Retail Insights

Musings on the Future of Retailing

The day will soon come for mass merchants where checkout counters will be eliminated. Once RFID is fully implemented, the customer will be able to push the shopping cart through an RFID reader station, which will instantaneously total the items and show the results on a screen. The customer, who has an imbedded RFID chip in her debit or credit card (perhaps some day in the near future, in her body), will push a button to authorize the purchase, and off she goes.

RR Future of RetailingPoint the Way

We will also soon reach the day when consumers, while shopping in a store, can point their smartphones at any item to read the RFID chip embedded in the product and link directly to an information web page, which will tell the potential buyer more about the item. If the customer wants to ask questions, he or she will touch a button on the screen of the smartphone and immediately be transferred to the call center of the supplier where trained operators will answer inquiries via text or voice, depending on the consumer’s preference. If the customer wishes to purchase the item, she either puts it in her physical shopping cart, or if she wants it delivered, she puts it in her virtual shopping cart. Should the item be out of stock at the physical location, it will be seamlessly ordered and delivered. The virtual connection will also allow her to see colors and sizes not carried physically at the location and have her selection sent directly to the home. All of this can easily occur without speaking to a single sales associate.

Here’s how it will work. Virtual interconnectivity will allow the customer to bargain in store or online without talking to a human being. She reads the RFID tag on the shelf with her smartphone and the price appears on her screen. The price is $19.95. She touches a button or speaks, instructing her smartphone that she’ll pay $17.95. This “offer” goes to the seller whose artificial intelligence computing system will either authorize the markdown or counteroffer, at say $18.95. ll of this occurs in nanoseconds without inconveniencing the customer who can easily continue to comparison shop at competitive retail outlets on her smartphone. We will have truly returned to the days of the street bazaar where buyers and sellers haggle over every price. The only difference will be that the buyer is interacting with machines representing the sellers.

The Shape of the Future

In this future world, big-box, multi-brand retailers will be simply real estate operators who will lease shelf space without owning inventory. These store-location operators will provide a national umbrella brand for the store, as well as a variety of in-store services (displays, sampling, demonstrations, restocking), which suppliers that are leasing shelf space can purchase à la carte. All inventory will be owned by the suppliers who will determine how much inventory to stock and when to replenish. Shifting ownership of inventory to suppliers also makes them responsible for pilferage and damage costs. Physical stores will become showrooms where consumers can touch, hold, and try out products before making the purchase either in the location or on the Internet. These new mass merchant showrooms may evolve into the updated version of catalog showrooms (Best, Service Merchandise), which died in the late 1980s.

Specialty stores will be closer to today’s retail model in the new world order, each fighting to capture a niche through lifestyle branding and the level of customer service offered. The specialty retailer will own the brand, and carry unique products designed in collaboration with its supply chain, and it will own the inventory. Therefore, unlike the big-box retailers, specialty retailers will not be able to pass inventory carrying costs and obsolescence back on the suppliers. To be economically viable, these specialty retailers will need to be quick and nimble in their product line and inventory management, while offering an appropriate mix of human and virtual support to sell product and sustain the consumer relationship.

Real Estate in the Digital Age

As more transactions occur via the Internet, the high operating overhead to support a declining number of transactions in physical stores will result in closure of peripheral low-volume stores. It will also induce retailers to execute “showcase” locations, which may lose money, but will offer the customer the “touch and feel” experience critical to reinforcing the brand’s lifestyle image. As the number of specialty retail outlets shrink, more C and B mall and street locations will rapidly decline and close. Empty strips and malls littering the landscape will be either repurposed by developers or torn down as the nation dramatically reduces the number of retail outlets in response growth of Internet and television shopping.

The cost-driven abandonment of unprofitable stores by national retail brands will have a disproportionate impact on small towns and outer suburbs of metropolitan areas. The limited presence of national retailers may permit a renaissance of the small town entrepreneurial merchant whose keen eye for product and intuitive sense of local customer taste allows him/her to shop globally via the Internet to buy unique product for one or two local store locations.

Franchise Models

At least one national specialty retail brand, Apricot Lane, seems to be positioned for a local-level, entrepreneur-driven retailing future by offering entrepreneurs the opportunity to operate franchised individual retail locations. The franchise concept allows the local entrepreneur the ability to leverage the scale and resources of a large national organization while maintaining the flexibility and assortment uniqueness of a local individual operator.

For the national organization that owns a branded retail concept, this franchise business model is attractive because the inventory, payroll, and working capital costs are financed by the individual store operators. Franchisees should be able to operate in a given location at a lower breakeven point than a national chain. If a store fails, it is the franchise operator who loses the investment, not the national retailer. Another advantage of the franchise is a well-trained and motivated owner, with a major financial stake in the business, driven to maximize the sales potential of a specific location (as opposed to a hired manager and uninspired part-time store associate). On the downside, managing the brand experience is much more difficult for the corporate office when entrepreneurial independent operators are given the flexibility to define assortments, determine inventory investment, directly conduct their own marketing campaigns, and manage the consumer experience in store. This brand management challenge is the likely reason franchising is rare, and usually unsuccessful, in the fashion retail space.

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Enabled by today’s technology, an e-commerce model can be envisioned where the consumer goes to a website operated by the local franchise store, which includes product specific to that store, but seamlessly offers the customer the full range of product available on the national website. Local stores can maintain frequent and direct communication with local customers through social networking and email, leveraging the technology resources of the national brand owner. With this model, consumer intimacy is maintained and nurtured instead of being abandoned as the national brand retreats from specific locations or entire markets.

The history of retailing suggests that when a retailer begins a significant retrenchment, it enters a death spiral from which recovery is rare. Shifting to a franchise or partial franchise operation is a model that may allow existing national specialty retailers, coping with rapidly shifting market dynamics and financial pressure, to reduce asset investment and maintain a broad national footprint of physical locations. And even better, it injects some good old-fashioned American entrepreneurial spirit into their organizations and product assortments.

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