The Demise of Retail

I've been thinking a bit about the retail industry lately - I doubt that the conclusion I've drawn is unique, but I figured it was worth hammering out and stowing the notes on my blog:

Since 1993, when the Internet first went dot-com, futurists have been proclaiming the death of retail. Naturally, they were dismissed, and the fact that many retailers are still going strong has been presented as evidence that their predictions are misguided.

But the more I think about it, the more I am beginning to believe that the predictions were well reasoned, though the decline of the retail industry has been very slow over the past two decades, it may accelerate in the not-to-distant future, and may take a few generations to become virtually extinct - which I sense to be inevitable.

Two things have brought this back to mind: First, there is the spread of service-oriented architecture in information systems design, breaking down data so it may be re-integrated by a custom application, which will in effect enable manufacturers to add their products to a "store" of infinite size. Second, the iPhone application that enables individuals to scan a barcode in a retail store and locate the same item online, often at a much better price. As the first becomes increasingly inclusive and the second increasingly ubiquitous, this will create a shopping "platform" that will render the retail model of distribution largely moot.

Retailers have presently suffered losses to the online medium, as they cannot compete on price for the exact same item. The retailer must add to the price charged to customers in order to cover their own operational expenses and turn a profit - and so must every intermediary (wholesaler and broker) between the manufacturer and the retail outlet. What has saved retailers, thus far, is the greed of the manufacturers, most of whom have decided to price their goods at the same level as retail outlets and pocket the difference. Increased competition among manufacturers will put an end to price-matching, as all it takes is one or two large manufacturers to break ranks, sacrificing per-unit profit for the competitive advantage they will gain, and the rest of their sector will be motivated to fall in line to defend their market share.

A greater obstacle is consumer preference. Presently, consumers in the market for certain goods have a sense of unease about purchasing products without a hands-on examination, and are wary of the return policies of online retailers, in he belief (often well-founded) that they are not as simple as they are alleged to be. Retailers are currently capitalizing on this preference, relying on the belief that the holistic "customer experience" of shopping at their physical locations counterbalances the difference in price, and indeed this may be longer-lived than many have prophesized.

However, the psychological attachment to an in-store experience is learned. Shoppers today wish to handle merchandise because they have become accustomed to doing so by their years of shopping in physical stores when there was no suitable alternative channel, and are uncomfortable with the online channel due to its novelty. But this behavior is changing, and each generation of shoppers will have diminishing first-hand experience with physical stores and increasing comfort with the online channel. It may take a generation or two (or more), but the market will inevitably be weaned of its addiction to physicality and the value it places on the "experience" of visiting a retail store.

Some retail formats are already virtually extinct. Consider this: when is the last time you walked into a record store? The very name is an anachronism, in that vinyl "records" are seldom available except in antique stores or specialty retailers, and even the delivery channel has gone digital, through MP3 downloads. Meanwhile, Amazon has made bookstores (outside of airports and other locations where a book is a convenience purchase) virtually extinct, and devices such as the Kindle, the iPad, and their imitators are threatening to do the same for printed books and Netflix has crushed its competition in the video entertainment industry and is going increasingly digital.

Admittedly, books, music, and video are "special" categories of merchandise, in that they can be delivered digitally - but there are an increasing number of product categories that consumers no longer purchase in a physical location, but prefer to order online. Virtually the only categories that have not suffered significant losses have been perishables (such as groceries) and fashion (clothing and jewelry) - but again, as consumers break their habit of "handling the merchandise" and manufacturers adopt more accommodating return policies, even these categories will begin to leak, and eventually hemorrhage, market share to the online medium.

That's not to say that retail will become totally extinct, but I see a rapid de-evolution in the next decade or so, occurring in two phases:

First, stores will devolve into showrooms with limited inventory on hand for customers who simply must take immediate possession of an item. In some ways, stores already are becoming showrooms, for any customer with an iPhone (though it's debatable whether an individual who enters a store to view an item, then purchases from another source, is really a "customer" after all), and in order to remain competitive, they must slash their overhead to be able to compete on cost, such that any premium they charge for immediacy of possession is an acceptable trade-off to their market.

Second, there will likely be increased efficiencies and economies of scale in the logistics sector, such that the cost of short-term delivery (overnight, or a few days at the most) is less than the premium charged by physical retail outlets, shifting the scales in the market's assessment of the value of immediate possession. In all, there are very few products for which consumers are unwilling or unable to wait until the next day to possess.

Neither do I expect retailers to go gentle into that good night: they can be expected to take defensive measures, such as removing the barcodes from products, responding aggressively to customers who are seen using price-comparison software in their stores, or even attempting to block wireless communications within their premises (though it would take some lobbying with the FCC to be able to implement such a solution), but in the end, this is not an effective and permanent solution, merely a way of attempting to stave off the inevitable by making other media less convenient (and meanwhile degrading the "experience" they are attempting to rely upon as a competitive advantage).

In the end, the only thing that seems uncertain is the length of time: exactly how long will it take retail to die. I can't prophesy an answer ... a few more decades, or perhaps a few more generations ... but I have a definite sense that its demise is coming, slow and certain.