CHAPTER 9
The infinite store: rebooting retail
Working in retail has never been harder. And I’m not talking about traditional bricks-and-mortar retail, I’m talking about retail in general. It doesn’t matter if we sell online, in a store or via a combination of the two, the change in landscape, which has opened up the market, has made it more competitive. The more competition we have in any market, the harder it is to operate profitably. Again, the first rule in economics is that increased supply results in reduced prices.
It’s the most basic economic fact that everyone seems to forget. In a world where choice is increasing exponentially, it presents two simple options for retailers: be the cheapest and quickest, or live deep inside the long tail.
The physical and virtual challenges
Initial thinking as retail moved online was that online retailers were eating store operators for lunch, and this was sometimes the case. Excluding the online megabrands (Amazon comes to mind), it’s much harder for everyone than it was before the web, even those who are solely online retailers. Online retailers don’t have the benefit of foot traffic. Instead, they live in a search-engine quagmire with 20 chances per page to be found or they have to invest heavily in creating a fan base and community around their brand. The point is, there’s no online audience that will magically drop onto their www doorstep. Meanwhile, the physical retailer faces new challenges of customer bases evaporating due to the shift to online purchasing.
Retail was easy
If a brand chooses to do both forms of retail, it must operate in a more complex business infrastructure. Retail was once one of the most simple business models — find a geography, buy a product, sell at margin — while it’s now one of the most complex. What was once a mum-and-pop business possibility is quickly becoming a sophisticated, technology-driven, multi-channel mind warp.
It’s hardest for the retailers selling what everyone else sells. Selling well-known, widely-distributed products online is simply a race to the bottom, a price war that can only be won by the most efficient operator. It’s quickly turning into a game of logistics more than it is about customer engagement. The world of today is an infinite store, where everything is available at the best price possible to anyone, anywhere.
The retail revolution
Retail is going through a revolution, but unlike many of the other industries being impacted by fragmented technology, it’s not the first one retail has been through. It ought be suffering from a bit of dêjà vu. Considering the move from spice market to international trade via clipper ships to touring caravans to the mall and e-commerce, this is just the next iteration in the transfer of goods and ideas to people. The fundamentals remain the same. Just as before, smart retailers need to embrace new behaviour patterns and technology to their advantage.
What retail forgot
Retail has always been about bringing the unique from worlds afar; that is, introducing to people items they couldn’t find or get in their corner of the world. From the spice market to the department store to the first iterations of the supermarket, the story of the department store is worth recalling. The traditional department store, which was only born during the nineteenth century, was about curating products from around the world and bringing them home, making available to people amazing items from before the days of travel, let alone global travel. Department stores arrived and redefined bricks-and-mortar retail as emporiums. They inspired the idea of ‘shopping’ as more than necessity and bridged it over to desire and aspirational living.
The discount death spiral
Retailers forgot about enlightenment, curation and inspiration and got caught up in a TV-industrial, volume-focused price spiral. Price became the core focus of everything they did. The evidence is in all the communication materials. They even set up what’s known as ‘retail’ communications campaigns, which are entirely focused on price and nothing more. The brand, or what I call ‘reason’, campaigns trailed into the background and were often removed from the corporate retail agenda entirely. They forgot that their job as retailers was to bring the world to their geography. Instead, retailers are a place where you buy cheap stuff and deals where you get two for the price of one. Many traditional retailers have put themselves into a retail price death spiral where all they’ve stood for were cheap prices, so what will they stand for when others sell goods more cheaply online?
Price and range equalise
Once every person and every retailer of open-source products (those things anyone can choose to retail) are online, both price and range equalise. They become like water and find a flat surface and a market without undulation and variance. Those who don’t price match on standard products simply don’t sell. While it’s silly to say that bricks-and-mortar retail is inferior to online retail, it’s also fair to say that a physical retail store which competes on price is unsustainable.
Same brand, different plan
The art is in understanding the different proposition of online ‘delayed’ versus physical or ‘live’ retail. Once the surface level of pricing and range is equalised, or removed from the equation, the real differentiators of how brands go to market start to kick in. In both realms, retailers have to stand for something. And that something should be the difference in every channel. Even if it’s the same company, we need to go to market in different channels, in different ways; that is: same company, same brands, fragmented strategy. The value propositions in opposing worlds can only survive if they are worlds apart.
While the brand can stand for one thing and while there may be overlaps online and offline, the tactics and strategy should reflect what’s possible in the opposing channels and differentiate in meaningful ways. But they must cross over in meaningful ways too.
The questions that matter
Anyone in retail needs to ask themselves a set of important questions that weren’t relevant post–World War II because in that era they were obvious questions. Stepping outside and reconsidering the dynamics of the retail world, these questions include:
- Price strategy. Do you want to compete on price? If the answer is yes, then it’s going to be increasingly difficult to retail in physical stores. There’s an extra step in the supply chain, and the economics simply don’t make sense. In a market of near-perfect pricing knowledge, price-sensitive buyers gravitate to the cheapest price unless the warehouse and the store are one and the same. In many ways, this is what Walmart and Costco already do. They are more a bulk warehouse pick-up system than a traditional retailer. In general, online will win the price battle because price leadership is about low-cost infrastructure, and extra links in the retail chain do not make for low cost.
