Sunday, March 27, 2011

March 2011 Early Indications: Reinventing Retail

Despite its unquestioned status as an innovator and a leader in
customer experience, Amazon isn't typically credited with business
model disruption on the scale of Napster, Skype, or online brokerages
like E-trade. While major retailers including Amazon and Wal-Mart
appear to be weathering the current economy reasonably well, many
stores are in for a wave of changes.

Four overlapping forces are at work, two of them moving extremely
rapidly: economics, demographics, mobility, and social media. Taken
together, these powerful waves of change are creating new
opportunities, threats, and leaders in a well-established industry.

I. Economics

Consumers have less money to spend, particularly on discretionary
purchases. Three main drivers come into play here.

A) Mortgage equity

From 2000 until 2008, Americans withdrew more than $40 billion of
mortgage equity per quarter
, riding an updraft in housing prices to
turn that change in market value into vacations, cars, or kitchen
renovations. Now, equity is increasing: people are investing more in
their mortgages than they are pulling out. Foreclosures certainly
skew this number, but the bottom line is that consumers are not
converting mortgage equity into consumption at nearly the same rate.

Perhaps the most visible symbol of the transition is the change in the
upscale home decor market: Home Depot's 34 Expo Design Centers closed
in 2009. Interestingly, the website is still up. A sampling of the
text illustrates the transition from the heyday of renovations, a long
way from current days when dollar store and McDonalds stocks top the

"EXPO Design Center offers homeowners professional design and
installation services, and carries the most luxurious and innovative
products picked from around the world.
Each of EXPO's 10 showrooms features unique lifestyle vignettes so
that customers can walk from one to the other, visualizing full-room
scenes while pulling all of the elements of an interior design project

B) Wages and unemployment

In addition to the shutoff of mortgage equity cash withdrawals,
unemployment remains high: by Gallup's numbers, fully one fifth of the
workforce is either without work or working part-time when full-time
would be desired. For the employed, meanwhile, wage pressure is high:
according to Labor Department statistics, year-over-year wage and
benefit growth has been slowing for at least the last decade. On
average, a worker can expect to see his or her pay packet increase
only about 1-2% a year. To take a slice of the population I see every
day, 40% of Americans in their 20s move back in with parents, in part
because expenses are high and job prospects are limited. For their
part, the parents themselves may need help making the mortgage.

C) Price pressure

Oil prices have surged since the wave of democracy movements has
spread across the Arab oil states. Food prices will head up because
oil supplies fertilizer feedstocks and powers tractors, but also
because of short, medium, and long-term factors: climatic conditions
(Russian wildfires, Chinese drought, Mexican freezes), competition for
crops from ethanol production, and increased meat in the diets of the
developing world. When a family spends more for food and fuel, and
most likely doesn't see big raises (if they're not in the 20% of the
underemployed workforce), discretionary purchases will have to shrink.

II. Demographics

As smartphones become more and more prevalent, distinctions based on
about the separation of physical retail from cybershopping are quickly
disappearing. According to Nielsen, U.S. smartphone users 15-24
trended 55/45 female, unlike the rest of the world. Significantly,
Groupon says its customers' usage overlaps heavily with smartphones:
68% of users (as of 2010) were 18-34 years of age, and 49% were
single. Following the Groupon direction, 67% of smartphone users
under 35 use smartphones while shopping, according to Chadwick Martin
. As fast as U.S. consumers are buying smartphones, however,
they lag southern Europe. According to year-end 2010 figures from
comScore, U.S. smartphone penetration moved 50% in a year, from 17% at
the end of 2009 to 27% a year later. Spain, meanwhile, leads all
countries at 38% smartphone market share. Italy is growing more
slowly, but still ranks second to Spain at 35%.

It shouldn't be a surprise that women are more social than men, but
online, they are clearly in the ascendancy. Consider what the
following sites all share in common: Women drive 62% of Facebook
activity. 60% of Zynga gamers (Farmville et al) are women. 77% of
Groupon users are women. Women follow more people and post far more
than men at Twitter. Women are notably more active than men at
dining-related sites including Yelp and Opentable. Why does this
matter? Women control 80% on consumer spending in the U.S.

Overall, the statistics suggest that

*this is a global phenomenon
*women are in the vanguard in the U.S. particularly
*growth rates are extremely high.

