Retailing and Distribution

Each Monday I post the next section of my 2001 book, which was originally called (by the publisher) Hoover’s Vision but which I have now retitled The Art of Enterprise. I have posted over half of it already; click on the “Monday” column to see all the prior sections. The entire book can be downloaded as a PDF for $10 at





34 Retailing and Distribution

Retailing, like food distribution (and unlike financial services), is not one of the hot industries of the future when taken in aggregate. Retailing is, however, huge – now employing more Americans than all manufacturing combined. When you break this behemoth into its components, some will boom and others decline. There will be tremendous opportunities in the right areas. And even in those categories (like supermarkets) that are mature in the US, the rest of the world will greet the best and smartest merchants with open wallets.
With the rise of etailing, people at first pretended that it was a different industry. Amazon and its peers were not retailers – they were Internet companies, an entirely new type of beast. There were supposed to be new ways to make money, ways that superseded hidebound retail ideas like selling goods for more than you paid for them. The idea was to capture market share at any cost, to grab virtual real estate on the World Wide Web by any means necessary. Some bizarre business strategies emerged. There was even one startup furniture etailer which offered free shipping. (No one noticed how heavy sofas are, at least not in time to stave off bankruptcy.)
Now we seem to have come back to our senses, recognizing that at least some conventional ideas, like gross margin, were not totally stupid.

Rethinking Distribution

By most measures – customer focus, lack of pointless mergers, innovation, diversity of options for the customer – the retailing industry scores high. But I believe it is time for a new look at the definition of the industry. Most retailers, whether they operate on line, by mail order, by telephone, or in stores, do not examine the entire distribution process. That is, how do products and services get from the place they are made to the place where they are used?
Think of the problem this way. Each household has various connections to the distribution network, which are diverse in nature, frequency, and location. In some cases, like the twice-a-week trip to the grocer or the periodic visit to the barber or salon, the household member reaches out to the distributor. In these instances, the consumer picks up her own “freight tab.” But many retailers of products and services deliver to the home, including the phone company, the water company, the post office, the electric company, and the cable company. In some cases, Fedex and UPS become an integral part of the distribution process. Some of these relationships can become personal – I know my UPS fellow better than I know the local letter carrier.
In addition, each consumer also has a set of psychological and emotional relationships with his suppliers. These do not always make sense. Time Warner, my cable supplier, mails me something each month, but I never hear from most specialty stores, even those where I spend a small fortune. I may be a “member” of the National Geographic Society, but I have a lot more sense of community with the people who own the convenience store on the corner. All my friends hang out at the local café, but does the café ever send me an email to let me know that today’s dinner special is my favorite?
In short, what “communities” do I belong to as a consumer, and what role can retailers and service providers play in the development and enhancement of those communities?
Participants in the distribution system – retailers, shipping companies, shopping center developers, wholesalers, and service providers of every kind – need to look at the entire network of relationships from end to end. At the customers’ end, study how people spend money – where they spend it, how often, and how far from home. Examine every entry in the checkbook, every item on the Visa statement. Maybe we’ll discover that filling the tank with gas and stopping at the dry cleaner are both weekly away-from-home rituals. Maybe we’ll learn that stock trades and airline reservations are things executive types manage from their desktop computers, perhaps with approximately equal frequency. Should such things be packaged together, or at least adjacent to one another? (Maybe this is a lot to hope for in a world where department stores don’t put the handkerchiefs near the socks and supermarkets don’t put the buns near the hot dogs.) Given a broader understanding of how people behave, might retailers be able to use such tools as the telephone, the Internet, and the postal service more effectively?
I believe that smart retailers and others in the distribution chain will begin to look at the entire pipeline. Where do things start out and where do they end up? Does it make sense to make computers in Austin, ship them to a warehouse in Chicago, then sell them on a website to a customer in Dallas? Isn’t there a better way?
            Who should team up with whom? Amazon and UPS are already married at the hip. But shouldn’t the auto service center be married to the taxi company? Shouldn’t the airline be married to the limo service and the airport van? Shouldn’t the gas meter reader deliver flowers to my Mom on his monthly visit to her house? (From me, of course.)
Only by thinking like this will leaders in retailing and distribution be able to decide when to use the Internet and when to use catalogs, where to build stores and what hours to staff the phones. Perhaps the Internet is not the natural way to sell frozen foods; perhaps it is the only way to do stock trades.
I think that any such end-to-end analysis of how we distribute goods and services will show that there is still a vital role for stores. I do not believe that e-commerce means an end to retailing. The total pie will continue to grow, and there will be plenty of room for the best etailers alongside the best retailers. People are by nature social animals, and they want to be around each other. Most successful retail stores are, above all, social experiences. They engage their customers.
The best etailers will realize this. Many will even open stores. If Sony, Apple, and Nike think they need stores to advertise their brands, so too may Yahoo!, AOL, and Amazon.
It’s a big mistake to think of most etailers as being dependent on the Internet for their success. I think Amazon could have prospered long before the Internet. If, twenty years ago, you had offered every book in print for sale via a catalog or over an 800 number, you could have had a successful business. (There were in fact some attempts to build such a business, but they were not executed, marketed, or financed as well as Amazon.) It’s true that Amazon came along at the right time, picked up the latest technology, and used it better than anyone else. But I believe their greatest strength remains their understanding of their merchandise, their understanding of their customers, their ability to recommend merchandise, and their high service standards – not their use of the Net. Even today, the challenges of Amazon are the same as those faced by retailers throughout history – how can I get more people to come to my store, come more often, stay longer, and buy more?
Most of the successful retailers of the future will smoothly integrate the Internet, the telephone, direct mail, and retail stores. Companies that distribute through only a single channel will not disappear, but they will become rarer. Let’s face it – customers don’t care what distribution technology you use, they just care whether you get the job done. The more options you offer, the better. 

