In the battle of clicks versus bricks, retail must transform or die
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.
So the big looming question is what really happens to retailers if their stores merely become showrooms for online purchases.
Well I think it depends on the retailer. I think Apple's retail stores are already showrooms for online purchases. In many ways, Steve Jobs really did understand what the future of retail was all about.
Some retailers will survive this phenomenon when it occurs, such as the Best Buys of the world that already operate in volume and thin margins. But they won't have as many of these stores around as they used to and will have to consolidate their showroom locations and focus more on regional shipping and warehouse operations instead.
And guess what, that's where most of the remaining jobs in retail are going to be too.
Retail sales positions will be few and far between, such as in specialized luxury goods stores in affluent areas and the few auto dealerships that are left standing once they too have gone to the "Showroom" model and cars are bought almost entirely online.
On the e-commerce side, these positions will be filled by outsourced call center personnel using telepresence technology.
In the case of smaller or medium-sized retailers with showroom space, what you may end up see happening is them partnering with Amazon or other large e-tailers such as Best Buy and Wal-Mart and Target to act as the front end broker.
In essence Amazon and Best Buy and Wal-Mart will outsource and productize their e-tail clouds, because their platforms will be the most mature. And they'll take a piece of the action, to be sure.
Since the Brick and Mortar merchants that will exist in the future are the ones with the most retail power and ability to transition to multi-channel commerce -- Wal-Mart, Target, Best Buy and the warehouse stores like Sam's and COSTCO -- means that only the biggest and most powerful and most efficient in terms of how they run their operations will survive.
So there may not be as much choice for comparison shopping in Brick and Mortar, especially if these large, powerful retail chains or companies like Amazon end up owning much of the electronic shopping real estate as well, or end up controlling the channel for smaller distributors of specialty goods.
Additionally, the e-tailer industry and the web as a whole needs to move to 2048-bit encryption as the 128-bit certificates that are in common use today no longer will serve the needs of the industry once supercomputing economies of scale reach commodity systems.
Additionally, a secure and resilient public e-tailing cloud with repeatable, packaged solutions needs to become a reality and not a pipe dream. Setting up an e-store should not require an army of consultants or IT staff, you should just be able to buy your virtual floor space, and have back-end systems pre-built that are ready to plug in.
Having to engage web designers to create your virtual window dressing or shingle for corporate identity should be your biggest problem.
For the most part, I see the larger players in IT such as IBM, HP, SAP, Oracle and Microsoft, as well as Amazon providing the outsourced infrastructure, software and services that are needed to make this work.
But the technology has to improve substantially for all of this to occur. There are a bunch of enabling technologies that will mature over the next 10 years that will allow the online shopping experience to be better than what exists in brick and mortar, and thus make it the preferred way to shop and engage in retail.
The first being display technology. Right now, we're looking at iPad 3 tablets having the potential for greater than full HD resolution (2560x1600 WQXGA) being shipped at the end of just 2012.
By 2021, it is not unreasonable to assume 4K (4096x3112) resolution on large screen computer monitors and TV sets will be fairly commoditized and even higher resolution displays may be affordable by that time.
With higher resolution, more brilliant color displays on tablets, smartphones and TV, the more realistic the depiction of the merchandise.
In addition to higher resolution, 3DTV technologies as well as virtual and augmented reality (assisted by wearable computing and motion-tracking interfaces such as newer implementations of Kinect) will actually allow the consumer to shop in realistic, immersive virtual in-store environments, and even "wear" clothing or "touch" merchandise right from their very own homes.
Need help with your purchase? Telepresence technologies will allow retail sales assistants (based out of a call center somewhere) to help you pick out exactly what you need. Or help you return an item.
Not sure if that dress you picked in the virtual store is "You?" No Problem. You'll even be able to patch in your friends via group shopping trips to see what you are buying and help make suggestions.
The best part? No traffic jams, no holiday road rage, no fighting for parking spaces, no crowded stores, and no more pepper-spray filled Black Fridays.
