08 Apr Collision Zones
Long after the economy crashed, things are still colliding. The financial crisis of 2007 2009 had a profound effect on the economic health of specialty retail markets. Most of this at first was due to the initial impact to the economy of the credit crash, but this merged into other factors that are still in play so it feels as if it’s been one long hit. And to many it has been, indeed.
Ongoing disruption to the retail sector persists today in the form of ever continuing changes to how goods are bought and sold, and specialty retail has not yet stabilized. Many wonder if it will ever stabilize again, and indeed the matter is an open question.
So much depends on how things settle out. At the moment, the specialty retail market is undergoing compression. Pressure from both within and without is leaving less room for business models that have for so long been key parts of the market. Traditional roles such as sales reps, distributors, public relations firms, and even retail stores are all under pressure to justify their existence. For those who don’t find ways to add value in the new model, as the markets compress there will no longer be room for them. Those who adapt and/or disrupt will thrive, and those who don’t, won’t.
We don’t need to look too far back in history for examples of this phenomenon: As mass manufacturing became commonplace, tailors and cobblers became less so. Most businesses that made horse carriages and buggy whips went away after car ownership became more common. Far fewer printing presses have been sold since personal computers were invented, and those businesses that used presses newspapers, magazines, and journals have seen their ranks diminished as well. All that has happened prior to businesses in manufacturing, transportation, and information is now happening to the retail sector, and the question everyone wants to know is: Will this ever end, and, if so, when?
The New Normal View is that until the ongoing compression reaches an equilibrium, things won’t stabilize. In other words, things have to stop crashing together before we can give an accurate sense of what the new business landscape will be. But based on how things are moving now, and with careful observation, we can give a sense of where things are headed. We’ve identified five collision zones where compression is putting extra pressure on specialty retail. There certainly could be many others.
THE FIVE COLLISION ZONES
Currently we are seeing collisions between: 1) Vendors and consumers; 2) markets and margins; 3) cashflow and credit; 4) cultures and crossovers; and finally, 5) what’s been done and what will be. As the spaces between these extremes come closer together, the space to make a living within these zones shrinks.
COLLISION ZONES: VENDORS & CONSUMERS
One way that we like to think of it is that we live in the time after Willy Wonka invented the Wonkavision. Willy Wonka changed everything. At any time of the day or night, from anywhere, people can reach into the machine and get whatever they want. We’re communicating differently, and people’s buying habits have changed. This is a permanent shift in behavior that goes far beyond simply having more outlets from which to purchase specialty products.
Until recently, retailers and vendors made choices that determined what consumers could buy, as well as where and how. Vendors did this through dealer selection, and controlled distribution. Retailers chose the brands and products that they would carry on their shelves. Consumers were forced to compromise, and couldn’t always buy exactly what they wanted depending upon what was available within their market, or what their local retailer held in inventory. Now, consumers can get exactly what they want, whenever they want it, from wherever they are, at any time of the day or night.
The value proposition of specialty retail has long been that this is where shoppers can purchase those hardtofind items that can’t be found elsewhere. Meanwhile, big box stores have staked their financial health on their ability to stock “everything.” Consumers have become conditioned to the reality that neither of these value propositions is true, any longer. The whole paradigm has flipped, and consumers are now rowing the boat.
All who do business in the space between a brand and a consumer (the middlemen) are now within this collision zone, and in fact may just be in the way.
COLLISION ZONES: MARKETS & MARGINS
Math defines a hard reality, and it’s getting harder. Margins are tightening at every link in the supply chain, and we have yet to feel the real squeeze. Labor costs, raw materials pricing, shipping and other fixed costs are increasing worldwide.
Sometime soon, on a global scale we’ll be at the end of low prices. This isn’t to say that consumers will accept this, so vendors will do everything they can to maintain low prices for as long as they can while finding margin to exist themselves. As this slow motion collision occurs, those who must make their living completely within the collision zones will need to find ways to add value to the equation, or to draw their margin from somewhere else other than through selling products.
