90% of sales are in bricks-n-mortar stores, but many are dying anyway

The stats are in and the rush to declare bricks-n-mortar retail dead appear to be a bit premature. While online commerce appears to be growing at a fairly impressive rate (of somewhere around 15% to 20%[1]NAB Online Retail Sales Index, depending on where you are) that growth rate is on a very low base. This means that somewhere are 90% of retail sales still occur in a bricks-n-mortar store, and that figure floats up to 95% if you include bricks-n-mortar stores with an online presence.[2]Chris Lund (April 2014), “Reports of bricks and mortar’s demise have been greatly exaggerated”, Strategy.

The problem with this point of view is that it ignores that fact that while the future might be here, it’s still unevenly distributed.

At a whole of economy level retail might be growing, and most purchases still occur in a bricks-n-mortar store, but when you dig into the details a different story emerges.[3]Winners and losers in retail @ PEG What we’re witnessing is the incremental destruction of small (and some not-so-small) areas of the retail market as consumer behaviour changes and makes them irrelevant.

The first wave of online retail – Web 1.0 as it’s called these days – was moving catalogues online. This enabled consumers, for the first time, to search for what they wanted from the comfort of their own home, rather than need to head out on a shopping mission. This created a distinct change in what consumers purchased, as they could now use the power of Google to find the best product at the best price, or the cheapest product at the lowest price, and make their purchase directly with the retailer (local or online) who offered precisely what they wanted.

This had two interesting effects. The first was the destruction of mid-market brands.

Historically consumers were forced to compromise, their choice limited to what the merchant around the corner chose to stock. Confronted with three options – a cheap option, a middle quality option, and a good option – the consumer was forced to compromise. They would pick the best that they could afford or the cheapest that the merchant chose to offer. Web 1.0 meant that if they they could find something better, possibly at a lower price in another country, then they could would avoid the middle quality option and go directly to the best. Many mid-market brands collapsed as a result.

The second effect was the destruction of many local retailers. Most of these local retailers – the small clothing shop on the high street, or the department store in town – were little more than the end point of someone else’s supply chain. Their value lay in the fact that they were convenient, being close to home. Web 1.0 enabled consumers to reach around these local retailers and source the products themselves. Unable to compete on price, quality or convenience, many local retailers collapsed (or are collapsing).

So while retail might be growing overall, some roles in the retail market are no longer sustainable. Typically this means firms that trade in easily transportable, durable goods, such as books, CDs, video games, clothing, jewellery and the like and offered little more than convenience shopping.

More recently the emergence of social media and smart phones (the information comes to us, rather than us going to the information) means that we no longer rely on brands or firms for the information that drives a buying decision. The tangible effect of this is a dramatic decrease in brand loyalty. Fast food chains have already seen this effect, as everyone from travellers to teens started using recommendation services (Urbanspoon, Yelp, etc.) rather than trusting the brand, and were heading to local bistros rather than the outline of some national or global chain.

This effect is causing consumer facing parts of the market to fragment. This is a second knife in the back for many retailers – such as department stores – as their “sell to everyone” model doesn’t work in a market that’s fragmenting into a range of niches. The firms that are successful in this space are those that use a range of media (face-to-face stores, pop-up stores, social media, mobile apps, web sites…) to build a relationship with the consumer, and/or which are focusing on niches. The balance of power has tipping into the hands of firms that are agile enough to address these niches, “sell to niche” rather than “sell to all”.

So, taking all that together, we can see that 90% of purchases are through physical stores is not surprising. The problem is that:

  1. retail sectors that are moving online will be seeing more the 10% of transaction leaving bricks-n-mortar (let’s assume 20%), which is enough to drive many firms out of business
  2. spend in many sectors is moving to the cheapest and the best, eliminating many local businesses and mid market brands
  3. mobile and social means that many niche firms are now successfully competing with larger firms, causing significant problems for the larger firms

While the top line number might seem quite benign, the terror for many firms is in the details.

Image source: Chris Talbot

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