Retail: The Final Frontier?
Both these stories expose the vulnerability of fixed asset distribution. In simple terms, the cost of doing business in a traditional retail environment is fixed: It doesn’t vary with volume; it’s independent of the revenue required to support it. Over the years, our retail distribution systems simply have been overbuilt.
Certainly, the sheer cost of leasing real estate is a huge factor contributing to the decline of retail businesses. Inventory management also has been increasingly costly as warehouse space, inventory management systems and personnel expenses have increased.
Perhaps the most important criticism of the fixed asset distribution model is that retail stores are just plain dumb. In essence, they treat all comers like strangers, new customers with whom they have no prior history. Similarly, they seem to presume these people have no knowledge of the company, no prior experience with the organization. That’s a huge wasted opportunity.
Consider a major athletic footwear retailer that has spent $130 million on national advertising every year for a number of years. TV and print ads are designed to drive consumers to stores that carry its line of shoes. Its advertising makes the brand look fairly new, but the majority of Americans are familiar with this company and are already customers. Still, the fixed asset distribution model prevents this company, or any other retailer, from developing an interactive, intimate relationship with those customers.
Modern databases are smart — they allow marketers to segment customers and prospects to a fine degree — but database technology outpaces retailers’ ability to exploit it.
In gauging the fate of the dedicated retailer, we can point to three key problems:
1. Economics. It’s prohibitively expensive for merchants to employ traditional media to speak intelligently and intimately to a multitude of tiny market segments.