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Niraj Shah  |  November 29, 2014
Wake Up, Brick-and-Mortar Retailers

The Web is bringing a sea change in terms of what shoppers expect, no matter where they shop.

The Web’s effect on retail breaks down into four areas, the first being selection.

Shoppers now take for granted the concept of access to a deep range of goods. In the past, the range of available goods was determined by the merchants located near you. Stores would carry whatever inventory made economic sense to them, but that might have been less than you would have liked.

Retailers can get away with limited selections now only if they are selling exclusive and trendy gear. With the exception of branded fashion companies, it’s hard to win these days without offering a wide variety. Even the selection at a classic big-box retailer with hundreds of thousands of items on its shelves doesn’t seem that wide anymore.

The second factor is—for lack of a better word—painlessness. Shopping can be both fun and fast. Driving several miles to a big-box store in hopes that they might have just what you are looking for is neither. There is clearly a better way to get what you want in a way that saves you time. Outside of fashion and accessories, there aren’t many fun brick-and-mortar retail experiences these days. But having the world’s selection at your fingertips available when and where you want it, now that’s cool.

Third, the market price for what you want to buy is now completely transparent. In the past, there was a fair degree of opacity that allowed retailers to charge a little more here, a little less there, and make it all work out for the bottom line. Companies can’t do that now. In an environment of high transparency, the ability to mix favorable “basket margins” is limited. Prices on everything have to be competitive all the time. That is a problem for retailers that have a high cost structure to support.

Finally, discovery and browsing have moved online. What that means is that while people are constantly looking for inspiration about what to buy, less and less of that is happening in stores. Instead, it’s happening via interactions on Facebook, on Pinterest, on Instagram.

As a result, retailers are losing a critical connection to shoppers, and in the process have less influence over where they shop. Online retailers can adapt to shoppers’ fast changing obsessions quickly by rejiggering their assortments to some degree daily. But even good brick-and-mortar stores take a month to turn over their inventory, which is a recipe for falling behind.

So far, the effect of these changes has been a slow but steady shifting of purchasing from mainline retail to the Web. Where the equilibrium point will be reached is hard to know. What’s clear is we are nowhere near it now.

My company Wayfair sells home goods, a market where roughly 7% of sales happen online and the retail landscape has historically been very fragmented. Both of those things are rapidly changing—sales are aggressively shifting online, and retail is increasingly less fragmented.

Will the Internet ultimately take a third of all retail sales? That is a reasonable estimate, but the number could be higher in the end. Consider this: There are 73 million “millennials” in the U.S. between the ages of 18 and 32. Soon, they will enter the years when they will be establishing families, buying homes, becoming more robust consumers. Consider also that the Millennial generation is 2.5 times more likely than the baby boomers to shop online.

If you were running a brick- and-mortar retailer and knew that 25 years from now a third of your sales would be online, you would run your business differently. Certainly worrying about this quarter and next quarter would seem very shortsighted. The big question is whether these businesses can break out of the cycle of quarterly pressures and adapt.

This piece originally ran in the Wall Street Journal.

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