How To Sell Online

Death of Retail

It’s important that entrepreneurs keep an eye on long-term trends.  Whereas good money can sometimes be made bucking trends in the short-term — it’s generally better to flow with a river than against it.

One such trend is e-commerce — buying and selling on the Web.  It’s becoming well recognized that this is a revolution in progress — that e-commerce is destined to fundamentally change the way goods are bought and sold — not only in this country, but all over the world.

What is NOT as well recognized is just how much it’s destined to change.

I’ll argue below that the long-range prospect for retail (and wholesale) is death — that these businesses are destined to disappear into oblivion — just as surely as the buggy whip disappeared with the advent of the automobile.

And not just the brick-and-mortar retailers — but all the new e-tailers (the Web retailers), who are blowing through investor capital in a misguided attempt to buy brand presence and market share — in a market that is very unlikely to exist (or at best, will exist only fleetingly)!

The root of the argument is simple economics.

A manufacturer’s costs to manufacture consumer products is in the range of 1/4 to 1/6 of the final retail price.  Now, the manufacturer needs to sell to its wholesalers at like twice that (1/2 to 1/3 of retail) to cover its operating costs and yield a profit.  (If you don’t like my numbers, pick your own — it won’t change the conclusion.)

The other 1/2 to 2/3 is presently eaten up in distribution — that’s the cost of the present wholesale/retail intermediaries.  These distribution costs were necessary pre-Web to get products “in front of” consumers.  But the Web changes all that — the Web has the power to get everything in front of everybody!

The wholesale/retail intermediaries no longer have an economic function to perform (or will not in the not-to-distant future) — hence their inexorable demise.

Let’s look at this situation through the eyes of the individual players.  First, the manufacturers.

Manufacturers

Manufacturers now recognize that they must have a Web site — if only because their competitors have one.

Some manufacturers offer only product information on their sites — referring prospects to their retail outlets for the actual sales.

This is cool — until one of its competitors starts offering some of its products for sale directly on the Web.  The competitor’s thinking is, “This will add some sales in regions where we don’t have good retail coverage”.  And they’ve probably heard from some customers — these sites provide a “contact us” link — who actually prefer to buy on the Web.  (Yes, there are more than a few of us.)

Now, the competitor will probably hold to its retail pricing in order to “protect” its existing distribution channels.  But in the process, the distribution costs thus saved (1/2 to 2/3 of the retail price), are dropping right through to the competitor’s bottom line as additional earnings.

This forces the other manufacturers — inexorably — to start offering their own products for direct sale on the Web.  And eventually, all manufacturers must do it.

Again, this is cool — until one of two things happen.  Either a competitor starts offering its products at less than retail in order to increase its market share.

Or, more likely, some startups — unburdened by the need to “protect” their (non-existent) distribution channels — start offering some of those products direct on the Web at 1/2 to 1/3 the going retail price (i.e., at the same price the manufacturers are selling to their wholesalers) — and start stealing market share.

This puts the manufacturers in a quandary — either accept erosion of market share on these products (a sure loser) or reduce the pricing of their direct sales of these products to better compete with the upstarts.

Of course reducing the pricing on these sales means losing some of those “additional earnings” gained above.  But much worse, they’d be underselling their own retailers — and they’d have a revolt on their hands.  So they have to reduce their selling price to the wholesalers such that their retailers can sell at a matching price.  There go those “additional earnings” — and a good bit more.

The manufacturers have no choice but to reduce their distribution costs.  And the only viable choice they have is to shrink their distribution network — either by market or geography.

This of course forces the manufacturers’ Web sales higher (consumers wanting their product in that market or location have no alternative) and the process continues to snowball until all of the distribution channels (and their associated costs) disappear — and products are selling at what they would have sold to wholesalers under the old system.

Market forces unleashed by the Web make this inevitable.  The only question is, how soon — and my bet is that it will be a lot sooner than just about anyone expects.

But this isn’t the end of the story for the manufacturer.  As their direct sales grow, they’re building direct customer data (no longer filtered through their distribution network).  They’ll start using that data, in the same way that Wal-Mart does — but to determine what to build (not just what to buy).

Gone will be their costs of inventory (and not just the enormous inventories now in their distribution channels, but even their in-plant inventories — “lean manufacturing” and “build-to-order” can finally come into their own — and with these inventories, the costs of scrap, obsolescence warehousing, etc. — and prices will be driven even lower.

