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Who Will Survive the Retail Revolution?

June 2017 Corporate, Marketing

As you drive by the shuttered strip mall, or visit the regional shopping mall with vacancies including the anchor stores, it doesn’t take a brain surgeon to see that retail shopping in America is in trouble.

In The Future of Shopping, a 2011 article by Darrell Rigby—a partner in the Boston office of Bain & Company—sees retail today as part of a 50-year cycle. Rigby writes 150 years ago, the railroads promoted the growth of big cities and the rise of the department store. One hundred years ago, the automobile made possible the shopping center and 50 years ago, we saw the rise of the Big Box category killers.

Today it is computer technology and the rise of e-commerce that provides the disruptive technology. In 2011, Rigby reported e-commerce was responsible for $200 billion in retail sales. That number has nearly doubled to $395 billion in 2016, according to DigitalCommerce360.com, and it reports e-commerce is expanding 15.6% per year and now represents nearly 12% of annual U.S. retail sales of $3.375 trillion.

In 2016, The Atlantic (April 10, 2017: What in the World is Causing the Retail Meltdown by Derek Thompson) reports that JC Penney, RadioShack, Macy’s and Sears have each announced more than 100 store closings. The article further reported Sports Authority and Payless (shoes) had filed for bankruptcy, and four chains, Lululemon, Urban Outfitters, American Eagle and Ralph Lauren have hit new multi-year lows. Ralph Lauren is closing its flagship 5th Avenue store in Manhattan. The article opens with: “From rural strip-malls to Manhattan’s avenues. It has been a disastrous two years for retail.”

The Surprising Winners and Losers of the Retail Revolution, by Sean Silverthorne, points out Home Depot and Pet Smart both received a good prognosis. The future of Walmart was judged to be suspect. Other chains like A&P, Sears Roebuck and JC Penney are under threat.

Jose Alvarez, a Harvard University marketing professor interviewed by Silverthorne says in support of the Home Depot Business model:

“They looked strategically at all aspects of their offering across the various channels they have at their disposal to maximize customer satisfaction and the return they get on their TIPS (Technology, Inventory, People, Space) assets. For example, if your toilet blows up, you aren’t going to wait two days for delivery for a part from (competitor) Amazon Prime. You need that part right now. You need it to be in stock, and you need somebody to help you understand what to do, what kind of silicon sealer you need—Home Depot does a great job of that. They make sure they carry enough inventory so you can get that job done immediately. Lighting fixtures, on the other hand, are a different animal. There are hundreds of thousands of options to choose from and generally the need is not an immediate one. They carry a selection of good, better, and best options in-store along with the electrical supplies and tools you will need to install the fixture. Online they carry an endless aisle of products and they provide videos and expert advice to help with installation. They do not deploy their TIPS assets in a one-size-fits-all manner. Home Depot has studied deeply how to best deploy their assets in order to satisfy the customer in a way that allows for an excellent return on invested capital.”

 

In support of Pet Smart, Ragiv Lal, another Harvard professor, said: “

“PetSmart saw the online threat early and built a strategy to insulate themselves from the damage that ecommerce could inflict. They saw what was coming, and entered services. If you look at the store today, almost a third of PetSmart’s sales are in services, things like grooming or hoteling—those sales aren’t going away, they are not threatened by the Internet. And while the pet parent waits for the services to be completed, PetSmart provides a wide array of in-aisle treats and accessories to drive impulse purchases. At the same time, they’ve maintained a strategy of exclusivity with pet food so that they are not stocking all of the same items that Walmart and the supermarket carry.”

 

Finally, the reason by Walmart’s future may be suspect, Prof. Lal, said:

 

“Look at the business model. Walmart catapulted into a $400-billion-plus company by luring customers into stores with groceries at very low margins, reaping the benefits of additional trips, which generated increased sales of higher-margin general merchandise items. But if you look at what has happened to that model, it is challenged on all fronts. On the general merchandise side, Walmart has competition from the Amazons of the world. So their ability to make money with general merchandise has become compromised because ecommerce forces prices down. Amazon’s cost structure and their formula for deploying assets is superior to Walmart’s. At the same time, the traffic that was being generated by lower food prices is being threatened by much leaner and more competitive grocery stores. The icing on the cake is that the lower-income customer has another choice in the form of dollar stores. So, on all counts, you have a model that is under significant pressure.”



About the author

James T. Berger, Managing Editor of The Wiglaf Journal, through his Northbrook-based firm, James T. Berger/Market Strategies, offers a broad range of marketing communications, research and strategic planning consulting services. In addition, he provides expert services to intellectual property attorneys in the area of trademark infringement litigation. An adjunct professor of marketing at Roosevelt University, he previously has taught at Northwestern University, DePaul University, University of Illinois at Chicago and The Lake Forest Graduate School of Management. He holds degrees from the University of Michigan (BA), Northwestern University (MS) and the University of Chicago (MBA). Berger is an often-published free lance business writer who has developed more than 100 published articles in the last eight years. For more information, visit www.jamesberger.net or telephone him at (847) 328-9633.

James T. Berger
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