I enjoy shopping. But every time I’ve been to a mall in the past year, I’ve been nothing but disappointed. I can never find anything I like, or want. When I do, it’s too expensive. And then, we watch stores close down, one by one.
I see plucky indie shops somehow stay in business. We keep hearing of the resurgence of indie bookstores. The ones I’m by invest heavily in events. There’s some or the other mini-celebrity every week or so.
Between these stories, what are the facts, what’s fear-mongering, and what is just reckless hope? Is Best Buy going to crash and burn because they didn’t have a mic with a pop filter that I wanted? Is City Lights Bookstore going to last another 40 years? Why do I like IKEA so much more than, say, Pier 1 Imports or West Elm?
I attempt to find out.
The Research Sources
I fed in ‘retail apocalypse’ into Google Scholar, and picked works which weren’t paywalled. I’m going to talk about four papers.
Two of them aren’t really academic papers. They are industry presentations to give you an overview of what’s happening. Of the remaining, one was an in-depth research paper that went through several data sources to try understanding the landscape. The other was a paper from Harvard Business School that is more sociological in nature than data-driven.
Unlike previous pieces, in this one, I don’t talk much about data and methods, because they seem redundant, and simple. I focus mainly on the results, because they are interesting and expansive.
The Retail Apocalypse Isn’t Completely Real
I found this rather comprehensive paper titled The Recent Evolution of Physical Retail Markets: Online Retailing, Big Box Stores, and the Rise of Restaurants. It looks at a variety of data sources, including trade surveys, business patterns, personal expenditure data, and Yelp, to paint a picture of what retail looks like today.
This paper identifies that restaurant data isn’t part of the data around retail, owing to reporting classifications, which is what causes much of the doomsaying about the death of retail. They combine restaurant data with non-restaurant brick and mortar store data, and see the interesting patterns that this throws up.
Along with this, I also looked at this presentation titled Debunking the Retail Apocalypse. It’s easy to read and mainly contains results and conclusions.
Both these sources reach similar conclusions. Let’s see how they do that.
In addition I also looked at this presentation by an analytics business titled How To Survive The Retail Apocalypse, which is more geared towards approaches to dealing with the situation.
So brick-and-mortar retail is down 3% from 1999, and down 4% from 2007 in terms of number of stores. Non-restaurant retail was at its peak at 1.07 million in 2007, and is now still down at 0.98 million in terms of number of establishments, down around 10%.
But, the number of non-restaurant stores was 1.64 million in 2007, and went down to 1.59 million in 2010. It’s now getting back to being 1.63 million in 2017.
The number of restaurants are up, however, from 475K in 1999, to 650K in 2017. The authors say the increase in number of restaurants makes up for the number of closed stores, which can keep downtown and shopping areas alive.
Also, the top 16 chains that closed, i.e. Radioshack, Payless, Sears, GameStop, account for 48% of all closed stores. But the top 16 chains that opened new stores account for 4000+ new stores just in 2017. These include brands like Dollar Tree, Dollar General, 7-Eleven, Sally Beauty, O’Reilly Auto.
This points to bad business models or changing conditions that mean brick-and-mortar businesses can still thrive, but the conditions that determine the winners have changed.
When we look at how employment has changed in physical stores, we see there is a small decline in non-restaurant retail. They employed 11% of the workforce in 1999. Now it’s down to 10%. But restaurant employment is up from 6% to 8%, which makes up for the decline in non-restaurant stores.
With sales, non-restaurant stores have recovered fully in sales to pre-slowdown numbers. Restaurants have had a much more modest recovery sales-wise, because they focus on paying employees a living wage on average.
When we look at sales vs employees, productivity has gone up, and there are more sales per employee. I suppose this is because of a combination of automation and squeezing workers. This is one of the reasons why retail is growing. It now takes less employees to achieve the same results.
But as wages are rising, there’s less sales per payroll dollar, which might lead to decline in retail. Restaurants make the least dollar per payroll, but are able to sustain themselves, because people want to spend more on food, and there is a demand for food away from home. But rising payroll costs are what discourage people from opening restaurants. I can attest to this, watching restaurant after restaurant close in Palo Alto because they can’t afford to pay chefs and waitstaff to live within commuting distance.
Restaurants thrive in areas where there is a moderate rise in payroll per worker. They don’t thrive in areas where that’s very low or very high. If there’s no growth, or if it’s too expensive, you probably have issues finding and retaining employees.
Both sit-down restaurants and delis are thriving, across the country. Bars are declining or growing slowly, though. Poorer counties see a decline in bars. I understand that. Buying drinks at a bar or a restaurant feels like pouring money down the drain often, and when money is tight, that’s the easiest way to cut expenses.