Now let’s look at the situation through the eyes of the brick-and-mortar retailer.

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Retailers

The major retailers are in denial.  They’re watching the growth of the e-tailers — and watching their existing suppliers struggling with the problem of selling on the Web without impacting them.  There’s an “awareness” that they have to change — but not in any way that’s threatening to their future!  Some of their arguments:

• Shopping is entertainmentfor many of our customers — and they won’t go away.What’s not recognized is that shopping on the Web is entertainment too — just different.  And in many ways Web shopping is more entertaining — more products, more product information, more product comparisons, more user commentary — and better bargains (someone somewhere is selling what you want as a loss leader).
• Shoppers want our customer service.Sure they do — at equal pricing.  Consumers want the lowest price they can get — at an acceptable minimum level of service.  The large retailers proved that themselves.  Is there any question you got better service from the local owner-operated hardware store than you’re getting from the category-killer that moved in and put them out of business (because you chose to buy their “lower prices”)?The Web sellers, because of much lower costs, can offer even lower prices — and when they get their customer services under control (they simply have to follow the model the major catalogers have already proven), consumer buying can be expected to move to the Web from the large retailers — just as it did to the large retailers from the small ones.
• Shoppers need to touch and feel, to try on, to try out.This goes back to the customer service argument — yes, when the pricing is equal.  But when the pricing is attractive, these “needs” become a little less important — especially when the Web sellers finally get their act together and implement the catalogers’ reliable, quick and hassle-free returns policy.
• It’s not economical to ship large goods like appliances and furnitureThey’re being shipped now — to the stores.  The only difference is they’re being shipped in bulk.  All this says is that there’s a coming opportunity for a small shipper to figure out how to economically handle these kinds of goods individually — and build a new “heavy-duty” UPS or FedEx.
• People need local stores to “run out to” to pick up small things.Or maybe they’ll just need to plan ahead better.  It’s unlikely a local store — even a small one — will be able to survive on just “pick-ups”.
  Of course, I’ve over-stated a bit that all retail is dead.  The local gravel pit, sod farm, farmers market, etc., will still be around.  (Note, however, that these are as much “manufacturers” as “retailers”.) But so will the local gas station (or alternate fuel source).  These stations have already re-structured as “convenience” outlets so they’ll likely become our “pick-up” source.

E-tailers

The Web retailers have two major advantages over their brick-and-mortar counterparts.

First, they can offer a much greater selection than any store can stock — including all the slow-moving items that the stores can’t afford to stock (i.e., the kinds of items now available only from the specialty catalogs).

Second, they can sell much cheaper because they have no brick-and-mortar costs to cover (and in the case of the larger chains, no remote management and staffing costs).

The brick-and-mortar retailers counter that the e-tailers costs are not that much lower:

• Websites are expensive to set up and maintain, alluding to some of the multi-million-dollar sites that have been reported.The fact is computers, software, and system maintenance — in the long run — are virtually “free”.These elements are expensive onlywhen one is pushing the leading-edge of the technology.  If the e-tailer wants the latest interactive technology or a leading-edge transaction processing system, yes, it’s expensive, because it has to be developed from scratch by high-priced analysts and programmers.But the next time these individuals do a similar system, it’s much less expensive.  And the third time even less.  And eventually a couple of them will write a $39 software package that will allow anyoneto build their own system.The same thing applies to maintenance.  Yes, a team of high-priced system administrators is needed to maintain a leading-edge system.  But once they’ve developed their operating procedures and their suite of software tools, that system can be maintained by a 2-year-technology fresh-out.Right now virtually all of e-commerce is “leading-edge”.  The pioneers are madly innovating to find the “winning” embodiment of the technologies.  And that is expensive.  But as that embodiment(s) takes shape, it becomes much less expensive — and over time essentially “free”.
• The e-tailors have to set up and train customer service staffs just like ours.Yes, but the e-tailer’s task is arguably easier and less expensive.The e-tailer’s staff is centrally located manning phones — not remote customer-service desks.  Their staff can be trained and monitored more efficiently.  And fewer people can handle more customer questions — meaning less cost.(The e-tailors have a long way to go in adequately staffing this function.  However, in the end, those who do will be the ones who see repeat sales.  This function, much more than Web design, will determine the eventual “winners”.)
• The e-tailors have to set up warehousing and distribution systems just like ours.Again, yes, but their task is easier.  They have the newest technologies to work with — and they’ve learned from your experience.