III. Mobility

Once people go mobile, what do they do? Among smartphone users in the
U.S., the overwhelming leader in shopping tasks is price comparison.
eBay bought the Red Laser startup in 2010 and quickly rolled out its
capability to a) turn a smartphone into a barcode scanner and b)
compare the UPC of the physical good in the store to prices across
virtual merchants. The speed and power of the services are most
impressive: if you haven't tried it, this is game-changing behavior.
Nine million downloads were reported as of early 2011, and eBay has
licensed the technology to more than 150 firms, including
and Shopkick (about which more in a moment). Amazon offers the same
functionality. I have heard rumors -- that I can't yet confirm --
that retailers are defeating the bar codes on their own merchandise
(black magic markers are quick and effective) to prevent in-store
price comparison.

The logic of these merchants is easy to understand. Amazon has
massive buying power, enjoys a ~6% structural advantage because of its
sharply limited exposure to state sales tax, and has built a powerful
lens into various product categories with its affiliate sellers: shop
for a camera, and J&R or Adorama will likely be featured on the page,
while in athletic shoes, Road Runner Sports might show up. Through
these and other means, Amazon knows and likely often makes the market
for a given item.

Apart from these shopping-specific applications, the power of the
smartphone platform as a general-purpose computing platform is being
explored at a stunningly rapid pace. As mobility becomes more
powerful and more flexible, retails will continue to be pressed to
match the innovations of the smartphone. The Apple app store,
operating since 2008, has a section of about 350,000 titles; the
Android platform is growing faster and hit the 250,000 mark this
quarter. Consider the variety of single-purpose devices that
smartphones and tablets can be programmed to emulate:

-audio mixing board
-DJ turntables
-star map
-OBD "check engine" light decoder
-language lessons
-decibel meter
-remote control
-handheld haptic game
-audio-based song identifier

all in addition to a broad range of audio, visual, and text-based

Having access to such power while in motion has the effect of lowering
coordination costs. Services that not long ago required a formal
organization can be accomplished on a people-to-people basis. AirBnB
(an air mattress in your spare room turns you into a bend and
breakfast, hence the name) has booked a million room nights, and now
has launched an appealing mobile app, for example. Square, a
potentially disruptive credit card reader attachment for smartphones,
allows anyone to become a merchant. Kiva has loaned more than
$200,000,000 to more than 500,000 entrepreneurs in in just over 5
years. Zipcar operates a short-term car rental service that would be
impossible without distributed wireless technology. Each of these
innovations holds challenges and lessons for physical retailers.

For example, access to smartphones changes game play. Check-in games
such as Foursquare and Gowalla allow patrons to become "mayor" of
businesses they frequent. Shopkick, a two-year-old startup, gives
shoppers reward points simply for checking into a retail location.
The service employs a proprietary radio technology that both works
indoors and is more accurate that GPS. Best Buy and Sports Authority
are both customers.

More recently, 2D (QR) barcodes allow the retailer to leverage the
mobile platform to raise customer service capabilities, manage
promotions, and otherwise use the same smartphone to help turn the
tide of price-comparison and the concomitant commoditization. The
Home Depot launched a program using bar codes to drive in-store
purchase behavior, in part through the kind of detailed product
information and person-to-person reviews familiar to anyone who's
shopped on line. Macys and Best Buy are also experimenting with the
technology in selected markets.

IV. Social media

Shopkick is also significant in that it marries location/mobility with
social media. Many users of Facebook and other networks are
interested in social change, so Shopkick piloted with CauseApp, which
was downloaded more than 500,000 times. It donated money to
non-profits based on a consumer checking into participating retailers.
(SocialVibe offers similar functionality to such clients as Disney,
GE, and Microsoft, but not specifically on mobile.)

Apart from social causes, shopping is an inherently social activity.
Groupon is an obvious example: deals are not merely broadcast, but
engineered to be shared by social networks. Blippy allows members to
update each other on purchase behavior. LivingSocial began as a
social sharing site (tell your friends what's on your bookshelf), but
later launched daily coupon deals.

