Why Retail Has Reached an “Inflexion Point”

The combination of (1) the shrinkage of the middle class, (2) rise in on-line shopping and buying and (3) the decline and fall of the traditional shopping mall are tearing the U.S. retail environment apart at its seams.

These are the findings revealed in a new book, “Retail Revolution: Will Your Brick and Mortar Store Survive” by Rajiv Lal, Jose B. Alvarez and Dan Greenberg. Both Lal and Alvarez are Harvard Business School faculty members and Greenberg is a former Harvard research associate.  Insights into the book were the subject of three articles in March 2015, in Harvard Business School’s Working Knowledge by Sean Silverthorne, editor of Working Knowledge. The book was self-published and can be purchased for $49.95 on Amazon.com and through other booksellers.

Middle Class Shrinkage

The first key point made by the authors is that the shrinkage of the middle class has caused major changes in the current retail environment.

According to Alvarez: “Traditionally the U.S. economy has prospered on the economic well-being of the middle class.  Many of the mass merchants have gone after the middle class, but as income bifurcation happens the middle class tends to disappear; you don’t have the disposable income to take advantage of.  In just about every category it is really difficult to go after the middle so you wind up with this split between the dollar stores and others who provide the low end, and those targeting the high end.  Both of these are doing fairly well from a traffic and margin perspective.  Ecommerce is making life most difficult for players targeting the middle class.”

Growth of On-Line Sales

The second major reason the retail environment has reached a tipping point is the growth of on-line sales. According to Alvarez, “technological development reached a point where ecommerce is easy and omnipresent. If you think back before smart phones and tablets, shopping on-line was much less convenient.  Today on-line shopping is omnipresent….Technological developments allow consumers to shop when they want, where they want for almost anything they desire….”

Alvarez adds, “The other important factor that leads us to believe we are at an inflexion point is demographics.  You have this new generation of digital natives who are used to operating online.   Their default option for shopping is through digital interface. These consumers do not hesitate to place an order for almost any class of good including shoes, clothing and other items that were traditionally considered safe from ecommerce.”

Changes in Shopping Malls

Finally, there is the dramatic change in the shopping mall. According to Alvarez:

“Ecommerce has significant implications for the current conception of the mall. We are seeing that traffic is down, impulse buying is down, therefor basket size is down – so everybody in the mall is affected by traffic being down.”

Alvarez says that if you have two or three mall anchors of tenants driving traffic, this affects the entire mall. This creates a domino effect that reached down into the community through the lowering of tax base. “One major trend that Retail Revolution (the book) points out is that retailers will reduce store count and also reduce the size of those locations as online commerce begins to satisfy more and more demand….”

Looking to the future Lal says, “You could really imagine a store where there would be manufacturers, showrooms, and fulfillment — Amazon. There would be no transactions in the store and the showrooms would get paid by the manufacturers or by the brands.”

Three Possible Strategies

The authors offer retailers three strategies:

1. Enhancing the value of the box. This strategy is for players not significantly impacted by ecommerce.  Example: Home Depot.  Suggestion: use the Internet synergistically with brick and mortar business.
2. Shrink and transform the format. Suggestions: shrink the space; come up with a new business format. “…The space you make available for products is going to support a different value proposition…” whether service or as a showroom for manufactures.  The retailer has to reimagine the customer experience, according to Alvarez.
3. Wind down. The retailer must come to the hard decision. Whether in the long term you can sell your category of goods profitably.  If you can’t, you cannot stay in business.

Of particular interest is the ‘Clash of the Titans,’ the Walmart concept versus the Amazon concept. Lal points out that Wal-Mart’s success is in part due to its policy of luring customers into the stores with groceries, which Wal-Mart sells at a low margin.  However, Wal-Mart cannot match Amazon’s cost structure.

A final observation from Lal: “You used to think many categories were immune to the Internet.  We thought touch and feel was important in many categories. What we see today is that assumption is no longer true.  Think how much jewelry is sold online – diamonds – it’s incredible.”