Will digitization of retail supply chain eventually lead to Balkanization of online retail?
Digitization of retail supply chain is creating strange consequences. Here is one example:
Analysts are openly questioning the survivability of JC Penney. Lurid headlines such as this one abound in press. Will Ashworth opines in the linked article:
When Johnson took over from Mike Ullman last February, the company had weaknesses, but it wasn’t yet on the brink of extinction. Now, though, the American retail icon is in serious trouble … so much so it’s conceivable that JCPenney could be on the same well-known downward path Woolworth’s traveled 15 years ago.
Retail companies around the world are going through a period of intense change. Old models are rapidly dying down and new models are emerging. As discussed in my book THE 5-STAR BUSINESS NETWORKS, newer business models are emerging to replace the redundant models. The pace of change is accelerating at the same time. Again Will Ashworth provides some historical context in the same article:
For those unaware, the F.W. Woolworth Company was the original five-and-dime store founded in 1879 by Frank Woolworth. By the time Sam Walton was opening his version of the discount store — Walmart (NYSE:WMT) — in 1962, Woolworth’s had more than 2,000 stores and was a corporate behemoth.
Unfortunately, expansion in the 1950s and 1960s was its ultimately undoing, adding stores but not profits. In 1997, Roger Farah, the current president of Ralph Lauren (NYSE:RL), was the top man at Woolworth’s and the one to pull the plug on the 400 stores that still existed. A year later, it changed its name to Venator Group, and three years after that to Foot Locker(NYSE:FL), its strongest brand.
Walmart, meanwhile, went from startup to replacing Woolworth in the Dow Jones Industrial Average.
It took Walmart more than two decades to replace F.W.Woolworth Company. Today, with the rapid uptake of online purchasing by the masses, the business model is again up for grab. Amazon doubled its revenue by $24 Billion in 3 years, and commands a PE multiple of more than 100. Walmart is nearly stagnant, hunting for growth in developing markets, and get a PE multiple in the teens. Do these statistics portend the things to come in near future? At least the first impression tells us that the market expects Amazon to be the new leader in a few years time.
However, there is another side to the story which is not yet fully explored. As the purchasing moves online, it also becomes increasingly specialized. Consumers buy from retailers who build relationships with them by providing knowledge and specialist information. While Amazon is fighting for margins around 1.5%, and bases its strategy around fast delivery – online specialty stores have proven that in return for product education, customers will pay handsomely and wait for the products longer. This extra margin allows online specialty stores to invest time in formalizing and digitizing their knowledge base, and provide more accurate customized answer to customer queries. For example, see this report from The Times of India which states the following:
“Despite the trend towards mass merchandising, we believe that niche merchants can hold their own very well. To do so, they must find ways to differentiate through high quality merchandise, deeper product catalogues or exceptional service in that category. Apparel and baby products, for instance, are categories where a specialist has several advantages over a generalist,” the report said. For instance, Amazon found it difficult to compete with Diapers.com and Zappos-acquiring both companies eventually.
Added to this is the fact that many online specialty stores are owned by passionate and highly knowledgeable people in the realm of their respective product range. This passion creates the advantage that large format online retailers may not be able to match, and leads us to ask where does the future of online retailers (or retailers in general) lie?
Any takers to that question?