Back in the retail domain, shopping is taking on a social dimension as
it overlaps with gaming and entertainment. Calling it
"shoppertainment" isn't elegant, but the description fits. While
people have long passed on news of deals to their friends
(coupon-sharing sites are more than a decade old), the trend toward
merging entertainment and commerce can be clearly seen in the rapid
rise of one-deal-at-a-time sites. The grandddaddy here is probably
Amazon: the Gold Box was introduced in 2002 and has been expanded and
refined in the years since. More recently, woot! launched in 2005,
offering one deal a day, with the new product available at midnight
Dallas time. The social dimension is key: contests, blogs, and
user-generated content abound. Facebook refers significant traffic.
Product descriptions are written in a mock-literary tone that can be
equally grating, snarky, and humorous: the FAQ expressly states they
are written for entertainment purposes. The site expanded from its
core in electronics to include parallel wine and t-shirt offerings.
Amazon acquired the firm in 2010.

In that same time, Gilt Groupe was getting serious publicity. The
one-deal-at-a-time firm, founded in 2007, specializes in luxury goods,
available only to members for 36 hours. Annual revenues are in the
$300 million range. Given the firm's New York offices and proximity
to the fashion industry, media attention has been plentiful. The firm
states it is contemplating an IPO in 2012.

Far from New York, another one-deal-at-a-time (ODAT) business has
expanded. is headquartered in Salt Lake City and
carries roughly 1,000 brands. Its family of sites sell bike,
snowboard, ski, and outdoor gear, sometimes at aggressive discounts.
As opposed to Amazon (which hosts Gold Box deals for a few hours),
woot (24 hours), or Gilt (36 hours), SteepandCheap usually sells in
30-minute windows. Matching the inventory, the price, and the time is
akin to television programming: much as local stations rely on David
Letterman to bring viewers to their 11:00 p.m. newscasts,
SteepandCheap and its sister sites like Bonktown (for cycling gear)
need people to sit on the site for more than one bargain.

Several tools are helpful here. First, social media and texting allow
people to clue fellow enthusiasts in to new deals. Second, the site
can send alerts to mobile devices, and smartphone owners can purchase
from mobile devices. Finally, affiliate sites, some of them
aggregators, also help spread the word among deal-hunters. Given that
these are discretionary purchases, the game elements of the
presentation help provide incentive: counters convey the number of
people on the site (for the website version, not the app), the current
inventory levels, and the time remaining. Deals may show up multiple
times per day; something less than 48 unique products are featured.
But because of the randomness, an average of about 10,000-12,000 users
can be watching the site during daylight hours.

The model clearly works. In one 30-minute segment, 168 Oakley
sweatshirts came up at $16.99 each; 152 sold, for a net revenue of
$2582. In another block, 339 pairs of cold-weather boxer shorts sold
at $14.00 apiece; that netted $4746. Averaging those random examples
gives about $3600 per half-hour, $7200 per business hour, or maybe
$75,000-$100,000 per 24-hour day. Guesstimating $500,000 per 7-day
week would extrapolate to $25 million a year just for one site;
others, devoted to bigger-ticket items, would have different profiles.
All together, is a $250 million business, according
to Wikipedia.

Adding it up

Where is retail heading? Three overall trends appear to be mutually

1) Physical and virtual shopping are becoming indistinguishable.
Shoppers can touch and compare physical items at the same moment
they're accessing extensive price comparisons, researching detailed
descriptions of features and benefits, and weighing word of mouth
(either archived on review sites or real-time via Twitter).

2) Retailing, particularly for discretionary purchases, must transcend
price, selection, and service. Involvement, whether through game
elements (including the in-store promotions made possible with
smartphone bar-code readers), user-generated content (ski videos at
Backcountry, for example), clever ad copy, or other features, is
becoming more important in some categories.

3) Price and performance pressure will not relent. Groupon and
LivingSocial are conditioning bargain-hunters to expect 50% off as the
baseline. Amazon's volume purchasing, supply-chain excellence, and
tax-advantaged status make them difficult to beat. At the same time,
their sites load fast, their mobile apps are appealing, and surveys
rank them at the top of on- or off-line customer service polls.
Regardless of prime real estate, customer goodwill, or previous
isolation from competition, local retailers cannot avoid confronting
the long reach of the Seattle superstore. In addition, Amazon never
stands still, constantly innovating, acquiring, and refining, making
them a moving target for anyone else to benchmark, much less emulate.