How to Survive the Retail Apocalypse

It’s been a tough year for retailers. Major retailers across the US are closing hundreds of stores as they face renewed pressure from online competitors.

Meanwhile, Amazon has begun moving in earnest into bricks and mortar, with its $13.7 billion acquisition in Whole Foods. For years, grocers have downplayed the Amazon threat, but Amazon’s entrance into the grocery space has wiped out nearly $40 billion in market value.

At the same time, Amazon also has moved into areas that retailers once thought were safe, such as fashion. By the end of the year, Amazon is expected to surpass Macy’s as the biggest apparel retailer in the US.

No segment seems safe. Even Home Depot, once presumed immune, has started to feel the pressure. After Amazon announced its deal with Sears to Kenmore-brand appliances, some $12.5 billion on market value was wiped out overnight as the stocks of big box retailers like Home Depot, Lowe’s and Best Buy dropped sharply.

As the Home Depot example shows, the unfortunate reality for retailers is that Amazon doesn’t need to replicate all of you inventory to have a significant impact on your business. Given the relatively thin margins of retailers, Amazon entering only one or two segments, such as large appliances, is enough to have a significant impact, first on investor perceptions and eventually on your bottom line.

The bad news is that the decline of retail may just be getting started. By one estimate, retailers will have to reduce their store footprint by as much as one billion square feet to get back to growing profitably.

There’s good reason to believe that’s true. US retailers are significantly overextended in terms of store footprint compared to the rest of the world. By point of comparison, US retailers have about six times the square footage per capita compared to those in the UK.

As more and more sales continue to move online, the retailers that own all this excess capacity will continue to shrink. And at the same time, Amazon will continue to grow.

The future certainly looks dire. So what is a retailer to do?

Option 1: Go It Alone

The simplest path for retailers is to bow to long running consumer trends and launch an ecommerce initiative. Most major retailers have some ecommerce presence currently, but there’s a difference between tacking a website onto your business and making your business truly digital.

This includes launching native mobile apps and integrating the mobile experience into your business. The goal is usually to leverage your existing store footprint to deliver a better ecommerce experience for consumers

Initiatives like in-store pick up, free shipping, and mobile checkout are a good start here.

The problem is none of these will give you a competitive advantage against Amazon. Your standalone app and website are competing for consumer attention with Amazon. Given that the average number of new apps consumers download each month is basically zero, this is not a fight most retailers can win. And this approach won’t likely stem the tide of store closures and layoffs.

Option 2: Submit to Your New Overlords

If you can’t beat ‘em, join ‘em.

This strategy doesn’t mean foregoing your own ecommerce efforts. But it does mean recognizing that you’re now playing Amazon’s game.

In addition to your own ecommerce initiatives, you’re also selling on Amazon. In this scenario, eventually most of your ecommerce revenue will likely come from Amazon. The additional revenue opportunities can be a boon in the short term.

The downside of this strategy is that playing Amazon’s game means you’re playing by its rules. Ask traditional publishers how well this has worked out for them.

This includes paying Amazon’s customary take rate, which typically increases over time as new categories mature. This additional cost will create significant margin pressure for most traditional retailers.

Additionally, selling on Amazon means you’re competing on price with all the other vendors selling there, including many small sellers who can afford much thinner margins. Typically, this means that prices will decline over time as more sellers enter a category.

Finally, you’re giving up your direct relationship with the consumer. All the data and the customer relationship is ultimately Amazon’s, not yours. Long term, this means your brand value erodes as consumers see you as just another option in a crowded marketplace.

Option 3: Fight Fire with Fire

The third option for retailers is to embrace the disruption and fight back.

This means emulating Amazon’s platform business model and launching your own marketplace.

For inspiration, look to the biggest traditional retailer of all. After a decade of getting destroyed by Amazon in the ecommerce game, Walmart finally embraced platform innovation after its $3.4 billion purchase of Jet.com.

Since its acquisition, Walmart has empowered Jet CEO Marc Lore to take over its ecommerce efforts and allowed the marketplace to remain separate from the core business. The result has been unprecedented ecommerce growth for Walmart.

Other retailers can emulate Walmart’s success by creating or acquiring a marketplace in their industries.

Some retailers won’t be able to undertake this approach on their own – building a platform requires significant investment, especially when competing against Amazon. But multiple retailers could work together to launch a platform. We’ve written before about the need for an anti-Amazon alliance.

While this kind of cooperation would be alien to traditional retail thinking, it would could be the best path forward for many retailers.

Platform Innovation Is the Best Form of Digital Transformation

In the TV and content space, several traditional providers banded together to create Hulu. However, Hulu is still a linear business. Not surprisingly, it’s seen middling success at best.

Retailers need to go a step further in their digital transformation. In a marketplace, traditional retailers would sell their own goods, but also allow independent brands and third parties to sell as well.

Ultimately, the companies that win in the new age of retail will be those who own the customer relationship. Long term, the only way to maintain that customer connection is to provide the most value to consumers.

Marketplaces inevitably provide more value than your business can on its own. If you don’t own the marketplace, you won’t own the customer.

Yes, this approach will mean eventually disrupting your core business. This approach also means recognizing that the proprietary, linear thinking of 20^th century no longer works for retail.

The good news is that you will own the upside of the platform you create, which has the potential to be much more valuable than your existing business. As we described in Modern Monopolies, investors value platforms much better than their linear equivalents.

In order to survive the retail apocalypse, retailers will have to embrace the change rather than fight it. Otherwise, Amazon’s grip on retail will only continue to grow.

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