- 1. Patterns of Disruption in Retailing HDCS 4393/4394
Internship Dr. Shirley Ezell
2. What Can We Learn?
- Some would describe retailing as an industry filled with
uncertainty.
- Electronic commerce and the role of Internet retailing is part
of the near future discussed by all kinds of retail
organizations.
- Electronic commerce is likely to change the basis of
competitive advantage.
3. Mission of Retailing MeetsDisruptive Technologies
- Getting the right product at the right price at the right time
has been the basic mission of retailing.
- The way retailers fulfill this mission has changed as a result
of disruptive technologies.
- A disruptive technology enables innovative companies to create
new business models that alter the economies of their
industry.
4. History ofDisruptive Technologies in Retail
- The 4 major disruptions were:
- 3. Discount Department Stores
- Check out the diverse internet retailers (from Amazon to
Chemdex, from eBay to travelocity) and think about how these
internet retailers have changed way things are purchased and sold
in the marketplace.
- While disruptions change the economics of an industry, they
dont necessarily change the companies profitability.
5. What Have You Learned About Profitability?
- Retailing profitabilityis largely determined by the margins
stores can earn and the frequency with which they can turn their
inventory over.
- The average successful department store earned gross margins of
approximately 40% and turned its inventory over about 3 times per
year.
- This translates into: the store made 40% 3 times, for a 120%
annual return on the capital invested in inventory.
6. Comparing Profitability with DiscountDepartment Stores and
Internet Retailers
- The average successful discount department store earns 23%
gross margins and turned its inventory over five time annually. It
received a similar return on inventory investment by changing the
balance between margins and turnover rates.
- If Internet retailers continue like Amazon.com to turn
inventory at 2000 rates, they could achieve traditional returns
with margins of 5%.
7.
- Department Storesas Disruptive Innovators
- The original dominant local retailer gavecustomers value with
large inventories,extending credit, personalized advice.
Thisretailers produce a high-inventory, service-oriented business
with slow turnover,struggling to turn their inventories over twicea
year. These retailers were forced to chargehigh prices to earn the
margin to stay inbusiness.
- With the launch of department stores in thelate 19 thand 20
thcenturies, business menlike Marshall Field and R.H.
Macyoutperformed the existing retailers incustomer service, created
a disruption, anddid a superior job of getting the right
productsinto the right places.
8. What didDepartment Stores do?
- Massed enormous numbers ofdifferent products in one
locationwhich was very attractive forshoppers.
- Department stores began to outperformlocal stores in pricing,
and, by accelerating inventory turnover rates, they earned the same
returns on much lower gross margins.
- To compete in the service area they focused their merchandise
mix on simple familiar products to compete with the local store,
that knows about individual customer needs and preferences.
9. What Helped these Success Stories & Other
Disruptions?
- Railroads provided access to the goods and transported
customers from their homes to stores.
- Site location became a competitive advantage with scientific
counting of customer traffic.
- Catalog retailing targeting ruralcustomers was helped by free
maildelivery. Sears and the money-backguarantees followed by
expansion ofSears into chains of outlets.
10. What Helped these Success Stories & Other Disruptions?
(Cont.)
- The automobile brings in the next changes. Shopping Malls did
not alter the business model. They attracted enough customers to
sustain a collection of focused retailers such as The Gap,
Williams-Sonoma. These malls had similar margins and inventory
turnovers as department stores but they also had a deeper product
lines within each category.
- Department stores continue toanchor while many
strips/outletsare combinations of category-focusedretailers.
11. 2. Mail-order Catalogs
- Catalog retailing expanded when specialty catalogs followed the
trends of the malls changing the generalist catalogs and closing
Wards and Sears catalogs.
12. 3. Discount Department Stores
- Discount Department Storesexpanded in the 60s locating inless
expensive real estate at theedge of towns and were disruptive.Their
business model changedwith low-cost, high-turnover, withsuccess
stories of 5 inventory turnsper year and gross margins of 20 to
25%.
- Discounters concentrated on simple products that could sell
themselves to compete with limited services and used branded hard
goods (hardware, kitchen utensils) and products communicated by
pictures to the consumers.
13. 3. Discount Department Stores (Cont.)
- Department stores reacted by going up market with soft goods
requiring more service andproduct knowledge in selling.
- Discounters were successful by pricing their goods 20% below
the prices of retail department stores. But as department stores
left this market, discounters began to compete with only low-cost
discounters.
14. 3. Discount Department Stores
- This left room for another force.Highly focused retailers
attack thediscounters (specialty discounterssuch as Circuit City,
Home Depot, Barnes & Noble) and became category killers with a
sustaininginnovation rather than a disruptive force.They offered
broader, deeper selections of products keeping the 23% and 5
inventory turns.
- Most of the discounters, not counting Wal-Mart, left the
hard-goods market and it is not usual to see merchandise mixes like
Target with 60% to 80% of space with soft goods. Competing against
full-price department stores is easier than competing against the
category specialists.
15. 4. Internet Retailing
-
- The 4 thretailing disruption: The Internet can deliver on 3 of
the original retail missions. The Internet can offer a wide range
of products. It can earn 125% return on inventory investments and
it can turn its inventory 25 times each year needing only 5% gross
margins.
16. 4. Internet Retailing (Cont.)
- Currently, the web seems to be repeating both patterns.
However, the Internet department stores will not yield market share
to specialized retailers. As the volume of purchases in individual
categories grow, search engines and bandwidth may make it easier
for consumers to find specialized e-tailors.
17. Conclusion
- In analyzing the retailing disruptions, the generalist stores
and catalogs dominated at the beginning of the disruptions but were
dominated by specialized retailers. The specialists emerged when
the market for the new form of retailing was large enough to
support sales for narrower but deeper product mix. The disruptive
retailers used simple branded product mix comprehended visually and
numerically and shifted their mix toward higher-margin products to
compete with the discounters.
18.
- One question : How fast will the disruptors move up market into
more complex products and value-added services?
- One of the disadvantages electronic sales will need to overcome
is delivering products at the right time.
19.
- That historically experts have underestimated the ultimate
reach of disruptive technologies. Organizations and managers need
to recognize the impact of technologies, and move into the
mainstream, compete, and change the environment.
And What canwe Learn?