: during the COVID-19 pandemic,
online shopping has become an even more important
way for consumers to access and purchase retail
goods and services. In mere months, the penetration
of e-commerce in the United States grew an amount
that would have taken ten years before COVID-19.1
In Europe, capital markets currently value online
retail up to five times higher than brick-and-mortar
retail, and many executives recognize their
seemingly small online business has value equal to
or greater than their brick-and-mortar business.
 While there is hardly a retail executive who would
not describe online or omnichannel as a top
priority, few retailers are substantially reallocating
investments—marketing spending aside—away
from their historical core. Even fewer retailers have
moved beyond isolated e-commerce operations
and truly shifted to an online-led, omnichannel
go-to-market model.
One reason why so many retailers are still driving
omnichannel with at least one foot on the brake is
likely the lack of transparency about the tremendous
benefits to the offline business from the online
business, and vice versa. This interconnectedness
reinforces the huge opportunity that omnichannel
offers brick-and-mortar retail.
Why true omnichannel integration
means embracing the store
Putting a retailer’s online activity at the center does
not mean online takes precedence over offline.
The brick-and-mortar business will remain a critical
element for winners in omnichannel. For many—
The true revenue performance of a
retailer’s online channel can be
understated by up to 100 percent, or even
more if not accounting for the influence
online has on offline.
2
McKinsey Apparel Omnichannel Survey, 2019, McKinsey.com.
3
OmniNEXT 2021 consumer research features more than 1,000 respondents in each category.
Omnichannel: It’s time for the online tail to wag the retail dog
at least in the midterm—it will be the more profitable
part of the business. However, a retailer’s online
presence (including its website, app, email, and social
media) will be the single most important portal to
start interacting with consumers. In a world in which
80 percent of consumers, on average, make their
retail brand or purchase decisions online and omni­
channel customers purchase up to 70 percent
more often their offline-only peers, the impact of the
online channel on offline cannot be overstated.2
This is why it will be essential for e-commerce
leaders to take a much broader view of omnichannel.
Today, many optimize only for their channel. But
capturing the full potential of omnichannel requires
a cross-channel perspective and transparency to
measure and manage channel interplay. Although
most retailers struggle to attain this transparency,
there are ways to build the bridge and assess both
online and offline conversion.
McKinsey has developed a survey-based approach
to gain full transparency.3 These insights can
help retailers measure omnichannel conversion—
3
 not only of online purchases but also of offline
purchases directly triggered by a recent online visit.
The results vary by category and geography. For
example, in nonfood the ratio ranges from 0.5 to 1.0,
meaning for every customer converted through
online channels, a retailer can expect to see up to
the same volume of incremental offline purchases.
In other words, the true revenue performance of
a retailer’s online channel can be understated by up
to 100 percent, or even more if not accounting for
the influence online has on offline.
A look at hard-goods retail in Europe reinforces
this dynamic (Exhibit 1). Retailer 1, which has a high-
performing e-commerce team, clearly leads
the three retailers in online conversions. From an
omnichannel perspective, however, retailer 2 is
doing significantly better, because it is much more
successful in bringing online customers into the
store, giving it the highest omnichannel conversion
rate. This transparency not only changes the
perspective on a retailer’s performance but also
suggests different strategies for adapting the online
user experience and operations.
The example above shows how substantially
e-commerce leaders can increase their channel
leverage if they fully embrace the online store.
Another reason for doing so is the power that stores
can give an omnichannel play online: players such as
Amazon have built an outstanding brand based
on customer experience. However, omnichannel
retailers can take advantage of their historical
strengths—particularly their brand equity and
physical presence, both of which are hard to rep­li­
cate. This is specifically true for nonfood
category killers, which can build on their trusted
category expertise.
An example for this omnichannel advantage becomes
apparent when you compare the ability of brick-and-
mortar and pure-online retail to attract online
customers organically; that is, reaching consumers
without investing in paid traffic channels. In most
categories, brick-and-mortar retailers typically

Exhibit 1

vary in
Retailers vary inthe
thestrength
strength of
of their
theiromnichannel
omnichannelconversion
conversion rates.
rates.

