2012 – the year when traditional retail really starts to hurt

By December 20, 2011Ecommerce

A few things recently have made me think that traditional retail is nearing the beginning of the end.  That isn’t to say it will disappear, but I think it will undergo some fundamental changes.

Perhaps most notable development was Amazon’s Price Check Promotion which offered a 5% discount to shoppers in traditional stores who looked up items using its Price Check App and then made a purchase through the online retailer.  I love the way this combines a compelling offer with a bold statement about the superior economics of online retail (more of which below).  Unsurprisingly it has been very popular.

Then the backlash from traditional retail shows just how scared they are.  When companies start complaining about unfair competition it is a good sign that they are on the ropes.

Another small example here in the UK is music and games retailer HMV – their market cap is now sub £20m, down from nearly a £1bn in recent years.

I’m putting all this in a blog post now because I have just read an interview with Marc Andreessen in which he makes the prediction that 2012 is the year in which “retail stores really start to feel the pressure”.  He gives a nice explanation of why online retail has a better business model:

as e-commerce gets more and more viable and as these category killers emerge in the superverticals. If I own mall real estate or retail stores in cities, or if I own chains like electronics chains, I’d be concerned…. I think electronics and clothes are going to be a real pressure point. Home furnishing is going to come under pressure. It’s going to get harder and harder to justify the retail store model.

The model has this fundamental problem where every store has to have its own inventory and every store is also a warehouse. The economic deadweight of that entire inventory in each store–that’s what took down Borders.

Retail runs at very thin margins. So if e-commerce takes a 5 percent or 10 percent or 15 percent bite out of your category, then it becomes harder to stay in business as a retailer

I can see three broad areas of investment opportunity coming out of ecommerce as a result of this tipping point from offline retail to online retail:

  • traditional retailers looking for ways to get more value out of their in-store stock by building integrated online-offline propositions which make local stock available online
  • software tools which make local stock available via third party sites like eBay (see their acquisition of Milo)
  • ecommerce companies which innovate to make the shopping experience more user friendly and accessible – StylistPick here in the UK is a good example

Note this is different from the daily deals and flash sales opportunities that have been prevalent over the last couple of years.  These models unlocked huge value by getting local retailers online and providing a sales channel for end of line stock, but whilst there is overlap, to my mind they are not the same as true shopping.

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  • Can we disconnect the “purchase” from the shop. In other words, physical shopping needs to become an “experience”, since the economics and convenience are so much better.

    Or maybe it’s just the middle that will be squeezed. High end experiences (personal shoppers, or the Moulton Brown store in my local shopping centre) might have a better chance than sensibly priced middle of the road shops). Primark will still have a place.

    The key, as always, is how to offer a differentiated service that people will actually pay for, and to my mind, that is not fundamentally about selling stuff, but selling the experience of buying it.

  • I agree. Ecommerce will take the middle ground and physical retail will go high and low. That will be the next phase.
    Sent from my Android phone using TouchDown (www.nitrodesk.com)

  • Traditional retail stores need to take the extra initiative and invest time and effort in their online marketing strategies to bring physical customers in the store by creating fun interactive in-store incentives.  

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  • The other huge advantage that eCommerce has is the richness of information and customer reviews that are present at the time of purchase. If I’m in a bookstore, and I see a book that may be of interest, I have to pick up my smart phone to read reviews. While I’m at it, I can find a e-store that sells the book at a lower price. Better still, I can buy it and download it right to my phone. It’s touch to compete with this if you’re a bricks & mortar retailer. So that retail experience has to be really really special to justify hopping into the car. 

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