Shopping has already begun to move in some force out of the High Street, the mall and the superstore and onto the Website. Traditional retailers have no option but to join a revolution that will cut costs, increase variety and make home delivery - which largely vanished in retailing's previous upheavals - the norm for countless products. Many retailers will find this an uncomfortable transition. But they have run out of options, because their fundamental economics are under attack.
The most valuable fixed assets in retailing have quite suddenly become vulnerable: the stores. Major multiples, still expanding vigorously wherever they can find sites, may find this bizarre - but what's happening to banks and building societies is harsh reality. Their High Street street assets are becoming liabilities. Branch handling costs for transactions are vastly higher than automated processing. Not only are the branches thus uneconomic: the low, low costs of electronic networks - a hundredth of branch expenses for ordinary transactions - have opened doors to new, direct-marketing competitors.
Retailers may downplay the analogy with the High Street banks, 'money shops' which have nothing to display or stock. But the startling rise of Amazon.com ('Earth's Largest Bookstore') can't be dismissed. With no shops to its name, Amazon had 2 million visitors in 1997, generating $148 million of sales - all on the Internet. What is happening in books can happen anywhere. What if retail outlets generally mutate into nothing but showrooms and warehouses?
It quite recently made sense to berate the banks for their lack of retailing skills. The latter, however, are now becoming redundant. Nor can the financiers hope to escape the retail squeeze simply by offering backroom services, like investment: 5 million people traded stocks on the Internet in 1998, a total predicted, says the Financial Times, to double or triple by the Millennium. Obviously, you might think, the Internet's financial bandwagon is one on which everybody wants to jump, because of its huge profit potential. You would be wrong.
Indeed, what on earth would persuade you to invest in this product? You have no idea of how to make money from the thing. You know just as little about which customers, if any, might want the offering. Plainly, this is a non-runner. Yet banks worldwide are 'rushing to invest large amounts' in just these circumstances. The product is Internet banking, and the evidence of this weird 'gold rush mentality' - without any gold - comes from Ernst & Young researchers who interviewed 100 banks in 26 countries.
Management at large shares the bankers' ignorance. One recent survey found that only 3% of UK managers considered themselves well-informed about the Internet. A year later, in early 1999, their level of awareness had improved by a spectacular two-thirds - to 5%. The majority differ from the banks only in the propensity to invest. No gold rush here: 54% of UK companies with turnovers exceeding £100 million, according to another, contemporaneous survey, have no intention of developing websites.
The stand-outs presumably feel that the Web offers no worthwhile commercial benefit. As they will soon discover, they are wildly wrong. But the banks, while investing heavily, take an equally pessimistic view. Collectively they believe that electronic commerce will only increase its share of banking transactions by a wimpish 1% annually. If that unlikely estimate proved true, banks would lose out on the tremendous transaction savings mentioned above.
The problem is not that banking managers, or retail ones, are blind to the revolution now developing apace. The Internet, however, is changing the rules, not only for transactions, but for all the processes of management. The awful fact that 54% of the surveyed banks wait a full day before processing online messages from customers shows how wrenching a transformation is required. It's far more comfortable to stick to the old ways and hope that revolution will pass you by.
BUSINESS-TO-CONSUMER
The only trouble (and a mighty one) is that it won't. Despite the expressed conservatism of many retail leaders, all business-to-consumer markets offer rich, in fact, the richest potential on the Internet. That's the verdict of an IBM-Economist Intelligence Survey report. The catch, more marked in heterogenous Europe than the homogenous US, is that complex and fragmented markets increase the required investment of time and money - another fact that managers find off-putting.
They only dare hold back, however, until somebody forces the pace, like Amazon.com in bookselling. The book interloper was busily remaking the sector, even when its profits lay only in a ludicrous stock market valuation. With bookselling over the Net well on the way to becoming the largest means of purchase, other consumer goods are bound to follow suit, with recorded music and films high on the list. But other companies in other sectors are racing along the same disruptive path. Many, like amazon.com again, are newcomers with no old ways to preserve.
The newcomers' investment in new ways is helping to double Internet business-to-consumer commerce every year, in Europe as in the US. The implications for orthodox retailers are, first, that they will inevitably lose market share. The Net's present minuscule proportion of total consumer purchases will grow very rapidly, maybe eventually matching the growth curve of business-to-business sales (doubling every three to four months, according to Price Waterhouse). Second, how much share the stores retain will depend on their ability to innovate - and to change at speed.