However, note that there is nothing here that the e-tailors are doing that the manufacturers cannot do equally as well — and they have the advantages of not needing the warehousing (replacing that function with “build-to-order”) and having only to modify their existing distribution systems (to service individual consumers rather than their existing wholesale/retail intermediaries).

Note also that the manufacturers can always undersell the intermediaries — regardless of how the intermediaries restructure themselves!.

Opportunities

If you, as entrepreneur, inventor, craftsperson, haven’t seen hundreds of opportunities in this scenario, you haven’t been listening.

Entrepreneurs- – Obviously you want to be thinking “manufacturing” more than “services” (especially middleman services).  Figure out how to make some “thing” very well — better and cheaper than anyone else can make it.

And concentrate on that thing.  If you spread your core competence too broadly, you’ll likely find an up-and-coming competitor walking away with your market.

Keep in mind that your competitor will no longer be the “guy next door” — but anyone in the world!  (The Web gives you direct access to your market that you never had — a worldwide market — but at the cost of giving everyone else that same access!)

For the entrepreneur who just wants a small local business, there’ll likely be some new “personal service” niches opening up.  Some people will need more advice, counsel and hand-holding than they can get from the Web — and given the lack of alternatives, will pay for that “service”.

It’s clear that interior decorators will be the local furniture-sellers of the future.  Many are already doing it — the Web only helps them do it better and faster.

But who’s going to “dress” the man or woman who depends on the local clothing store to advise them what to wear.  Just may be a “service” business there for that clerk (or ex-storeowner).

One thing there’s likely to be little of is jobs.  With the distribution channels gone and manufacturers skinnied down to operate “lean”, there’s not much of a job market left.

Government will have to take up the slack through employment and welfare.  That means a much heavier tax burden on business — and much bigger government (and there go some of those “lower prices” we mentioned earlier).

It’s ironic that this technology that gives us so much market freedom may well come at the cost of world socialism.  Let’s hope that entrepreneurs will come up with some better alternatives.

Craftspeople — Getting your products out in front of customers presently takes as much or more time than making them.  But a new day’s dawning!

As the Web becomes a worldwide storefront, your (low-cost) website can present your products to the world — as prominently as anyone else’s.  No more sales reps (who may or may not be showing your products), no more trade fairs (that burden your time, energy and budget).

Today, your site can get lost in the millions of other sites — you’re not “presenting” your products if no one can find your site.  But that’s a short-term problem.  (Immediate solution — get active in the many crafts email forums.)

The search engines are rapidly getting better — and there’s so much “economic need” driving their evolution, that it’s just a matter of time before finding your site will be as easy as finding a book in a library.

Even now, for beginning crafters, the Web auction sites are a godsend — a zero-cost, zero-time avenue for building early sales — a way for them to learn their market before venturing into their own site (and a way for the stay-at-home-mom crafter to earn a few extra bucks).

Inventors — You currently have two alternatives to licensing your inventions — research the market and contact the companies yourself — or hire someone to do it for you and stand a very high risk of being “scammed”.

The growth of the Web isn’t likely to do much for you there — unless companies start adding the email address of their product scout to their website (which a few are starting to do).

However, “licensing” may become much less important to you.  You’ve always had the option of “venturing” your product (instead of licensing it).

Manufacturing the product has never been the barrier — there are plenty of contract manufacturers around.  But distribution has.  Someone (namely you) had to get out into the marketplace and spend a great deal of time selling and building up sales of that product.

But when the Web is the marketplace, you can do that from your own desktop!  Like the craft products, your products will be just as prominent, just as widely seen, as those of the largest manufacturer.

You’ll lack the brand-name recognition of the large companies’ products — but if they don’t want to license, you’ll still have a very viable alternative.

And if, in fact, your product sells as well as you think it will, those companies will be back — to license your product or to buy your company.  Sound like a bit of an improvement over what you’re seeing now?

The next decade promises to be an interesting one!

I am proud to have the permission of Ed Zimmer to use this article written by him in 1999

Tags: Death of Retail, future online selling, future retail, retail decline, retail dilemma, retail forecast, retail prediction, retail slump, The End of Retail