In the battle of clicks versus bricks, retail must transform or die

Summary:Ten years hence retail footprint will be a shadow of its former self and heavy competition from online will allow only the strongest brick and mortar businesses to survive.

This article is an expansion of Jason Perlow's arguments in our ZDNet Great Debate Series: Is e-commerce killing brick and mortar?

Photo from Brian Ulrich's Copia "Dark Stores" photo project

As much as it bothers me to say it, clicks are absolutely killing bricks. No, it won't happen overnight in some kind of apocalyptic mass extinction event -- but anywhere between ten and fifteen years from now, the makeup of what we call "brick and mortar" today will be largely a cultural anachronism.

Ten years hence, it will be the mice and the trackpads and touchscreens that will rule the earth and generate most of the retail sales in this country, not feet on the ground and bodies in stores.

ZDNet Editor in Chief Larry Dignan notes that current retail brick and mortar business is about ten times the size of current online sales.

That may not sound like a lot right now but let's look at overall growth. Earlier this year Forrester Research projected online retail sales in the U.S. would increase 11.98% in 2011 compared with 2010, to $197.3 billion from $176.2 billion.

Originally, back in March, Forrester projected that the annual rate of increase will decline slightly each of the next several years, with online retail sales in 2015 rising 7.81% over 2014, to $278.9 billion from $258.7 billion.

That represented a 9.62% compound annual growth rate for the U.S. over the five-year forecast period.

And where is that growth occurring? At the expense of Brick and Mortar.

If we take in this last Black Friday's sales (a 26 percent increase over the previous year's online sales activity according to ComScore) and the record breaking $6 billion dollar "Cyber Week" into account, then I am sure we are looking at revised e-tailer growth figures in the offing from Forrester and other industry analyst groups.

Post-Thanksgiving 2011 should serve as a wake up call for department stores and large walk-in retailers. Change is already underway.

Will Brick and Mortar disappear entirely? No. We'll always need certain types of walk-in retail, and some types of businesses will be more resistant than others. Just like the Crocodilians survived the big 'ol asteroid 65 million years ago, we'll still need places like Walgreens and maybe even Target or Wal-Mart.

But ten years hence retail footprint will be a shadow of its former self at best, and heavy competition from online will force only the strongest and most customer-oriented brick and mortar businesses to survive, with the inevitable consolidation of some of the largest businesses to follow.

The dinosaurs didn't go extinct overnight. And there are reptiles that still live today that aren't much different than ones that lived in the Cretaceous. Similarly, the most robust brick and mortars will still be with us ten or twenty years from now. But the weak or unadaptable will not survive.

Much of this is going to occur as a result of transformative changes in consumer behavior.

I agree with my colleague David Gewirtz that there is going to be a digital divide which could pose challenges to moving towards a completely online based commerce model, because the have-nots may lack the technological resources to participate in it.

However, I've already explored this to a certain extent in my two Digital Underclass articles in which I detailed how the Public Library and the brick and mortar bookstore is almost certainly going to face a similar fate to that retail.

Unfortunately, I think the Public Library and bookstores are likely to disappear much quicker than retail and we'll be seeing the majority of written media being consumed electronically within five years.

However, that being said, the cost of personal computing devices are also going to go way, way down over the next five to ten years. Anyone who wants to be able to get online and shop will certainly be able to.

The shopping apps and websites are also going to become much more sophisticated and user-friendly over the next five years.

They will also learn individual consumer behavior and know exactly what kind of products to push, and consumers will be able to set up recurring shopping lists (for things like groceries) and integrate this into their financial planning with their banks to track their spending behavior and set up savings for particular items.

This isn't Sci-Fi, this is what banks and retailers are working together on for their customers now, and you'll see some of this coming to banking apps/websites on your favorite smartphone or tablet this year.

For those of us that leave the cities for the suburbs or even developing semi-rural areas for a better quality of life, these apps and websites will be a godsend.

Yes, there will be "Food deserts" as David describes in the big cities, but these are problems associated with de-population in general. And with de-population brings inevitable retail vacancy.

The question has also been posed as whether or not the collection of sales taxes will have any impact on Internet-based commerce.

While some consumers will agonize over ten dollar differences between one vendor or another in terms of total end to end door to door cost (of which taxes are a factor) ultimately they will want to gravitate towards vendors that are giving them the best deal overall, and that could be in the forms of incentives and or loyalty programs, such as Prime.

