Retail Industry

The Problem

It is often joked that the most powerful economic force is the American consumer. This may very well be a fact, but predicting buying habits of the American consumer is an incredibly difficult task.

Given this challenge, most retailers are regularly stuck with unwanted, deadweight products in their inventory, which in turn leads to clearance sales, returns to manufacturers, and inventory write-downs for linear retail businesses.

Conversely, platform retailers, who mostly function online, face this problem extremely rarely. If an item doesn’t sell, it’s the producer’s problem, not the retailer’s. These differences in unit economics have allowed platforms to not enter the retail space with force, often with an exclusively online presence. But these online-only businesses are having a significant impact on decades-old brick and mortar competitors.

The retail graveyard is getting rather crowded, including the likes of Borders, Circuit City, CompUSA, Sports Authority, Blockbuster, and Tower Records, to only name a few. Even more problematically, the ones that haven’t crashed yet are by and large doing quite poorly. They’re limping along, not flourishing.

One only needs to look at the market capitalization of today’s major retailers and compare it to the peak values from a decade ago.

Amazon's retail graveyard

Via CBInsights

In short, most of these companies (and a number not on this list) are either one bad economic cycle or platform business innovation away from bankruptcy. The threat to retailers isn’t any particular item or company, but rather time; the question to ask is not if, but when. As our case study on the demise of electronic stores suggests, the amount of time left for many of these retailers is only around 7-10 years, which should strike fear into retail executives and investors.

The Opportunity

Fortunately, there are a number of opportunities for existing industry giants to pair their knowledge and existing-customer bases with a platform business model. The great thing about these opportunities is that they’re all specific to the vertical, which means the same business model that works well for the fashion retail industry can thrive just as well in the electronics market.

The best example of this opportunity that we are currently exploring with a number of industry leaders are secondary product marketplaces. There’s a tremendous opportunity for a retailer to become the eBay or Amazon of its specific vertical.

As an example, a conglomerate like LVMH could easily dominate the high-end, vintage resale product marketplace. Would a consumer choose to buy a vintage Chanel dress through a startup platform or through a leading luxury fashion brand? The key to consumer loyalty here is trust and LVMH leaves a lot of value on the table by not totally owning the velocity of its signature products.

That said, if no existing retail giant makes a move into this space, a startup will rise and begin to erode the retailer’s dominance, nipping at its heels and eventually eroding its margins. A successful play in the resale market could quickly build a billion-dollar business, and there’s nothing to stop it from moving on to selling original products and competing directly with traditional fashion retailers.

Several companies are already working on this and similar ideas. Linear, online-only retailers have already grown in the fashion space, generating huge business, and the next evolution of the industry will see one or two dominant platforms to emerge.

The Endpoint

For the product marketplace, it doesn’t have any inventory expense, which means it makes the retailer’s margins without the wholesale expense. As it looks to expand market dominance, it can begin selling original products on a linear basis to undermine the shoe brands and the retailer.

This is an arena wherein Amazon has already found incredible success. For very standardized products like toiletries, Amazon has begun to sell white-labelled paper towels, toilet paper, etc. allowing them to capture greater margins and phase out not only retailers, but also product brands, too.

Additionally, while the platform will only attract smaller sellers at first, as it scales it will begin to attract some of the smaller brands that compete directly with the big retail brands. By combining this fragmented inventory, the platform will erode the sales of traditional brand leaders.

The finish line in this scenario is reduced sales for brick and mortar locations as consumers choose vintage, resold, or direct-to-consumers products over the offerings typically available in a retail store. The right choice is to own this new marketplace before a competitor or a startup does and cuts out the retailer completely.

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