The Decline and Rebirth of Retail

Jeff Jordan has an interesting post that looks at long terms trends in retail and more recent news, suggesting an acceleration that is itself a tipping point to the benefit of online. It’s hard to argue with the trends he is pointing out, however that is not the entire story, or at least the interesting one to me.

To look at physical retail and suggest that online will overtake it is not where the story ends. Physical retail won’t stand still, and much like other points in it’s history it will go through a transformation that results in a much different retail industry than we see today.

The next generation of retail likely looks like a hybrid business that brings the convenience of online with the merchandising aspects and physical customer experience of traditional retail together. Okay, that much is probably obvious but if we peel back the covers we could probably identify some interesting intersection points between the two retail models, starting with the distribution capability.

Traditional retail has a distribution model built for store fulfillment, and in parallel they have built distribution centers for online retail fulfillment. 3rd party logistics providers (3PLs) have gotten pretty efficient at template distribution models, scaled appropriately and completely turnkey, an efficiency that no doubt will continue and the result will be unburdening the retailer with significant capital costs if they chose to take this path.

Online retail is not without it’s own costs and discovery is increasing at a rate that will pinch online retailers on their bottom line. If you are Amazon you don’t worry about this, but for everyone else you have to focus a lot of effort on finding people who are not driving by your physical stores daily. Organic SEO is an art and for popular searches a vendor site will rarely display, and SEM is expensive for popular keywords. How else will you get traffic to your site to feed the funnel. a youtube video that takes off? I wouldn’t suggest you build your business model around that.

Jordan highlights a number of news items to support his thesis and while I take the intention they are provided in, I can’t help but highlight a few alternate theories. He writes “it’s getting hard to find a physical book, music or video store these days,” and while true this is easily attributed to the change in consumption habits instead of how people buy these products. I’m also not aware of where I can find a paper scroll store these days. The shift to digital content drives this disruption, not the retail model. how would you go to a physical retailer to get streaming content?

The apparel retailers Jordan highlights are suffering for reasons not associated with the shift to digital, namely the singular focus on a demographic group that has left them behind. Trends change and brands lose their luster, this is not new nor is it caused by online retail. In fact, I would argue that if any segment is insulated from being overtaken by online, it is apparel but the problem is that many physical apparel retailers still think of themselves as a retailer instead of a combined media and retail business. One online retailer that points to a future that could be embraced by physical retailers is the Net-a-Porter company, which for men is represented as the site. It’s a clever adaptation of storytelling and merchandising that should be embraced by physical retailers as a way of sustaining margins and managing an audience instead of just attracting customers with promotions.

I could go through each example Jordan uses and offer an alternate theory for their decline. Maybe in aggregate the trend Jordan highlights is supported by the examples but perhaps they are just complex individual cases of a business cycle playing out. Therefore, the question that we should be considering is the degree to which online retail is growing the entire retail industry, not just transferring business from physical to online.

Regardless of how much I am pro-online retail (300+ Amazon transactions alone last year, on any given day all of the major delivery services are stopping and depositing a small mountain of boxes. there are few things I won’t buy online), I can’t help but admit that physical retail has many appeals and with smart transformation could give online retail a run. Retailers will need to abandon many of the philosophical tenets that have sustained the industry for decades and unlike previous evolutions this is not going to be a crank of the wheel and a tuck here and there, physical retailers need full scale transformation to come out on the other end and only the healthy ones will have the strength to get through it.

UPDATE: McKinsey has a great article on the retail and they explore the ability for retailers to use multichannel strategies to turn stores from liabilities into competitive weapons.