by: Idris Mootee
This is the toughest time for retailing since many decades. It is also a perfect storm for many retailers from department stores to chain stores to refocus and strengthen their core and rethinking positioning. Many department stores and fashion chains have been operating without a real strategy for a long time, many turned themselves into landlords.
If you take a look back at the history of retailing, starting with the original village green, we added a “main street” which functioned as the main shopping/social area. Department stores ultimately developed, which then moved to the new “malls” starting in the early 60’s. The first shopping malls were traditionally anchored by two or more large tenants, with in- line space devoted almost exclusively to the sale of clothing. Food courts weren’t even added to that standard format until bigger malls developed. Then shopping “centers” spawned different variations such as mega malls, outlet malls and specialty malls. There are only a handful of formats. Many mall experiences are not exactly great, I think both department stores and malls have lost their luster over the years.
I was first introduced to the concept of “Wheel of Retailing” many years back by Professor Walter Salmon (prof of retailing at Harvard Business School). McNair proposed the Wheel of Retailing theory to explain a retail evolution pattern, which he had observed in Europe and U.S. The Wheel of Retailing theory states that the evolution process consists of three phases: entry phase, trade-up phase, and vulnerable phase.
The theory is pictured as a large wheel with three spokes dividing the wheel into three segments or phases. The first or entry phase of the Wheel of Retailing starts with the opening of innovative retail institutions, which initially offer limited products with low prices and minimum services. Retail institutions at this phase strategically accept low margins due to lack of services and facilities offered and low market penetration, but these low margins can reduce product prices and help retailers to increase penetration of the market. When these retail institutions are successful, other rival retail institutions rapidly copy and adapt those strategies.
At the end of the entry phase, the number of the same type of retail institutions has increased. As time passes, these innovative retail institutions become traditional retail institutions that offer more services and better store experiences at higher prices. These retail institutions are simultaneously increasing their margins and prices and appeal to more middle and upper income consumers rather than bargain hunting and lower income consumers.
As time passes and the wheel turns, retail institution types mature additionally and move into the third and final phase, the vulnerable phase. These firms are mature retail institutions that should have strong or at least stable cash flow. However, as retailers add higher levels of operational practices, costs increase, product prices rise, and margins erode. Some mature retailers abandon high quality and high services in order to reduce operation costs and product prices to survive price competition. These changing operational practices make the third phase retailers vulnerable to easy replacement by other retailers. In this vulnerable phase, retail institutions lose market share and profitability. Over 705 of today’s large retail institutions are in the vulnerable stage and this downturn accelerate the shake up.
All these conditions allow for the emergence of a new innovative retailer in the next cycle of the “Wheel of Retailing”. The innovative retailer will enter the wheel with low costs, low margins and low price products. A new innovative retailer in the next Wheel of Retailing cycle often initially coexists, with mature retail institutions, which are at the highest popularity position in the previous wheel of retailing cycle.
For mature retail institutions to remain successful, strategic transformation is the key to the future. Retailers need to think of themselves not only as channel but also as “service innovation hubs”, by acting as intermediaries and co-creators well beyond their core narrow retail propositions. Firms such as Tesco, Carrefour, El Corte Inglés, Nordstrom, Sainsbury’s and Metro are rapidly diversifying through tie-ups with suppliers and partners into financial services, telecoms, utilities, travel, amongst others. Unfortunately many did not execute well and fail to create a meaningful service wrapper around these products.
Retailers should re-invent the traditional store experience and need to engage all senses with the environment. Radical store experience design and service innovation can rejuvenate these mature retail organizations. This is the time.