What I get from this is that brick-and-mortar stores haven’t fully recovered from 2008, especially since that was when they took on loans, with leveraged buyouts, which led them to a quick path to bankruptcy, like Toys R Us.
But why did they fail in the first place? Is it Amazon that is killing them?
Where Retail Fails
When we see stores like RadioShack, Sears, Payless, and Sports Authority fail, one thing that seems apparent is that they didn’t develop an online presence early enough, and didn’t invest enough in it.
When we look at what verticals are growing, and which are declining, an interesting picture emerges.
Stores that are growing include DollarTree, Dollar General, Aldi, Target, Walmart, and Costco. It turns out that the verticals that are growing fastest are discount stores, home goods, grocery, and fast fashion.
Verticals that are declining include sporting goods, books, department stores, clothing stores, and electronics.
Why is this happening? Is it Amazon? Or is it big box stores like Walmart?
Between 1999 to 2010, big box stores went from 4% of all sales to 9%. And online retail grew from 0.5% to 3.5%.
But between 2010 and 2017, the reverse trend happened, with big box stores declining to 8%, and online sales grew to 7%.
This growth of the share of online sales affected certain verticals disproportionately in 1999, the share of online retail in electronics was 7%. In 2017, it had risen to 50%! Similarly, sporting goods and books were 5% online back then, and it has risen to 37% now.
Counterintuitively, furniture purchases closely follow with 30% online, and clothing purchases are 22% online.
So we can say ecommerce certainly cuts into brick-and-mortar sales in these verticals. This is because of customer experience, and costs.
The middle class is declining in America. Which is why people are more discerning where they spend their dollars. The rise of discount stores and bargain stores like Walmart and TJ Maxx can be explained by this. Even with restaurants, coffee, pizza and fast food outlets are growing. People do want to eat out and do so more frequently, but they prefer to spend less money each time. When they do spend money, they want more value and to improve their lives, which is why cosmetics and vitamin stores are also growing.
But do big box stores also kill retail in their neighborhood? Apparently not!
The growth of big box stores in a county leads to more retail growth activity in that area. Big box stores tend to become an anchor store in a mall or strip mall, which leads to a whole ecosystem of smaller stores developing around it.
How Retail Stores Stay Relevant
Competitive retail stores need to optimize on the areas of pricing, product and operations, and customer experience.
Pricing is becoming more important, as the middle class is declining. The key is value for money, which is why along with bargain and discount stores growing, chain restaurants like Olive Garden and Cheesecake Factory are declining.
There’s several ways retail stores are trying to optimize on having better operations to reduce costs and increase margins.
Private labels and store brands are a way stores are trying to be competitive and build brand loyalty
They are trying to streamline their supply chain and their logistics. For example, Zara can have something go from a design studio in Spain to a store in Manhattan in 25 days.
Retailers try to improve their online presence, sometimes by acquiring startups that already have a great online presence.
Retailers also try to improve their last mile delivery options by acquiring companies that are specialized in those areas, or partner with them. Examples are Target acquiring Shipt, and Amazon acquiring Whole Foods.
Retailers are also automating store operations. Walmart, for example, filed a patent for a cashierless store.
Personalization is another big area for retail stores to draw in and retain customers
eCommerce startups have brick-and-mortar stores so as to promote and strengthen their brand, and reach new audiences.
Traditional retailers open stores more focused on branding and customer experience. This is what is happening with the Apple store.
Stores also use augmented reality to enhance their in-store experience. Google and Lowes teamed up to create an app which helps you navigate the Lowes store and find what you’re looking for.
Companies also use AI to make your experience more personalized.
I wonder how electronics stores can stay relevant and cater to their customers better. I went to a Best Buy the past weekend, and they had everything other than what I wanted. It was an incredibly frustrating experience. Electronics stores need to have a very large inventory for a good customer experience. We probably need an IKEA of electronics. I suppose that used to be Fry’s. Well, the one closest to me just closed.
Case study: Indie bookstores
How do indie bookstores stay relevant? I frequent a few. They all have a ton of events, but their inventory doesn’t quite seem catered to me, which is annoying. I like attending the events, and I’m glad they take it upon themselves to be a relevant force in the neighborhood.
I read this paper titled Reinventing Retail: The Novel Resurgence of Independent Bookstores, where the author immersed himself in the indie bookstore industry between 2005 and 2008. It is more of a qualitative study than a quantitative one, as a result of conducting 258 interviews and several focus groups. It is insightful about the perks and challenges of the indie bookstore world.