% of total onsite traffic

Online conversion In-store converted online traffic Omnichannel conversion
Order No order Triggered Visited store Online In-store
by online anyway converted

Retailer 1 1.7 0.6 1.7 0.6 2.3

Retailer 2 1.2 1.3 1.2 1.3 2.5

Retailer 3 1.3 0.5 1.3 0.5 1.8

4 Omnichannel: It’s time for the online tail to wag the retail dog
achieve an organic traffic share nearly twice that of
pure players (Exhibit 2). As a result, brick-and-mortar
players can spend significantly less on marketing
to reach the same number of consumers. With
marketing costs accounting for 10 to 15 percent of the
online business, this advantage translates into
increased profits of up to 5 percent of sales. Thus,
the brick-and-mortar operations, which in general
are perceived to be at a disadvantage on costs
compared with pure play, can create substantial
upsides for incumbent retailers.
Why it still requires an
‘online-first’ mindset
Successful omnichannel not only means shifting
online operations from a pure-online mindset
to an omnichannel approach. Retailers should also
rethink their brick-and-mortar operations in
the same way. After all, consumer perception of the
brick-and-mortar proposition to a large extent
determines the entire omnichannel proposition.
The importance of the brick-and-mortar proposition
can be underpinned by a consumer-backed

Exhibit 2

Omnichannel players
players have greater shares
shares in
in organic traffic,
traffic, spending less
lesson
on
advertising than online
online pure
pure players.
players.

Paid traffic share, % of total traffic Organic1 Paid2

Omnichannel player Online pure players Comparative spending3

Apparel 87 13 53 47 250

Do-it-yourself 88 12 57 43 250

Furniture 72 28 65 35 25

Sports 72 28 63 37 30

1
Includes direct-to-consumer and search-engine optimization (SEO).
2
Includes search-engine advertising (SEA), social media, and display advertising.
3
Approximated.
Source: German Market, McKinsey OmniNEXT benchmarking database, 2021

