Richard Hui
Shopping — both online and offline — is a great luxury of the modern era. People can enjoy a great selection at lower prices and shop from the convenience of their home, while still having the option of going to a local mall or retailer to peruse the aisles for instant gratification.
But consumers can’t have their cake and eat it, too, and the retail world as we know it today can no longer give it to them.
Retail Will Change Forever
Technology is killing the traditional retailer. Victims will include those selling commodity brand-name-type products like consumer electronics, appliances, sporting equipment and furniture, and may even include those selling consumable goods.
Price wars, combined with technology shifts, will eliminate national, regional and local competitors who just can’t keep up. Many of today’s vendors will cease to exist as online shopping takes larger shares of all sorts of markets. Just look at the trends in companies like Best Buy, Staples, Radio Shack and Sears.
Burdened by physical infrastructure, many of today’s in-store retailers can’t escape the online gravitational pull that eats at their business despite their investments to adapt.
The ones that remain will only be the biggest and the best. Amazon will succeed in taking over the online space, and Walmart will be the survivor of the in-store/online model, while other online niche competitors find a way to earn a living.
The Transition Phase
In this new environment, original equipment manufacturers (OEMs) that previously had their products on display in local channels lose their ability to provide touch-and-feel access for the consumer.
To address this gap, OEMs will pursue a store-within-a-store concept, presenting their products side by side in the new “showroom” environment similar to concepts seen in Asia today.
Consumers can walk in and browse a number of different offerings from knowledgeable staff employed by the OEM. Products will be priced at the manufacturer’s suggested retail price (MSRP), leaving retail partners free to price where they can in an approach designed not to cannibalize sales from existing channels.
OEMs are happy because their product gets moved regardless of where it is sold, while retailers enjoy touch-and-feel support for items sold in their store.
As the model develops, OEMs build a local logistics infrastructure for drop-shipping and same-day delivery, strategically placing them in a position for the dramatic shift to come.
OEMs Disrupt
As OEMs gain experience selling direct, they become more retail-focused in their thinking. A strategic move by OEMs to move to MAP (manufacturer’s advertised price) could disrupt the competitive market model. MAP pricing requires that products must be sold at a manufacturer-set price everywhere, resulting in a net price increase for all.
OEMs can then earn additional margin from direct sales over and above the wholesale price retailers pay. This new margin goes toward product promotion and further domination of the market.
Apple, Samsung, Video Game Consoles, Beats and smartphones are all examples where pricing is tightly controlled by the OEMs today.
Despite losing some sales to direct purchases to the OEM, the overall effect will see remaining retailers do just fine with better margins while continuing to draw customers based on their wide selection, service and brand recognition.
The New Retail
As prices become set by the OEM, consumers have no choice but to pay what is asked.
Lower-priced brands or non-MAP-priced products become less visible and marketed by retailers because of lower margins.
New retailers wanting to get into the market must have existing volume in order for the OEMs to engage; this will be difficult to achieve as distribution is controlled by OEMs and retailers. This limits new competition.
New manufacturers will find it difficult to drive demand because they lack marketing power. To break in, they will have to establish traction and earn their spots via social/viral marketing before they can be accepted into the mainstream.
Technology has rapidly managed to change the economy as we know it. What began as a hopeful benefit to consumers in web 1.0, that which saw competitive forces drive prices down and access to goods up, eventually will evolve into a place where we get trapped in a more expensive system that is difficult to disrupt.
In the end, the new world isn’t so great for consumers.
What Can Retailers Do To Change This?
First and foremost, retailers need to find and incentivize visionaries and technology experts to drive concepts on their behalf and develop strategy. Identifying and hiring experts from outside will save time and avoid costly mistakes. To support this, retailers should also consider forming consortiums to share learning, reduce costs and find answers more quickly.
As online players experiment and move to same-day delivery models, they further encroach into brick territory at a very up-close and personal way, upping the ante when it comes to service and convenience. The advantage of speed all of a sudden shifts to online. Local retailers need to counter this option quickly by offering similar services.
Online players don’t currently have the ability to offer same-day delivery across all their product lines, so, for now, local retailers hold the upper hand. Retailers should take advantage by establishing that position in the consumer mind as soon as possible.
With technology constantly finding new ways to encroach on local business, local stores must counter with their own investments that focus on ordering convenience and UI improvements. This will be an important piece of the consumer experience, which will help maintain loyalty and drive repeat orders.
In addition, retailers need to look at taking better advantage of their local infrastructure and partnering within their core area. Thought should be put into the question of how can retailers, with local presence and distribution, work with the new way?
This can help provide a hedge against new competition or an opportunity to evolve and work with them. By the same token, retailers with buying power could offer their products in marketplaces. Although these properties often offer lower margin opportunities, they can be viewed as another hedge and way to learn as retail evolves.
Also, the lack of data mining capabilities needs to be addressed. Many retailers don’t know who their customers are and are held back by legacy systems. As an example, retailers continue to place local ads without specific information on exactly who their customer is when they make in-store sales.
As long as this hole remains, success in the long term is going to be difficult to achieve simply because those that can leverage data in correlation to specific consumers will find a way to improve and outsell the competition over time. If they can close this gap, they uncover a golden opportunity to connect directly with their shoppers in a more customized, cost-efficient and targeted way.
Furthermore, in an almost counterintuitive way, retailers must embrace the shift to OEM MAP pricing. Band together to encourage MAP controls that offer an even playing field with enough margins for all. Use the consortiums to flex buying power while it still exists to slow down price erosion. Although still bad for consumers, this can become a transitional step to hedge against changes in the market.
Finally, whatever they decide to do, retailers must move with urgency, learn, adapt and execute quickly to avoid becoming obsolete.
What’s In The Future?
By no means has the dust settled in the fight for retail. Necessity builds innovation and companies need to find a way to survive. The local survivors will be the ones that happen to “luck” into the right model fast enough to stabilize the seismic shift that’s taking place.
No matter what happens, OEMs hold a huge chip in the game — how and when they play it will have significant ramifications on the retail landscape as we know it today.
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