I was smarter than JB Were about Internet Retailing, and Lend Lease did not listen

This week I am focusing on the future. I am talking about the future of Marketing at a Perth Conference in a few months, so I am updating my prognostications and thinking about the future.

Then I came across this beauty:

This is an exact and complete copy of something that I wrote in 2000 - some 13 years ago...
I can't remember who I wrote it for - or indeed why - but I commented on commentary made by JB Were on the (then) JHD Internet retailing study.
Not only did I disagree with their assessment, I also told Lend Lease what they should have done.
NOBODY likes a smartarse - especially after the fact - but I wonder if Lend Lease wished they had listened to me? 'I told you so' is small consolation though...


The future ain’t what it used to be

by D Price

The JB Were commentary on the JHD/ Marketshare Internet retailing study makes interesting reading, but also many arguable points. A study that understates the impact of the Internet shows a distinct lack of understanding of what the Internet is and more importantly what it can be, and apparently also the craft of Retailing. Research is too often a summary of all the answers they get, but did they ask the right questions? Not having had oversight of the original study and its methodology, the questions raised below are inferred from the commentary by JB Were.

One. The first major oversight in stating the impact will be relatively minimal is of course that it ignores the impact of the volatility caused by the many attempts at market entry by hopeful entrepreneurs. Even though many may not last long (the burn rate of their venture capital is too high) they still cause competitive pressure and this is applied serially. This means traditional retailers will face continued and long-term margin squeeze. Like space invaders they just keep coming at you – principally because the barriers to entry are so low. [They are of course their own worst enemy because they are eroding consumer confidence over time.]

Two. Retailing is not only reliant on price to move merchandise. Fundamentally the commentary is correct and that the total cost of merchandise may be made up of different elements (distribution costs v rent). But what the analysis overlooks is that there is also a distribution cost in traditional retail channel which is borne by the customer. If the consumer perceives the + 15% charge for delivery to be less than his or her cost (i.e less than the consumer’s opportunity cost), then a niche opens up for online sales. Convenience is a big factor in retailing and its cost can not be underestimated.

Three. There is a high degree of risk in basically asking consumers to predict their future behaviour. I am willing to bet my entire net worth (don’t get excited, there isn’t much…) that cellular phone sales exceeded all the expectations of manufacturers, service providers, retailers and shopping centre owners. Thomas Watson famously predicted that the worldwide demand for the first IBM mainframes were to be the grand total of 5. The US Telegraph Company saw no future in Alexander Bell’s invention, and the typewriter was rejected initially as fad that could not replace a good stenographer. There are many examples like that including the photocopier and the fax. The Internet gives the consumer freedom, choice and convenience. These are powerful values that drive fundamental consumer behaviour patterns.

Four. The respondents in the survey – in all likelihood- could only assume that web shopping in 5 years time would be the same as it is today. That is, sitting behind the computer, browsing and searching and ordering and waiting and waiting. The technology is in its infancy, and it will evolve to increasingly suit the requirements of consumers. Internet shopping will in future probably not even involve the computer but rather the fridge or the mobile phone. Along the same vein, the study assumes that the 20-yr old of today and the 20-yr old of 2010 will shop the same way and for the same things. The 10-yr old of today is growing up with a different market view and technology expectation.

Five. The effect on the retail mix of centre should not be underestimated. As book stores, music stores, florists, financial services computer & software shops slowly disappear or get relegated to strip shops, it will reduce leasing options, which in turn, because space remains fixed, will be leased (at a lower rate?) to an existing category which diminishes the viability of that category which further pushes rentals down. There is a ripple effect that could be dangerously insidious. The product categories that are most amenable to Internet shopping are:

  • those that can easily be turned from atoms to digits (music, software)
  • those that can be automated because it is either a very routine activity (paying bills) or a highly complicated transaction (buying insurance)
  • the conditional purchases (gifts, impulse items) especially where the recipient is geographically separated from the giver.

Six. As retailers jostle with the dot coms for Internet space & marketshare, the traditional retailer (a) diverts its attention from the existing business and (b) dilutes their financial investment in the existing businesses. This inevitably means less capital expenditure and all the corresponding consequences.

Seven. The commentary does not define ‘shopping’. The role of the Internet in making comparisons, sourcing merchants and/or products may well extend way beyond the actual transfer of cash. These activities are an integral part of the shopping experience and the concomitant loss of impulse buying opportunities that are lost in a shopping centre is enormous. In some categories, impulse buying amounts to 85% of sales.

Eight. The effect of a real decline of 5% in sales obviously also means a decline in volume. Most of the retailer’s distribution costs are relatively fixed, and any savings made by selling less, will certainly be offset by loss of channel power (e.g fewer quantity discounts). This means expenses remain relatively fixed, whilst sales are declining – through to 2005 and beyond. A 5% decline in sales volume that continues to decline must be of concern to any long-term retail property owner. Continued negative prospects will depress share prices, lower the ability of the retailer to raise capital which in turn impacts on its ability to finance itself for new concepts or through sales troughs. ‘Market sentiment’ – as any investor knows – is a difficult thing to change

Nine. The famous saying of ‘Lies, lies and damn statistics’ certainly applies. The graph predicting % online sales (JHD/Marketshare) is very misleading. Internet sales have doubled every year for the last 3 years (at least). The authors are of the opinion that the rate of increase will flatten out dramatically. The graph still shows exponential growth, but the X-axis (time scale) jumps from 1-year intervals to 5-yr intervals on the same axis. Effectively they are saying that the exponential growth will not continue to happen, but the graph still shows the exponential growth curve, which is what we intuitively believe.

This  graph is really what they are predicting – a gradual and steady growth rate and not an exponential growth rate.

ChartProjections.PNG

The basis of this assumption is the 1700 consumers who were (in some form or another) asked whether they (thought) they were going to shop more often on the Internet in the future. Asking consumers to extrapolate behaviour from the present into new paradigm is very risky to say the least.

Ten. The results are ‘surprising’ because the impact is ‘less significant than the market expectation’. I would be very worried if my research differed from the ‘market’. There is always a first time, but the market never gets it wrong. Basic human greed may make investors overpay for shares in the future and correct it, but there are literally thousands and thousands of investors and analysts who have looked at the Internet, and they have seen the future. I think this may be a case of getting the right answer to the wrong question.

Finally. It is often said that a company’s supreme goal is to ‘satisfy the customer’s needs’. Paradoxically, this is also fraught with the danger that the customer’s future needs (which are presently unprofitable) are ignored. Focus on present customer satisfaction stifles innovation. I don’t believe LLR is the kind of company that will risk that.

My view is that the Internet, as we know it, is going to change the shopping landscape radically and forever. The process will take time and there is sufficient space and time to enter the market better than most of the hype would seem to suggest. Most importantly, I believe Lend Lease should focus on the Infrastructure side of the business where

  • there is higher barriers to entry
  • the existing skills set of project management can be best leveraged
  • Lend Lease has traditionally made its money (property infrastructure & financial infrastructure)
  • the scope is global & compatible with existing businesses and not competing with customers and suppliers.

The Internet (shopping) phenomenon reminds me of the situation where a movie becomes hugely popular despite the fact that all critics hate it. But then, it is just another opinion…

Regards

Dennis Price


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