We believe that one way they will do so is by increasing their service offering, either by servicing the products themselves or by serving the customers who will buy them. The easy examples here are in adding a service department for repairing and maintaining goods that are sold, or by providing concierge services, which promise to offer consumers a personally curated shopping experience. We also believe that innovative new approaches such as virtual inventory and fractional margins will make a big difference; when retailers are able to to sell something to their customers that they don’t yet have in inventory most likely splitting the margin with someone else, somewhere else, who at the moment of the sale does things are going to change radically. That time is coming, and by some measures is already here.
COLLISION ZONES: CASHFLOW & CREDIT
Even under the best of circumstances, cashflow is challenging. Due to the seasonal nature of outdoor specialty retail, many businesses are under water or close to it many months a year. A line of credit helps somewhat, but after the credit crash that triggered the last recession, credit has been difficult to come by.
One solution to this going forward is for stores to reduce their footprint and inventories. We see the potential for a future where smaller stores with fewer staff sell more stuff at full price. How will this happen? Virtual inventories and fractional margins will help, but so too will having information systems in place to make these things work. We are advising all of our clients to start building information systems that will merge more seamlessly with their business partners’ systems. Already available are systems where retailers and vendors can see and draw from one another’s inventory, and coming soon we believe that this will be more common on a peertopeer basis as well.
COLLISION ZONES: CULTURES & CROSSOVERS
The way people play outdoors is changing, and outdoor industry culture is changing, too. Consumers are cross training and recreating in many new ways such as indoor rock climbing and SUP, and less so with the old ones such as downhill skiing and backpacking that were the genesis of many of the heritage outdoor and ski specialty stores and brands. The good news is that brands and shops from one season to another can go in new directions by opening new categories, bringing in new brands, and hiring new people. The only thing that seems to be lacking here is the will to do so. Changing the cultural identity of a store and crossing over into a different market is hard to do, but it is not impossible. For many, it happens the moment that they decide to do so.
What first needs to change is the paradigm. We hear too many say: “When are these young kids going to take up backpacking?” More rarely do we hear: “These kids don’t seem to be backpacking as much as we used to, so what are they doing instead?” We as an industry need to ask more questions and listen to consumers for the answers. And we also need to look within our own market data sharing it with others to get a more in depth picture of it as well to chase the trends. Big data has only been the domain of major internet retail players, but this will one day change as people learn that getting more insight into their customer is more important to their business than preventing a perceived rival from learning the same thing.
COLLISION ZONES: WHAT WAS & WHAT WILL BE
The world is changing so rapidly, it’s difficult to keep up. The way that things have been done will not be the way that they will be done going forward. Change is difficult to absorb, and the pace of change is increasing. What we do in specialty outdoor retail is not complicated, but it’s increasingly a very hard way to make a living. Many retailers are finding that they have to do more and more just to stay in the same place. There are more tools than ever before, but it’s hard to master them all. To many, this is scary stuff.
If we cling to what was, we will be swept away by what will be. The same waters that are best for drowning are often the same waters that are best for surfing. The difference is that a surfer moves with the water to get into position to catch the next big wave; those who fight the tides are those who are most likely to drown.
Which will you be? At some point, we all need to decide. Because if we don’t decide, the decision will be made for us. Our experience is this: Get into the water, swim out into it, and let it push you around. Dive in. It’s not getting any warmer, and it’s not getting any less chaotic, maybe not ever. But you can swim out beyond the breakers, where things become more calm; out beyond the breakers, you can get perspective of what’s happening in the surf. Out beyond the breakers, where the water is deeper, things become more clear.
Many thanks to Becca Skinner for the one-time use of her copyrighted image. Learn more about the photographers who graciously provide us with images to use on this website by going to Meet Our Photographers.
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- Collision Zones - April 8, 2017