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The Rise of eCommerce and the Risk to Retail

The Rise of eCommerce and the Risk to Retail

by John Larkin

John runs the blog here at eCommerceLift and is a verified Shopify Expert. Interested in an initial growth consultation? Click here

A year ago


The Rise of eCommerce and the Risk to Retail

To many in the eCommerce word, Marc Andreessen’s word is gospel. His track record speaks for itself. Before the age of 35 – he had founded and sold two companies (Netscape and Loudcloud) that sold for a combined $5.6 billion. Then, on top of that he started Andreessen-Horowitz, an investment company that invested early in companies like Twitter, Foursquare, Pinterest and Skype amongst others.  To say he has his finger on the pulse of what’s happening is somewhat of an understatement.

So when he pronounced that “traditional retail is dead”; then it was time for all of us to sit up and take notice.

“Retail guys are going to go out of business and eCommerce will become the place everyone buys. You are not going to have a choice,” he said in an interview with Sarah Lacey of PandoDaily. “We’re still pre-death of retail, and we’re already seeing a huge wave of growth. The best in class are going to get better and better. We [at Andreessen-Horowitz] view this as a long-term opportunity.”

Andreessen is better placed than most to comment on the future of eCommerce companies. In recent years he has invested in online retailers like ShoeDazzle, Zulily and Fab as well as being a board member at eBay.

“Retail chains are a fundamentally implausible economic structure if there’s a viable alternative,” said Andreessen. “You combine the fixed cost of real estate with inventory, and it puts every retailer in a highly-leveraged position. Few can survive a decline of 20 to 30 percent in revenues. It just doesn’t make any sense for all this stuff to sit on shelves. There is fundamentally a better model.”

I’d bet on the pure plays in eCommerce,” he said. “Software eats retail. My core theory is that the best software companies will win at retail, so it’ll become increasingly important for these companies to have the best software programmers in the world.”

Andreessen’s theory is basically that the notion of “shopping for leisure” is fast coming to an end. The idea of going to a shopping mall or high street to browse and pick up a few items is fading. This is borne out by the fact that in 2013, there were more shopping malls torn down in the US than actually built. Andreessen’s belief in the future of eCommerce is that for the last 30 to 40 years, retailers have tried to make the shopping experience fun and comfortable.” But what is more comfortable than shopping while tucked up in bed with one eye on your favourite TV show?” asked Andreessen.

This slowdown in retail in general was echoed by someone who would be seen as entrenched in the old bricks-and-mortar regime of traditional retail – Starbucks CEO Howard Schultz. December is usually a boom month for Starbucks – with city centres full of tired shoppers, Starbucks is usually there to capitalise. But last December (2013), Starbucks’ results were down. Way down.

“The large slowdown we saw in the month of December in traffic was very broad-based,” said Schultz in an interview with Jeff Macke of Yahoo Finance. “It wasn’t unique to any particular region. It wasn’t unique to any particular day-part or product set or product line. There was just fewer people out there shopping, and so fewer people for us to capture and provide some great experiences in our stores.”

Now we will look at two traditional retail companies; one of whom is embracing the changes thrown up by the eCommerce revolution and one of whom is struggling with the transition. 

Wal-Mart

The biggest traditional retailer in the world would seem like an odd place to start when looking at companies that are well placed to profit from the eCommerce revolution, but strangely enough, the company started by Sam Walton in 1962 has become a digital-centric company in the last few years – a move that has started to pay dividends. For years, Wal-Mart allowed its sales to be cannibalised by the likes of Amazon. Until 2011, the company’s website was a joke, especially inside the likes of Amazon, who viewed Wal-Mart executives as dinosaurs.

Sri Subramaniam, was an executive involved in the overhaul of the site and he described how archaic the system was in an interview with Fast Company.
“If you used Walmart.com's old search engine to check out ‘smartphones,’ you'd get links to a couple of cell-phone chargers, not the iPhone. A ‘cotton socks’ query returned results for cotton candy and balls of yarn.”

Wal-Mart turned to Venky Harinarayan and Anand Rajamaran, who ran Kosmix - a search intelligence company who overhauled the website and grew conversions from ‘visitors’ to ‘buyers’ by 15 percent in under 10 months. 


The overhaul team and Kosmix (which Wal-Mart purchased for $300 million) became known as ‘Wal-Mart Labs’ and quickly rolled out products like ShopyCat, which scans your friends' profiles to identify interesting gift ideas from their stream of likes, comments, and status updates. Shopycat then seeks out an appropriate gift for such a stoner/thinker from Walmart's product database. 