The American Booksellers Association reported a historic high number of members in 1995. 1995 was also the year Amazon was founded. There was a 43% drop in indie bookstores in subsequent years, with Amazon debuting Kindle ebooks, and price wars from big box bookstores. When Borders closed, people predicted a ‘bookpocalypse’.
Which, like all predicted ends of the world, did not happen. Instead, indie stores have had a resurgence in recent years, and have established themselves as pillars of their community. Sales of print books have increased every year since 2013.
How did they reinvent themselves?
This paper says there are three key ingredients: Community, curation, and convening.
Community: Indie bookstores positioned themselves as the center of localism movements. They stressed strongly on local values, and were beneficiaries of movements like Small Business Saturday. They also invested well in maintaining a social media presence, with hashtags like #bookstagram, and managed to become a fixture across all age groups.
Curation: Indie bookstores built strong relationships with customers, and recommended them books beyond just the bestsellers, which would suit their unique interests. They also worked on “handselling” - asking customers a series of questions to recommend them the perfect book.
They also focused on carefully curating sidelines - book-related merchandise, like cards, toys, and hobby tools. I can attest this works on me. This bookstore I frequent has little hobby kits on sale, like a lettering kit, or a soap-making kit, and they make for great presents. The challenge here is to curate them so you have enough interesting things, but not so much that you become a generic gift shop that also carries books.
They also stocked geography-specific and local-interest books and sidelines. Another cool thing they did was shelf talkers - little notes from the employees about specific books on the shelves, to add a personal touch.
Convening: Events are now bookstores’ big draw. Some indie bookstores host as many as 500 events a year! Bookstores have become a viable ‘third place’ - a place where people convene and bond outside of home and work. They have become intellectual centers of the community, and they improve on that by hosting events partnering with local schools and chambers of commerce. Bookstores also are often an anchor store at a mall or shopping area, which gives the mall its identity. This helps them improve their branding as a pillar of the community.
Challenges
The big issue with indie bookstores’ survival is the razor-thin margins. Profits are low at 2-5%. As we’ve seen in the previous section, bookstores face intense competition from ebooks.
Wages and rent are a huge cost for bookstores. How they are dealing with them are interesting.
With rent, bookstores try to negotiate better rates with landlords by leveraging their position as the anchor store in the mall or shopping area.
With wages, bookstores try to reduce other expenses, and try to pay their employees well. They prefer to invest in their employees, because passionate employees who knew the landscape are extremely valuable and make a big difference in sales.
The Path Forward
Indie bookstores have banded together through the American Booksellers of America and other associations, and teach each other best strategies to survive, and thrive. They have conferences and classes about the trade, and focus on knowledge sharing and marketing together.
The path to do well as an indie bookstore involves the following steps:
Experiment with curating and convening.
Cultivate an identity in the community.
Benefit and learn from engaging with other indie bookstore owners.
Teach others the best practices you have learned.
Grow. At this point, a business model has probably emerged, and you have figured out how to sustain your business.
Thoughts
What sticks out to me from reading all this research is
Online or offline, it’s all retail, and customer experience is king. Going where the customers are and catering to them is the only key.
The demographics of people have changed in America, with a shrinking middle class. This means competing on price is essential. There’s no more money for middling stores like World Market or Pier 1 Imports which aren’t competitive on price or on quality.
Some verticals are simply better served online, like electronics, sporting goods, and books. Stores in these areas are going to lead to disappointed customers, unless you can have a massive, high quality inventory, or expert salespeople who can help you get something specific to your needs, or you build a community around your store. Bookstores and sporting goods stores are doing this to a great extent. It’s time electronics stores also follow suit. With the maker/hobbyist scene growing, the time is ripe to do so.
There’s a lot of potential for startup innovation in helping brick-and-mortar stores reduce costs and improve customer experience. Analytics, customization, supply chain management, and automation are already pretty hot right now, and they are only going to grow.
A variety of low-end restaurants are fueling the revival of the restaurant scene. The long term trend is going to be towards automating away as much as possible in a restaurant, in order to improve margins.
Wages growing moderately are prime conditions for a retail revival. If wages and cost of living are going up too much or not going up, those areas are where we might see more urban decay, no pun intended. This feels particularly problematic in cities like San Francisco, where landlords are okay with keeping storefronts empty than reduce the rent, leading to defunct, dark neighborhoods.
Retail is not dead, and be very skeptical of people who proclaim things dead. We’ve been selling and buying things for thousands of years. As always, there’s going to be an adjustment every now and then, which will lead to old monopolies coming down, and new ones going up. Watching the changing of that landscape is certainly very interesting.