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A Retail Manifesto: It’s online or bust. Are you ready?

3 years ago, Posted in Uncategorized

The shopping experience is a very human experience, but even human nature can change. The retail setting we’ve had, from the Grand Bazaar of yesterday to the ubiquitous shopping mall of today, is – in no uncertain terms – on the way out. Technology that can change retail and how we buy and sell is already here.

Online retailers with an eye toward the future have already figured out how to use it. Those still living in the brick-and-mortar past, however, may have no future at all.

It may not be this year. It may not be five years from now. But physical stores, from big box retailers to neighborhood boutiques, will die … or be reduced to quaint reminders of a distant past. Online sellers – at least those able and willing to make the leap – will dominate the competition with better prices, better selection and a better experience for buyers and suppliers. This may seem obvious to some people. For others, it may still come as a jarring surprise. Here’s how and why this is happening.

Redefining retail

Before we reinvent the meaning of retail, I should first note some observations I’ve been making for several years:

  1. Retail isn’t about the way we shop, or even about having physical shops where people go to buy the things they want or need. Retail, at its core, should be defined as “getting the products to people that they want, in the way they want them.”
  2. Up until about 50 years ago, small, independent “Main Street” stores played that retail role. This was an era when production was closer to demand (i.e. goods were produced in the same general region where they were sold), and customers had the time and interest to cultivate a personal relationship with the store owner.
  3. Then came the big boxes. By outsourcing production far away and creating large format stores, they were able to dramatically lower prices. To do this, they created new and elaborate distribution channels to get goods to market. At the same time, they used the buying power created by the larger format to control the price of a select number of SKUs, or stock. However, since this approach relied on a physical store format and supporting distribution network, these retailers became trapped. They were compelled to choose from a relatively small selection a) to get buying leverage over suppliers and b) because their physical shelf space was finite. The result for the end user: a retail world where choice was limited to what the retailer wanted them to see instead of what was truly available.
  4. New technology and progressive companies are, finally, flipping the equation. No shopping lines. Limitless inventory. Best pricing. Total convenience. For suppliers and customers, the golden age is just ahead. If middleman retailers want to stay in the picture, they’re going to have to change their role, or become extinct.

Retail in the age of disintermediation (i.e. the retailer as referee)

The current retail revolution is part of the broader trend – fueled by new technology – of eliminating the “middleman” and directly connecting users and suppliers. Tom Goodwin aptly summed this up as the age of disintermediation, writing:

Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate.

Successful companies are almost (but not quite) getting out of the way and enabling consumers to interact directly with suppliers of products and services. In the retail world, the old concept of middlemen taking their cut just for having something in stock doesn’t apply. Instead, the residual value retailers offer comes from being a kind of referee, weeding out bad actors and ensuring their system is trustworthy and reliable, so customers keep coming back. Retailers don’t have to provide a physical store or actual products. Instead the retailer of the future delivers value primarily through the technology that lets all these transactions happen – painlessly, safely, instantly, at the speed of the Internet.

Importantly, this new marketplace and the traditional way of doing business cannot continue to coexist. Online sales, ultimately, do not supplement in-store sales – they cannibalize them. The more people shop online, the less they’ll shop in-store: in my eyes, this is a zero-sum equation.

While the old retail distribution model hasn’t collapsed yet, the writing is on the wall. Walmart recently announced profits would dip by up to 12 percent in 2016, sending its stock down 30 percent for the year. Target planned to close 13 U.S. stores in January, after taking a $4.4 billion loss in Canada and closing all stores there. Sears has closed 300 stores since 2010, and flagships like JCPenney and Macy’s are following suit. More than half of US malls likely won’t be around injust 15 years or so. The stores that go into them, fashion brands like The Gap (closing one quarter of their outlets) are becoming unfashionable relics.

The end of brick-and-mortar may not come tomorrow, but I believe that the trend is now irreversible.

A brief history of online retail “revolutions”

We’ve experienced online shopping “revolutions” before, of course, in rapid succession. Some have offered more hype than substance. But the latest incarnations have been utterly transformative.

