These days it seems like that the popular media mostly highlights the inevitable doom of brick-and-mortar retailers and the boom of online retailers such as amazon and alibaba.
However, in doing so, it is easy to overlook the valuable lessons thought by previous disruptive innovations in brick-and-mortar retailers and what building blocks made them successful before e-commerce stole the limelight of popular media.
To do that, below, I will study these past disruptions of retailing – heavily influenced by Clayton Christensen’s theory of disruptive innovation. With the appreciation of the past, I hope to write about the future or present of retailing industry.
Before I begin, here are the definitions of common themes in this article;
- Definitions of Words Used
- The Fundamentals of Retailing
- Overview of Disruptions in Retailing
- What is next in retail disruption?
Definitions of Words Used
- Disruption, Disruptive, or Disruptive Innovation: All these words will be used interchangeably in the article below but will strictly adhere to the definition put forward by Clayton Christensen. In summary, disruptive innovation has three ingredients; enabling technology, innovative business model, and coherent value network. (Source: Christensen Institute)
- Retailing or Retail: These words are use broadly to refer to all types of retailers – supermarkets, grocery stores, etc. I realize the limitation and generalization of this approach. Thus, I hope to focus on an individual type of retailer in future articles.
- Geographical Focus: This articles focuses on the North America retailing industry. However, it is my hope that such patterns can be applied to other parts of the world.
With definitions out of the way, let me start by laying out the fundamentals retailing.
The Fundamentals of Retailing
These fundamentals of retailing can be viewed as the building blocks with which a retailer exists to add value (i-e the mission) in order to make a profit (via the profit formula);
- Mission of Retailing: The essential mission of retailing has always had four elements: getting the right product in the right place at the right price at the right time.
- Profit Formula: The profitability in retailing is largely determined by two factors: gross margin and turn.
As a natural result of free market economy, here is how the retail industry has competed to maximize profits via disruptions up-until now;
Overview of Disruptions in Retailing
First, here is an overview of past disruptions in retailing – incentivized by the free markets and with the mission and profit formula stated above. The remaining of the article will explain this summary in detail.
The Original State of Retailing
Before 1800s, retailing was dominated by local merchants who provided the full service – keeping large inventories, extending credit, repairs, expert advice. As a result, these retailers were forced to charge high prices to earn a profit to stay in business.
This era is best defined by local corner stores with behind-the-counter cashiers who would serve you a product upon request. Here, the cashier or store owner served the role of educating the consumer about a product or recommending a product for a problem the customer walked in for. This is because the radio, TV, or print catalogs were yet to be invented and used as a marketing tool.
If you wish to explore more of the retail’s history, I suggest starting with this infographic on history of retail as I have only picked “disruption” milestones from it and expanded upon below.
First Disruption – Department Stores and Catalog Retailers
The first disruption in retailing came about in the late to early 20th century in the form of department stores and catalog retailers by businessmen like Marshall Fields and RH Macy. Unlike local corner stores with high-service (of knowing you by name), these stores tended to underperform in customer service by allowing more of the self-serve shopping cart environment.
Department stores began to aggregate products under one roof as their customers could now travel via railroad to shop. Furthermore, with the introduction of rural free delivery, the catalog retailers (like Sears) began offering large catalogues of products with money-back guarantees to a good chunk of the rural population – think of it almost like a print version of what amazon offers today to its customers.
Second Disruption – Malls and Specialty Catalogs
The second disruption of malls and specialty catalogs – unlike the rest – was a sustaining innovation and not a disruption one as it was similar to department stores but offered only better products via targeted selection through a multitude of stores attracting customers to the mall.
Furthermore, with general catalogs going mainstream, many specialty catalogs began to emerge that focused on focused product lines. For an example, think of Staples Catalog (focused on business supplies) vs Sears General Catalog (offers limited business supplies).
Third Disruption – Discount Department Stores
The third disruption gave birth to the stores many of us familiar with today – discount departments stores with a subset of specialty discount stores. Whereas the previous years were dominated by “getting everything under the roof”, discount department stores began to focus on high-turnover and focused product lines. In other words, these retailers began to specialize (hence the “specialty” discount store).
These allowed the retailers to establish a brand around an expertise. For example, HomeDepot began to focus on deeper product lines for home renovation and improvement.
The enabling technology for this phase of disruption was the advent of sophisticated information systems for distribution, logistics, and ruthless vendor management.
Another important shift began to happen with consumer priced goods (CPG) companies. They began to consolidate – the bigger companies acquired the smaller one to continue growing – all of which resulted in the giant CPG companies we know today – Unilever, P&G, J&J etc.
Fourth Disruption – Internet Retailing
The fourth retailing disruption, enabled by the Internet, is now the topic of popular interest and concern among the retailing industry. Most importantly because, it disrupted the essential mission of retail – product, place, price and time – very fundamentally as it can (arguably) deliver on all of them. Furthermore, it has a potential to further optimize the profit formula by optimizing inventories, selling a wide range of profit margin goods – that is the reason why investors poured money into Amazon despite it having a net loss for more than 10 years.
Starting with the product, an e-commerce website can carry an infinite selection of items that it’s brick-and-mortar output cannot match. An overused example is the amount of books available on Amazon versus a brick-and-mortar bookstore. Furthermore, amazon is innovating rapidly with same-day or one-hour delivery (place), customized pricing (price) and shopping anywhere at any time (time).
In a nutshell, Amazon is following the same strategy as the department stores of adding more products under their roof. Amazon, was started with selling books, is now the biggest online clothing retailer in the United States.
What is next in retail disruption?
Having understood the past patterns of disruption, some critical questions emerge such as;
- Will e-commerce cripple the discount department stores just like how discount department stores crippled the department stores?
- What strategic strengths of online retailers should do brick-and-mortar stores be cautious about?
The above questions, and even online retailers, deserve an article of its own. I hope to answer the above questions and more in the future as part of my Checkout 51 project.