Retail’s Creative Destruction Spawns a New Commerce World Order

Contrary to the creative perception most people have of the fashion and retail industries, the biggest challenges facing these industries are institutional risk aversion and, for many, a lack of creativity. While a cautious attitude is warranted given all the recent setbacks both industries have faced, an innovation and positive-attitude reset is required to take advantage of the opportunities ushered by retail’s evolution. No winning brand ever said, “Stick with the status quo.”

The case for change is critical given the big tidal wave impacting retail. What we’re seeing is the throes of retail’s creative destruction. The term, coined by the late Joseph Schumpeter, and referring to a complete restructuring of a way of working in favor of a better approach, applies to retail’s present and future. We’re seeing a complete dismantling of what has worked badly and the consumer is ushering in a new direction.

The Catalyst: The On-Demand Consumer
In this new framework, a digital consumer is in charge. Brands and retailers must court them, which is a powerful contrast to the distribution models of yore when brands built the product and distribution channels and consumers simply showed up to consume.

Today’s retail framework puts the consumer at the very center, empowering her and him with all relevant rational and emotional information as well as increasingly smart tools to personalize search and purchases. The brands now have to work hard and pay what it takes to stand apart from the crowd and wow this consumer.

The Pressure Tipping Point
This process is tedious, ongoing and expensive, especially for traditional players, considering their steep learning curves in all new things digital. Many of them have struggled to deliver the scalable personalization new retail requires, especially when competing with shiny direct-to-consumer plays that are not obliged to show profitability (think nimble startups) or that can subsidize expensive strategies from other high-margin business areas (think Amazon).

These smarter entrepreneurial digital/omni players have stolen foot traffic and put further financial strains on traditional players. Wall Street took notice and forced further austerities based on their performance expectations, hence today’s headline narratives of an “apocalypse.”

Retail’s Creative Destruction, a Play in Three Acts
What we’re seeing today is not an apocalypse, but a potentially powerful rebirth. Retail’s creative destruction is comprised of three phases.

The first one is the shakeout phase where unsustainable models simply collapse under the weight of ineffectiveness, irrelevancy and ultimately, insolvency. This is the most alarming but potentially the most transformative of the phases, as self-correction gets rid of waste and serves up a flaring red flag for other players to get their act together.

The second is part of a broader tectonic shift in society, business and technology fueled by digital media and consumer empowerment. It’s a shift away from the establishment and its cadre of intermediaries in favor of a more direct connection and relationship between creator and consumer. We’re seeing it in media with the rise of niche, passion and purpose-driven content, most of it social and viral in content. We’re also seeing it in the constant disruption of established industries by new, more nimble, problem-solving, direct players such as Tesla and Uber in automotive and Netflix in entertainment.

Third is the ongoing bankruptcy of retail players that lost their footing and related avalanches of financial weight too burdensome to carry. We are also seeing it in the unbundling of and reimagining the department store concept and the physical brick-and-mortar store itself. As consumers embrace the analytical personalization of Amazon and other direct-to-consumer plays, traditional stores have been forced to become more edited and nimble with a greater focus on experiences and lifestyle-enhancing functionalities such as click-and-collect.

On a higher level, the shakeout is also impacting how retail companies work and operate. As companies are pressured by Wall Street to downsize, the executive ranks have also been impacted. The new work profile prizes management natively fluent in the new world and vocabulary of consumer-centric, mobile-led strategies. The more nimble leaders and winners coming out of this new phase are also ushering in tech company collaborators of a similar ilk along with wholesale vendors and creative partners that get speed and relevancy.

Realignment
I’ll argue that we’re now in the latter phases of the shakeout, with the last good-to-better retailers surviving along with the winning new startup ventures that have been able to deliver completely innovative models all the way down to the balance sheet. We’re now in the early phases of realignment. During this phase all the smart systems, ideas and players will find each other and stack collaboratively to create a better model for everyone.

The first phase of realignment is around size and scope, scaling down across the business in terms of the number of stores and better control of inventory. On the inventory and operational side of things, better supply management integrating platforms are stacking more effectively with less spillage, meaning lower margins of error. I expect to see an increased rate of consolidation around systems networks and solutions, giving retailers and brands a powerful universal view of the consumer and the business. This will provide an opportunity to size around trends from product development to marketing and sales.

The realignment phase will also result in a more effective emotional understanding and connection with the consumer. The better brands are accomplished at knowing themselves and what they can deliver with collaborators. The new brand leaders are able to tap into a natural ecosystem of media platforms, brand advocates and cross-industry partners to bring their experience to life. These smart brands make this a rich, iterative process through listening and rewards. This natural form of connection is drastically less costly than traditional awareness and push campaigns.

In this alignment phase I also expect a lot more unanticipated collaborations. While the shakeout phase seemingly pits opposites against each other (think brick and mortar vs. direct to consumer, mass vs. niche), in this new phase we expect more collaboration (partnerships, acquisition) among new and established players where they both benefit. The new players will benefit from the scale of the established, and the latter from a new customer base and new approaches. Think of Walmart’s acquisition of Jet.com, upstart millennial mattress brand Casper at Target, and CPG behemoths Unilever’s acquisition of Dollar Shave Club.

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