The Retail Industry Is Dead. Long Live the Retail Industry!

It’s long been conventional wisdom that the retail industry is dying. We’ve seen unprecedented store closings and bankruptcies at major chains such as Toys R US, Sears and Rite Aid and even successful chains are trimming locations. It seems that in a digital world, physical stores have become a thing of the past.

The truth is that the retail industry isn’t dying, but is going through some major shifts and needs to adapt to a world where the primary function of a physical store is not to drive transactions, but to service and support customers. To compete in this new marketplace, what’s needed is not so much to embrace new technology, but to reimagine the retail businesses.

Humans Serving Humans

It’s no secret that Amazon severely impacted superstore book retailers like Barnes & Noble and Borders. Borders filed for bankruptcy in 2011 and was liquidated later that same year. Barnes & Noble managed to survive, in part by reducing locations, focusing on college book stores and expanding into publishing, but is a shadow of its former self.

Small independent bookstores, however, are thriving. In fact, a study at Harvard Business School found that while the number of independent bookstores plummeted 43% between 1995 and 2000, during the heyday of Barnes & Noble and Borders, it soared by 35% between 2009 and 2015.

Part of the reason for this trend is that book sales data tends to be shallow. Even a successful book may only sell one or two copies per location per month. That makes it difficult for algorithms to predict demand effectively. An independent bookstore with an attentive staff, however, is much closer to its customers and can often make better judgments.

The Harvard study found that independent bookstores thrive through a formula of community, curation and convening. Because independent bookstores are embedded in their community’s fabric, they are well placed to curate titles that will appeal to their customers and convene events that strengthen those bonds, drive sales and increase their ability to curate.

Even in our over-automated age — or maybe because of it — there is great value to be unlocked from humans serving humans.

Falling Rents Mean New Opportunities

While the retail apocalypse is real, there is a silver lining — falling rents. When the retail industry was booming, landlords could not only charge top dollar, they were able to add strict conditions to leases, such as long lease terms. That made it hard for retailers to experiment with new locations and concepts.

For example, LEGO has been operating LEGOLand amusement parks for years, which serve the dual purpose of connecting with customers and leveraging its brand to earn incremental revenues. Yet now, with so many “anchor stores” at malls empty and landlords struggling to find tenants, it has been building smaller Discovery Centers to do much the same.

Melissa Gonzalez, CEO of The Lionesque Group and author of The Pop Up Paradigm, sees similar opportunities opening up for more traditional retailers. The shifting economics of commercial real estate have opened up possibilities for them to be more innovative and better hone their business models.

“What we’re seeing is that landlords are much more flexible and open to experimentation,” she told me. Many will take short-term leases, give better terms, invest in architecture to facilitate pop-up opportunities and even, in some cases, forego up-front rent for a brand that they think can add luster to the space.”

Offline Powering Online

Another salient aspect of the retail environment today is that traditionally digital retailers have begun to invest in physical locations. Over the last ten years, e-commerce has more than doubled its share of the retail market from just over 5% to 13% of total sales. That growth has meant that digitally native firms need to cater to more demanding mainstream customers.

Amazon’s purchase of Whole Foods has gotten the most fanfare and sent shock waves through the retail industry. One aspect that is often overlooked, however, is the advantage that a large network of physical stores gives Amazon online. Each location can serve as a distribution point for its Amazon Fresh and Prime Now services.

Bonobos is an online retailer that got its start when Brian Spaly created a pair of pants designed to eliminate “khaki diaper butt” while at Stanford Business School. He eventually moved to New York City and shipped merchandise from his apartment. Before long, he increased his product line and business was booming.

Yet as the business grew, the company was increasingly getting requests from customers to try before they buy,” so it has opened a dozens of Guide Shops where customers can get fitted, receive advice from a stylist, and have their purchase shipped to them. The internet basically serves as its backroom.

Value Never Disappears, It Just Shifts Somewhere Else

We often hear that technology destroys jobs, but that’s not really true. It can automate tasks, disintermediate middle men and eliminate the need for certain industries and tasks. After all, no one drives stagecoaches or stokes coal on a railroad anymore. Yet value never really disappears, it just shifts somewhere else.

This is generally true, but especially important for the retail industry today. Traditionally, the function of a retail location was to drive transactions and the business was optimized to that task. Executives closely monitored metrics like “sales per square foot” and “average transaction size.” However, when a customer can make a purchase just about anytime and anywhere, those measures have become relatively meaningless.

Apple doesn’t care whether you make a purchase at one of its stores any more than Bonobos does. Their locations exist to provide the kind of human connection that you can’t easily get online. In our increasingly automated world, it is that connection that we crave. That’s why MIT professor Zeynep Ton has found that retailers who pay and treat their employees well often outperform their competitors financially.

Yet all too often, businesses get caught in an efficiency trap. When a new technology arises, whether it is artificial intelligence, the cloud or automated retail checkouts, they only see an opportunity to cut costs and widen margins. Yet soon competitors adopt the same technology and there is little, if any added benefit. Value has shifted away from those automated tasks.

The businesses that thrive over the long-term, however, not only see where value is shifting from but where value is shifting to and race to get there.

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