  • The 1st online revolution: This happened just before the dotcom bust. It failed because Internet infrastructure built for dial-up simply couldn’t handle the volume or technical requirements of millions of shoppers.
  • The 2nd online revolution: In the next generation, companies basically turned their websites into online versions of their own stores (ie. if a product was physically in stock in their brick-and-mortar outlet, you could buy it online, too). This had little impact on pricing, availability or convenience.
  • The 3rd online revolution: Amazon built a new distribution network from the ground up with the Internet as its backbone: a quantum leap improvement that now sees the company outpacing Walmart with a market cap of more than $260 billion.
  • The next wave – data-enabled retailBig data and artificial intelligence is now changing everything. As we develop increasingly sophisticated ways to gather consumer signals and share them across the logistics chain, the guesswork is finally being taken out of retail – for both consumers and suppliers. I’ll explain.

Data-enabled retail: How predictive analytics is transforming the retail landscape

Today, many companies, including big online retailers, are still operating on an old and unreliable business model. They, in essence, guess what customers want based on a lagging, clumsy data metric: past sales. If something sells well, they assume buyers want more and order more stock. If something doesn’t sell, they kill future orders (and swallow the loss). What’s missing is a more intelligent way to actually forecast demand in real time.

For literally the first time in history, by building a new kind of online marketplace tracking multiple data points in real time, retailers can now offer up what people actually want to buy. Instead of tracking sales, which can take months to complete starting from the first chain in the distribution system, the most progressive retailers are now monitoring clicks on products, pricing, shipping time and any number of other key variables before anyone makes a buying decision.

This is the approach we built my company around and it radically changed how we do business. It’s not BuildDirect’s role any longer to guess what home improvement products customers want, then put in orders with suppliers based on those theories, then hold sales to bend buyers’ decisions one way or another (i.e. the classic, big-box approach).

Instead, it’s our job to find the best ways to track what people are clicking or not clicking, what they put in their cart and what they abandon, in order to analyze demand and pricing by date, location or other variables. Then, we need to find the best way to share this information out in real time with consumers and suppliers. By taking ourselves out of the equation, we create more value for everyone:

  • Buyers, finally, are in the driver’s seat. Selection and pricing will only get better in the years ahead as this approach spreads and it becomes progressively easier to find exactly what you want at the best price.
  • Suppliers – the unsung heroes in the retail experience – at last get their moment in the sun. With predictive analytics, they can innovate their assortment to what buyers really want.
  • Retailers themselves get out of the guessing game. They carve out a new, more powerful role as referees between sellers and buyers; as data aggregators, processors and clearinghouses; and as logistics experts, finding the most efficient ways to move physical stock from Point A to Point B.

The road to a brickless retail future 

There are still challenges ahead as we move to a brickless retail future. For starters, building a real distribution network – shipping systems, warehouses, the technological infrastructure required for predictive retail – isn’t easy. Amazon spent billions doing it. At my company, our own effort to do this in the home-improvement sector cost us tens of millions and nearly bankrupted us early on – but without it, we probably wouldn’t be in business today.

Then there’s habit to contend with. Right now, plenty of people insist that online shopping simply can’t match the brick-and-mortar experience of holding, gazing at or trying on products in real-life. It’s useful to remember that not long ago many current-day iPad and Kindle users also insisted that nothing could replace the look and feel of the written word on paper. Online retail technology is getting better all the time, and innovations like VR headsets only hint at changes to come.

All this may sound faintly utopian. But the reality is that the future of retail is already here. It’s not a theory. It’s a proven business model whose logic grows more compelling all the time. These days Walmart is trying to be the next Amazon, not the other way around, sinking billions into updating its ecommerce capabilities. Chain stores, big-box stores and malls are shuttering their doors for good. The days of check-out lines, sold-out stock, crowded aisles and doorbuster insanity are numbered. Indeed, the future of retail is already here. Are you ready?

MaddieDavidson

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