Retail in 2030

Today, we’re going to explore what the world of retail might look like in 2030 (an aribitrary date in case you are wondering :)) by digging into the implications of the following 5 stories.

  • Supercell’s Clash Royal game has earned 1 Billion Dollars in its first year through in-app purchases.
  • An interesting 20 minute conversation between 2 New York investors — David Tisch and Andy Weissman — and Jeff Raider, the co-founder of Warby Parker, the online eyewear retailer.
  • Amazon shut down Quidsi and unprofitable brands like Diapers.com. Everything is going to be consolidated under Amazon.
  • Amazon acquires the Middle Eastern version of Amazon.com — Souq.com (Souq is “marketplace” in Arabic)
  • Amazon is building stores for furnitures, appliances and the like

Industry sizes can surprise us. For example, the size of the global music industry is $42 Billion. With the sheer volume of news cycles dedicated to the likes of Apple Music, I expected the size to be larger. The global advertising industry is worth $600B — that was probably less surprising. The automotive industry, on the other hand, comes in at an estimated $1.5 Trillion. However, the size of the global retail industry made me pause.

$23 Trillion.

So, I thought we’d talk about retail today. And, since this is a tech newsletter, we’d start with online retail. The first step is to go back to our 4 core business models.

The internet turbo powered our ability to create businesses around incidental/one shot purchases by enabling two things to happen — 
 1. Easy storefront creation. Every one of us can set up our own storefront with ease. No crazy licensing process required — just go and register a website. 
 2. Easy payments. We can easily enable payments thanks to PayPal, Stripe, et al.

And, thousands of entrepreneurs have create shopping blogs, projects on the likes of Kickstarter to take advantage of this. But, there’s a downside of this model. There are literally millions of such storefronts to choose from. So, once again, retailers have a few choices at hand to solve this.

I. Create an addictive experience. The first choice is to create an addictive experience that has you coming back. This is hard to do if you are a small retail blog. Some manage the occasional viral kickstarter project. But, it speaks to the key challenge of selling on the internet.

The masters of this model are games. They suck you in with a free, addictive, product and keep up-selling you. Supercell and Pokemon Go are classic examples of this and have both made upwards of $1 Billion.

II. Build a great brand (and combine it with solid economics). Building a great brand on the internet is hard. But, doing so, thus, has immense value. And, Warby Parker have done a fantastic job building a brand. They focused on a niche and spent all energy in developing a distinctive customer experience.

However, that’s not all. They did all of this by being much cheaper. This is something internet brands can easily do as you don’t have to deal with the many layers in the supply chain.

That said, I need to re-iterate how hard it is to build a brand. Amazon failed with Quidsi and Diapers.com brands. They probably intended to fold them under the main brand anyway. However, even at that scale, it isn’t easy to get customers to think of Diapers.com as a destination versus searching for diapers on Amazon.

III. Create a subscription. I think of this as “The Birchbox model” — a monthly box with a collection of curated goods. These kinds of boxes include all sorts of products — clothes, accessories, toys and comic books. There are some very successful, lucrative businesses that have been built on subscriptions. And, a great example of this is Dollar Shave Club.

All of this gives us a way to think about success in online retail.

As you can see from the image, Amazon is in a privileged position. It combines the strength of a brand and a subscription. This has led to Amazon accounting for 30% of US digital sales on its platform. Roughly half of these sales come from 3rd party merchants. So, in business model speak, Amazon is actually a combination of 3 business models — a subscription for Prime members, one shot purchases for all and a tax for third party retailers (as they charge a percentage of revenue).

That’s just in the US, however. What if we apply this to the entire planet? Let’s imagine that, by 2030, global retail sales are 30 Trillion dollars. Let’s assume a third of these sales are online (conservative prediction) — that would be 10 Trillion dollars. Amazon could easily stake a claim to capture 20%-30% of that or 2–3 Trillion dollars on online sales alone. Hence, the acquisition of Souq.com to cover the Middle East. We’re witnessing the beginnings of global domination at a scale never seen before.

But, retail is still a small portion of offline sales. And, Amazon’s ambitions are not just online. While multiple big box retailers are shutting stores down, Amazon is actually just in the process of creating stores. How does this make sense? Why does this make sense?

To understand this, we need to go back to economics and the world of supply chain.

This combination of a physical and online presence is an omni-channel approach. I have an entire post dedicated to why this makes sense. But, essentially, once you get really big, it makes sense to distribute products according to the nature of the product itself. Online retailers have cost advantages when you deal with expensive, highly uncertain products and physical retailers do better with low value, low uncertainty products.

Put simply — it makes no sense for Amazon to ship toilet paper. The cost of shipping exceeds the value of the toilet paper. So, it is best for Amazon to have a store near you where you can collect that stuff. While they haven’t cracked the code on groceries yet, they’ll be able to do that once they have physical stores all over the place (there were rumors they’d be buying American Apparel and, again, that makes sense).

I say that with confidence as Amazon has treasure troves of data that can help predict demand to a degree no other retailer can. That results in a massive cost advantage (poor prediction = higher inventory = higher cost) as they can create a tailor a supply chain that fits. For example, an Amazon electronics store will only have the best selling electronics with everything else a quick online order away. Putting both their online and offline pursuits together, this new flywheel or virtuous circle that describes what Amazon is doing.

Amazon’s formidable data advantage means they can weave technology advances beautifully. Imagine augmented reality glasses with which you are able to read Amazon reviews for products you are looking at.

The sheer size of the retail industry means there will always be space for the likes of a Warby Parker and niche brands that do a great job connecting with consumers. However, for most of the rest, shopping is often about defaults. And, Amazon wants to be that global default experience.

So, that takes us to my retail in 2030 prediction — I expect Amazon to be the first company to notch revenues of $1 Trillion by 2030.

Notes: In case you were wondering where I pulled market sizes from — retail, auto (I approximated average cost of a global car to be $15000 — based on roughly half the US average), music and ads.


This is edition 4 of a weekly technology newsletter called Notes by Ada. If you like this and would like free weekly notes via email, please just subscribe here.