But doesn't all of this ruin the "Sport" or enjoyment of shopping? If shopping was a "Sport", it's like Major League Baseball is today.
Nobody really wants to go into a ballpark to see a live game anymore because it's too damn expensive to get tickets since most of the seats are corporate owned.
The traffic to get to the game is a total time kill and then after you've hacked off a leg to pay for your seats and the ridiculously expensive parking, the concessions end up eating whatever is left of your wallet as you watch tiny players on the field up from the nose bleed section.
It used to be fun, but now it sucks. It's much more enjoyable to sit back on your couch, pop open a beer, crack open a bag of pretzels, and see everything in crisp detail on a big screen TV. And then be able to pause the action when you need to take a nature break or grab another Miller.
In the same sense, there may be a lot of people that love the idea of shopping, but they don't love under-trained salespeople that don't know the products or worse, mislead you into buying something you didn't want to buy.
They certainly don't like having to kill entire weekends stuck in traffic to get back and forth to the mall, and they don't like having to drag their kids around and make it an entire ordeal while they get tired and hungry and scream and yell and embarrass you in front of hundreds of people and demand you buy them things.
For every reason you can call shopping a "sport" there are a dozen other reasons why it sucks.
With various technological improvements, the Internet may actually make shopping a fun and stress-free family experience again. Who the hell wants to replicate something that is completely awful when we can completely re-define it instead?
And to re-define it means that the e-tailing services that exist today need to mature and become more customer oriented in order to substantially reduce the need for physical retail.
Amazon has a very good model today for dealing with order tracking and returns, but that can be further improved by having real human beings on the telephone or on video chat available to answer questions, particularly in situations where a sales associate would perform the role of helping to choose products.
Additionally, I expect that a online store in the future would have extremely detailed information and pictures or even 3D models of products, as well as an ability to easily compare and contrast similar products in inventory.
The easier it is for a consumer to understand and have confidence in what they are buying and who they are buying it from the easier it will be to sell the products.
The more the in-store warm and fuzzies can be replicated electronically for the consumer, the more dead Brick and Mortar becomes.
So when is this brick and mortar retail apocalypse going to occur?
This is hard to say. My extreme vision of the future which I depicted in my most recent article on the subject says 2021, but it could just as easily be 2025 or 2030. All of this depends how quickly the enabling technologies mature and how much they cost. Technology is certainly moving extremely fast in this area and it is is difficult to predict when this convergence is going to happen.
For the middle class it will very likely happen a lot faster than for the working class, since they will easier be able to afford the enabling technology.
But at the end of the day it's not the question of "Will" it's definitely the question of "When." For certain types of businesses it will happen faster than others.
For durable goods with lots of reviews, which are not highly specialized and aren't as susceptible to the sensual experience in order to make a convincing buy, much sooner rather than later.
I also think it is important to state what the role of mobile technology in this online retail transformation is going to be.
Mobile is a disruptive technology and in my view will likely be where much of the initial dismantling of Brick and Mortar actually occurs. When supermarkets and drugstores and warehouse stores like COSTCO and Sam's start offering Apps that allow people to pick up their groceries and prescriptions when they are on the way home from work, you know the revolution has begun.
If sub-$200 computing devices like Kindle Fire are the beginning of this trend towards subsidized or inexpensive tablets/digital convergence, and public/free Wi-Fi or pay-as-you go 3G/4G service in the US becomes more commonplace (as it is in Europe and Asia) then it goes without saying that these devices are going to end up being the main focal point for commerce itself.
Plenty of people will not even own PCs, they'll own cheap tablets and smartphones and be able to do virtually all of their shopping on them.
I'm most interested in seeing what Amazon tells us after Year One of Kindle Fire and how much sales end up being generated by their app for Android and iOS.
My guess is that we're likely to be absolutely stunned by how much stuff was purchased on mobile devices at the end of 2012.
Do you agree or disagree that we are headed towards a largely online commerce model in the next ten to fifteen years? Talk Back and Let Me Know.