Burgeoning Internet sales are damaging the traditional business models for many small-business retailers across America. It began to happen a few short years ago, with most brick-and-mortar shops feeling confident they could survive this disruptive innovation forever.
“Loyal customers will never desert us,” they proclaimed. Sadly, their view was more hope than fact, and little by little, Web sales began to erode their revenues and profits. Now retailers wonder what they can do.
I know exactly how they feel. Back in 1997, I sat at a banquet table next to a young man named Jeff Bezos, a fellow Ernst & Young entrepreneurial winner from Seattle. “Jeff,” I said, “Please tell me about your business. What do you do?”
“I have started a new business called Amazon. We sell books over the Internet,” he explained.
“Really?” I replied.
I then turned to my wife and privately prophesied Bezos would be out of business within the space of two years. “Who would ever want to buy books over the Web?” I thought, "We all visit our favorite bookstores when we want to buy books. We’ve done it for decades. Why does he think we will change our buying behavior?"
Now, when my wife sees news about Amazon and Bezos she laughs. “Boy, Alan, were you wrong.” Wrong indeed. Bezos not only sells millions of books but everything else a shopper wants to buy. He is also Fortune Magazine’s Businessman of the Year.
This past week a local retailer called me and asked, “What can I do?”
“Local shoppers don’t buy from me anymore,” he said. “They would rather buy online. Alan, there is no way I can compete with Web retailers on price. They can sell the very same products I sell for less than my wholesale price. Even worse, their selection of products is vast. My offerings are limited. Furthermore, manufacturers who traditionally sold only to us are now selling directly to our customers. In effect, they have cut us out of the deal.
“At first I was furious about this change, then very disappointed and now deeply saddened,” he continued. “I understand why this has happened. I get it. But I’m not happy about it.”
My retailer friend said he had stopped selling products and moved to offering more value-added services such as personal training and informative classes. But he said, "Frankly, this won’t cut it. I’ve done the math and I can’t see how we can survive. I’ve talked with fellow retailers about the situation and we all share the same dilemma with no answer in sight. Alan, what should I do? What are my options?”
I told my friend that in many ways, today’s businesses are like US Steel, a company that fell from its perch as the preeminent world producer of steel products to just 10th place. What happened?
Nucor, a reinvented company, entered the steel industry with new cost-saving technology, lower prices and low-end products that US Steel had ignored, and by and by it replaced the financial juggernaut. It happened ever so slowly, until on one dark morning, the biggest steel manufacturer on earth was no longer the king of American industry and shrank from 250,000 workers to a mere 50,000.
Many small U.S. retailers are in the same sinking boat with no life jackets. In so many ways, selected groups of retail shops are the dinosaurs of our lifetime.
That’s the bad news. But shop owners and their crews could consider a few options:
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