In a different life, I worked extensively at Bain & Co. in the supply chain and retail industries. It put me on the radar of Amazon.com and various VC firms, as the e-commerce wave was arriving in the late 1990s.
I’m thinking about those moments as I read a WSJ article on how Target has fired its CEO, joining companies such as J.C. Penney, American Eagle Outfitters, and others looking for new leadership. Those jobs will not be easy to fill. It’s always tough to make money in retail, and it’s even harder because of the Internet.
The economics of retail are difficult: they’re really like airlines with tremendous fixed costs. A retailer has to pay for a lease, build out a store, stock a store with inventory, and then, staff it.
It is tough to make money in a high fixed-cost business, as you are really reliant on volume. Airlines obsess about “seat fill rate,” hotels focus on “percentage of rooms rented,” and consulting/law/banking firms need “high labor utilization rates.” The biggest driver of profits in those fixed cost businesses is volume. So, retailers need a lot of foot traffic.
Well, e-commerce has taken away much of that volume. I don’t know about you, but I personally hate shopping and buy everything I can via e-commerce. I have diverted my spending way from retailers.
I think you can say similar things will happen to any business that needs a lot of warm bodies to make their revenue models work and which risk disintermediation via the Internet.
It has been said that “software is eating the world.” I agree. You only have to look at retail as a prime example.
Interesting read. I work as both a real estate agent and a travel agent. In Real Estate, my buyers basically tell me what they want to go see because all the listings are on the internet. They do much of the legwork themselves by culling through the automatic daily email feed I send them. Just a decade ago there were piles of paper listings to go through to find property. Now it’s electronic.
As for my travel agency business, there is no brick and mortar store. They closed up once all the internet travel agencies appeared. I’m guilty of that because I worked for many years at internet travel software companies. But what I’m finding of late is people are becoming “tired” of the internet. There’s just so much information to be had that they obsess over the myriad travel websites and wonder if they re making the right choice. It’s not uncommon for someone to spend 4 or 5 hours checking and researching websites and reading reviews to find a deal. There’s a fair number of people moving back to traditional travel agents to help make the decisions for them. There will always be a better deal somewhere out there, but a true travel professional will do their best to get an acceptable price and the client will know the decision is one based on the agents experience. Many times it will be equal to the internet prices they find anyway. The only difference is the margin is slightly less for the tour operator, hotel or cruise line having to pay me a commission for their product vs. a consumer buying directly on their site.
We’re 20 years in, and eCommerce is still well under 10% of total retail.
Yes it’s growing more quickly, but this post feels a bit like the quip about Mark Twain’s death.
Jo, you’re assuming that retail and eCommerce are always an either/or relationship. I might want to try on the jacket and not pay shipping fees, or pick up the laptop and not pay a restocking fee.
One way for retailers to get foot traffic is to use the stores for the things they are good at and to improve service levels significantly.
have to disagree with you on this one, Rob. same store sales is down at nearly all major retail chains, which has led to many closings.