WalmartLabs has also created projects that just get customers to think differently about Walmart and eCommerce, including “Get on the Shelf”, an online contest for people to submit their own inventions to go on sale at Walmart. According to Fast Company “Get on the Shelf was a social marketing blockbuster, garnering more than 4,000 submissions, over one million votes, and news hits in small towns across America.”

Wal-Mart still has a ways to go before it fulfils its potential as an eCommerce company, but their management are finally starting to wake up to the threat of eCommerce retailers to the old Wal-Mart model. Now though, instead of being the butt of the joke, Wal-Mart are hitting back. 

 "It's fun to see them trying to be us," said Walmart.com CEO Joel Anderson when talking about Amazon’s plans for same-day delivery in certain US cities. "We have more than 4,000 forward-deployed fulfilment centres and we're already doing shipments from some of them. Some people call them stores."

JC Penney 

With more than 1,000 stores in prime locations in malls across the US, JC Penney used to be seen as the department store for middle-income families, especially for men's and women's clothing, children's toys, and home goods. 

But by 2010, the company was struggling. Losing ground to online retailers, the company turned to Ron Johnson, the man credited with leading Apple’s retail growth since 2000. It was Johnson who implemented the all-white stores and was a strong advocate of Apple’s rigid pricing scheme.

He wanted the Apple’s products to be the same price online and in retail store so as to prevent the growing problem of ‘showrooming’ where customers examined a product in a store, but then went home and bought it online for a cheaper price than the store where they carried out their research.

JC Penney wanted to join the eCommerce revolution, so it did the most obvious thing in the book – it turned to a former Apple executive and hoped that that in itself would be enough. It wasn’t. Not by a long shot. 17 months after being hired, with sales plummeting and losses mounting, Johnson was fired.

A large part of JC Penney’s appeal was due to its innovative ways of using coupons and promotions to get customers in the door. This combined with the fact that the store applied massive discounts to a lot of its stock. Johnson decided to change the whole ethos of the store from the get-go. He eliminated the use of coupons and the seemingly indiscriminate use of discounts across the store in favour of one clear-cut, low price from the beginning. 


When Johnson’s reign began, six out of every ten items bought in a JC Penney store were discounted. Some items had 25 percent off, others had 75% off. Johnson saw this as a massive problem. His contempt for the practice was obvious from the outset.

“Customers come into the store, they looked at the new merchandise, and they looked at the prices,” he said. “They liked the merchandise, but didn't like the price, and so they didn't buy. As a result, this new merchandise sits on the shelves. The first markdown takes place after six weeks, and only then does the merchandise begin to move. So for six weeks, not much happens. You're wasting your real estate and capital. We're not going to play this game. Why not sell at $50 right away?

For most eCommerce retailers, this is a message that would make sense. Online stores like sunglasses retailer Warby Parker have a set price for their glasses and customers like this openness and clarity. But there is a vast difference between a savvy online shopper and the type of customer who goes to a department store looking for a bargain. 

“There’s a thrill involved in finding an item on a sale rail in just your size when there’s only one left,” said Jim Aisner of Harvard Business School. “I thought people were just tired of coupons and all this stuff,” Johnson told Businessweek. “The reality is all of the couponing we did, there were a certain part of the customers that loved that. They gravitated to stores that competed that way. So our core customer, I think, was much more dependent and enjoyed coupons more than I understood.”

Overview

Johnson’s tale was one that all traditional retailers that are considering a move into eCommerce should be cognisant of. Simply imposing an eCommerce mentality onto a company isn’t enough. You need to respect and consider what made the company a viable traditional model and then carry that into the online sphere. 

Perhaps the most informative point to be gained from Johnson’s experience was revealed when a Businessweek reporter asked him why he didn’t try out new pricing strategies on a limited test basis. Johnson shot down the idea, responding, “We didn’t test at Apple.”

This arrogance was perhaps the main reason Johnson failed. Just because a model suited one company, it is not necessarily guaranteed to fit every company. Marc Andreessen may well be right, retail as we know it may well be dying, but eCommerce will probably complement, as opposed to supplant traditional retail.

“Multi-channel retailing” is one of those horrible jargony management phrases that crop up in boring business books and is spouted about as the future of retailing. (Surely whoever came up with the concept that was meant to save retailing would know the importance of branding and would have came up with a better name than the insomnia curing multi-channel retailing?)

Whatever it is called, it basically means that your online presence should match your traditional presence. Customers shouldn’t prefer your store or your website, both should work together. Mark Cuban, like Marc Andreessen, is one of the world’s top tech investors. Probably most famous for being the outspoken owner of the Dallas Mavericks, he summed up the one lesson any eCommerce retailer should be following.

“Make your product easier to buy than your competition,” he said. “Or you will find your customers buying from them, not you.”
Make your product easier to buy than your competition or you will find your customers buying from them, not you.

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