Earlier this year, The Economist published a special report on The Future of Shopping, with nine articles on the subject. In its overview article, The Economist argued that “a new species of shopper is emerging: less centered on America, more intent on ensuring that what they buy reflects what they believe, and technologically dexterous. This latest incarnation of the global consumer looks likely to change how capitalism works - for the better.”
Three major changes are transforming the world of retailing. First, Western Europe and North America are no longer the biggest retail markets; nor do they epitomize the leading edge of retail as has long been the case, with innovations like the department store, the mall, catalogue shopping, and e-commerce. Shoppers are increasingly Asian. “Last year China and America were almost neck-and-neck as the world’s biggest retail markets. China’s two biggest online marketplaces, Alibaba’s Taobao and Tmall, both do more third-party business than Amazon.” And Asia’s shoppers are now at the frontier of retail, with innovations like livestreaming e-commerce.
A second change is that, beyond low prices, younger shoppers are increasingly influenced by their social, ethical, and political values when making buying decisions. They’re selecting which brands to engage with based on their social values like environmental credentials and workplace environment. Well managed firms work hard to establish the kind of positive reputation that attracts people to want to be associated with the brand and its products and services. This is particularly important in our Internet age, which enables a company’s actions to be instantly communicated to all. “One way that capitalism adapts to society’s changing preferences is through government regulation and laws, which voters influence, at least in democracies. But the dynamic response of companies to the signals that consumers send is a force for change, too,” and the reason firms spend considerable time, energy and funds nurturing their brands.
The final big change is the increasingly digitalization of the economy. The explosive growth of mobile devices means that a company can be engaged with its customers not only when they’re shopping online, but wherever they are, - at home, at work, or in a store. “More accurate and voluminous data about shopping patterns are breaking down the decades-long relationship between mass consumption and mass production. In its place is a more varied world in which the shopper can decide whether to buy online or in store, whether to shop via platforms or from individual brands, and whether to accept targeted ads or not.”
Customized digital interactions enable companies to build deeper ties with their customers than ever before, and thus evolve from a buy-what-we-have to a connected-customer strategy. In addition, producers and consumers can now have a more direct relationship with each other, squeezing middlemen from the supply chain if they add no value.
While the pandemic has boosted online retail sales, the biggest innovations are not in e-commerce but in what The Economist calls The return of one-to-one commerce. A brief history of shopping explains the importance of such an innovation.
The first retail revolution took place in 16th century Elizabethan England, when craftsmen who previously had a one-to-one relationship with their customers set up the first shops where they sold a variety of items produced by different craftsmen.
The second major retail transformation took place a few centuries later when the Industrial Revolution ushered the era of mass production and mass consumption. Factories produced a variety of affordable goods aimed at a growing number of working- and middle-class shoppers, which were sold in stores that grew in size to benefit from economies of scale.
The third retail revolution is now taking place, with the return of a kind of pre-Elizabethan one-to-one relationship between consumer and producer made possible by digital technologies and vast amounts of data. “One-to-one is shorthand for today’s upheaval in the world of shopping,” notes The Economist. “The consumer has never had so many things to buy, or ways to buy them. New forms of communication via social media, messaging services and apps have brought producers and consumers closer together. Using trillions of gigabytes of data, manufacturers know better than ever what customers want. Their products can be delivered direct to the doorstep. The traditional middleman, who for centuries piled hidden cost on hidden cost, is being squeezed out.”
The pandemic increased e-commerce penetration, which in just a few months reached levels not expected for years. However, this e-commerce explosion does not herald the death of the physical store. In 2020, worldwide e-commerce sales were $4.2 trillion, less than 20% of all retail sales. After Covid-19 is brought under control, the pace of e-commerce growth will likely moderate.
But, one-to-one commerce will change the nature of stores, especially in the West, because the current retail infrastructure was not built for the digital age. “America has 24 square feet of retail space per person, … three times as much as Britain and six times as much as China. In America more than 8,700 stores closed last year. … In Britain 16,000 stores shut and 183,000 retail jobs were lost. … China’s embrace of e-commerce reflects the ubiquity of smartphones, the shortage of attractive shopping centres beyond the big cities, and high urban density, which cuts the cost of delivery.”
The future will be both online and offline. Retailers have been developing omnichannel strategies, where physical and digital shopping seamlessly interact for the benefit of their customers. Consumers will gain greater convenience, giving them the choice of shopping physically or online depending on their preferences. On the other hand, retailers have been struggling to make omnichannel both efficient and profitable. “They have to pay not only for the costs of their stores but also for a form of digital ‘rent’ to display their goods high up on online search channels such as Facebook. They must not only pay for delivery but also allow customers to pick goods up in their shops. And they face a growing nightmare of processing returns that now cost retailers more than $1trn globally every year.”
Omnichannel strategies are particularly challenging in the supermarket industry. The industry had the biggest growth in online activity of any retail category, - rising by almost 50% in America in 2020, a trend that’s expected to outlast the pandemic. But few retailers are likely to make money from selling groceries online, because of the higher costs of picking and delivering the grocery items as opposed to having customers pick and take them home themselves. “In a business such as food retailing that already had margins as low as 2-4% before going online, only the best capitalised and most efficient are guaranteed to survive the online onslaught.”
What about the future of retail? Pessimists worry about dead shopping malls, abandoned department stores, millions of unemployed shop workers, and dwindling retail tax revenue. Optimists, on the other hand, look forward to the potential for democratizing retailing and enabling brands to reach customers directly without paying big mark-ups, while creating a more frictionless economy, with smoother pricing, fewer barriers to entry and more innovation. “Inevitably the transition will incorporate bits of both,” but let’s hope that the optimists’ views prevail.
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