The retail world is in turmoil. That is nothing you don’t already know. I will not bore you with the 100 or so articles on retailers closing and all of the negative press in the retail and real estate worlds. Instead, I will give you my (philosophical) thoughts as follows…..
I start with a question as to what, in a big picture sense, is “retail” anyway?
It is a place – a location – where someone with branded (or unbranded) goods sells their wares to the public.
Retail is therefore a classic “middleman”.
And what does the internet do to “middlemen?”
It destroys them – or at least eviscerates their profit margins.
So what is happening to traditional retail? It is being destroyed. And the agent of destruction is a company that cannot seem to make that much money itself; namely, Amazon. It is disintermediating retail and “taking over”; however, it is kind of, well, ironic, that even that company has had trouble making much money (especially when subtracting stock-based compensation).
Incredibly Wall Street – and investors – have decided that Amazon doesn’t need to make money to have a market cap in the hundreds of billions of dollars – but that is a side issue. The point for retail is that the internet – largely through Amazon – is destroying the traditional retail industry. Even the behemoth – Wal-Mart – is in the cross-hairs of this disintermediation.
But the “death of retail” has been largely exaggerated. Indeed, I think that instead of the destruction of retail there is going to just be a dramatic industry shift as follows:
I would start the analysis – like I often do – with Michael Porter – the Harvard Professor who is a worldwide authority on competitive advantages.
Porter says don’t try to get “better” than your competition. Instead try to be “different” from your competition.
From my analysis of Porter I have come up with the concept of the “Power Niche.” This is a phrase I have coined that advocates developing pricing power in a small niche market – as opposed to having no such pricing power in a broader market.
Yet it seems like many – doomed – retailers are doing the opposite of what Porter (and I) recommend.
For example, there seems to be a rush to improve:
The “experience” of the customer
And a bunch of other things of similar import
I think overall these ideas will go nowhere because they are just making the retailer “better” and the laws of perfect competition – as exemplified through Amazon – will just grind on and on with this inexorable race to the bottom of profitability.
Instead, there is an easy way out for many – but not all – retailers and that is to just shift the dial from being a “retailer” to being a “purveyor of exclusive branded products.”
If you are a “retailer” who is selling something you can buy at Wal-Mart or Amazon or pretty much anywhere else you have zero competitive advantage. If however you are selling Spiffy Jiffy Blue Jeans that can “only” be purchased in your store, and nowhere else, you hold all the cards for the customer who wants Spiffy Jiffy – there is nowhere else to go.
Does this mean you win? No, of course not. But now you have a fighting chance. Instead of a race to the bottom of profitability you are now in the business of building a brand. As one of the greatest investors of all time –Warren Buffet – has said, he buys brands because they permit the owner of the brand to sell the product at an above-market price for an extended period of time.
The brand is therefore the thing. It is the “Power” in the “Power Niche” (if you are thinking like me) or the “being different instead of being better” concept (if you are thinking like Porter).
So to sum up:
I think traditional retail is close to dead and dying. There will be a few survivors which are the low-cost producers – like Amazon and Wal-Mart. Most of the other traditional retailers will go the way of the dodo.
However, branded retail (with exclusivity) is just getting started and I think will do very well over time.
For real estate players, if you buy my thinking, the analysis is easy; namely, look at the retailers in the buildings you are buying, lending on, leasing up, etc. Ask, do they have Power Niches? Are they selling branded exclusive products? Or are they racing Amazon to the bottom of profitability.