I’ve been doing a lot of thinking about how retail is going to play out now over the next few years and how a few trends are shaping that future. I don’t pretend to have all the answers but I’ve embarked on that journey, and it’s a passionate topic of mine since I began a price comparison site back in 1998. It was a massively exciting time as everyone tried to understand how the internet would impact the retail space, then it tailed off a lot between 2005-2010, and now things are getting very exciting once again.
So thinking about the basics; if you wanted to start a retail business today with huge potential then I find it unlikely that it would be using the traditional model of opening a large number of stores across the country — with the aim to try and cover every catchment area for people wanting to buy your product. I’m not talking about eating establishments, coffee shops, or other serviced based verticals that need you to physically enjoy their offering in that location — but rather the objective of selling you a nice shiny product to take home.
Why? Capital and labour intensive with really low net profit margins. Take the example of Moss Bros (which I saw on the TV show Undercover Boss a few days ago); according to Duedil they made £109m of revenue (year end Jan 2014), with net profit of £4.4m. Now maths isn’t my strong point but that looks like 4% margin to me and seems an awful lot of work to make that. Ok, how about Mothercare; £10m (end mar 2013) and £500,000 net profit — 5% net margin. Some of the more fashion-led shops are up to just under 10%, but still….
It all boils down to infrastructure, operations, and legacy.
A manufacturer (now mostly in Asia) makes a range of products on behalf of a wholesale brand who in turn will sell to a series of distributors or into the retail brand directly. The goods are imported and then a series of lorries will transport them to a series of warehouses scattered across the country, which the retail brand / shop now has to take receipt of and find a way to divide them amongst all their customer facing retail shops and get them there. Repeat this for new product ranges and top-up orders a few times a year, factor in returns (40%+ in clothing) and the inventory issue that some shop locations may run out due to good sales while others are sitting on excess stock — and you have an interesting challenge trying to make this all efficient.
Everyone takes a cut along the way and the costs mount up.
Now rent property and invest in hundreds of retail shops, fill them with the products and staff. Make a website, have ancient EPOS systems to manage things on the back-end, and fudge a mobile-responsive site on top and/or an app that some agency has sold you as the “next big thing”. Finally get some very basic analytics going on with no-one really understanding how to make use of the data — and you wouldn’t be far away from where most retailers are these days. No wonder Amazon is running away with over 60% of e-commerce transactions these days. Oh yes.. don’t compete directly with Amazon!
I like thinking about this from the customer perspective and working backwards and seeing if this comes up with an interesting model for a new type of retail business.
To me, it should mostly start with mobile and, in particular, tablet devices that make the perfect shopping environment while lounging on the sofa in front of the TV. Smartphones are complimentary to this while you’re commuting to and from work. Native apps too, so no worrying about mobile responsive sites — in fact, I probably wouldn’t even build a desktop site beyond using it just to promote the apps.
Glossing over how those apps would look and work for now (that’s another post), we’d need to think about getting hold of products to sell. I wouldn’t want to resell other people’s brands (less profit) unless I was just creating an aggregation service, but would rather create my own brand of products. Now a forward thinking manufacturer would actually realise they could just sell directly to customers all around the world and not have to deal with retailers at all — but they’ve not built themselves this way (yet!). So I’d go direct to a manufacturer and work out a deal — ideally one that involved ordering the minimum amount of stock or arranging a just-in-time style operation.
I could consider drop-shipping but you’re now relying on a 3rd party to provide the customer experience post-purchase and I doubt they’d do an amazing job.
I’d get the products shipped to one central location (country-specific of course) and have a team of ninja’s with the latest tech to beautifully package and send through to customers — with each one being responsible for that order arriving to a happy customer’s front door. It wouldn’t be an outsourced fulfilment house, it would be built from the ground-up as an integral part of the business.
What about real customer interaction with the products?
I’ve been saying for a while that the future of high-street retail is to turn themselves into experiential places to create an amazing environment pre and post purchase. When you factor in that you don’t need to hold inventory there, then you can do wide range of amazing things and have one of everything for customers to interact with. Look at REI in the US and Canada that give you climbing walls and running tracks to try out the outdoor gear, Bonobos where you get custom measurements and personal service, and Apple of course where you can touch all the computers and get support and training afterwards. Not forgetting Warby Parker, Harry’s Shave Club, Bluebottle Coffee, Nasty Gal…
You only need a few places like this to build your brand and create an amazing experience that people tell their friends about. In fact, I’m sure they’ll make pilgrimages to visit them if they’re good enough.
A perfect time to launch a new retail brand
So many things make this an exciting time to be in. Mobile devices continue to put supercomputers into the hands of billions of potential shoppers world-wide, app-stores let you connect with them on a global scale from day one. Innovative SaaS based businesses can handle all sorts of things like payments, analytics, logistics, and team collaboration.
Marketing has got much more measurable, targeted, and innovative with so many new ways of connecting with customers. It’s still competitive and tough of course, which is why creating an amazing customer experience and brand is so key to differentiating. It’s why those understand this idea of full-stack e-commerce with an amazing brand experience are getting investors excited.
So, to recap, I think the future is about native mobile apps with a beautiful shopping experience, sourcing directly from a manufacturer with rapid turnaround times, an integrated team looking after the whole customer experience, an amazing brand, and a small quantity of experiential physical places for customers to engage with your brand, products, and value services. It’s a complete holistic view of the entire end-end customer journey — nothing less than that.
“E-commerce as a term will become obsolete in five or six years.” — Neil Blumenthal, Warby Parker