The Evolution of the Retail Store

Reading today about Apple redesigning their store experience got me thinking about the role of the store in the future.  New online companies are exploding into multi-billion dollar vertical categories and growing rapidly.  Does that mean there is no room for the store?  Not in my mind, but it’s fundamental role will evolve consistent with our thesis around the convergence of offline and online models.

For the last few decades, retail companies expanded by driving greater and greater geographic footprint.  Stores were the only point for transacting product and even today represent the preponderance of sales.  “Same store” numbers helped to gauge the productivity of a store but top line most of the time was driven by number of new stores.  Stores had P&Ls they were responsible for, and this system has created an entrenched infrastructure and KPI bias where many retailers measure and optimize around in-store traffic, rather than driving the “most efficient transaction” regardless of where they occur.

I believe this model has to change.  Consumers have a myriad of choices on how and where to transact today.  Online ordering with the very liberal return policies have made it far easier to buy something, try it, and send back than potentially taking a few hours to physically go somewhere.  Buying has bifurcated into two buckets: routine transactions and inspired transactions.  Routine transactions are things that we know we need, don’t require a lot of thinking, get replenished on a regular or reasonably regular basis, etc.  We either know what we want (new jeans) or we’re indifferent across a broad enough range and need to solve a functional task (toothbrush).  Inspired transactions are things that I’m not sure about, that I’d love to learn to fall in love with, that I am trying to discover.  I want a new look instead of just jeans; I want to understand the philosophy of the brand that I am going to wear as I view it as an expression who I am.

I’d argue that the entire domain of routine transactions is designed to go online.  It’s far more efficient and the best use of a consumers time.  Educate me online and let me transact.  Don’t make me spend hours to do a chore.  The second category is where offline shines.  I walk into the Apple store to engage with product.  I’ll go into the Apple store to experience an iPad or the MacBook Air to see if I really care about how thin it is.  I’ll subconsciously feel how “smart” the brand is in servicing me and differentiating.  If I go to the showrooms on 5th Avenue, it’s to feel the luxury and curation of what Cartier or Saks represents.  And it is about entertainment as much as anything else.

Heineken Lounge at an Airport - A Brand Experience

What does this all mean?  Well, I see huge reductions in the number of points of presence for many retailers (not including same-day consumables like coffee or food).  Retailers have to align with consumers, liberate their time and allow them to transact in whatever manner provides the greatest utility.  Retailers should be in the business of selling things wherever that most efficiently occurs.  My partner Larry told me about one innovative retailer that uses their physical store to crowd source and showcase new products only – as soon as something sells in meaningful volume (indicative of a repetitive buyer in a “routine transaction”), it is moved to the online store and that shelf space is freed for a new product to experience.

Over time, I see stores being “owned” by marketing and viewed as a brand expense instead of the revenue bearing, full P&L today.  Should I penalize the store if you came in, had a great experience, and then bought online for convenience?  Or more likely believe that it served its purpose?  Controversial, maybe.  But 10 years from now I think the retailers that survive the transition to digital will look at it more that way than how they do today.  I also wouldn’t be surprised if 10 years from now, we see a flagship Gilt store on 5th Avenue and major cities around the world.  It sounds crazy now, but that might be the most “efficient” way on a blended marketing basis to create mass awareness (like TV today).

The bottom line is that the role of the stores has to change.  It cannot be about the purchase.  Too much of buying is moving online.  It has to be about experience, education, and inspired serendipity!

Here Comes Android

Certain things are all about timing.  My situation with my smartphone is one of them.  I have grown incredibly frustrated with AT&T’s service on the iPhone, to the point where I am close to a breaking point.  3-4 drops on a stationary 30 minute call with full bars?  As much as I love the iPhone with all its applications, there are definitely a few things I would change about how it handles email support.  I can’t help but think back to the simple but reliable days of my Verizon Blackberry (putting aside of course my VC requirement to have an iPhone).  I am vulnerable, I am questioning, I am searching for how this gets better.  Timing could not be better for some solution to this, as so far, the only answer has been to hope the iPhone continues to innovate and launches on Verizon in 18 months.  As those doubts have come creeping in, I see the promising “iDon’t”, “Droid Does” ads from Verizon, causing me to pause and think.  And I don’t think I’m the only one.

Android itself comes at an impeccable time.  The entire industry is in pain, with the exception of Apple, who is now suffering from the woes of its partner’s network.  The industry is crying out for a viable third party, open solution.  Windows Mobile is currently getting terrible reviews, Linux on the mobile has had fleeting momentum, and Android is benefitting from the major halo surrounding Google.  Motorola is staking the next generation of its franchise around the device.  Verizon’s strong network and user reputation is using Droid as their play against the iPhone until Apple comes to the table with more reasonable terms.  New specific function devices are proliferating, with the launch of e-readers, tablets, slim phones, smartphones, TV/movie devices, etc, all requiring a system to manage resources.  And a whole community of developers is inspired to make Android successful – in and outside of cell phones.

My belief is that Android will become a lasting, successful platform in the mobile device space.  I also believe the ecosystem around it – including an open store, applications, games – all will follow.  Apple has the clear lead, but with no other player having the critical mass to build an alternative (other than Microsoft who seems to losing momentum), Android becomes a real galvanizing alternative.  Whatever the outcome, I hope it leads to reliability and choice for consumers!