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The End of History or Retail 3.0?

November 23, 2011

Ever since people started shopping on the internet, commentators and forecasters have been predicting the death of retail as we know it, much as the self-service format (Retail 2.0) largely killed off the full-service model (Retail 1.0) in the last half of the 20th century.

The dot.com crash gave pause to that idea and a less radical consensus has formed around the view that the internet is “just another channel”; retail will become a stable world of integrated clicks and bricks. There’s an almost eerie parallel to Francis Fukuyama’s notion of two decades ago that history was dead.

It’s perhaps worth pushing the parallel even further: Less than ten years after Fukuyama’s book was published, history came back with a vengeance. And if you take a look at the data on retail you’ll see that in category after category the internet format — Retail 3.0 — has accounted for essentially all of the growth over the last decade, if not more.

The writing is already on the wall for some categories. For example, scarcely a single new book store has opened since about 1998. In computers and electronics — the Apple Store notwithstanding — the internet has captured more than 40% of sales and incumbent stores are so vulnerable to smart-phone-based comparison shopping that they are rapidly becoming nothing more than showrooms for internet-only retailers.

In many categories, online retailing is advancing much faster than the last format innovation — self serve — did the last time around. That’s partly because having to build out stores is not a constraint to growth in the virtual world.

But it’s also because the internet growth is starting to affect the economies of scale on which traditional retailing relies. Every time an item is sold online, another unit of volume is lost by a self-serve store somewhere. And as they lose that volume, their economics become more marginal, the pressure to protect profitability by raising prices increases, and the risk of a doom loop deepens.

No doubt some will argue that consumers will always want the in-store experience and that may indeed be true in some categories. But ask yourself this: are you hearing a refrain of the mom and pop grocer’s pain in the 1950s? Or the dedicated appliance store owner in the 1970s? Or the self-deluding rationalization of a 1970s gas station attendant? All of these “traditional” formats have all but vanished — there was no defense for those who failed to adopt the new self-serve formats.

Take apparel: who would have thought ten years ago that Zappos could build an online business which prides itself on delivering not just low prices but an excellent customer experience, including service? Zappos’s online-only retail format is so efficient that it can offer very competitive prices, free shipping and free returns of as many shoes as you like, at a stroke removing the biggest problem with online apparel shopping: “Does it fit?”

In the future will our daughters meet at the mall to shop on a Saturday or instead at a friend’s house or a fashionable café to compare what they got in the post that morning? Perhaps they already do…

Ken Favaro and Nick Hodson

Ken Favaro is a senior partner in Booz & Company’s New York office and the global head of the firm’s Enterprise Strategy practice. Nick Hodson is a partner at Booz & Company and is based in San Francisco.

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From → Retail

One Comment
  1. An excellent piece on on-line retailing. The only question is, what is the next form of retailing going to look like?

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