Retailing as Spectacle

I’ve said that retailing is primarily a social experience. But in recent years, the “experience” part has largely disappeared. You know I think the world of Wal-Mart. But it’s unfortunate that thousands of other retailers reacted to Wal-Mart’s success by saying, “We must strip our stores down to the bare walls and sell cheap cheap cheap.” So many companies aped Wal-Mart that US retailing got boring.
When I first visited New York in the mid-60s, the top tourist sights included Macy’s, Gimbel’s, and other retailers up and down Manhattan. Today the ooohs and aaahs are less likely to come at department stores than they are at stores operated by manufacturers like Nike, Sony, and Disney. Retailers are no longer the trendsetters that they once were. When R. H. Macy or Marshall Field opened a new store a century ago, thousands of spectators took long train trips just to witness the grand opening. No more.
The decline in spectacle is especially striking at the department stores which inherited the mantle of leadership from Macy and Field. Target is more likely to get customers’ tongues wagging than the average new suburban department store. In addition, these stores do not really deserve the name “department store,” having abandoned departments like books, CDs, pets, stationery, auto parts, tools, and electronics (which often turned out to be the growth categories). If you use the purest, original definition of “department store,” then the fanciest department store in the US today is either Target or Sears. I think there is a tremendous opportunity for someone to come along and reinvent the middle and high-end department store.
Successful retailers must put on some type of show. Consider the history of the movie theatres. Everyone said they were dead when radio came along, so they added sound. Everyone said they were dead when TV came along, so they added color. Now we have stereo surround sound in our homes, so the theatres are installing stadium seating and IMAX. The key is to give the customers something they can’t get at home. Likewise, a retailer competing with Internet upstarts – or with Wal-Mart – must increasingly deliver unique experiences that are capable of forging an emotional link with the customer.
There are some signs that we are letting the customer “back in” to the experience of commerce. Forty years ago you could watch the food being prepared at the corner luncheonette. Then we decided it was better to hide the kitchen away from view. Our news anchors were placed at clean isolated desks, so we couldn’t see “the process.” But today we open new restaurants with the kitchen in the middle, we put newsrooms on view for all to see, we even bake bread and squeeze juice in the middle of the grocery store. And people love it.

Theme Stores

Due to the distractions of etailing, there has been a lull in the creation of new store concepts in recent years. Venture capital backed away from retail, and so did most entrepreneurs. But this will not last. When new ideas do again begin to percolate, one trend to watch for is the development of the theme store.
Historically, retail stores were primarily organized in the same way manufacturing industries were organized. Thus, we had bookstores, record stores, sporting goods stores, clothing stores, furniture stores, and so on.
But customers’ lives and experienced aren’t organized around merchandise categories. Instead, they’re organized around thematic concepts – sports, music, history, food, travel, art. For example, high-volume bookstores get some of their business from people like me who love books, but most of it comes from people who love computers, or horses, or baseball, or cooking, or travel, or some other theme or activity.
Thus, it would seem logical for retailers to organize themselves in the same way their customers think – around themes. But this is rarely done. If you go to a sporting goods store, you’ll rarely find books on sports; if you go to a travel agency, you’ll rarely find travel guides for sale. These retailers and service providers are organized around their idea of the world, not the customer’s idea.
Today there are only a handful of theme stores in operation. The Container Store is a chain of stores that is based around the customer’s perceptions (about organizing their lives) rather than the old yellow-pages merchandise categories. Home Depot EXPO stores are another forerunner of the future. They sell books, give classes, and carry all the merchandise related to home improvement and decorating.
Why not a cooking theme store? That is, a store where you can buy food and a serious selection of cookware and cookbooks, take cooking classes, and sample the dishes in a café. Why not a sports store that includes courts, classes, and equipment? Or a history store that sells everything from books and antiques to genealogy classes? Or a health store that combines the best elements from natural foods stores, doctor’s offices, fitness centers, drug stores, and the health, diet, and nutrition sections of bookstores? (As the baby boom ages, this last idea may have the greatest potential of all.)  

Gateways for Further Understanding of Retailing

The Experience Economy: Work is Theatre & Every Business a Stage by B. Joseph Pine II and James H. Gilmore is about the power of making every transaction an “experience.”
Why We Buy: The Science of Shopping by Paco Underhill, the best current observer of retail behavior.