Patterns of Disruption in Retailing

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Patterns of Disruption in Retailing

• HDCS 4393/4394  InternshipDr. Shirley Ezell

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What Can We Learn?

• Some would describe retailing as an industry
  filled with uncertainty.
• Electronic commerce and the role of Internet
  retailing is part of the near future discussed by
  all kinds of retail organizations.
• Electronic commerce is likely to change the basis
  of competitive advantage.

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Mission of Retailing Meets Disruptive
Technologies

• Getting the right product at the right price at
  the right time has been the basic mission of
  retailing.
• The way retailers fulfill this mission has
  changed as a result of disruptive technologies.
• A disruptive technology enables innovative
  companies to create new business models that
  alter the economies of their industry.

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History of Disruptive Technologies in Retail

• The 4 major disruptions were
• 1. Department Stores
• 2. Mail-order Catalogs
• 3. Discount Department Stores
• 4. Internet Retailing.
• Check out the diverse internet retailers (from
  Amazon to Chemdex, from eBay to travelocity) and
  think about how these internet retailers have
  changed way things are purchased and sold in the
  marketplace.
• While disruptions change the economics of an
  industry, they dont necessarily change the
  companies profitability.

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What Have You Learned About Profitability?

• Retailing profitability is largely determined by
  the margins stores can earn and the frequency
  with which they can turn their inventory over.
• The average successful department store earned
  gross margins of approximately 40 and turned its
  inventory over about 3 times per year.
• This translates into the store made 40 3 times,
  for a 120 annual return on the capital invested
  in inventory.

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Comparing Profitability with Discount
Department Stores and Internet Retailers

• The average successful discount department store
  earns 23 gross margins and turned its inventory
  over five time annually. It received a similar
  return on inventory investment by changing the
  balance between margins and turnover rates.
• If Internet retailers continue like Amazon.com to
  turn inventory at 2000 rates, they could achieve
  traditional returns with margins of 5.

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Department Stores as Disruptive Innovators

• The original dominant local retailer gave
  customers value with large inventories,
  extending credit, personalized advice. This
  retailers produce a high-inventory,
  service- oriented business with slow
  turnover, struggling to turn their
  inventories over twice a year.
  These retailers were forced to charge
  high prices to earn the margin to stay in
  business.
• With the launch of department stores in the
  late 19th and 20th centuries, business men
  like Marshall Field and R.H. Macy
  outperformed the existing retailers
  in customer service, created a
  disruption, and did a superior
  job of getting the right products into
  the right places.

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What did Department Stores do?

• Massed enormous numbers of
  different products in one location
  which was very attractive for
  shoppers.
• Department stores began to outperform
  local stores in pricing, and, by
  accelerating inventory turnover rates, they
  earned the same returns on much lower gross
  margins.
• To compete in the service area they focused their
  merchandise mix on simple familiar products to
  compete with the local store, that knows about
  individual customer needs and preferences.

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What Helped these Success Stories Other
Disruptions?

• Railroads provided access to the goods and
  transported customers from their homes to stores.
• Site location became a competitive advantage with
  scientific counting of customer traffic.
• Catalog retailing targeting rural
  customers was helped by free mail
  delivery. Sears and the money-back
  guarantees followed by expansion of
  Sears into chains of outlets.

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What Helped these Success Stories Other
Disruptions? (Cont.)

• The automobile brings in the next changes.
  Shopping Malls did not alter the business model.
  They attracted enough customers to sustain a
  collection of focused retailers such as The Gap,
  Williams-Sonoma. These malls had similar margins
  and inventory turnovers as department stores but
  they also had a deeper product lines within each
  category.
• Department stores continue to
  anchor while many strips/outlets
  are combinations of
  category-focused retailers.

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2. Mail-order Catalogs

• Catalog retailing expanded when specialty
  catalogs followed the trends of the malls
  changing the generalist catalogs and closing
  Wards and Sears catalogs.

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3. Discount Department Stores

• Discount Department Stores
  expanded in the 60s locating in
  less expensive real estate at the
  edge of towns and were disruptive.
  Their business model changed
  with low-cost, high-turnover,
  with success stories of 5
  inventory turns per year and
  gross margins of 20 to 25.
• Discounters concentrated on simple products that
  could sell themselves to compete with limited
  services and used branded hard goods (hardware,
  kitchen utensils) and products communicated by
  pictures to the consumers.

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3. Discount Department Stores (Cont.)

• Department stores reacted by going up market with
  soft goods requiring more service and
  product knowledge in selling.
• Discounters were successful by pricing their
  goods 20 below the prices of retail department
  stores. But as department stores left this
  market, discounters began to compete with only
  low-cost discounters.

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3. Discount Department Stores

• This left room for another force.
  Highly focused retailers attack the
  discounters (specialty
  discounters such as
  Circuit City, Home Depot, Barnes Noble) and
  became category killers with a sustaining
  innovation rather than a disruptive
  force. They offered broader,
  deeper selections of products keeping the 23 and
  5 inventory turns.
• Most of the discounters, not counting Wal-Mart,
  left the hard-goods market and it is not usual to
  see merchandise mixes like Target with 60 to 80
  of space with soft goods. Competing against
  full-price department stores is easier than
  competing against the category specialists.

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4. Internet Retailing

• The 4th retailing disruption The Internet can
  deliver on 3 of the original retail missions. The
  Internet can offer a wide range of products. It
  can earn 125 return on inventory investments and
  it can turn its inventory 25 times each year
  needing only 5 gross margins.

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4. Internet Retailing (Cont.)

• Currently, the web seems to be repeating both
  patterns. However, the Internet department stores
  will not yield market share to specialized
  retailers. As the volume of purchases in
  individual categories grow, search engines and
  bandwidth may make it easier for consumers to
  find specialized e-tailors.

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Conclusion

• In analyzing the retailing disruptions, the
  generalist stores and catalogs dominated at the
  beginning of the disruptions but were dominated
  by specialized retailers. The specialists emerged
  when the market for the new form of retailing was
  large enough to support sales for narrower but
  deeper product mix. The disruptive retailers used
  simple branded product mix comprehended visually
  and numerically and shifted their mix toward
  higher-margin products to compete with the
  discounters.

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• One question How fast will the disruptors move
  up market into more complex products and
  value-added services?
• One of the disadvantages electronic sales will
  need to overcome is delivering products at the
  right time.

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And What can we Learn?

• That historically experts have underestimated
  the ultimate reach of disruptive technologies.
  Organizations and managers need to recognize the
  impact of technologies, and move into the
  mainstream, compete, and change the environment.