It is only a matter of time before the internet will undercut almost every traditional supplier of consumer services and products, writes David Birnbaum, adding: The only survivors will be the few brick & mortar and e-commerce companies that provide real value.
They are telling us that our industry is now involved in an existential war between e-commerce and brick & mortar and that the winner will dominate the retail industry for the next 50 years.
That is garbage! The reality is far different.
Almost every failing brick & mortar retailer has tried e-commerce and each has failed for the same reason. They have done a poor job.
More to the point, there are any number of brick & mortar operations that continue to do well as brick & mortar: In the US, think Walmart and Target. In Europe, think Zara and H&M.
The issue is, and never has been, where you sell. It is rather what you sell; how you sell; and who you sell to. In this regard, the retail industry remains wedded to the same three tenets as always:
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By GlobalData- Know you customer;
- Determine what your customer wants;
- Give it to them.
In today’s world, success is all about tools.
My daughter Emma, my partner and specialist in the new industry, told me a story. A woman began to receive e-mails from one of her favourite stores advertising babywear. After a few weeks, her parents complained to the store. “Our daughter is 15-years old and has no need to buy baby products!”
You guessed it! Their 15-year old daughter was pregnant and due to big-data, AI and sophisticated algorithms, the store knew before the parents.
A simple case of know-your-customer, determine-what-your-customer-wants, and-give-it-to-them.
This dramatic change is but a small first step in the internet revolution. The latest and most important step is the return of value for money.
We are taught that the formula for optimal profit is Cost plus Value equals Profit (C+V=P). The question is, how do we define value? Does the product (or service) actually provide real value, or is it only perceived value based on advertising? And if so, does it matter? In the recent past, real value has been replaced by perceived value, until we have reached the point:
Product Cost = $1
Advertising Cost = $10
Product price = $100
We now live in a world where optimal price is defined as whatever the market will bear.
The internet has changed all that.
We think of the big internet winners as Google, Facebook, LinkedIn, Instagram, Twitter, etc. Yet as successful as these companies are, they are but tools, just as Amazon, Etsy etc are but the middlemen. Both groups are the necessary support of the true winners in the internet world: The service and product providers of the new value for money economy.
- Think Netflix vs the traditional TV and movie studios
- Think Ryanair and Asia Air vs the legacy airlines
- Think Airbnb vs the traditional hotel chains
- Think importing pharmaceutical products from Canada
- Think internet based legal advice and medical diagnosis
The list increases every day.
Take Netflix:
- Why would anybody pay $10 for a single movie ticket when for $12 a month Netflix offers a large and ever-increasing number of both movies and TV programmes available to its subscribers and their families and friends?
- Why would a TV or movie packager approach a traditional studio when Netflix has become the go-to market for TV programme and movie production?
Netflix has cut out the $10 advertising cost because it relies on the many many online reviews and interviews.
In this sense, the internet is simply the latest step in the disruptive innovation process. Just as the advent of television forever reduced the value of the movie business; just as the advent of cable forever reduced the value of network television; so too has the new e-commerce world reduced the value of cable.
The difference is that while past disruptive innovations drastically changed products and even industries, the new value-for-money e-commerce innovation changes everything.
Think garments.
Our industry is the prime example of the buy-for-one-sell-for-ten mentality. There are many reasons for this:
- Brick & mortar by its very nature increases overhead cost;
- Markdowns take the lions share of markup;
- Brand importer markup more than doubles the cost even before the retailers add their own markup;
- Unnecessary personnel adds to the cost burden.
All of these are important. However they are secondary to the single most important factor:
- Retailers increase markup because they believe they can, provided they spend enough money on advertising.
The new value-for-money e-commerce industry is now in the process of burying the old brick & mortar retailers:
- With no physical stores, they avoid the added overhead cost;
- With purposely limited production, they avoid markdowns;
- With no-one between them and the consumer, they avoid the double markup for the brand importer;
- With a bare minimum number of employees they remain lean and avoid unnecessary cost burden;
- With reliance on consumer recommendations through social networking, paid advertising becomes not only unnecessary, but an obstacle.
It is only a matter of time before the internet will undercut almost every traditional supplier of consumer services and products. The only survivors will be the few brick & mortar and e-commerce companies that provide real value.
There are only two temporary obstacles holding-back the rising tide of change.
1: The old generation neither understands the computer world nor trusts e-commerce.
2: Governments making serious effort to block change.
Both are but temporary restrictions. Old people pass away as do old-school politicians.
Imagine a group of intelligent Jurassic period dinosaurs investing in the La Brea Tar Pits. The investment made sense until the moment the climate changed. Even as the change was taking place, the giant dinosaurs still looked at the tar pits as a refuge. The good news is that 200 million years later, paleontologists have access to a wonderful bunch of fossils giving a better understanding of an earlier world, now dead and gone.
There is little difference between the dinosaur fossils we can see today and the major corporations that will become the fossils of tomorrow. They too will provide a better understanding of an earlier world, equally dead and gone.
