Glossy+ Research: The New E-commerce Playbook

Introduction

2023 was a year of ups and downs in retail. While many companies experienced financial downturns, such as Macy’s continued slide in revenue, the industry was also presented with key digital opportunities, including the proliferation of AI technology kicked off by OpenAI’s release of ChatGPT at the tail end of 2022. 

According to the U.S. Department of Commerce, e-commerce sales have consistently grown in the U.S. over the last few years. It estimated that e-commerce sales for Q3 2023 – adjusted for seasonal variation, but not for price changes – increased by 2.3% from the second quarter of 2023. In a separate report on holiday spending, the Commerce Department noted that December spending was up 0.6% from the previous month, and up 5.6% compared to 2022. While showing slower growth than during the height of the Covid-19 pandemic, there’s clear evidence that e-commerce continues to expand and become a main channel for retailers.  

But e-commerce, and retail more broadly, do not have a catch-all playbook. Consumers shop differently depending on the category of the retailer, and these behaviors and needs dictate the type of e-commerce experience needed for each industry. To benefit from these growth trends in a competitive environment, retailers must examine the idiosyncrasies of their industry, including how consumers engage with their stores, to determine how to assemble the best digital experience. 

Glossy’s sibling publication Modern Retail recently released the annual Modern Retail Index (MRI). The first installment analyzes retailers’ e-commerce strategies and compares the different ways retailers cater to customers’ online needs. We drill down on the core components of every retailer’s business — and the ways they’ve modernized digital platforms to stay relevant with customers. The Index found the following:

• Specialty retailers Sephora and Ulta excel at providing robust customer product reviews and incorporating AI tools for product recommendations.
• Department stores Kohl’s and Nordstrom leaned into emerging technologies, particularly AI, to counter poor financial performances. 
• Amazon’s e-commerce strategy creates extended touchpoints for its consumers outside of its primary website, including partnerships with Shopify and Meta.
• Big-box stores Walmart and Best Buy dominated the e-commerce dimension by expanding their paid membership programs with tiered pricing and early access to promotional deals.

Beauty and fashion specialty retailers offer robust online reviews, AI tools and membership programs

The beauty industry has been a major category for online shoppers, where customers shop online at higher rates than other product categories. As a result, it’s not surprising to see Ulta and Sephora dominate the e-commerce dimension due to the emphasis that both beauty retailers and their customers place on online shopping. 

Ulta and Sephora performed exceptionally well in the reviews dimension. Both sites have a heavy focus on reviews to create “social proofing” — the effect on one’s belief or behavior of seeing the beliefs or behaviors of others. This is an important social factor for items that have a steeper learning curve, such as health products. Between the two, Ulta scored slightly higher than Sephora in reviews due to its ability to pull in reviews from other sites. For example, a MAC lipstick can have reviews left by shoppers from ulta.com and it will also pull in reviews from maccosmetics.com. This allows Ulta to beef up reviews, especially for newer products to help customers make purchase decisions.

Sephora uses a slightly different strategy to increase the review count for products on its site. Sephora has an incentivized review program. The retailer will send customers free products in exchange for testing and writing a review for the product. The reviews from free products are labeled “Incentivized” on the review page. Along with its incentive program, Sephora also pulls images tagged on social media into its review section, providing more images for product reviews. 

Despite the different industries they represent, almost all the retailers in the cohort have adopted AR/VR technology, a common trend throughout the entire index. 

Sephora announced plans for its Smart Skin Scan, which will allow customers to scan their faces using their smartphone cameras. The images will then be processed by AI-powered tech and the tool will give recommendations for skincare products. This comes on the heels of Sephora’s previously released and already popular ColorIQ scan that matches foundation colors to skin tones. Ulta announced a similar product through its partnership with Haut.AI. Haut.AI provides tools that allow users to scan images of their faces and skin in order to receive recommendations for skincare products. Haut.AI’s collaboration with Ulta is connected to Ulta’s skincare product category to push its products. Sephora and Ulta use AI to help solve customer questions about which best products are best suited for a situation, and they aim to provide more long-term customer facing strategies with the technology.

