Retailing exists because consumers are ignorant, small and immobile. Will the internet really change this?
Retailing exists because consumers are ignorant, small, and immobile. When I plan tonight’s supper, my first problem is that I do not know the range of options available. Nor, within that range, do I know what is good and what is not. I ask the retailer to search and select on my behalf.
Having decided on beans, I face my second problem. I am small. Facing the might of Heinz and the power of Crosse and Blackwell, it is difficult for me to negotiate a good price. The retailer aggregates the demands of many potential customers and bargains on behalf of us all.
And then I find it rather inconvenient to visit the Heinz factory to collect my beans. My third problem is my immobility. I would rather pick up the beans from some more convenient location, close to home, and ideally with a car park.
Retailing exists to solve these three problems. The three components of retailing are product search and selection, purchasing, and delivery logistics. In grocery distribution, all these functions have come together – Sainsbury and Tesco do them all. That was not true some thirty years ago. There are some markets in which a different agent performs each of these three functions, like pharmaceuticals (tablets). That doesn’t sound like an organisation system that will last. And there are other industries, like financial services and travel, which have yet to organise themselves ideally on the functional lines.
So where does electronic home shopping fit into this picture. It doesn’t resolve the problem that I’m small. And it doesn’t help much with the logistics either. There are one or two products that you can send down a wire into people’s homes, like videos and banking services, but no technology yet devised can deliver a can of beans or a washing machine on the internet.
The service of electronic ordering of food shopping has existed for a long time. It used to be called ringing up the grocer, who would send his delivery boy round on a bicycle. It is a service that largely disappeared, because it costs too much to provide. And nothing has changed that basic economics.
What modern technology offers that is new is a capacity for structured search – the capacity to interrogate the electronic media to search for the goods and services you want. New technology may not resolve the problem that I’m small, or deliver the product: but it helps reduce my ignorance, or at least helps me to organise it.
So the ideal product for electronic shopping is the washing machine, a product sufficiently complicated and sufficiently expensive to justify an effective search across the available product range, and too big and bulky to be taken home by the shopper.
And yet people could buy washing machines today off the catalogue or on the phone. But mostly they don’t. What they actually do is rather peculiar. They visit a display of washing machines. All of them look virtually identical, and they sit in the middle of the shop floor, devoid of plumbing or electricity, like beached whales. If you asked the assistants to demonstrate them for you, they would assume you were off your head. All you get from the display is the reassurance of the physical presence of the machine. You can touch it, you can feel it. One way or another that seems to be very important. Maybe virtual reality can deliver the same reassurance. Somehow I doubt it.
What really drives changes in market and industry structure is not simply the availability of technology, but changes in the underlying economic and commercial structures. Remember again that retailing exists because consumers are small, ignorant and immobile. And that group of problems applies to almost everything we buy.. Yet what is retailed amounts to little more than half of consumer expenditure.
The other half of what we spend is varied. It includes hosing, utilities financial products, petrol, and many kinds of services – cleaning, car maintenance, conveyancing. There is scope for retailing almost all of these: providing the combination of search and selection, effective purchasing, and convenient distribution logistics which are the characteristic of those retailing activities that already exists.
You can already see this happening. Supermarkets have captured a quarter of the petrol market, you can make withdrawals from your bank account from a machine on their sites or through their tills, and Marks & Spencer will make you a loan or sell you a unit trust. As competition comes to utility markets, a surprising range of companies will emerge as suppliers of gas and electricity. And why can’t the house shop take over from the estate agent and the money shop from the bank? Some of these new retailers will be physical shops like those we are used to, others virtual shops at the end of the telephone. That half of consumer expenditure that is retailed could rise to three quarters. There is a lot of scope there for a very different industrial structure to the one we know today.