Ever since the first Sears catalog was published in 1888 (the Amazon.com of its day), pundits have called for the death of retail establishments. It’s easy to see why they would think that such a thing was happening—namely stores around them were closing in rapid succession. Of course, these successive waves of retail disruption (the appearance of Woolworth’s, SS Kresge, K-Mart, Wal-Mart, the advent of malls, big box stores, the birth of suburbia, online shopping, etc.) have occurred and only served to make American retail stronger and more versatile. Only two decades ago, the mere mention of a Wal-Mart coming to a town would lead to near riots as disparate groups from local retailers to unions would unite to protest. Now, Wal-Mart itself is struggling against online retail. Despite more than a century of change, disruption and repeated waves of retailer bankruptcies, the only constant is that consumer spending has increased each decade. In the end, consumers want stuff, they just want different stuff; delivered in different ways. Those who can figure out where retail is going, are set to earn excessive profits.
I started this whole adventure (Mall Tour 1, Mall Tour 2) to see what I could learn about the direction that retail is going. While it is obvious that online shopping will control a growing percentage of the pie when it comes to retail, there will be many niches in the world of bricks and mortar that also thrive—despite or possibly because of online. If you look back twenty years, Wal-Mart’s assault on the retail industry only abated when retailers stopped competing on price, and started competing on quality, selection and service instead. If online shopping will further broaden the powers of selection and service, where are the remaining niches?
I recently read One Buck At A Time the story of Dollar Tree Inc, by Macon Brock, the co-founder of the chain. I was struck by his tenacity to drive costs lower, but also to find unique products that would retail for a dollar, while costing the company a good deal less when bought in massive quantities. What is even more interesting, is that Brock had started his empire by growing a chain of mall-based toy stores, only to have the advent of big box toy retailers like Toys R Us gain the upper hand in his industry. Rather than compete directly against the big box retailers, he admitted defeat, sold out and looked for a retail concept that would not be held hostage by the box stores. It taught him that most stores cannot compete against a larger selection, and a lower cost structure. Dollar Tree does neither—all its wares are available on the internet, but no one is going to pay for shipping an item worth only $1.00. Even better, almost all wares are impulse buys, with the convenience of basic household consumables as the draw for customers. This really struck me, as Dollar Tree is a retail concept that is more than just surviving—in fact, it’s thriving against internet options. What else will survive?
That’s what I have been wondering for the past few weeks. Along the way, I’ve spent a good deal of time exploring different retail concepts. I went to the local antiques flea market. Business is healthy. These are one-of-a-kind bulky items. Despite well recognized international systems for grading and assessing wear, purchasers want to see the goods themselves in person. Next door, the local food court was humming with local produce, local prepared foods, ethnic foods. You can produce and ship from online, but you miss out on the experience of sampling dozens of products in an hour. As we moved further along in this old warehouse, we saw vintage used goods—also doing quite well. Vintage sizes aren’t always comparable with modern clothing sizes—you really do need to try them on. Here’s an epiphany, there’s a whole class of goods that can be sold online, but sell better in person. Moreover, these goods are retailed by local individuals who are perceptive to local tastes and can adapt rapidly to changes in their local community. The whole “local” movement is alive and well. The internet cannot compete with that.
What about those who cannot access the internet? This may sound stranger than you would have thought, given the proliferation of smart phones, but 7% of the population is unbanked and another 20% of the population is underbanked. Another 3% of the population is illegal. These percentages overlap, but you have many people who cannot or will not be able to order online. When you have tens of millions of customers, you have a huge addressable market that many of us largely ignore—yet by sheer size, these people represent a massive customer base. Those providing goods and services to this group will survive and thrive, especially as the economy bifurcates between those who have access to credit and those who do not.
Despite my belief in a mass-extinction event for retail and commercial real estate, I want to be clear that there will be winners. Dollar Tree is a winner, but it is all grown up. What’s the upside there? The key will be discovering the next generation of winners. I sure as hell am not setting up as an antique vendor, though many of these local retailers are more than prospering. I want actual companies to invest in. Who are the winners that are; largely immune to the internet or even supported by it? That are built for the next generation of consumer tastes? That are already at a scale so that we can invest? There is a huge wave of disruption coming. Those who can figure out the winners, will make lots of money.
To be continued…