Another area of strength for the group is membership programs. While the cohort mostly offers non-paid memberships, the group places a large emphasis on creating loyalty programs with high incentives for the customer. 

Sephora has one of the most famous loyalty programs in the index. Its “Beauty Insider” program features a tiered system based on annual customer spending amount, with benefits increasing as customers spend more in a year. The program has several benefits, including free shipping, promo-event access and birthday presents. Recently, Sephora added a gamification component to its program called Beauty Insider Challenges. The challenges, many digitally based, can be tasks such as trying Sephora’s ColorIQ tool or using its buy online, pick up in-store feature. By completing the challenges, customers acquire points that they can later redeem for a variety of benefits.

Similarly, Ulta also offers memberships based on a customer’s annual spend amount, with increasing benefits the higher the tier and the more the customer spends. Other cohorts looking to create loyalty programs can look to the specialty retail group for examples of non-paid memberships that aim to increase annual spending rather than draw revenue from membership fees.

Department stores integrate AI to counter poor financial performances

But despite the lofty e-commerce experience rankings for many in the cohort, big-box retail did not experience the strongest 2023 financial performance. Kohl’s and Macy’s, in particular, faced a rough financial year. Both retailers underperformed against new retailer additions and also both do not utilize a paid membership program to increase customer benefits. 

In recent years, many retailers have moved beyond traditional loyalty programs and have started using paid memberships to create new benefits. The lack of a paid membership program has caused Macy’s and Kohl’s to fall behind their cohort members, Walmart and Best Buy.

“I think the unfortunate thing is, it’s not clear what they can do at this point, because they started so late to address this,” said retail analyst Steve Dennis about department store relevance. “What’s the reason all the people started shopping at TJ Maxx and Ulta and Target and Amazon? What is it they’re going to do to win that business back? Because it’s a declining category as a business model, so if they don’t start gaining back significant market share, they’re just going to slowly sink into oblivion.”

To counteract this, department stores have started integrating emerging technologies, especially AI.

Kohl’s offered a clear example of an AI-powered tactic to generate buzz: The retailer created an AI tool specifically for the holidays called Story Book Magic that allowed customers to input information about gift recipients to create customized stories and gift lists to help inspire gifting ideas. Customized gift guides were a key holiday strategy to help lift Q4 revenue, with gift guides being one of the most used and best-performing holiday marketing tactics – as seen in Modern Retail’s Holiday Marketing and Commerce Strategies report.

On the other hand, Nordstrom employed AI more operationally to help improve functions like customer service and to enhance the retailer’s ability to buy trending styles for upcoming seasons. “We are also focused on what we call our fashion map [which] essentially takes a natural language-based approach with deep learning to interpret images and information from social networks,” said Nordstrom’s CTO Edmond Mesrobian in an interview with VentureBeat. ”This allows us to get to know customers through a natural language conversation, as opposed to keyword searches that are very taxonomy driven and hardcoded. We are continuing to work on achieving AI discovery to get closer to our customers in a personalized way.“ 

While the department stores did not perform well financially, they continued to improve their digital experiences. Kohl’s used a customer-facing AI tool aimed at generating short-term buzz to draw in customers, and Nordstorm used behind-the-scenes AI functions to improve workflows. Both strategies focused on turning around falling revenue. 

Given the uncertainty of the market throughout much of the year, department stores found themselves in the position to play catch-up in 2023 resulting in more reactionary e-commerce strategies. The rest of the big-box retailers, like Walmart and Best Buy, remained industry leaders and focused on progressive and forward-looking e-commerce enhancements.

Amazon’s e-commerce strategy goes beyond its own site

One of the areas that Amazon has led, and continues to lead, is paid memberships. Amazon’s Prime program has been around for many years and continues to develop further. The program started by giving consumers access to free expedited shipping, a major draw-in point given Amazon’s extensive fulfillment system. Now it includes a streaming package through Prime Streaming, a Twitch subscription, Prime reading, discounts on prescription medication and many more benefits. Amazon’s paid membership program creates extended touchpoints for its consumers outside of its primary website.

