The future ain’t what it used to be
by D Price
The JB Were commentary on the JHD/ Marketshare Internet
retailing study makes interesting reading, but
also many arguable points. A study that understates the impact of the Internet
shows a distinct lack of understanding of what the Internet is and more
importantly what it can be, and apparently also the craft of Retailing.
Research is too often a summary of all the answers they get, but did
they ask the right questions? Not having had oversight of the original
study and its methodology, the questions raised below are inferred from the
commentary by JB Were.
One. The
first major oversight in stating the impact will be relatively minimal is of
course that it ignores the impact of the volatility caused by the many attempts
at market entry by hopeful entrepreneurs. Even though many may not last long
(the burn rate of their venture capital is too high) they still cause
competitive pressure and this is applied serially. This means traditional
retailers will face continued and long-term margin squeeze. Like space invaders
they just keep coming at you – principally because the barriers to entry are so
low. [They are of course their own worst enemy because they are eroding
consumer confidence over time.]
Two.
Retailing is not only reliant on price to move merchandise. Fundamentally the
commentary is correct and that the total cost of merchandise may be made up of
different elements (distribution costs v rent). But what the analysis overlooks is that there is also a distribution
cost in traditional retail channel which is borne by the customer. If
the consumer perceives the + 15% charge for delivery to be less than his
or her cost (i.e less than the consumer’s opportunity cost), then a niche opens
up for online sales. Convenience is a big factor in retailing and its cost can
not be underestimated.
Three.
There is a high degree of risk in basically asking consumers to predict their
future behaviour. I am willing to bet my entire net worth (don’t get excited,
there isn’t much…) that cellular phone sales exceeded all the expectations of
manufacturers, service providers, retailers and shopping centre owners. Thomas
Watson famously predicted that the worldwide demand for the first IBM
mainframes were to be the grand total of 5. The US Telegraph Company saw no
future in Alexander Bell’s invention, and the typewriter was rejected initially
as fad that could not replace a good stenographer. There are many examples like
that including the photocopier and the fax. The Internet gives the consumer
freedom, choice and convenience. These are powerful values that drive
fundamental consumer behaviour patterns.
Four. The
respondents in the survey – in all likelihood- could only assume that web
shopping in 5 years time would be the same as it is today. That is, sitting
behind the computer, browsing and searching and ordering and waiting and
waiting. The technology is in its infancy, and it will evolve to increasingly
suit the requirements of consumers. Internet shopping will in future probably
not even involve the computer but rather the fridge or the mobile phone. Along
the same vein, the study assumes that the 20-yr old of today and the 20-yr old
of 2010 will shop the same way and for the same things. The 10-yr old of today
is growing up with a different market view and technology expectation.
Five. The
effect on the retail mix of centre should not be underestimated. As book
stores, music stores, florists, financial services computer & software
shops slowly disappear or get relegated to strip shops, it will reduce leasing
options, which in turn, because space remains fixed, will be leased (at a lower
rate?) to an existing category which diminishes the viability of that category
which further pushes rentals down. There is a ripple effect that could be
dangerously insidious. The product categories that are most amenable to
Internet shopping are:
- those that can easily be turned from atoms to
digits (music, software)
- those that can be automated because it is either
a very routine activity (paying bills) or a highly complicated transaction
(buying insurance)
- the conditional purchases (gifts, impulse items)
especially where the recipient is geographically separated from the giver.
Six. As
retailers jostle with the dot coms for Internet space & marketshare, the
traditional retailer (a) diverts its attention from the existing business and
(b) dilutes their financial investment in the existing businesses. This
inevitably means less capital expenditure and all the corresponding
consequences.
Seven. The
commentary does not define ‘shopping’. The role of the Internet in making
comparisons, sourcing merchants and/or products may well extend way beyond the
actual transfer of cash. These activities are an integral part of the shopping
experience and the concomitant loss of impulse buying opportunities that are
lost in a shopping centre is enormous. In some categories, impulse buying
amounts to 85% of sales.
Eight. The
effect of a real decline of 5% in sales obviously also means a decline in
volume. Most of the retailer’s distribution costs are relatively fixed, and any
savings made by selling less, will certainly be offset by loss of channel power
(e.g fewer quantity discounts). This means expenses remain relatively fixed,
whilst sales are declining – through to 2005 and beyond. A 5% decline in sales
volume that continues to decline must be of concern to any long-term retail
property owner. Continued negative prospects will depress share prices, lower
the ability of the retailer to raise capital which in turn impacts on its
ability to finance itself for new concepts or through sales troughs. ‘Market
sentiment’ – as any investor knows – is a difficult thing to change
Nine. The
famous saying of ‘Lies, lies and damn statistics’ certainly applies. The graph
predicting % online sales (JHD/Marketshare) is very misleading. Internet sales
have doubled every year for the last 3 years (at least). The authors are of the
opinion that the rate of increase will flatten out dramatically. The graph
still shows exponential growth, but the X-axis (time scale) jumps from 1-year
intervals to 5-yr intervals on the same axis. Effectively they are saying that
the exponential growth will not
continue to happen, but the graph still shows the exponential growth curve,
which is what we intuitively believe.
This graph is really
what they are predicting – a gradual and steady growth rate and not an
exponential growth rate.