Retail managements have never previously had to challenge the reasons for their existence or expansion. Now the size and usage of added space need most searching scrutiny. Once, catalogue operations were peripheral. Now mail order and conventional retailers alike should be contemplating a long stride into a future where selling by electronic catalogue is the norm, and stores become places of entertainment, demonstration, trying-on and wonderful service. Failing that, many of those fixed assets will go the way of surplus High Street banks - nowhere.
The shadow and promise of the Internet hang over every store. The sweeping changes now afoot will change the face of shopping and retail management alike. One of the most successful web sites, Dell Computer's round-the-clock PC store, represents a more powerful trend still: the elimination of the middleman. Many others are seeking and will seek to cut out retailers and distributors alike. The Net adds more muscle to a threat which can only intensify.
Many retailers have recognised the danger and taken sensible steps, like opening their own experimental shopping sites. The traditional retail management structure, with its hierarchical pyramids ficed ideas, is ill-suited to this new experimental world. But the technological revolution also offers the chance to create flatter structures, linking everybody in stores and head offices on Intranets. All can share, not only information, but ideas, expertise and experiments - instantly, and in real time.
This collaboration will be badly needed to exploit the still uncertain (but vast) potential of on-line shopping, and to develop enticing store formats and operations that will tempt shoppers away from screens into real shops. But the electronic share must surely rise. Since newcomers will certainly grab rich shares of these new electronic markets, that's a challenge to which established retailers must rise: or else risk redundancy themselves. Consultant Michael de Kare Silver has written a masterly account of the implications for retailers. In E-Shock he provides them with ten strategic options:
• They can simply supply information only, using a Website which deliberately sells nothing.
• They can 'export' the business, retaining their traditional outlets, but expanding into other geographic or rich markets over the Web: Oxford bookseller Blackwells has followed this route, investing in a major expansion of its existing wholesale business and venturing via the Web into the US market.
• They can try to subsume electronic shopping into the existing stores. Customers will order the requirements electronically, but come into the stores to pick up the purchases and perhaps make others.
• They can be more ambitious and see what is plainly true: that the Web is another channel altogether. Full-blooded development of the new channel may well lose business from their existing channels. They can, however, hope to offset the losses by attracting new customers.
Cannibalising yourself is more comfortable than being eaten by others. British supermarkets, with their palatial sites paid for by high margins, are already being challenged by local operators who are offering home delivery and who can compete on price thanks to their almost total lack of overhead. The policy of opening another channel, though, is less ambitious than that of attacking on all fronts - call centre, home delivery, e-mail order, Website, stores.
THE TROUBLE WITH STORES
What to do with the latter, though, presents a problem. The pursuit of other channels will inevitably diminish store traffic. Silver describes a 'mixed system' solution. You concentrate on a 'flagship' site (perhaps a mall) which supports an on-line plus home delivery service which is based away from these centres - 'shopping, leisure entertainment meccas which will reach out into wider catchment areas'. Part of the entertainment, no doubt, will be Internet shopping.
In some cases, though, the shops will disappear altogether as the Net takes over. The Automobile Association's 142 High Street shops vanished in this way. Other shops will certainly follow in these disappearing footsteps. Others still will dwindle into kiosks with Internet access. But the pace will be set by the dedicated e-sellers with nothing but networks and home delivery: 'Unencumbered by existing physical sites and with a lower cost because these organisations are learning how to take advantage of their position in the market'.
Silver's other two responses are more speculative. Can retailers have the best of both worlds, combining Internet and physical locations in 'a store for the future'? Can conventional stores 'revitalise and buck the trend'? There are very few examples from other industries where established leaders have been able to give birth to new ventures in the same field and to become leaders in the new technology as well. The example of Woolworths in the US is deeply discouraging. Confronted by the disruptive technology of the discount store, Woolworth set up its own Woolco chain, while continuing to invest in the traditional business.
The Woolcos eventually all closed down: and so, eventually, did Woolworth, becoming a sports shoe chain under a different name. To our eyes, the choice is starkly simple. Either carry on as usual, and lose first profit and then the business. Or plunge like an eager newcomer into the Web world, setting up the business as a separate operation with its own finances and management. Existing stores can be maintained so long as they earn their keep, either in their own right, or as feeds and supports for the e-commerce operation. But most conventional retailers will never reach this destination, because they are starting from the wrong mind-set.
