Saving Brick and Mortar

The big news story of the past week in Britain has been the cold temperatures and snowfall, which as a Canadian I am free to find fun in the fear caused by comparatively mild weather.

The second biggest story is the recent collapse of four major retailers here (from Yahoo): Comet, Jessops, HMV, and Blockbuster.  Comet is an electronics retailer, Jessops does photography, HMV sells music and video, and Blockbuster is a film and game rental company.  Such stories are not limited to the UK, as worldwide recessions and growth of e-retailors has hit retailers stateside also.

One simple explanation for the demise of these companies is disruption from online services, and perhaps also the rise of digital cameras and smartphones for the case of Jessops.  The Yahoo article linked to above provides a good summary of other reasons for the fall of these rather large companies.

Does this signal the beginning of the end of traditional, brick and mortar retailors?

Brick and mortar is facing a multi-pronged assault.  First is from online retailers and distributors – such as Amazon, Netflix, and iTunes.  Second is an emerging threat from home- and local mini-manufacturing, such as desktop 3D printing.  I am personally pretty bearish on this happening, although such systems have a chance to become mainstream if part quality can improve, costs continue to come down, and ability to work with multiple material improves.  A more likely threat is from local mini-manufacturers, using technologies like 3D printing, waterjet cutting, and injection molding to make semi-custom products on demand.  The advantage is of less machine down-time, distributing costs.  Additionally, staff at a mini-manufacturer will be able to assist with designing, design selection, machine operation, and assembly.

Each of these distribution methods has its own benefits and shortcomings.  Some are detailed in the table below.

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Home manufacturing and mini-manufacturers are still in relative infancy, and it is hard to assess how great of threat they are to brick and mortar retail.  Personally, I think the processes most often suggested for home or mini- manufacturing inherently have weaknesses related to quality and multi-material products.  Additionally, the main value-add of this kind of manufacturing is customization, which I don’t think will have the mainstream appeal to justify higher costs over mass produced products for most instances.  I have previously written in more detail on my opinions here.

For brick and mortar sales, a lot of value comes from being able to interact with the product.  Look and fit are much easier to decide in person than through a web browser.  Personal and expensive products like wedding rings and cars are things that people usually don’t buy without first interacting with.  For these kinds of high-end products, knowledgeable sales staff is also valuable in choosing what the right purchase is for you.  This contrasts with economy-minded products, where online reviews are often more helpful than sales associates.

Groceries are a retail category that have been slow to gain popularity in e-retail.   This is due to a trade-off between time and choice.  Being perishable, groceries are a category where 2-day shipping is insufficient.  Further, people like to select the best produce, meats, and breads from those displayed at the store.  In cases where quick access to the product is required, brick and mortar is the preferred type of retailer.

Apple stores have been lauded as an example of a great brick and mortar model, evidenced in part by Tesla motors modeling their showrooms after Apple stores.  Both of these are an additional vertical in products and experiances that are already highly controlled by their respective companies.  This allows the companies to control the entire experience for customers using their product by including selection and purchase along with usage.  Additionally, there is a marketing and advertising aspect to having such a visible front for the respective products.

There are segments where brick and mortar seem unlikely to be able to compete with e-retailers.  When the product is information, near instantaneous, free transfer, near zero inventory cost, and convenience make a clear case for digital distribution, such as Netflix for films and TV, iTunes for music and other media, and the shift from newspapers and magazines to web-based equivalents.  The only option for brick and mortar in these industries may be to hope for a time machine, to travel back and time to develop or acquire digital distribution.

A second example is Dell, especially the company as it was around 2005.  Dell has a great model of direct-order, where the buyer can semi-customize their purchase and also get great value compared to buying in-store.  In some ways, the model lead to the cannibalization of the consumer computer hardware industry.  Competition and commoditization lead to collapse of margins.  It is said that in an efficient market, there is no money to be made.  That is what has happened in computer hardware – it’s great for consumers but not for manufacturers.

Distribution through online sales reduces regional market inefficiencies.  A customer in San Francisco no longer has to choose between local stores: they have access to wide areas of stores, subject only to tariffs and shipping costs.  This lowers prices because a store in San Francisco is now competing with online stores all over the world, in addition to local stores.

A discussion on e-retail would be incomplete without mentioning Amazon; the giant in the space.  Amazon wins due to massive diversity of products stocked, quick and cheap shipping, convenient use, and meaningful user reviews.  Hidden to the purchaser, they have the infrastructure and distribution centers to make the experience work.  With said infrastructure and its momentum, the burden is probably on any other retailor – web based or not – as to how they will beat Amazon.

How can this be done?  I have a few ideas and suggestions

1. e-retail is only as fast as the postman

For things that are urgent or perishable, brick and mortar has an advantage to e-retail.  While there is convenience to shopping from home, there is also convenience in buying something and getting it right away.

2. Quality sales advice

Brick and mortar stores should be much better than e-retail at consumer education, and it usually is for high-end and very personal products.  There is no reason e-retail resources such as price comparisons and user/expert reviews can’t be as accessible in-store as online.  There are apps and interactive displays that are starting on this, but I think there is further mileage.

However, the key advantage of brick and mortar should be knowledgeable and caring sales staff.  People interact with products in a very personal way, and a salesperson should be much better suited to understand the user’s needs than a web based script or robot.  Consumer information and marketing could be a key area for innovation for brick and mortar retail.

3. Beating e-retail on price is trench warfare

Competing on price alone is rarely a sustainable business model, and brick and mortar probably has an inherent disadvantage to online retail due to higher overhead.  The lone advantage may be in shipping in bulk for brick and mortar, compared to by unit for e-retail.  In this, a model like Costco may be able to remain competitive due to high volume, low number of products, and low-overhead operations.

I see a continued shift to e-retail from brick and mortar.  The consequences of this could be quite far reaching.  Not only will business be transferred from traditionally to online retailers, but there are implications for employment, international trade, a surplus of retail real estate, and decline to the cultural pastime of shopping.  It’s still early to conclude on home and mini-manufacturing, but I don’t see these as being major threats in the space, and especially not in the near-term.

There exists a continued opportunity to disrupt the retail space.  For example, mobile devices are still relatively greenfield for retail apps, without any dominant players.  Further, the social aspect of shopping should not be overlooked.  Perhaps this factor may lead to support brick and mortar, or some innovation improves the social aspect of online retail.

What do you think?  I’m always interested to hear your comment in the bottom.

One thought on “Saving Brick and Mortar

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