On January 29, Marc Andreessen predicted the death of retail in favor of disruptive, pure-play etailers, such as Fab.com. A choice quote from the PandoDaily article:
“Retail chains are a fundamentally implausible economic structure if there’s a viable alternative,” he says. “You combine the fixed cost of real estate with inventory, and it puts every retailer in a highly leveraged position. Few can survive a decline of 20 to 30 percent in revenues. It just doesn’t make any sense for all this stuff to sit on shelves. There is fundamentally a better model.”
I've been studying retail ever since I can remember. My parents were retail entrepreneurs from the time I was born, as I wrote about in this Lucky7 post. I've been programming since I was seven-years old, as I wrote about in why I named this blog Lucky7 - in tribute to my mother. I leveraged these two experiences to start my own etailer in 1998 - programmed on an eCommerce platform that I created. And I've founded two large companies to help retailers - Bazaarvoice and Coremetrics. I've also served on the Board of Shop.org for three consecutive terms. So to say I've been thinking about this for awhile is an understatement.
I think that Marc is both right and wrong. There is no doubt that today's pure-plays are more disruptive than ever, from Vente Privee in luxury to Warby Parker in eyeglasses to J. Hilburn in custom tailored men's clothing (one of my favorite brands). There are so many more people online and now comfortable with shopping online than when I started my etailer with my wife, Debra, in 1998. And the venture capitalists and entrepreneurs are much more sophisticated in how to disrupt the traditional supply chains and massive real estate expenses of offline retailers, and ultimately leverageThe Innovator's Dilemma (a must-read book for entrepreneurs) against them. The opportunities for this new breed of pure-plays is massive. But offline retail will not die anytime soon, and here are my predictions.
First, a little context as it is an interesting day to write this post. My daughter, who is eight-years old, just finished a book last night and wanted to buy the rest of series this morning. I told her, "let's buy them online and use some of your allowance money". Her response, "I really want to go to the store so I can get one of them today and also see what else they have". She also told me that our three-year old son could play on the train at "that store right by the Starbucks" while she browses the selection. "I can't just browse around online like I can in the store, Daddy." I find this fascinating because we are a very sophisticated family when it comes to shopping online. But yet here is the future generation telling me they want to go to the store and convincing me why we should. However, when we got there, this is what we saw, to our dismay:
If you can't read the sign, it is a Barnes & Noble and it says after 16 years in business, they have closed down. This is in a prime real estate spot in Westlake - one of the best shopping areas in Austin. So we headed off to Half Price Books, which is a very strong, local retailer in this age of digital disruption. On the way, I saw this:
One retailer going out of business, another one opening. This reminded me of a conversation a week ago with Gary Hoover, a good friend and the founder of Hoovers and BOOKSTOP, the original book superstore. Gary knows more about the history of retail than anyone I know. As such, we had him teach the history of retail several times at Bazaarvoice over the years. I encourage you to tune into his blog.
When I shared Marc's article with Gary, he agreed with me that it was right and wrong. The category of media - books, movies, videogames, and records - have been the most disrupted by etailers such as Amazon.com, who was very smart to tackle a category that could be most easily digitized first. Travel is another category that was ripe for disruption and Gary felt this personally with the bankruptcy of his startup TravelFest, which was the best travel agency I had ever experienced (I was a loyal customer back when I worked for Deloitte Consulting). Travel is a virtual category, like tickets at Ticketmaster.com, where booking online and printing at the location makes sense.
Other categories, however, aren't so easy. Such as groceries, symbolized by the photo above - the opening of a new Wheatsville in Austin, which is a great, local food co-op for health conscious grocery shoppers. Remember Webvan? Very smart investors in Silicon Valley and on Wall Street (when it went public) believed that the rest of the world was just like San Francisco and plowed more than $1 billion into Webvan only to return … nothing.
Clothing isn't so easy either. Although we order plenty of clothing online (Debra said we never would back when it first started happening and I told her she would change; I was right - this time). But sometimes you want to go to the store and just browse to see what you will like. This is harder to do online with clothing. With books, it is easy - a book is a book, no matter who sells it. But with clothing quality, feel, fit, and accessorizing matters. Tailoring matters too. Having someone come to your home, as I do with J. Hilburn, is pretty revolutionary. But I don't buy all of my clothes from J. Hilburn. And what about just wanting to browse and learn (we have a hunting and gathering instinct that is deeply embedded).
So, here are my predictions:
- Service will matter. Loyalty programs will become even more important. Tailored service tied to loyalty programs in the store will become a norm for the retailers that survive. Debra is very loyal to Nordstrom and Neiman Marcus because of how they treat her in the store. Her personal shopper helps her discover new fashions that would be really hard to discover online and even if she was successful she wouldn't be able to try the product on or assess the quality like she could in person. These personal shoppers are employees of Nordstorm and Neiman Marcus - and they have a relationship with her and regularly send her handwritten cards. Relationships matter.
