The future of global retail will be local

When I covered retail for the Financial Times in the early 1990s, industry bosses often recited their three secrets of success: location, location, and location. At the time, retail was largely a game of ownership. Companies will go to great lengths to analyze local demographics, economy and infrastructure to estimate potential turnout and spend small fortunes to acquire the most promising locations. Put your stores in the right place and customers will get trapped in the web, just like spiders catch flies.

This retail model, which clearly favors established, capital-rich companies, has been riven by the explosion of the Internet. For most digital transactions, the store location has become irrelevant. With no brick-and-mortar outlets at the time, Amazon delivered merchandise right to your door. The secret of retail success has been increasingly redefined as Logistics, Logistics, Logistics.

The next development came when consumer brand companies and smaller merchants chose to bypass traditional retail outlets and e-commerce platforms and go directly to the consumers themselves. This led to the direct-to-consumer frenzy, which Shopify, the innovative Canadian company, has fostered. Shopify is widely seen as an anti-Amazon, providing back-office logistics, payments, and delivery infrastructure services that small independent merchants can’t afford to build themselves.

Investors have poured money into DTC companies such as eyewear retailer Warby Parker, sports bike company Peloton and apparel service Stitch Fix. The strategy was to use social media to build brand awareness, attract consumers, and ship to them directly. For a while, the game guide has been quietly operating and several DTC companies have floated in the stock market at amazing ratings. But now it appears that investors have come to the conclusion that this DTC model has been seriously compromised, if not mortally wounded, and have blogged about the sector in a big way. Shopify’s stock price is down 73 percent over the past year, too. Last week, the company announced that it would cut 10 percent of its workforce. What after retail?

Toby Lutke, CEO of Shopify, has argued that his company’s shrinkage is merely a result of earlier overextension. Shopify has assumed that e-commerce will jump five to 10 years forward as a result of the Covid pandemic and has expanded very rapidly in anticipation of rising demand. “It is now clear that the bet did not pay off,” he wrote in a note with regret to the staff.

But the company’s euphoric optimism about its long-term prospects masks some of the deeper flaws in the DTC model. Like other retailers and consumer goods companies, DTC companies are struggling with rising cost inflation, rising interest rates and weak consumer demand. In addition, many of them are trying to deal with high shipping costs, supply chain disruptions and their over-reliance on an increasingly uncertain Chinese manufacturing base.

But they also face pressures of their own. The cost of customer acquisition has gone up exponentially with the increase in Facebook ad prices. Determining the target audience via social media has become more difficult after Apple’s decision to allow users to opt out of app tracking services. Furthermore, DTC companies sometimes face stiff competition from counterfeit merchants.

Traditional retailers and consumer goods companies, including Walmart, Heinz and Nike, have learned the tricks of the DTC trade and are increasingly becoming multi-channel operators as Amazon expands its network of physical stores. Although Amazon has also been experiencing the harshest economic climate, it remains the dominant e-commerce operator in most of its markets. It is easier for consumers to use one friction-free platform than to deal with different websites of different brands. Without decisive and unlikely regulatory intervention to separate the third-party market from its own sales and deliveries, it is hard to see how competitors could usurp the e-commerce giant. But in the world of business, as in politics or sports, the emergence of indomitable strength is often the moment of greatest weakness. Everyone wants to expel you from the throne.

One of the experiences worth watching closely is in India, where an impressive initiative has been launched in 100 cities to provide public-supported digital infrastructure for retail. The Open Network of Digital Commerce aims to create an interoperable collective network for e-commerce rather than a closed private platform, allowing millions of small merchants to connect with suppliers, customers and delivery companies. Its ambitions are to bring 30 million sellers and 300 million shoppers to its network by the end of 2024. No one was to underestimate it, Nandan Nilekani, co-founder of Infosys IT and architect of India’s public technology group, called it “the most transformational Exciting business is happening in the world.”

India has always championed public digital infrastructure. The digital identity system Aadhaar is now used by 1.3 billion people, while its UPI payments interface enabled 6.3 billion online transactions last month. ONDC’s vision is to empower millions of small neighborhood merchants to take on Amazon and Walmart-owned Flipkart. If the experiment succeeds, the mantra for the next era in retail could be localization, localization, and localization.

john.thornhill@ft.com

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