What do you call a retail model that is not going down but getting divided based on the economics of the world, consumer behaviour and early adopters? Let’s dive into the fragmentation of retail.
I’ve lost count of the number of times I have seen the terms ‘retail apocalypse’ and ‘perfect storm in retail’ being used in the last 2-3 years. I have watched the collapse of several major chains with an increasing sense of dismay and ‘the end of an era’ nostalgia. Department stores, toy specialists, electronics giants, they were all institutions in their own right!
Now, an apocalypse is a profound word and means ‘the total destruction and end of the world’. Grave! English is not my first language but intuitively it feels wrong to associate the word with the current retail situation. Some retailers are thriving while others are suffering. The respective financial performances are polarised.
Besides the multi-channel retailers with a strong USP and online pure-plays, marketplaces are the big winners. Marketplaces and well defined rental business models are thriving in the changing landscape. And, both marketplaces and rental models are powered by small businesses and/or individuals.
So, it is fragmentation, not destruction!?
Macroeconomics in Retail Sector
In the West, consumer confidence has been affected by rising unemployment, inflation, coalition governments, maverick Presidents, housing market challenges among other macroeconomic factors.
Different factors are affecting the different countries in their own ways. Closer to home, Brexit has put the brakes on progress and innovation. It has created a sense of limbo and uncertainty thereby affecting the morale of retailers and consumer confidence.
Retail is a low margin sector that will always be sensitive to small changes in the cost model. The rise in business rates is a good example. Obviously, second-guessing the terms of Brexit might be a futile exercise at this stage but the impact, either way, could be long-lasting.
Related reading: How to Best Connect With Retail Buyers and Stay in Touch?
In recent years, unpredictable weather patterns have affected retailer performance. It works both ways. Some retailers have benefitted from the extended summer whilst others have struggled with the stock exit of their autumn/winter range due to the same!
Meanwhile, I read somewhere that a clothing retailer improved their sales comps on the back of selling more coats in the biting cold weather. Other anomalies like excessive wind and unexpected tropical heat have also adversely influenced footfall to physical stores.
Retail is a balancing act and managing the push/pull of customer demand with the right product and minimum inventory under these conditions is incredibly hard, especially for those with long product lead times. I’ve read case studies of well-established retailers that nearly went bankrupt due to excess inventory.
Changing Consumer Behaviours
Smartphone penetration, internet usage and social media engagement have changed the face of retail in the last 10+ years. Consumers are much better informed and are happy to swap seemingly unrelated products and services to satisfy their needs.
Case in point, toy retailers have struggled to hold onto market shares as kids have increasingly replaced toys with devices. Even toddlers have a higher attention span for video content in mobile phones than their toys. Meanwhile, the devices themselves e.g TV, mobile, refrigerator etc are being replaced less often leading to a shrinking market size in certain product categories.
Further, social media has turned the focus inwards towards the individual and created a growing demand for personalised, ‘made for the individual’ products. It appears as if mass products that are not need-based (e.g. food, medicines etc) are gradually losing their appeal.
Long Tail as the New Norm
The big winners in this scenario are the marketplaces. Small businesses that cater to specific customer needs and create minor niches are collectively chipping away at the market share once held by the large businesses through the marketplaces. This could explain some of the fragmentation in retail.
Further, pure-plays, in general, have better prospects now due to the low cost associated with setting up the online business and the improved customer confidence in buying from new online websites.
The tech is really advanced and accessible now. There are several successful case studies on social media led pureplay businesses.
We live in a time of great change. Old consumer models are making way for new ones. It is unclear where the retail sector will be 5-10 years from now. Consolidation and fragmentation are words that come to mind. Agile businesses with a finger on the pulse of the customer would have survived with increased relevance. We will have to wait and watch!
Hema Selvaraj is the founder of Hep Audrey, an emerging British jewellery brand. She seeks to carve a niche for Hep Audrey as a contemporary brand in the fragmented jewellery sector. Hema is an accomplished retailer with an MBA from the Cranfield School of Management. She has also completed the Stanford Certificate of Innovation and Entrepreneurship recently.
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