- Product range strategy. Do you want to have a large or lean product range? Clearly, online will win the large-range battle. It doesn’t have the physical constraints of shelves and the cost of big stores. Online needs fewer places for the actual goods. In this world bricks-and-mortar retail can’t win a product-range battle, it can only win a uniqueness and customised one. It’s only a matter of time before widely distributed product brand owners start competing with retailers.
- Location strategy: What’s our physical location about? For online players it’s an easy decision: find a location that facilitates effective delivery. For stores it’s much more than that. If the store is merely about acquiring the product, then in a connected world it has no reason to exist. A physical store needs to be a place of entertainment, education, co-creation and socialisation — a maison and experience that satisfies the five senses. Stores need to be events, not re-sellers.
- Attention strategy: Will people use their feet or their fingers to find us? If it’s fingers (online), we have two simple choices: have an über niche audience that loves what we do because it’s unique, or have a kicking SEO (Search Engine Optimisation) strategy that’s first-page worthy. Both of these realities show a clear strategy: survival in retail is about being the cheapest or the nicest. Anything in between can’t compete or will get lost in a world of infinite supply.
Selling online
It’s still relatively difficult to sell something online. The large majority of small-business people need help setting things up. These steps are not outrageously difficult, but they need consideration and linkages of various technology. It’s not like blogging or social channels where if you can type, you can start publishing. This bridge needs to be built (and is currently being built). Once built, you’ll be able to turn on a smartphone, press a button and sell to anyone in the world, accept all forms of payment and manage a storefront with lemonade-stand simplicity.
If you make, you retail (big and small)
In the past, artisans used to sell what they made directly. The world of retail gave manufacturers, makers and artisans access to a new set of customers who could be from anywhere. The virtues of retail gave suppliers access to wider markets, more sales and bigger financial opportunities. It made sense to hand over part of the profit for access to new customers. Retail reduced the friction of selling by widening the customer base. For large tracts of the industrial era, retail was a specific industry that suppliers couldn’t and didn’t do. Now they can. We’re quickly moving to a ‘we all retail now’ environment and customers want and expect to be able to go direct to brands.
Retailing is no longer about those guys over there who sell stuff; it is, and should be, about anyone who makes anything, not only because it’s now possible, but because it can provide improved margin and the direct connections the market rewards. It’s incumbent on those who once supplied to others for selling to know they can do the selling themselves. In an economy where anyone can make anything, having access to the people you sell to becomes a survival necessity. The power is with the distributor. We’ve already seen consumer goods retailers making their own ‘home brand’ goods to compete with their suppliers. Every supermarket in the world has a line of private labels, as do electronics retailers, and even cable television providers are funding programs to fill their channels. Now that suppliers can return the favour, it’s about time they did.
Manufacturers have to demarcate their retailers
Even today it’s not uncommon for manufacturers within most industries not to have embraced the potential for direct selling. One of the most alarming reasons is because it may upset their current selling infrastructure; that is, upset their retailers or franchisees. It’s a problem whereby the rights to sell have been sold. The basic reality is that any manufacturer that doesn’t compete with its resellers is foolish. Exclusivity and the rights that go with it are an industrial relic. The strongest emerging retailers of the digital era don’t demand it, and some — such as Amazon, iTunes and Zappos — had to fight to obtain supply from famous brands and industry stalwarts. So why would anyone provide a legacy reseller with exclusivity?
Sorry, we don’t sell online
The auto industry in Australia is one industry that chooses not to sell direct. With a long-standing network of branded car dealers, it remains loyal to its dealership network. Despite the fact that most of these franchisees sell multiple car brands, often from the same yard, the large majority of auto players in Australia does not sell cars online or direct. You can research the car and design the interior, but you can’t buy it online. At the end of any online design process you’re provided with a list of dealership addresses to choose from where you can go to buy the car.
The fact that the price varies by dealer is also a relic that doesn’t fit in today’s world. How can anyone trust a brand when they know they may not get the best deal possible, especially when the product is not one of a kind? It’s as if they’re pretending we don’t live in a world of transparent retail prices. That type of trickery simply opens the door to more authentic brands. There’s a real opportunity for auto players in developed markets to amend their retail component, and auto buyers will reward those that do.
Manufacturers in most industries need to develop a healthy form of competition with their onsellers. If their onsellers can’t do a better job than they do, realistically they don’t have a reason to exist. Buyers have no knowledge of, and don’t care about, the way any business’s retail infrastructure was originally set up. They only care about getting what they want delivered to them on their terms. And you have to love what they want more than you love your legacy infrastructure. Cross competition with buyers and suppliers should be expected in all industries because the barriers that created a linear supplier chain no longer exist.