And Amazon has continued to expand its Prime services. Recently, the retail giant struck an agreement with Shopify to allow Buy With Prime on Shopify-powered merchant sites. Brands that use both Shopify and Amazon’s fulfillment network can use the Buy With Prime feature from within Shopify Checkout, with payments processed by Shopify Payments within the U.S. This allows customers to use another payment method while shopping, but again requires that consumers belong to Amazon’s paid membership program.

Not only did Amazon agree to work with Shopify, but also it agreed to collaborate with Meta. Ads on Meta-owned Facebook and Instagram show Amazon products that can be purchased within the apps if the user connects them to their Prime account. This has been deemed a win-win for both parties as it encourages consumers to shop through social commerce, a big focus for Meta, while also allowing Amazon to have a new touch point for reaching shoppers. “For the first time, customers will be able to shop Amazon’s Facebook and Instagram ads and check out with Amazon without leaving the social media apps,” said an Amazon spokesperson to CNBC in a statement. “Customers in the U.S. will see real-time pricing, Prime eligibility, delivery estimates, and product details on select Amazon product ads in Facebook and Instagram as part of the new experience.”

Not only does Amazon set the standard for a paid membership program, it will likely become a retail leader in AI technology. Amazon already has a successful cloud computing arm of its company and a physical AI robot, Alexa. And, it is continuing to invest more in emerging technologies. Amazon recently released Fit Insights, an AI-powered tool that provides brands with feedback about product sizing to help them improve future products. The tool aims to reduce return rates from customers who order multiple sizes of an article of clothing, but only keep one item from the order, a behavior known as “bracketing.” 

Along with Fit Insights, Amazon has also developed a new large language model (LLM) called Alexa LLM. The LLM will allow the Alexa device to connect with other APIs to perform customized functions. While a seemingly small step, it is important to note that Amazon is one of the few companies actively integrating AI into real-world devices – with the other notable example being Google.

Walmart and Best Buy top the ranking by expanding their paid membership programs

Walmart and Best Buy took the first and second spots in this year’s index. Their e-commerce dominance was maintained largely due to new innovations in both paid membership programs and applications of emerging tech. 

In June, Best Buy overhauled its membership program to introduce a new tiered model featuring an additional mid-priced tier, stating in August that it expected the My Best Buy Membership program to contribute at least 25 basis points of enterprise year-over-year operating income rate expansion – and that it was seeing growth in year-over-year paid membership sign-ups. Its domestic gross profit rate for the second quarter of 2023 rose to 23.1% compared to 22.0% in 2022, results it attributed in part to its membership program. 

Walmart on the other hand has continued to expand its membership program’s benefits. In last year’s index, Modern Retail+ Research noted Walmart’s partnership with Paramount+ streaming services. This year, Walmart Plus added early access to promotional deals, including early access to Black Friday deals and an exclusive weekend of deals in July called Walmart Plus Weekend – a direct competitor to Amazon’s Prime Day. While Target and Nordstrom also offered deals in the same time frame, Walmart was the only retailer in this index that gave exclusive access to paid members. 
Walmart was also the major stand out in the big-box group when it came to AI. Its partnership with Microsoft has allowed the retailer to integrate generative AI into its onsite and in-app search function. The new feature allows shoppers to present statements like “Help me plan a unicorn-themed party” instead of searching for individual items like “unicorn decorations” and “plates.” Walmart’s adoption of AI into its search algorithm focuses on the customer’s digital experience and improves overall site performance in the long term.

Key takeaways

• Ulta and Sephora performed exceptionally well in the reviews dimension. Ulta pulls in reviews from other sites, while Sephora has an incentivized review program in which customers receive free products in return for writing reviews.
  
• Just about every retailer in the big-box cohort saw revenue decrease in 2023, with department stores impacted the most. To counteract this, department stores have started integrating emerging technologies, especially AI.

• Amazon has led, and continues to lead, in paid memberships. Amazon excels in e-commerce through its paid membership program by creating extended touchpoints for its consumers outside of its primary website.
  
• Best Buy revamped its membership program to include a new tiered model and also an additional middle-priced tier, while Walmart expanded its membership program to include early access to promotional deals.