Tuesday, November 27, 2012

The future of physical retail

Response to Supermarkets Without Cash Registers, Amazon In Strip Malls, the Future of Retail Is Weird, on qz.com.

The article marvels at a few things; removal of cash registers as people scan and buy by phone or NFC wherever they are, big box retailing becoming showrooms for online retailers by accident, retailers selling product lines exclusively to fend off online competition. But most of this is already here, not on its way.

I can already shop at my supermarket using a mobile scanner, although I do have to pay at a cash register. That's a pretty easy jump to make.

Big box retailers already prefer to sell items only available at that chain; laptops are sold with different model numbers and marginally different specifications to make comparison difficult, and generic items are bundled with higher-margin items to permit a profit over the whole sale.

Showrooming, however, might just change things. Suppose a consumer wants to buy a laptop and a manufacturer wants to sell it. In the old system, you went to the shop. Mail-order was possible, but both expensive and uncertain. With amazon et al, neither is the case any more. But at the limit where no-one buys from the shop, why would it still exist? It must make money from the still-present need, of shoppers to actually feel the thing they're buying. Pictures do not do physical objects justice.

So the consumers want a showroom, but they no longer consider the old pact (pay enough to cover those costs) to be worthwhile. Apple has an answer; own the whole snake from production to consumption, and be the exclusive distributor. But only a handful of multi-billion-dollar companies can afford to be both national and have stores, or have enough products to make such a store (I'm thinking of the Apple resellers, or Sony franchisees) worthwhile.

The only other party with an interest in the showroom beside the consumer is the manufacturer. We're limiting ourselves (by the non-multi-billion argument) to manufacturers without the reach or perhaps the breadth of products to have their own stores, like Asus or Logitech, or Black & Decker. I think the answer for them is to subsidize the showroom.

It's possible that dedicated showrooms could pop up, showing a wide range of products and charging the manufacturer or distributor for placement in different areas outright. They could perhaps include a kiosk for buying a product there and then at a premium, but the expected mode would be what people do secretively already; scan the code, compare prices and order online.

I suspect, however, that a less clear-cut bargain is more likely. In the same way that supermarkets charge producers for better product placement (effectively adding shelf rental to the mix), big box retailers would expect ever larger subsidies from the manufacturers, until actual sales were no-longer their primary revenue stream. At this point, if becomes viable to show online store prices right on the shelf; Amazon could do a deal with the retailer for the retailer to do just that, and a smaller chain might show the prices regardless of an affiliation incentive.

The mistake the qz article makes, for me, is to suggest that virtual and physical are comparable, that a virtual shop can replace a physical one. The reverse is true. People that want to see the physical item do not want a virtual substitute; online or off, they want to pick up the book (for now), try on the dress, try clicking the camera shutter. Creating a virtual version of a physical store, with screens instead of shelves, is a hiding to nothing. The only difference between that and shopping online at home is that the product selection is more limited, so perhaps a decision is easier. But even that is easily remedied by a new online store.

Interestingly, once the need to make money selling physical boxes is gone, many other possibilities open up. Showrooms would be competing for their ability to show off the product and assist purchasing (wherever from), not their ability to suck you in and leave via the cash register. If it were me, I would set up a smaller shop in a mall with gadgets in, sell the shelf space and learn how to use all the gadgets. I would put Which and online reviews of items right with the item, provide live updating displays of prices from various retailers, and fill the shop floor with helpful staff.

If that sounds much like an Apple store, that's because it has many of the same goals; to provide the physical aspect of the purchase experience, to show off the product more than make the sale, and it too would be paid for by the manufacturer rather than the till sales. Crucially, though, it wouldn't be Apple. The customer would get the best prices for the products, which themselves would be competing in the marketplace. This is the Apple experience, but for the mass rather than the luxury market (Apple doesn't want you if you have less money).

Some other things would inevitably be borrowed from Apple; the genius bar is the flipside of the physical sales world, the ability to point at a broken screen and ask what it will cost to fix, rather than filing some form or a call centre call. The support side is a significant cost to the manufacturer, so there is a good incentive there for the showroom to offer such services at the cost of the manufacturer rather than the customer. And all the good things follow from such alignment of need and cost; a shop could demand much lower incentives from manufacturers with easily replaced parts, and charge much more for send-off-to-this-address setups. There could be a clean room upstairs, where you can actually watch your product being fixed.

I've concentrated really on big box electronics retail, but these are all generic observations, which would be true for clothes or any other sector. Clothing is way ahead here; department stores already provide a set of concessions which are presumably rented to individual retailers. The staff are general rather than manufacturer-specific, as is the sales and return setup. So if we look in that direction, we might expect to see concessions in our showroom.

There is opportunity for the forces of evil to corrupt the vision, however. With control over their concessions the manufacturers would opt to limit the set of retailers whose prices are displayed, and remove unfriendly reviews. And with the manufacturers firmly in the seat of funding, they would call the tune. To me, this is counterproductive; if you want to make a store, make a store. If you want an arena in which the customer feels confident to make the best decision and neither ripped off nor hoodwinked, then you have to actually behave that way.

An anecdote from the world of surprising retail innovation is relevant here: on a recent holiday to a coastal town, there turned out to be a shop whose owner simply rented shelf space to local craftspeople. In much the same abstract way as the concessions, they offered a unified service to the customer but neither set the prices nor chose the goods. Inevitably, the shopkeeper is able to provide crucial feedback to the craftspeople about what kinds of goods sold well, offer critical analysis of works in progress and so on; they are the whole interface between the customer and the manufacturer but as a service to both rather than the customer of either.

Argos offers a physical version of the virtual store; you can ask to look at any item before buying it, and the choice of a vast range over a vast showroom makes it a reliable source for convenience shopping. Suppose we do the same here; make part of the shop a warehouse of a few items of each product. Sell the shelf space to the manufacturers again. But next, permit the items in stock to be sold by any retailer involved. If Amazon are a partner, you're buying that camera from Amazon, and you execute the sale and any later claim through them. In effect the product sale is a transferrable contract which is sold to whichever retailer buys it for the highest price, and the customer gets the product there and then.

The future of retailing may well be very different, and how we choose to pay or from whom we purchase are the least of the changes.

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