Internet and the Decline of the Store

Innovation brings a continuing pattern of change, where each successive change leads to yet another change. The greater the innovation the greater the number of changes and the greater their impact. Most change is unforeseen, because innovation brings to light flaws in other seemingly unrelated areas which can now be remedied.

The home computer was designed to compute, which is why it is called a computer. However, from the outset, few of us ever used our computers to compute. Rather the PC was seen as a more efficient typewriter and a better more compact file cabinet. These changes lead us towards the paperless office, which in turn has all but destroyed the market for typewriters as well as seriously curtailing the market for file cabinets; and ultimately has reduced the demand for the dedicated office itself, by bringing about the home-office.

Similarly, the internet was developed to allow university researchers to communicate information easily from one location to another, and doubtless for a minority this remains its prime purpose. For most of us, however, the internet has replaced, the telephone, television, the encyclopedia, the CD and DVD player, the movie theatre, and possibly even the book. For a few games addicts, internet has replaced real life experience itself.

The internet has created industry leaders for industries that ten years ago did not even exist; such as E-bay, Google, Facebook, etc. At the same time the internet has all but destroyed traditional industries such wired communication, book and music publishing and book and music retail. It has all but destroyed the entire copyright concept: All unforeseen changes

We in the garment industry have yet to accept, let alone capitalize on the innovations of the internet. Frankly the whole business frightens us, and with good reason because if recent experience is any guide, the changes wrought by the internet may ultimately result in the disappearance of many of our companies and with it many of our jobs.

Having said that, I do not claim predict the future. However, I can state with confidence that the future global garment retail industry will be to a large degree internet based and very different than the industry that preceded it.

What appears below is just one possible scenario.

The current store based garment retail industry has fundamental flaws.

It is very difficult to get into, requiring substantial capital and because of that only a very narrow range of products can be sold in a store.

Once in, it is very hard to stay in, because by its very nature our industry is in a constant state of consolidation. The result is that many people with potentially marketable products have little opportunity to market those products

The greatest potential flaw is that as the retail-store group becomes ever and ever bigger, it may be providing less and less value to its customers.

high entry level:The retail store requires a substantial initial capital outlay.

·High rentals. The better the location the higher the rental

·Labor intensive

·High costs of decoration and maintenance

·Large opening inventory

limited products:The retail store is circumscribed geographically.

Its customers are limited to those who are willing to travel to the store. The more special the product; the more limited the customer base; the less likely that product can be sold in a store

Constant consolidation:

·To increase sales, the company must increase its customer base by opening new stores.

·The retail company has large number of joint costs which are borne by the group as a whole but which can be spread over the number of branch stores in the group. The greater the spread, the lower the cost to each branch store

§Design and other areas of pre-production.

§Advertising and promotion

§Logistics and distribution

·The joint-cost savings increases with the addition of each new branch.While the addition of store #2 may not generate enough business to make that store profitable, the addition of the same store at the same location, generating the same volume of business may be profitable if it were branch number #1000.

Decreasing value to its customers:

The measure of retail value is the degree to which the vendor sells the products the customers want to buy at the lowest possible price

Traditionally the greatest retail value came from the universal store that sold everything to everybody. Far from being a retail giant, the apotheosis of the universal store was the 19th century small town dry-goods store. Its products included everything its customers could not make themselves — from baking flour to hats and clothing fabric. Its market was everybody because it was the only store within traveling distance.

The 19th century dry-goods store owner personally knew each of his customers. This allowed the store owner to tailor his stock specifically to meet his customers’ needs. For example, Big Jim Doyle wore a size 9 hat (European size 72). No store, then or now, stocks a size 9 hat.However, 125 years ago when Big Jim needed a new hat his local dry goods store owner would cheerfully order one from the maker.This was only good business. The customer was kept happy and it was a guaranteed sale.

With the move from single store to multiple branches, it was no longer possible to understand, let alone meet the needs of each customer. Meeting the needs of the individual has now been replaced by first estimating the needs of the average customer and then meeting those needs. As stores moved from local, to regional, to national, and finally to supranational, the variance between the individual and the average has grown to the point where the whole procedure may have become irrational. Retail executives have now adopted the dubious concept of universal design — the belief that a style that tests well in Düsseldorf will sell equally well in Denver, Dacca and Dubai. To the degree that that the supranational retail group, meets the needs of the average everybody, it fails to meet the needs of the individual anybody. In today’s retail world Big Jim Doyle remains hatless.

At the same time, the mark-up required to maintain the store has reached the point where the retail price is now 6 to 10 times first cost.

These are the flaws inherent in the retail store. Internet as an innovation has brought these flaws into the open and offers an alternative.

There are two possibilities:

1.Universal design is a valid concept, in which case the large retail store groups will expand to take over the internet.

2.Big Jim Doyle buys a hat.

This is how it will work.The Big-Jim-Doyle hat market — fat headed men —is very small indeed (contrary to the belief of some), perhaps one in a million or 0.0001% of the total population. If you open a store in a large urban center such as New York City, and assuming you had 100% market share, you could expect possibly 8 customers. To serve your 8 customers, you would have to rent space, decorate that space, hire staff and pay for your opening inventory, to say nothing of the joint costs such as design, other pre-production, advertising, promotion, logistics and distribution.Definitely not a good proposition.

However, on internet the percent of total population remains the same, but the size of the market changes from 8 to 6000, because the total population has changed from the 8 million people living in the city of New York to the 6 billion living on the planet Earth. Furthermore the internet virtual store has far fewer costs than the physical store and therefore can offer a lower price. With the larger market, the virtual store can buy the products it requires a reasonable price. No hat maker will accept a special order for 8 hats. However, an order for 6000 hats is no longer even special, it is real business.

At the end of the day either universal design is a valid concept and therefore as the market expands it remains homogeneous —what sells one place will sell everyplace — or as it expands geographically the market becomes increasingly fractionalized. Either people are now buying the same styles everywhere because they like what stores are selling, or they are buying the same styles everywhere because they have little choice.

If the market is indeed fractionalized, we will see an enormous number of new internet-based retail entries, geared to provide special products to special customers — each with an almost infinitesimal market share of an enormous market.I personally believe this is the direction of the future retail industry because I believe we are now living in an era when the average consumer is becoming an ever decreasing minority and where the special customer is fast becoming the norm.

Caveat venditor

Whatever happens two point are clear:

·Internet will bring exponential change to market size.

·Internet will bring an exponential reduction to the cost for sellers to enter that market.

I cannot predict the future.However, I can state with confidence that the retail market leaders of tomorrow will be very different than the market leaders of today.

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