- Mobile will accelerate organizational change. Change is very hard, as evidenced by the success of simple books like Who Moved My Cheese?. Many traditional retailers have organizational structures that are unsustainable - organized by channel instead of around the constituent that matters most (the customer). Now with shopper behaviors like showrooming, smartphones are accelerating the organizational change that should have happened a long time ago. This is already messy and will becoming increasing so. Change comes with initial pain and it takes a bold (long-term oriented) and humble (openminded) leader to pull his or her organization through it. Mobile no longer allows retailers to think, "but the online channel represents such a small percentage of our overall sales". It puts the best of the digital world right there in the store. Smartphones are more powerful than laptops of just a few years ago - with GPS, compasses, photo cameras, video cameras, and so much more built into them - and always available right in your pocket to bring the disruption front and center to the store you are shopping in. I encourage you to read this article in the Harvard Business Review to think more about how retailers will evolve. The biggest innovation in retail will be in the stores - and it will be tied to mobile. shopkick is one entrant here, but that is just a very small example of the innovation to come in physical stores due to mobile. I'm spending a lot of time studying this area and believe there are huge opportunities here. [As I was writing this post today, Tung Huynh who used to work with us at Bazaarvoice sent me this post by LinkedIn founder Reid Hoffman. I think Reid's point about "software amplifying retail" fits in this area, although I think it is most "amplifying" because of mobile.]
- A differentiated store experience will become more of the norm. Like or hate the changes he is driving, Ron Johnson at JCPenney should be applauded for trying so hard. Perhaps the only mistake Ron is making is the one-size-fits-all "fair and square pricing" policy. Perhaps everything else he is doing will actually become the norm for mass merchants of the future, from the brand partnerships to the town square to yoga classes in the store, representing a bazaar of old where shopping was a communual experience. There are simply things you can do within a physical environment that cannot be adequately mimicked online. I believe Ron Johnson is thinking hard about these things. Gary Hoover is a big fan of Ron's, and I've learned that most times Gary is right (at least long-term). When you think about Ron's bold and visionary leadership, don't forget Theodore Roosevelt's The Man in the Arena quote: "It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat."
- Categories like groceries, clothing, or anything where quality varies widely and is best assessed in person because of our physicality (versus a book where our physicality doesn't matter) will be the last to fall to etailers. Innovation among these retailers is critical. I hope they have great leaders at the helm.
- Private-label merchandise and exclusive partnerships will continue to explode. From Costco's Kirkland brand to Cabela's namesake brand (I believe that 33% of Cabela's merchandise today is their own label), innovation in this area will be fierce. This provides a level of uniqueness and pricing stability (since you are making the product yourself and therefore control the margins) versus selling the same merchandise as everyone else, including Amazon.com. The good news is that the digital disruption has enabled retailers to do better at private-label than ever before, from the insight that online word of mouth (such as customer reviews and questions and answers via Bazaarvoice) to the Web analytics that Coremetrics delivers. I remember Best Buy increasing the sales of their private-label DVD player from #6 in the store to #2 shortly after launching with Bazaarvoice - just by studing the positive customer reviews of the top-rated DVD players they were selling to the negative customer reviews about their own and quickly innovating (faster than they could with someone else's brand, by the way, since they were fully in control of the manufacturing of their own product).
- More US retailers will become like Argos in the UK. They will leverage their physical location to allow you to see the product in person, talk with store associates about it, and then buy it online. I predict that local hubs will emerge for same day delivery. For example, imagine walking into a clothing store, trying on different sizes, and seeing swatches of colors and feeling swatches of fabrics available. Then a central location would deliver it to you that day or the next if it is too late in the evening. This would enable smaller footprints for physical real estate, which is one of Marc's direct challenges. So you get more stores, at a lower cost, with more selection, and with better inventory distribution (through centralization, instead of every store carrying it's own inventory). This already happens to an extent at Nordstrom where they will tell Debra her size isn't available but it is at a nearby Nordstrom if she needs it immediately or they will ship it to her if she can wait. But I do agree with Marc that the high cost of real estate is the biggest albatross around retailers' necks, so innovation in this area will have to occur for them to survive. Another example is the very small format pop-up store. The signs are already here - just give it a little time.
- 3D printing will be a wildcard (The Economist has been doing a great job followingthe evolution of this). It will first disrupt categories where the materials are fairly uniform, such as toys made almost purely from plastic. It will take a long time to disrupt categories like groceries or clothing. I predict disruption even in those categories will happen, but that is decades away. Given that retail is a $12 trillion industry globally, I was a bit surprised that Abundance didn't address 3D printing in this area (you can read my book review here - it was the best book I read in 2012).
I was thinking about this post last night, and I forgot one prediction that I've been telling people in the industry about for a few years:
- Digital signage in stores will become widely adopted as the costs of it fall. Much like mobile, digital signs will allow retailers to roll out the best of their eCommerce solutions inside their stores. It will make the store almost as malleable as their website, turning their physical real estate into more of a benefit than a high-cost albatross. Companies like Monetate, which I'm personally an investor in through theLead Edge Capital fund, allow online retailers to dynamically target offers, much like end-caps have allowed in the physical world but with much, much faster cycle times. Think about the impact of Monetate's solution when digital signage, including the replacement for even the smallest individual product pricing signs (i.e., shelf fact-tags), are widely installed. And the impact of in-store analytics solutions that are as powerful as Coremetrics or Omniture are in the online world to better target offers while in the store. Think about the power of online personalization - but in the physical store. And what about Bazaarvoice, after having acquired Longboard Media, bringing a similar form of advertising - the new "digital end-cap" - right there in the store. And think about how individual smartphones will interact with all of these new digital signs, which will likely include sensors that will recognize people's smartphones (leveraging their individual purchase behavior as well as their loyalty program for dynamic offers and creatives). New companies, like Compare Metrics, which I just personally backed (news here), will also play beautifully into this. I would tell you more about them, but they are in stealth mode (taking my advice from this Lucky7 post)!