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This holiday season, is it (really) the end of retail as we know it?

4 years ago, Posted in Point of View

When it comes to the demise of retail shopping, it pays to keep in mind that oft-quoted Mark Twain quip: “Reports of my death have been greatly exaggerated.” Ever since brown boxes with Amazon’s smiling logo started showing up at doors roughly 20 years ago, pundits have predicted that online shopping would soon supplant the bricks-and-mortar experience. And yet big box stores, from Walmart to Best Buy, have lumbered more or less imperviously on.

But that obituary is suddenly looking a lot less premature. Earlier this quarter, Walmart announced profits would dip by up to 12 percent in 2016, sending its stock down 30 percent for the year. Meanwhile, Amazon reported a record $25.4 billion in revenue in the third quarter, has added 75,000 workers in the last year and has seen its market capitalization soar to more than $260 billion, exceeding Walmart’s.

In the David vs. Goliath retail matchup, roles have suddenly reversed: Amazon is the ascendant force, while Walmart and its big box brethren find themselves struggling to stay relevant. As 2016 holiday shopping heats up, is this (finally) the beginning of the end of retail as we know it?

Dead mall walking

The numbers tell the story. Target is closing 13 U.S. stores by January, after taking a $4.4 billion bath in Canada and closing all stores there. Costco’s still getting by because their bottom line is buttressed by paid memberships, but that isn’t a model most retailers can get away with. Home Depot’s business model, while showing growth now, relies on a hot housing market; in the crashes of 2007 and 2009, their earnings and profits plunged by 40 percent.

Meanwhile, it’s not just big box retail that’s hurting. Fifteen percent of US malls will be converted to non-retail uses, or abandoned as ghost malls, in the next 10 years, according to Cushman and Wakefield Industrial Research. Worse, as many as half of America’s shopping malls could be blighted retail wastelands in just 15 to 20 years. Sears has closed 300 stores since 2010, and flagships like JCPenney and Macy’s are following suit. From the Gap to J. Crew, the major brand names we’ve gotten used to in malls across America are closing, oftentimes as a precursor to the mall itself shuttering its doors. Stores aren’t dying overnight, but the writing’s on the mall wall.

It’s not like the retail giants of today are blind to what’s happening or aren’t trying to adapt. Walmart is throwing $2 billion at eCommerce over the next two years. Best Buy is following suit, building an eCommerce-focused tech center almost spitting distance from Amazon’s Seattle HQ. But they’ve got plenty of catching up to do while Amazon is just increasing its lead.

The prodigal promise of e-tail

What accounts for this sea change in shopping habits? Up until recently, big retailers like Walmart that mastered the retail logistics puzzle enjoyed a clear edge over their online competition. By connecting directly with suppliers and streamlining distribution, they were able to ensure lower prices for consumers. That same efficiency drove more suppliers to want to be in their store. And, in a virtuous cycle, it brought in even more customers because they could offer more selection at even lower prices.

 

The Internet, meanwhile, promised to revolutionize shopping but often offered more sizzle than substance. From the earliest days of eCommerce, we were supposed to be able to browse from a limitless selection, find amazing deals from the comfort of home and get it all zipped to our door. The reality, of course, was different: stores typically just posted their existing physical inventory on their site, so selection didn’t change. Pricing was the same as in-store. And delivery, more often than not, proved neither faster nor cheaper than picking up the product in-person.

Then in the late ‘90s along came the Amazon model, which changed everything. Amazon isn’t the ghostly online mirror of a bricks-and-mortar store. Instead, it took the Walmart approach of actually streamlining and centralizing distribution channels and brought it online.

Sellers can list their merchandise directly, providing almost limitless selection. Manufacturers can tap into hard data to figure out how much stuff to make. Vendors use the same data to determine exactly how much to stock, and consumers can buy what they want with “1-click” and get it the next day (if not sooner … cue the drones). Amazon and its online ilk are doing everything Walmart did – but because they’ve used the Internet, not Main Street, as their backbone, they’re doing it better, bigger, faster and more efficiently.

The impact is growing harder to ignore. Despite rivals’ efforts to catch up, Amazon dominates its next 12 competitors put together in terms of online sales, taking in nearly $72 billion, compared to Walmart, with its (measly) $13 billion.

But can’t online retail and bricks-and-mortar store models coexist? The simple answer: not really. Walmart’s efforts to boost its online sales may have, in essence, cannibalized its in-store sales. The same customers that used to browse the aisles are now doing their shopping from home. Even if only a fraction of consumers make the shift, something has to give, and in this case it will ultimately be some of the more than 10,000 Walmart stores around the world.

 

Only the smart survive, as bricks-and-mortar crumbles

But a key question remains: If traditional retail is dying, and online alternatives are so much more efficient, why aren’t more companies following Amazon’s lead? One key reason: building a true distribution network, as opposed to just listing merchandise online, is hard.

 

Building a distribution network from the ground up requires connecting directly with manufacturers, figuring out how to ship products big and small across continents, finding space and staff to warehouse merchandise, communicating with vendors and consumers to assess demand and finding ways to not only share this information in real-time but harness data to forecast for the future. Amazon spent billions doing it. At my company, our own smaller-scale 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.

One example: Much of what we sell weighs in excess of 150 pounds, the max that UPS, FedEx or DHL will take. Just getting a single order of hardwood flooring from the factory to a homeowner required designing a new international shipping system from the ground up. This took the better part of a decade for us to build, but the upside is that shoppers can now actually order heavyweight items like floors and bathtubs online and see them show up at their door.

Apart from the distribution issue, there’s also human nature to contend with. For many people, it’s still much more pleasant and convenient to hold, try on and gawk at the things they’re about to buy. Science may well never unravel the secret to picking out the perfect pair of jeans online. Yet, as technology improves, eCommerce is steadily closing the reality gap. Clearly Contacts, for example, enables buyers to snap photos of themselves and try on merchandise online. L’Oreal has a magic mirror app for you to see how their cosmetics will transform your look, before you put it on. As user experience continues to improve, companies that boast a true online platform will be able to adapt and take advantage of these improvements, while those using old infrastructure will lag further behind.

So is it finally time to write the obituary for retail shopping? Of course not. “Retail” shouldn’t have to mean a store. The definition should be “the best way to deliver goods that consumers want.” Far from dying, retail is evolving and thriving. A system that was all about convenience for the retailer or distributor has shifted to offering convenience to the consumer. Meanwhile, companies that invest in a real online platform will see access to better data, make better decisions and be able to offer customers ever lower prices in the years ahead.

MaddieDavidson

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