Don’t ignore place
I’ve invested a large part of my adult career in fast-moving consumer goods marketing, which involves the types of products generally sold in supermarkets. One thing that really stood out to me was the limited definition of innovation. Even today, it generally takes into account only half of the marketing mix (which, as we explored in chapter 1, is the pieces of the brand puzzle — the product, the price, the place and the promotion). Most consumer-goods brands only innovate in what they make; that is, the thing itself — the widget. They make a new version of their existing product, configure a profitable price point and then sell it where they’ve always sold it. Manufacturers forget that innovation involves all areas of the business — not just what they make, but how they take it to the marketplace.
Why place matters so much
Place matters because it’s closest to the money. It’s the final hurdle; it’s where the interaction with the audience occurs. By outsourcing place to another party, you lose a significant amount of control over your brand. You lose the moment of truth. Even worse, someone else — the retail buyer, not the actual end user — gets to decide whether the new product is something they want and whether or not to range it. It’s a risky way of doing business, especially when it’s now not only possible, but expected, that manufacturers go direct.
With distribution systems and retail changing so much, it’s an ideal time to reassess the entire marketing program, not just pieces within in. Brands and industries that have traditionally sold via third parties have to find a way of going direct, even if it means collaborating with competitors to create a new, direct channel for circumventing their traditional retailers. We live in counterintuitive times.
If you look at new technology brands such as Google and Amazon, you’ll notice they innovate across all of the 4Ps, not only what they regard as their core or, more aptly, what their manufacturing arm already makes. Google is building self-driving cars, while Amazon makes and sells computers (the Kindle e-reader). Apple, through its stunning flagship stores, has become the most profitable retailer in the world per square metre.
The location trick is over
For a long time, retailers were a kind of window to the world, representing the final access point to what was available, a lot like mainstream media did. As kids, we’d wait impatiently until the local store finally ranged that ‘must have’ item we saw advertised on television. If they didn’t have it, we couldn’t buy it — and they knew that. The more remote, the higher the price. If a retailer owned a geography, they could make abnormal economic profits. Providing access gave them enormous power because we had few (or no) other options. But the location trick is over. Being the importer is no longer enough because we can now get what they can provide from anywhere in the world at the world’s cheapest price, delivered to our door.
In order to maintain relevance, small retailers will have to sell something the others don’t; otherwise they’ll be forever competing on price and struggling to carry a wide enough range. They need to be as far down the long tail as possible, providing a specific offer for a small and passionate audience that’s far more likely to be appreciative of what they create or curate and far less price sensitive because it’s being delivered by you for them and their tribe.
Border hopping and digital reinvention
One of the terrific things the web enables is the re-birth of businesses that couldn’t survive in the mass-market era, couldn’t compete on price and didn’t have enough appeal to remain viable. Online retail and the web are now enabling a renaissance of sorts. If you were a craftsman making handmade furniture out of Belgian hardwood, you had to hope you had enough people interested in that type of furniture within a 100-kilometre radius of where you lived and sold your wares. Today, businesses such as this that live deep inside the long tail can thrive. They have cheap access to selling to global markets; a populous with ever-increasing wealth and desire for unique artisanal products; and a unique product range, enabling them to be found in digital forums. While online retail has made many segments of the market more competitive, it’s re-opening doors that were closed and providing very fertile ground for profitable niche retail. As a result, we can expect retail choice to fragment into the most micro of segments.
Experience > item
What retailers in the physical space have to remember is that items are no longer what is being sold — they’re an experience. Retailers will, in many ways, be in the business of social facilitation. They need to start creating events and experiences that are theatrical in nature. For purchasers, being there is as important as (or more important than) what they leave with in their shopping bag. The item alone is not reason enough to invest time in going into a store. The mantra must be that the experience is greater than the item. This needs to be tattooed in the DNA of physical retailers. I can’t help but think that the burgeoning coffee culture has the ultimate retail lesson built into it.
Clues in coffee culture
The city I live in is obsessed with coffee. It seems as if every second retail store in trendy inner city suburbs is now a café serving espresso from its own single origin beans specially roasted in-house. The patrons are happy to pay more than 100 times the cost of the espresso coffee they have at home, using the same beans, because they’re not coming for the coffee. They’re coming to be present in the physical space the coffee shop provides, which is most likely decorated the way we wish our kitchen was. They’re coming to meet with friends, interact with others or chat with their favourite barista (who knows them by name). It’s about watching the skilled craftsman (in this case the barista) undertake their art in front of a live audience. They’re coming for the socialisation that human beings crave and to break up their day with a mini event. Coffee isn’t coffee and retail is no longer retail.
The idea of retail has changed so much that when it’s physical, it’s not even about what we buy from the store, but the experience provided during the process. Online we can get anything from anywhere at the best price possible.
So what happens when the stuff we want can be made on demand at home? It’s hard to believe, but 3D printing will make this an everyday reality.