Why does retailing look the way it looks? It may sound like a silly question, but if we can better understand the forces that induce companies to behave as they do, we can also understand the forces that are changing 'the secrets of success'.
Take retailing. For many decades, the fixed-location shop struggled to hold its own against competitors including local weekly markets and annual fairs. Only when enough people were being paid in cash and living in big cities did the shop, and shopping, begin to take off.
Then a new logic began to kick in. First, you had to be in the right location. Second, you had to offer the right range and prices. If you got these two 'musts' of retailing right, then you became the shopper's first port of call. Destination-shop status conferred further advantages. You could add to your range to appeal to shoppers'
'I might as well while I'm here' instincts. So impulse purchases and range extensions (such as grocers selling toiletries or wine) became critical. Once in-store, retailers found multiple ways to influence shopper behaviour - by the ways they displayed their goods or by offering different forms of promotion, for example.
After a while, these tactics began to change people's shopping habits. Previously, they made a list of the things they wanted to buy and then went searching for them; now they flipped the process to something more like: 'I'll see what's available and what's on offer.'
So, in retailing, one thing led to another, which led to another. Moreover, retailers who rode these waves of consequence with aplomb came to dominate, reaping all the benefits of increasing returns. For example, the more footfall and sales they attracted, the better their bargaining power with suppliers, and the more able they were to beat competitors on price and maintain good margins.
Of course, it wasn't all plain sailing. Sometimes, something shifted way back in the chain of causation. The shift from the high street to out-of-town is a case in point. Retailers such as Tesco, which seized this opportunity first, found a way to magnify all its original advantages - of being a destination shop; of 'I might as well while I'm here'; and 'let's go to Tesco and see what's on offer/takes our fancy'.
If we step back and look at this evolutionary trajectory, is there a single uniting factor? Yes: shopper economics.
Shopper economics has two ingredients: the price and value/quality of the product being purchased (a sine qua non); and the costs/benefits of the shopping process itself.
Shopping around is a time-consuming exercise (unless you are on a window-shopping, exploration trip). All those drivers of increasing returns in retail - location, becoming a destination shop, taking advantage of attitudes such as 'I might as well while I'm here', or 'let's go to see what's on offer' - all reduce the total (time/hassle) costs of shopping.
In other words, retailing has evolved the way it has not because of the power and influence of retailers over shopper behaviour, but because of the influence of shopper economics over retail strategies. The strategies that stick are the ones that improve the shopper's economics in some way, either directly (for example, via discounting) or indirectly (reducing the total cost of the process).
The same also applies to niche, experiential retail theatre, except that this time the focus is on emotional/experiential ROI, rather than time.
It also explains the evolution of online shopping. Amazon beats traditional booksellers on three crucial fronts: choice, price and overall shopping costs (time, hassle). It's weaker on other areas, such as browsing and serendipity, but it has worked hard to address these weaknesses (via 'if you liked this, you might like that' recommendations, for example). So overall, its growth (along with cherry-picking of stock by supermarkets) has precipitated a crisis in the book trade.
Surprisingly, the same underlying dynamic is now being shown in completely different categories such as fashion, where traditional standalone high-street brands now find themselves facing a pincer movement from rapidly growing online brands, such as Asos.com, while aggregating department stores offering greater choice with reduced costs of shopping around.
So far, however, I've ignored the joker in the pack. The most neglected aspect of shopper costs is that of decision-making. Sometimes, these costs are negligible: a cold drink on a hot day; routine replenishment of the kitchen larder. However, in many categories (especially less frequent, higher-value and higher-risk items) the costs of researching the market and coming to a truly informed decision can be considerable.
In fact, historically, the cost of researching a better decision was so high that the cost outweighed the potential benefit. Retailers offering a wide range of stock from which to choose were the best decision-support services available: you went to the shop to find out what was available and to make comparisons. But the costs of shopping around between retailers was very high.
So consumers tended to choose from what was in front of them (back to the retailer's increasing returns) with choices based on short cuts such as 'buy the brand I know' or 'go with the people I already buy from'.
Now, however, online search, price comparisons, peerand expert-review sites are slashing the costs of such research. Increasingly, the benefits of 'more research' outweigh the costs because shoppers have quick and easy access to rich, concentrated packages of information.
As soon as a category reaches this tipping point in the relative costs and benefits of further research, we see a fundamental shift in consumer behaviour: the shopper's first port of call stops being the shop. Instead, new online 'decision-support' services are winning pride of place as the shopper's priority destination. This not only changes what they buy and from whom, it turns off traditional retailers' access to all their different layers of increasing return at source - potentially reducing the retailer (whether online, offline or both) to the role of fulfilment agent.
In some categories such as travel, financial services and consumer electronics, this process is already well under way. But how far can it go? Are groceries immune, for example?
Perhaps not. In the US, Amazon's service for the routine replenishment of bulky household groceries is proving to be a success. Services like this slice once-cohesive business models (every product under the same roof) into a series of businesses-defined, different shopper economics, where the dividing lines are drawn according to high versus low decision-making costs and high versus low shopper-logistics costs (carrying weighty items, for example).
In other words, the transformation of retailing is only just beginning. It's not just retailing, though. You can use the same approach to analyse the evolution of brand, advertising and marketing communications strategies. Over a century, retailers and media owners became powerful and prosperous thanks to their role as a gatekeeper to their customer. They achieved this role largely because, at that time, they offered shoppers the best way to improve their personal shopping economics.
Those days are gone. New ways of improving shopper economics are emerging, along with new forms of gatekeeper. Yes, there will always be exceptions, but the era of retailer and media power is over.
Alan Mitchell is a respected author and a founder of Ctrl-Shift and Mydex.
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