When I was covering retail for the FT in the early 1990s, industry bosses would often recite their three secrets to success: location, location, location. Back then, retail was largely a real estate game. Companies would go to great lengths to analyze local demographics, economy and infrastructure to estimate potential footfall and spend small fortunes to acquire the most promising sites. Place your stores in the right place and customers would be trapped in your website just like spiders catch flies.
This retail model, which clearly favored capital-rich incumbents, was punctured by the internet explosion. For most digital transactions, store location has become irrelevant. With no physical outlets at the time, Amazon delivered goods right to your doorstep. The secret to retail success has increasingly been redefined as logistics, logistics, logistics.
The next evolution came when mainstream brand companies and small merchants chose to bypass traditional outlets and e-commerce platforms and go directly to consumers themselves. This led to the direct-to-consumer craze, which was boosted by Shopify, the innovative Canadian company. Widely seen as anti-Amazon, Shopify provides the back-office logistics, payment, and delivery infrastructure services that small, independent merchants can’t afford to build on their own.
Investors poured money into DTC companies such as eyewear retailer Warby Parker, exercise bike company Peloton and clothing service Stitch Fix. The strategy was to use social media to build brand awareness and attract consumers and ship directly to them. For a while, the playbook worked like a charm, and several DTC companies floated in the stock market at eye-popping valuations. But investors now seem to have concluded that this DTC pattern is seriously compromised, even fatally injured, and have massively written down the sector. Shopify’s stock price has also fallen 73% over the past year. Last week, the company announced that it was cutting 10% of its workforce. What future for retail?
Tobi Lütke, chief executive of Shopify, argued that his business’ shrinkage was just the result of his earlier over-optimistic over-expansion. Shopify had assumed e-commerce would jump five to ten years in the wake of the Covid pandemic and grew too quickly in anticipation of higher demand. “It is now clear that the bet did not pay off,” he wrote in a note of regret to employees.
But the company’s flippant optimism about its long-term prospects masks deeper flaws in the DTC model. Like other retailers and consumer goods companies, DTC companies are grappling with rising cost inflation, higher interest rates and weaker consumer demand. Additionally, many are trying to cope with higher shipping costs, supply chain disruptions and their over-reliance on an increasingly uncertain Chinese manufacturing base. .
But they also face particular pressures of their own. The cost of customer acquisition has skyrocketed as the price of Facebook ads has risen. Identifying a target audience via social media has also become trickier following Apple’s decision to allow users to opt out of app tracking services. Additionally, DTC companies sometimes face stiff competition from counterfeit merchants.
Large traditional retailers and consumer goods companies including Walmart, Heinz and Nike have also learned the ropes of DTC commerce and are increasingly becoming omnichannel operators as Amazon expands its network of physical stores. Although Amazon has also suffered from the tougher economic climate, it remains the dominant e-commerce operator in most of its markets. It’s easier for consumers to use one frictionless platform than to engage with different sites for different brands. Short of decisive and unlikely regulatory intervention to separate its third-party market from its own sales and delivery operations, it’s hard to see how competitors can usurp the e-commerce giant. But in business, as in politics or in sports, the appearance of invincibility is often the moment of maximum vulnerability. Everyone wants to overthrow you from the throne.
One experiment to watch closely is in India, where a fascinating initiative has just been launched in 100 cities to provide state-backed digital infrastructure for retail. The Open Network for Digital Commerce aims to create a collective interoperable network for e-commerce rather than a closed private platform, enabling millions of small merchants to connect with suppliers, customers and delivery companies. Its ambition is to bring 30 million sellers and 300 million buyers to its network by the end of 2024. Never an understatement, Nandan Nilekani, one of the founders of IT company Infosys and an architect of the stack state-owned technology company, calls it the “most exciting business transformation happening in the world”.
India has long championed public digital infrastructure. Its Aadhaar digital ID system is now used by 1.3 billion people, while its UPI payment interface enabled 6.3 billion online transactions last month. ONDC’s vision is to empower millions of small, neighborhood merchants to tackle Flipkart, owned by Amazon and Walmart. If the experience works as well as it could, the mantra for the next era of retail may well be location, location, location.