The Retail vs. e-Commerce Chicken and Egg

There was an interesting article in the Atlantic that dove deep on how online shopping is causing such turmoil for brick and mortar retailers. It’s a good, long read. A paragraph stood out to me as the key to this story.

On a whiteboard, he drew a series of lines representing the rising share of online sales for various kinds of products (books, DVDs, electronics) over time, then marked the years that major brick-and-mortar players (Borders, Blockbuster, Circuit City and RadioShack) went bankrupt. At first the years looked random. But the bankruptcies all clustered within a band where online sales hit between 20 and 25 percent. “In this range, there’s a crushing point,” Hariharan said, clapping his hands together for emphasis. “There’s a bloodbath happening.”

Using this logic, we would assume that any retailer selling clothes, shoes, and books are the immediate losers in this scenario. I think we saw what happened with big box book retailers like Barnes and Noble who scaled back locations dramatically thanks to Amazon — only boutique book shops remain for the most part. The latter is a key observation for how retail may ultimately change in every category. We have yet to see the full extent of the pain retailers like Macy’s will feel. Fashion as well is likely to end up less about big box stores and more about unique experiences.

Retail’s chicken and egg problem is a fascinating dynamic when we look at the data point shared in that paragraph. The only reason e-commerce can and will get to 20-25% sales share for a specific category is because consumers can go in, try on, decide what they want in a physical store but then go online and find a better price. We know the top two categories for online shopping are clothes and shoes and we also know those two categories have the highest number of “showroomers” (people who find what they want in stores then buy online).

The challenge for retailers is e-commerce players will always beat them on price. Retailers have to factor in their cost per square foot of retail, employees, etc., making their overhead a challenge to compete with online players. We know from our research the single greatest driver to purchase a product online instead of in a store is price. This means physical retailers are at a fundamental disadvantage. Yet, many of the top e-commerce categories depend on physical space for consumers to go try on, size up, touch, feel, and ultimately decide what they want to go home and buy on the internet.

How this gets solved seems tricky, at least in the categories I mentioned (I should add beauty products to as well given they are in the top five of monthly online purchases by consumers). If a store like Macy’s tries to match a product price and offer that price to the customer while they are in the store, they can’t survive because they lose money on that strategy. If an online retailer like Warby Parker or Bonobos or others who started online, then opened physical stores, keep this strategy, it becomes harder for them to continue to offer the best price. They themselves become subject to low-end disruption in the same way they played a role in disrupting big box retail.

One possible solution is visual computing. The idea has been thrown around before but I think I can finally see how it becomes a reality. I’ll use Warby Parker as an example. Say you are on the Warby Parker app looking for some new glasses or sunglasses. The app has an option for you to use the smartphone camera and see what different models look like on your face. Some apps try this today but fall short because they don’t actually know the dimensions of your face and how to best compare those with the dimensions of the glasses. But advancements like Intel’s Real Sense cameras have dramatically increased camera sensors’ ability to do true 3D depth sensing. Pair this with some visual computing machine learning and I can use my smartphone camera to scan my face and have accurate size and width dimensions to then compare the dimensions of the glasses against. When this happens, you will be able to see exactly how the glasses will look on your face. It may not be as good as trying them on and seeing how they feel but it’s going to come darn close. Similarly, Amazon it seems has been trying to work out ways it can use your smartphone camera to do a 3D scan of your body and then show you how clothes would actually fit.

All of this requires more advancements in camera sensors to have full 3D depth sensing capabilities and backend machine learning to match the body with the digital item. As I said, these have all been ideas tried out before but we didn’t have a clear path to know how we get there. Now it seems we do. And, by the way, these experiences fall into things that qualify as augmented reality as well.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

11 thoughts on “The Retail vs. e-Commerce Chicken and Egg”

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