Retail is the same game as ever. But technology is changing all the rules

Posted 3 weeks ago by Barry Conlon

Somewhere in my attic gathering dust lies a 25 year old economics textbook.  Its pages contain economic theory that once felt eternal.  The relationship between supply and demand, the impact of scarcity, how to value goods and services…principles that were indestructible, chiselled in stone by Adam Smith 200 years ago, never to be touched again.

For a wide-eyed Commerce student, these concepts felt intuitive and accessible.  They were neatly explained through bar charts and simplified worked examples about shoe shops and second hand cars.

It was all theory but seemed applicable to future real-life scenarios.  The Swiss army knife for whatever obstacles I’d have to MacGyver my way past during a career in business. Or at least during a stint running a hot dog stand or an ice cream van.

And there was reassurance in its longevity.  These truisms had survived intact for a few hundred years so surely they were good for another 25?

Adam Smith Statue

Then tech happened.  And some of the rules stopped making sense.  Things like making a profit became irrelevant, or secondary to metrics like user numbers and market share.  Companies adopted a strategy of growth-at-all-costs, which required deep pockets and even deeper patience from investors.

Many of the biggest technology companies in the world were, and still are, advocates.  Household names like Airbnb, Reddit and Deliveroo boast multi-billion dollar valuations in spite of never having turned a profit.  Ever.

The job of their CEOs is not to glory over spectacular financial results, but to convince shareholders to keep the faith, to ignore the consistent losses, to focus instead on the path towards profitability at some unknown time in the future (in Reddit’s case, 19 years and counting).

Questions about making profits are fended off like Homer standing up to Fat Tony for his pretzel money.

The investors in Truth Social certainly did not ask such hard questions as “Why aren’t you getting the money now? And so on.”   When Donald Trump’s Twitter-clone launched on the NASDAQ in February 2024, it had just reported losses of $58 million in 2023 on the back of revenue of only $4 million.  Its major shareholder was considered by the company itself to be its biggest risk, and its own auditors said the financial performance “raises substantial doubt about its ability to continue as a going concern”.  Its valuation?  $8 billion in early trading.

*Gently closes Economics 101 textbook, and returns it to the attic.

Does any of this matter?  Who cares if tech companies lose money year after year?  Well, for independent businesses in competition with them the playing field must feel lopsided.  Like trying to win the Premier League against Man City.

Imagine running a cafe next door to a competitor who doesn’t care about their coffee margins, opens 24/7 and gives away free croissants. Oh and they also have all the contact details of their customers, reward them for their loyalty and send them gifts on their birthday.

Any wonder 17,145 retail stores closed in UK in 2022?

Closed Shop

For retailers, technology has been an invasive species, Saltburn’ing its way into their mansion while secretly plotting their downfall.  Once it was a panacea, now it has designs on the host.

Where its initial attraction was to generate efficiencies, its scope soon turned to “disintermediation”, the removal of the middleman between the manufacturer and the end consumer, the elimination of bricks and mortar from the supply chain.  Like Uber replacing your local taxi company, Amazon replacing the department store, or, you know, AI replacing humankind.

Technology has brought about changes in consumer behaviour that were inconceivable during Adam Smith’s time.  Who could have envisaged the threat of “show-rooming”, where a customer visits a physical shop, tries a product out for size, then goes home and purchases it online for cheaper?  Come on now, you know you’ve done it.

Some prominent retailers like Argos are shedding the dead weight of bricks and mortar.  Others, like Debenhams, House of Fraser and Topshop didn’t react quickly enough.  Or maybe their shareholders just weren’t willing to fund annual losses for 19 years.

 There are some signs of a “retail-iation” (I thought I had invented a new word, but someone got there before me).  Show-rooming has been countered by “web-rooming”, where a customer browses the Web to get as much information as possible about the intended purchase, then visits an outlet in person to ensure the quality is real and the payment is secure.

Bricks and mortar hasn’t raised the white flag yet.  Brands like Zara and Arc’teryx are actually doubling down on larger stores.  Meanwhile the number of independent booksellers in the UK and Ireland rose to a 10-year high in 2022.  So much for the Kindle killing off the book.

Physical stores will never be able to compete on price.  So they have to offer a different kind of value.  Whether it’s Japanese tea rooms, crafting events or cocktail bars, experiences have become the pheromones of the buyer-seller relationship.

And of course they are fighting tech with tech.  Primark has an online store but for click and collect only.  Matalan is using bots to influence your purchasing decision.  And companies like Loqiva are creating the locally-owned infrastructure that businesses need to connect directly with their customers without all the barriers to entry.

The game hasn’t changed, but the rules have.  The giants of economics whose life work features in the pages of my dusty old textbook could never have imagined how technology would bend and break their laws of economics. Their theories may need revision, an updated edition that considers the realities of the 21st century marketplace.  Maybe AI could help with that.

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