Why is Traditional Retail Under Siege?

By November 30, 2016Creative

The overall growth in U.S. general merchandise and apparel over the last decade is relatively flat. Traditional retail

But look under the covers and disaggregate brick-and-mortar sales from digital sales. Not surprisingly, you’ll see digital growing at a double clip while brick-and-mortar is declining.

We recently interviewed Scott Friend, Managing Director at Bain Capital Ventures, who revealed the details behind that decline and predicted whether legacy retailers would be able to keep up with a rapidly evolving retail landscape. This post is based on that interview. Traditional retail

The State of Retail Today

For the most part, major retailers like Walmart, Target, Staples, and Sears have treaded water growing their digital businesses while the store businesses have declined.

If these organizations woke up today with a clean sheet of paper and said, “I want to redesign my omnichannel retail operation to be balanced with the way the consumer wants to shop,” they might be closing 25-40% of their stores. The challenge is, the stores are locked into long-term leases, so they can’t just close stores overnight.

And truly, if you were going to build the optimal store network, you might not want to close any of the locations. You might simply want 40% less space in every one of the locations—which of course isn’t possible either.

These problems have created huge economic constraints on retailers to invest more heavily in omnichannel and digital, and to attempt to upgrade the physical environments and employee practices in those stores to make shopping more engaging.

In parallel, the ability for new brands to go direct-to-consumer through the Internet with relatively very little capital has grown dramatically. I would imagine it took The Gap far longer to get to its first $100 million in sales than it did Warby or Rent the Runway, in part because they had to open stores in new locations to drive more demand versus having the benefit of universal reach on the Internet.

why-is-traditional-retail-under-siege_inline-1

So is it better to go digital and expand to brick-and-mortar instead of the other way around?

When Rent the Runway decided to launch showrooms, it was a three or four week effort. They quickly enabled the systems that were necessary to have physical locations for women to visit to have the “Rent the Runway experience.”

On the other hand, for a brick-and-mortar business to launch a new location that’s fully integrated might take years. That’s why the promise of omnichannel has been so long in coming.

These born-digital operators don’t have the challenge that legacy players have, i.e., siloed systems and information. They don’t have different customer files for digital and brick-and-mortar. A customer is a customer no matter where she shops, and there’s one system of record for inventory.

That purity gives born-digital operators a distinct advantage when they decide to open physical locations.

How are traditional players going to compete?

The sad reality is that not all traditional players will make it. Yet, many of them have incredible people and resources that they can leverage.

What can they do?

Again, the handicap is the fleet of stores that isn’t efficient. It’ll take time to bleed off inefficient real estate.

But we’re starting to see aggressive moves from legacy players in branding and retailing to get more digital DNA into the organization inorganically. I think we’ll continue to see a trend of major players coveting high-growth businesses and their teams that know how to do digital customer acquisition.

How long do these new born-digital operators have to challenge the incumbents?

why-is-traditional-retail-under-siege_inline-2

Scott sees their advantage lasting into perpetuity. It’s not just about being locked into leases: there’s a fundamental difference in the thinking of these larger organizations, their ability to take risks as public companies, and the type of people they attract and retain on their teams.

One of the only examples today of a very large company that operates at startup speed is Amazon. The web services side of their business seems to be innovating as fast as many startups that Scott’s team invests in. It’s daunting to see a company of Amazon’s scale with that level of energy and insight and action that normally is reserved for early-stage startups.

Scott doesn’t expect that we’ve got a short window for startups to disrupt legacy players. Instead, we should expect to see legacy players making meaningful strategic investments in some of these digital-first companies.

There’s never been a better time to start a direct-to-consumer company. The cost to start, from a technology standpoint, has never been lower. What used to cost millions of dollars for engineering now can be done for tens of thousands or hundreds of thousands.

why-is-traditional-retail-under-siege_inline-3

The range of investors that bring domain expertise has also never been greater. And the exit options for these companies upon success have never been greater, either.

What are the big areas of emerging disruption for the next 5-10 years?

Scott mentioned two areas to keep an eye on:

  1. Experiential retail. These are a combination of an experience and fun and exciting shopping under one roof. Example: SoulCycle.
  2. Conversational AI. This is a hot buzzword. The ability to have a good conversation with a computer on the other end of a device will enable more frictionless transactions. We’re living in the world of Siri and Cortana, and at the moment we’re still robotic in how we talk to them. That will continue to improve.

What is an investor like Scott looking for? How do people catch his eye?

The reality is, entrepreneurs are way better at putting a thesis together than investors are. Scott and his team are interested in super-talented people who are taking big disruptive swings at giant markets.

When you have an entrepreneur willing to convince the universe that they’re right about their idea, investors are open to hear them.

Are you an entrepreneur with an awesome idea? Click on Scott’s name below and shoot him an email.

This episode is based on an interview with Scott Friend from Bain Capital Ventures. To hear this episode, and many more like it, you can subscribe to the Hawke Media Podcast.

If you don’t use iTunes, you can listen to every episode here.

why-is-traditional-retail-under-siege_headline

© 2017 | All rights reserved Hawke Media.