While bets are being placed on whether the Green Bay Packers will beat the Pittsburgh Steelers for the Super Bowl ring, I’m placing my bet on a dramatic transformation of retail chains’ business models over the next decade. The football outcome can’t be predicted – both teams are awesome, and we can’t predict players’ energy showing up for the four quarters and their emotions throughout, factors critical to the final outcome. Market changes are easier to forecast because underlying trends shaping market dynamics are observable.
Strategic leaders, like good investors, are always on the lookout for changes in dynamics and how they will impact the strength of different business model strategies.
“Phone-Wielding Shoppers Strike Fear Into Retailers,” a December, 2010 Wall Street Journal article might as well have been titled, “Retail Store Business Model No Longer Viable.” The article told the story of a Best Buy shopper who found the perfect gift for his girlfriend, then used a mobile app to find the best price. Amazon had a much lower price (with free shipping and no tax) for the Garmin GPS, so while standing in the Best Buy store, the shopper purchased the product from Amazon. Best Buy invested in the shopping experience, Amazon earned the profit margin.
In perfectly competitive markets, buyers have all the power and suppliers compete solely on price: a commodity market, in other words. The Internet has given rise to these conditions in most markets, with mobile computing accelerating commoditization.
- The Internet lowered barriers to entry, increasing supply, thereby inducing more price competition.
- It also made prices much more transparent and enabled consolidation of industries, giving buyers more power.
In a perfectly competitive market, the lowest cost supplier wins. In this case, Amazon won because it has no investment in retail space.
What are the options for Best Buy and other big-box retailers? They might change their revenue and profit model from earning margins on products they sell to renting space to manufacturers, much as department stores now do with cosmetic companies. They might insist on product variants uniquely designed for their chain, which some grocers are requiring. Or they might backward integrate into their own store brands, giving manufacturers their comeuppance for not having smarter channel pricing strategies. TESCO is doing this, taking grocery market share from Walmart in the process.
Whatever retail chains do, they can’t keep doing what they are now doing.
This doesn’t mean I’ll bet on Amazon winning all the customers that store retailers lose. Consumers want more simplicity. A recent Economist article, You Choose, cited behavioral economics research demonstrating that consumers buy more when there is less choice. In other words, less is now more on the value scale.
Daniel McFadden, a University of California Berkley economist, says too many choices demotivates because of the “risk of misperception and miscalculation, of misunderstanding the available alternatives, of misreading one’s own tastes, of yielding to a moment’s whim and regretting it afterwards” not to mention “the stress of information acquisition.” Thank you Dr. McFadden. Now I know why it took me three years to finally settle on a pair of ankle boots, even though I needed a pair!
Amazon offers us endless choice. Any merchandising is limited to what computer correlations predict. (Merchandising involves knowing your customers’ needs and tastes and bringing the right array of choices to them e.g., what a terrific high-end clothing boutique regularly does.) My bet is that consumers will be increasingly drawn to niche on-line retail sites that narrow our choices, saving us enormous time and increasing our confidence in our purchases.
The new transparency in pricing gives manufacturers reason to rethink their channel strategies. Do they want different variants of products for different channels? This will be very costly. But if manufacturers don’t financially support retailers who show their product in stores, manufacturers can expect store brand competition. (Ask branded food products companies how store brands have affected them.) Renting space from retail stores will also increase manufacturers’ costs.
Perhaps changing channel pricing strategies to reward store retailers for showing manufacturers’ products is manufacturers’ safest strategy going forward. Don’t count on manufacturers following this logic, however, as too many of them only do what makes sense in the financial year’s quarter.
One simple change – apps on mobile computing devices – will set in motion significant changes in an industry’s business model. What changes are going on outside your industry with the power to transform your markets? Strategic leaders ask that question of themselves and their teams regularly, not just during strategic planning.