Retail feels the heat of change

Why does retail feel the heat of change? Because it’s right in the middle of it. Still, change takes time. Thus, your timing is important.

For obvious reasons, retail always feels the heat of an economic downturn first. Consumers start to slow down their spending in anticipation of stagnating or declining income. When inflation eats into their pockets, they tighten their belts.

Now, one way or the other, retail has been in crisis for well over a decade. There is a solid long-term trend towards online commerce. The pandemic accelerated the shift towards online retail before the pendulum swung back. But this swing didn’t benefit brick-and-mortar retail. As Alexander Graf put it:

No matter how bad things are in e-commerce – things are worse in bricks-and-mortar retail.

The crisis, however, shakes out the weakest players in both sectors. In June, German fashion retailer Gerry Weber announced the closure of 122 stores. Gerry Weber is a fashion brand that went direct-to-consumer (D2C, or DTC), but with physical stores. Turns out that this approach isn’t sustainable, at least not at the scale chosen by Gerry Weber.

This kind of shakeout is business as usual in any industry with business cycles. What’s special in commerce is the depth and width of structural change. In his 2023 slide deck, Ben Evans states that

every market and value chain is being remade around the internet.

As he explains, this reshaping is about real estate as well as advertising, or marketing in general, it’s about (retail) media, logistics, pricing and discovery – everything is changing. Retail feels the heat of change because it’s right in the middle of this change. Every value chain finally ends with the consumer, and retail covers the last mile.

At the current point of the business cycle, we’ve witnessed some slowdown in e-commerce (that some people prefer to call e-commerce winter). But there are also accelerating forces at work: when brick-and-mortar commerce declines actually faster, the share of online grows even without own contribution.

Blurring the lines

At some point, the transformation towards e-commerce will lead to tipping points. Beyond those, many brick-and-mortar retail models won’t be sustainable. Cities that heavily rely on physical shopping as their business model will feel the heat as well. We’ve turned our inner cities into overblown retail machines, making them vulnerable to crises.

It was a model optimised for car commerce. But that’s not as efficient as e-commerce.

In the past, we saw small, independent retail stores supplanted by bigger chain stores, which made our cities more and more uniform. Now, these chains themselves are being replaced by even bigger, sometimes global online players. The internet allows for scale effects of previously unknown magnitude. And it blurs the lines between formerly disparate categories.

Amazon, for example, has both a big media business and is the world’s largest advertiser. It buys and sells advertising. Or is it really advertising? As Ben Evans writes:

Everything below P&G’s COGS [cost of good sold] line is up for grabs. Are Amazon Ads advertising, marketing, slotting fees, trade dollars, discounts or price discrimination? ‘Yes’.

Retail used to be the answer to the question of how to reach consumers. It still is, but now it has a lot of new competition. As always, this enforces competitive differentiation. As long as the long-term trend towards online commerce prevails, physical retail will see further consolidation. It’s hard to survive in a market that’s constantly shrinking – at least in relative terms, but occasionally also in absolute terms.

Back to basics

Going omnichannel only makes sense if it is done consistently, and that is difficult for players without deep pockets. Those who can’t go big need to carve out their own, profitable and sustainable niche. A significant differentiator used to be the consumer experience, but in times of inflation, stagnation or recession, it has lost a lot of its mojo. We’re back to cold, hard value.

And value means brands, in the original sense as markers. To survive, retailers need to strengthen their own brands and rely on the right selection of brands to sell. Granted, that’s the basics of retail and has been for ages. What’s changing is that the brand experience now takes place in commerce. Brand marketing and performance marketing have married – another line that’s blurring.

Retail is still retail

In abstract terms, not much has changed: retail is still retail – the sale of products to consumers. But if we look under the hood, the whole machine is taken apart and reassembled. Recent technological trends, like Web3, the metaverse, generative AI, or spatial computing, pale in comparison. Yes, these trends will impact retail, one way or the other, sooner or later. No, these trends won’t change retail as fundamentally as the internet has done for almost three decades now and continues to do.

  • The Apple Vision (and whatever other players come up with) may turn into a new interface for commerce, as mobile phones have since the arrival of the iPhone. There is a lot of potential, and a lot of work to do. Worth experimenting with, and keeping in the backlog, but I wouldn’t bet the farm on it. Not yet.
  • Generative AI, and machine learning, already made inroads into e-commerce stacks, for optimising product display pages and stuff like that. An online shop can integrate AI with less effort than a brick-and-mortar store. We can view it as an efficiency play, or as opening up new creative avenues, but it won’t revolutionise commerce. Worthwhile to keep investing in though.
  • The metaverse is now in a kind of limbo, neither hell nor heaven. For now, this is a revolution postponed. In the hype cycle, GenAI ate its lunch. On the hardware side, everyone is waiting for the Apple Vision. Always a fuzzy concept, the metaverse needs a reboot.
  • Web3 has faded into the background, but may still have a considerable impact on retail. How exactly the next iteration of the web is going to materialise is an open question. However, building brands around communities (or the other way around) will undoubtedly influence retail.

Change takes time

The fascinating thing about the internet is that its potential impact on industries like retail was clear from the very beginning. The basic trends were established early on and have been stable for almost three decades: the long-term exponential growth of e-commerce, the unbundling and re-bundling of the old retail system, the changing media landscape, the logistics revolution, and much more.

Still, change takes time. Thus, timing is important. Retailers run the risk of being too early, or too late to the party. The best approach is to always place and hedge some bets. Have an opinion about all these trends and their impact on your business. Do some experiments and learn. Be ready to invest more if you spot the opportunity. As we approach the fourth decade of the digital revolution, this is true for every retail business, regardless of size or heritage, digital native or not.

Last updated on October 18, 2023. Photo by Toa Heftiba on Unsplash