Retail in the Age of the Internet

It's kind of embarassing how often I see the UPS man.

My household has made extravagent use of the benefits of Amazon Prime.  We order grocery staples, hardware, paper goods, electronic accessories, air filters for the furnace, and oh yeah, sometimes books.  The brown truck stops in front of our house several times a week.  Since I am almost always the one who answers the door, I am beginning to worry that our unusually young and good looking UPS guy thinks there is an ulterior motive behind the volume of our orders.

At least I'm not alone.  Almost certainly, you, too are ordering more and more of your merchandise via an online retailer.  There's nothing wrong with that, of course.  But it gets a little sketchy when you start visiting big box retailers like Best Buy and Target so that you can have a look at the goods--and then place your order on Amazon.com.  

That practice, known as "showrooming", is becoming increasingly common, and it seems to have cut pretty deeply into the all-important Christmas profits of brick-and-mortar retailers.  Since it's probably a lot cheaper to sell over the internet than to pay for prime real estate and employees to walk you through all the features, it's hard to see how the brick-and-mortars can compete with see-it-here, buy-it-there.

Those retailers may complain about the morality of it, and in truth, it seems kind of mean to me.  When I was planning our wedding, I used to come across a lot of bulletin board posts from brides complaining that bridal shops had cut the labels out of the dresses they tried on.  Since this was done to prevent exactly what said brides wanted to do--tie up hours of the shop's time trying on and fitting dresses, and then order the dress from some cut-rate internet retailer--I found it hard to muster up a whole lot of sympathy.  There's nothing wrong with taking your business to a cheaper retailer, but it's pretty shifty to try and trick someone else into providing the expensive service that the discounters don't offer.

But complaining isn't going to stop it.  How do you maintain a business model in the face of this sort of unwinnable price competition?

One answer is that you don't: a lot of these retailers are going to end up going out of business.  I'd guess that Best Buy, for example, will eventually follow Circuit City into liquidation.

Another answer is that you specialize in goods that people tend to buy onsite.  Target already has very strong revenues in groceries, clothes, and home decor; those may end up accounting for more and more of their revenue.  But given the speed with which people are moving towards buying even clothes and furniture online, this alone may not be enough to sustain a viable business.

The approach retailers seem to have decided on is to emulate mattress retailers.  Ever tried to shop a mattress at Macy's, and then buy it at Mattress Discounters?  You can't.  Each store has a different name for the mattresses, making it almost impossible to comparison shop.  This allows Macy's to charge an outrageous markup on the mattresses they sell--but without this technique, mattress showrooms might not exist at all, because mattresses are expensive, rare purchases that people are willing to take some time over.  If it were easy to comparison shop, everyone would do, well, what you were hoping to do when you browsed beds at Macy's: try out the beds, and then order from somewhere cheaper that didn't have to pay the expenses for the showroom.

But to do this, retailers need the cooperation of the manufacturers.  Target needs specialized products that can't be procured anywhere else--or at least, products that are sufficiently hard to compare to the stuff on Amazon.

Obviously, they've had little trouble getting this sort of help from clothing manufacturers--Target's special Missoni line crashed their website.  But electronics retailers?  The supply chains are a mite more complicated, and the economies of scale somewhat larger.  Is it worth it to produce a special line just for Target?

The Wall Street Journal suggests that, at least for Target, they may have to; the discount giant is just too big a customer.  But that raises a different question:  what would a Target-specific television look like?  It's easy enough to imagine Proctor and Gamble allowing Target a specialty line of skin cleansing products.  It's hard to imagine Sony creating a Target-branded line of flat panels with--what?  Red tailfins?

It may be that the internet simply makes the big box brick-and-mortar retailer economically unviable, and that one day, we'll have to buy big ticket items on faith, without being able to look at them ahead of time.  Perhaps the internet will get better at showing us our merchandise, developing virtual avatars so that we can try on clothes and put furniture in our rooms.  Or perhaps some entrepreneur will go into the showroom business:  pay $5, and browse to your heart's content.

Whatever happens, I think it's quite likely that the retail business will look quite different in fifteen years.  Of course, that's not much of a prediction; it's been a safe bet since at least the invention of the railroad.