Omnichannel: It’s time for the online tail to wag the retail dog 5
 methodology that quantifies the impact of online
and offline attributes on the overall omnichannel
perception compared with the competition. Our
analysis shows that the lion’s share of differences
in omnichannel perception can be explained by
broader aspects of the entire business. Factors that
contribute to online user experience are relatively
less important. For instance, in a comparison of DIY
retailers in a large European market, 70 to 80 percent
of the purchase decision resided in non-e-commerce
areas such as pricing, assortment, store proximity,
or after-sales service.
Since these areas are typically out of reach for an
e-commerce team in an omnichannel organization,
retailers often fail to capture the largest online
growth opportunities. To be successful both online
and offline, they must truly let the online tail wag
the dog—that is, expand beyond direct online-only
levers (digital media and user experience, for
example) and adopt a truly omnichannel (and online-
led) go-to-market strategy with respect to marketing,
pricing, assortment, and in-store experience.
Why does it make sense for the online tail to wag the retail
dog through an integrated omnichannel strategy? McKinsey
research highlighted three reasons:
1. Online is the starting point for the majority of customer
journeys—60 to 90 percent, depending on the category.
2. Online directly triggers omnichannel sales of up to twice
its size (and influences earlier stages of the offline
consumer journey).
3. Omnichannel customers generate substantially more
value than pure offline customers—in US apparel,
this segment accounts for more than 70 percent of
annual purchase volume.
4
Nike Inc Q4 2020 Earnings Call Transcript, June 25, 2020, fool.com.
5
Florian Kolf, “Warum Hornbach im E-Commerce schneller wächst als Amazon und Zalando,” Handelsblatt, November 23, 2021, handelsblatt.com.
6
Leong Kexin, “Beating the odds: Nordstrom’s omnichannel prowess,” Omnilytics, March 26, 2020, omnilytics.co.
6 Omnichannel: It’s time for the online tail to wag the retail dog
How to become a true
omnichannel winner
Retailers that have courageously transformed their
businesses into omnichannel enterprises are the
best argument for other retailers to take such action.
Best Buy, for example, went from being a declining
business in financial distress ten years ago to
becoming a growing and highly successful US
consumer-electronics retailer today, due in large
part to an omnichannel transformation. Nike has
focused heavily on its omnichannel transformation
and has seen e-commerce sales surge, making up
more than 30 percent of its overall business with a
goal to achieve 50 percent.4 Decathlon has doubled
its share of online sales every year since 2019,
reaching close to 30 percent in 2021. The company
has fully switched to an omni­channel way of thinking,
leveraging its strong network of stores while
expanding its online business. The company
launched its marketplace in ten countries in just
nine months, increasing its offer through third-party
partners. Hornbach, the third-largest DIY brick-and-
mortar player in Germany, fully adapted its go-to-
market to an online-first omnichannel model—
becoming the largest online omnichannel player by
far and growing this channel above 80 percent
within the past 12 months.5
Nordstrom has maintained a strong position
in a category rife with bankruptcy by betting on
omnichannel. Long before its peers did, the
department store rolled out curbside pickup and
guaranteed consistent pricing across digital and
physical channels. The customer experience
and financial benefits have been mutually
reinforcing, as Nordstrom CFO Anne Bramman
noted in 2020: “The economics of serving
customers are greatly enhanced by having combined
digital and physical assets in a given market.”6
Building on McKinsey’s experience with
more than 1,000 omnichannel projects
in retail in the past decade, we have
developed a methodology for retailers to
capture the full omnichannel potential.
Building on McKinsey’s experience with more
than 1,000 omnichannel projects in retail in the past
decade, we have developed a methodology for
retailers to capture the full omnichannel potential.
This assessment gauges performance from end
to end—not only from the attraction and conversion
of new customers through the engagement of
existing customers but also from online to offline
and vice versa. In our experience, a scan of the
full operations of the retailer often reveals potential
value that is three to five times greater compared
with the retailer’s online plan. Capturing this
potential truly requires a CEO-led transformation
across the entire organization. Capturing the
full omnichannel value creation potential typically
builds on four best practices:
1. Invest boldly to get the basics right. Excellence
in omnichannel experience starts with a
compelling online user experience. A substantial
investment in capabilities, especially around
technology, is needed to get there. The majority
of retailers devote less than 1.5 percent of
revenue to tech talent and technology, but true
omnichannel leaders invest double that or more.
Raising the level of investment on tech—and
on digital capabilities in general—is one of the
most important enablers to compete with
pure-online retailers on the basics. These include
performance media and search-engine optimi­
zation to drive traffic, seamless user experience
Omnichannel: It’s time for the online tail to wag the retail dog
and online category-management basics, and
customer relationship management to support
continued engagement.
2. Make the go-to-market radically “online first.”
Optimize the levers that have an impact on
e-commerce but often sit outside its control: a
company’s online and offline go-to-market
strategies both need to be devised using an
online-first mindset. In other words, if a high-low
pricing and promotion strategy is not viable
against online competition, the strategy needs to
be redesigned for the entire business. This is
the biggest cultural shift for retailers by far, as
they have to rethink their core strategies—pricing,
assortment, and marketing, which are often fully
tailored to a pure-offline model—and rigorously
adopt these strategies to be competitive online,
where 60 to 90 percent of customers make the
call whether they consider the retail banner at
all, be it online or offline.
3. Embrace the store (omnichannel accountability).
Online is not a stand-alone business but rather
the number-one portal to all channels, and it
needs to be steered and measured with a dual
mission to increase the online and offline
business. Providing incentives for channel leaders
to maximize omnichannel performance is critical
to unlocking its full potential. This approach should
be implemented both by putting hard targets in
7
 place and having executives role-model the
required collaboration across channel lines. Senior
leaders should also clearly articulate the In five years, we expect that describing e-commerce
mutually reinforcing roles of each channel. as the tail of the retailer dog will be quite inaccurate
indeed. Retailers are acting quickly, and now is
4. Take full advantage of the brick-and-mortar the time to use a rigorous online-first mindset to
essence. The foundation of a brick-and-mortar rethink their overall business and let the e-commerce
retailer—that is, brand trust, interaction with tail wag the omnichannel-retailer dog. Those that
people, and physical accessibility—is the primary do, we believe, will play a dominant role in the
differ­entiator of its online channel from those of industry and could find themselves being referred to
purely digital players. Retailers need to fully in the future as the new league of omnichannel
capitalize on this advantage by fixing the typical category killers.
cross-channel disconnects along the customer
journey and understanding where in the journey
the omnichannel capability specifically
differentiates from what a pure-online player
can offer.

Philipp Kluge and Markus Schmid are partners in McKinsey’s Munich office, Elizabeth Silliman is a partner in the Boston
office, and Cyrielle Villepelet is a partner in the Paris office.

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8 Omnichannel: It’s time for the online tail to wag the retail dog