It should be noted that in ComScore's most recent reports, Free Shipping (using programs like Amazon Prime or via promotional programs) was a driving reason why customers shopped at particular online retailers. Taxes really didn't factor into the equation.

So which retailers are most ready for this transformation?

The ones with the most retail power -- Wal-Mart, Target, Best Buy and the warehouse stores like Sam's and COSTCO are the ones that will be ready for Multi-Channel commerce.

Now the department stores -- those guys got real problems. I don't see them thriving in this new model. Tyrannosaurus, meet asteroid. I could see Sears returning to its roots and becoming more of a catalog goods supplier and hooking up with Amazon or perhaps Wal-Mart.

But Macy's? Bloomies? Nordstroms? Neiman-Marcus? Dillard's? Saks? Like Fortunoff, which died in 2009, they'll all be pushin' up the daisies, folks. Alas, poor Gimbels, I knew him.

The only evidence they ever existed in future decades will be preserved in Miracle on 34th Street every time they run it on Video on Demand during the holiday sales push.

The New York Thanksgiving Day Parade! Sponsored by Amazon.com!

And just what do you think happens to shopping malls when these anchor stores have to inevitably close? It means they will have to find other ways of being profitable.

Can you say big time consolidation of the big box stores within the next decade? Yep, I knew you could.

But before these big box stores start to heavily transition to an online model, the vertical businesses and the specialists are going to center around online commerce in order to increase their overall footprint and reach.

Certainly verticals are going to move towards an online business model, particularly if they sell highly specialized items and want to reach a national audience. This is already happening.

Perfect example: Who did I buy my portable 6,500 watt generator from during the aftermath of the summer tropical storm that completely whacked our local infrastructure in New Jersey?

Did I go to Home Depot or Sears who had people piling up for days trying to buy one because they couldn't keep one in stock? Nope. Home Depot's and Sears' websites couldn't even get me one quickly enough even if I wanted to overpay to expedite the shipping. Neither could Amazon, for that matter.

So I went to PowerEquipmentDirect.com which had plenty of units in stock. Did I need to see the item in person before I spent $1500 on the system and had it shipped 3 day UPS to my house? Did I need to touch the thing? No, I read reviews, and the company had a great "Choose your Generator" app that showed me how various models compared to other ones from different manufacturers.

Now, granted, this company has a showroom and warehouse in suburban Chicago filled with their merchandise, but I wasn't exactly going to go down there and look at one. I knew it was an established business with a good reputation and my AMEX platinum card rep would fight tooth and nail if any funny business occurred.

So do you really need to see a refrigerator or a lawnmower in person? Or a commodity desktop or laptop computer? Some old-school sticklers do, but I certainly don't. Apple has certainly proven that people will buy iPhones and Macbook Airs on the web sight unseen, months before product availability.

I'll give you that certain businesses such as say, luxury fragrance merchants, a jeweler, a watch store or Crabtree and Evelyn might require brick and mortar presence, but these are really only likely to survive in affluent areas, and will concentrate themselves around completely re-designed malls in New Suburbia rather than as free-standing stores.

Now, there is one other major exception I think to this online transition: service-oriented businesses and especially restaurants are not really part of this new electronic retail model that I envision.

Dining out is something that is much more fundamental and essential to American culture. It will change, to be sure -- and it is well underway -- such as decline in fine dining and more of a trend towards QSR-oriented concepts (Quick Serve Restaurants) but it absolutely will not disappear.

That being said, many people are already eschewing Bricks for Clicks. My 65 year-old parents live in Boca Raton, Florida, are perfectly ambulatory and fit, but buy virtually everything online. If they can avoid going to a shopping center, they do.

Sure, sometimes products arrive that aren't exactly what they wanted, but guess what -- Amazon and other large e-tailers have a great customer service departments and you can return items, just like brick and mortar. You got a United States Post Office near your house? Then there's no problem.

If COSTCO had a service that dumped stuff right at their front door, I'm sure they'd pay a premium to do it rather than burn gas and wasted time.

And I suspect many millions of people feel the exact same way.

Topics: Smartphones, Mobility, Tablets

About

Jason Perlow, Sr. Technology Editor at ZDNet is a technologist with over two decades of experience with integrating large heterogeneous multi-vendor computing environments in Fortune 500 companies. Jason is currently a Partner Technology Strategist with Microsoft Corp. His expressed views do not necessarily represent those of his employer... Full Bio

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