Typically, the chief executive of one leading British fashion manufacturer, speaking in March 1999, argued that fashion couldn't be sold over the Net. Customers could look at what was on offer, but they would have to use the firm's printed catalogue to order the clothes. In the same breath, the managing director revealed that the company had badly miscalculated its offering, going for high fashion when the market turned to more classic merchandise.
A printed catalogue is an expensive hostage to fortune. Prepared many months in advance, it locks the offer into its pages, with no hope of revision. A Web catalogue, in contrast, can be augmented, changed, extended on an hourly basis. Switches in fashion therefore hold far less fear. Moreover, Web ordering is simplicity itself: the Web catalogue can have moving pictures and sound: and its pagination is infinite. What would be hopelessly unwieldy on paper is wholly and easily manageable on the Web.
The users only see the page that is open before them. Clicks on the mouse send the user to the next wanted page with total efficiency. As time goes on (and not much time) people will look automatically at Websites each and every time they want to choose between alternatives, to find bargains, or just to window-shop - literally and electronically, to browse.
Part of the reluctance to embrace e-commerce may stem from the over-hype that probably dates back to The One to One Future, a book writen by Don Peppers and Martha Rogers. Their concept was revolutionary: the market of one. Companies would use the technology (as they certainly will) to tailor individual sales to each one of customers numbered in thousands, tens of thousands and more. The authors were simply ahead of their time. Apart from anything else, customers were then uneasy about giving their details to suppliers. That no longer applies.
THE ACTIVE CUSTOMER
The Net fundamentally changes the position of the customer, from passive to active. Where people have been fed everything willy-nilly, from advertising to products to outlets, they can now take control of what they buy, where they buy it, and how. A consumer revolution is under way that dwarfs all previous developments, greater in its impact than supermarkets, discount stores, department stores and shopping malls put together.
Writing in Fortune, Gary Hamel and Jeff Sampler explored a long, convincing list of the subsequent changes. This is not prediction, but an account of what is happening right now. The mass market customer is being unfaithful to the mass media which fed the customers with product and service ads along with the entertainment. 'Online customers simply aren't going to be pushed around', say the authors, who cite an extraordinary company named Yoyodyne and its 'permission-based marketing'. In 1997 a million players signed up to play Yoyodyne games and contests and thus became customers for client Websites.
Not surprisingly, Yoyodyne has been bought by Yahoo!, the leading search engine. Other bright ideas have also put cuetomers in the driving seat. CompareNet lets them compare and even discuss competing products in which they are interested. Junglee and CBB act as giant comparison shoppers to guide customers to the best buy. Or they can actually make their buy through an on-line auction. The traditonal definition of shopping has been thrown out of the window - and so will conventional retailers who fail to keep up with the change.
This is not just a matter of investing in the new technology. The experiences of one of the greatest names in retailing are a powerful warning. Marks & Spencer built a brand that seemed well-nigh invincible until, in 1998, profits went sharply into reverse on sales that barely inched ahead. Yet M&S has an ardent fan in Gary Hamel, the most incisive critic of big-time corporates. He placed M&S high in his management pantheon - lauded for its pioneering innovations, above all its development of supplier partnerships.
The business has long rejoiced in being a 'manufacturer without factories', whose suppliers, like those serving Dell, are an extension of the customer's business. But Dell is not a manufacturer without factories. It is a 'retailer without shops'. As more and more manufacturers make this transition, finding direct ways to the customer, retailers will face a painful choice: do they take on their suppliers in mortal commercial combat by going back down the supply chain? Or do they subside gently into oblivion?
The answers are plainly not obvious to retailers themselves. In E-Shock, Silver quotes a chief executive, Robert Tillman of Loew's, who believes that 'retail saturation combined with growth coming in electronic commerce represents the biggest challenge facing our industry today. How do we grow shareholder value when we can no longer grow what we are doing and what is growing is something we are unfamiliar with?'. The paradoxical answer is that only by becoming, thinking like, and acting like 'retailers without shops' can tomorrow's retailers hope to make their stores succeed .
read all 70 gurus with one feed read all Read all media
