The internet changed everything for retailers and retail brands for many obvious reasons (more customer touch points, more targeted advertising, pricing strategies, more advertising venues, access to more customers and more sales). But it has also had a subtle and important implication to it that most retailers and brands have not really grasped due to their historical points of view. The greatest impact of the internet has been that it has enabled people with common interests to connect on topics and discussions that move them in a more engaging and interesting manner because they can find people who have much more in common with them, irrespective of where they are located physically.
Historically, stores have been based on the geographic aggregation of customers – merchants formed stores when enough people passed by their location that they could make a living. When a population was large enough in their given area (either through travels or residence), there were opportunities to specialize. For example, as a western frontier town grew, the proverbial general store gave rise to to the dress shop and the hat store and the hardware store. There were enough people, with enough specific needs for stores with more specialization to flourish. As cities grew, there were more opportunities to specialize and focus on targeted markets, but advances in manufacturing and the transportation network (trains then trucks) enabled department stores to grow and flourish where there were large populations. With more and more people owning automobiles, malls began to sprout up along with discount stores who could buy in bulk, build less expensive large stores and access the sprawling population in the suburbs that needed goods for their homes and growing families. Each of these transitions was an innovation, and each was based on geography. As demand for goods grew across the globe, brands that embodied ideals or manufacturing capacity or distribution capability grew and flourished through these retail channels.
The internet and globalization go hand-in-hand. With the spread of various media throughout the world, the world has become smaller and flatter. With the internet, you’re connected to nearly 3 billion people. I wrote the original thoughts for this post as I was returning from Paris earlier in the year and I was reflecting that in all of the cities to which I travel, I find that it has become hard to tell where you are based only on the appearance people you see on the street. The same types you see in NYC, you see in Munich or Madrid or Bangalore or Santiago or Oslo (or Topeka for that matter). There is a homogenous heterogeneity that exists out there (how’s that for an oxymoron?) meaning that more and more, we, as a global society, are different in the same manner irrespective of where you are in the world. The consequence of this dynamic is that there is a significant possibility that you have more in common from an interest, value and aspiration perspective with someone sitting on the other side of the globe than you might with your next door neighbor.
The power of the internet is not just global reach. It is also very specific reach (and local reach for that matter). It is the only medium through which you can connect with people based truly on interests, values or aspirations on a very specific level. This concept is not a new concept for retailers – look at the many specialty retailers and niche brands that exist. These businesses developed out of the same insight discussed above: with a growing population, there are many areas in which you can access a niche market, create a brand and grow a large business. Here is a small presentation that I created that talks about how specialty retailers and brands developed and grew. It is a pseudo-mathematical representation of this theme by using bell curves to represent the size and distribution of a population, the arcs of the curve to describe a given market segment and the area under the curve and the arcs of the curve to describe the economic opportunity.
This sounds pretty technical, but its a simple concept that makes some key points:
- Retailers/Brands have historically approached their target customer as a collection of geographic markets with specific demographics for each geographic area. In other words, there was a separate curve that described the market for each geographical market that a store addressed.
- There is only one big “curve” with the internet since everyone is connected and can be accessed instantaneously irrespective of location. This one large curve is segmented based on values, interests and aspirations, not geography.
- Consumers will increasingly view themselves less as a geographic collective than a collective based on values, interests and aspirations, in other words, not a niche on a regional market, a but a very specific market that transcends geography
- On a global basis, what would be viewed as very specialized and small “niches” in a geographic frame of reference are really big markets and enormous opportunities
I don’t think the industry really understands this. Even if they do, they won’t do anything about it because the concept is too destructive to the status quo – its clear implication is that the internet replaces the store network as the backbone of its business. This does not mean there won’t be stores – there will be. Lots of them. But probably not as many as there are now. With the internet as the backbone, of the business, the store is just another touch point along with the web store, Pinterest, Twitter, Facebook, etc. With the store network as the backbone, the web store is just “another door” and the internet is a promotional vehicle to get customers into the store. In other words, in an internet-based commerce model, the business is oriented along the point of view “how do we engage our customer” vs a store-oriented point-of-view which asks “how do we get our customers into our stores”. In the former, you are indifferent to the medium of choice and how they are used and you create an organizational incentive system that rewards a deepened customer relationship irrespective of the contact point. In the latter, you created silos that compete with one another rather than embrace each other. Most retailers today still don’t compensate their stores for internet sales and vice versa.
The winners will be retailers and brands who architect their business around the relationship with their customers, using the right medium that conveys their message and strengthens their relationship. The internet will be the hub that connects the business to its customers, but electronic-only will fail in the long run. Physical stores are essential to activate and energize that customer relationship. The retailers and the brands that can use both the physical AND the electronic will be the leaders of tomorrow. Warby Parker for instance has opened pop-up stores and and encourages customers to visit its HQ location as well as locations in retail stores. It’s hard to tell who is doing well in the traditional bricks and mortar sector because just having a good web store and social media strategy does not mean that the company has architected its business around an internet backbone.
But the biggest problem that retailers might face is that all brands will begin to go more directly to their customers for two reasons: 1) they can and 2) because in an online world, retailers are capturing much more value than they provide. (More on this in my next post). So here’s my point after all this narrative: I think broad-based retail is in real trouble. And by trouble, I don’t mean that they just won’t grow as fast. Trouble meaning that a large number of them won’t exist in 5 years.