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Will stores become extinct in American retailing? This article argues that the answer is yes or, at least, yes—for great areas of retailing. Telecommunica- tion will make it possible to order merchandise from the home; delivery systems will take the place of pickups by customers; banks and other financial organizations will handle money transfers. But technological possibility is only part of the story. Growing numbers of Americans appear to be interested in the time saving convenience and breadth of choice that can be offered by telecommunication shop- ping, to say nothing of the fuel economies that would be made possible. Of course, the authors recognize, there are still important issues to be resolved, some of them subject to considerable controversy. It is probable, therefore, that this article, a sequel to “The Next Revolu- tion of the Retailing Wheel,” by Malcolm P. McNair and Eleanor G. May (BBR September-October
1978), will itself be followed by more analyses in future issues.
Mr. Rosenberg is associate professor of marketing, Schools of Business, New York University, where he has taught since 1969. An active member of the American Marketing Association, he is the author of the textbook Marketing (Prentice Hall, 1977) and of more than 60 articles on marketing in various journals. In addition, he is well-known as a lecturer on marketing. Ms. Hirschman is assistant professor in the department of marketing at NYU and associate director of the Institute of Retail Management. In past years she taught at the Univtrsity of Pittsburgh and Georgia State University. For several years she served as market research manager for Rich’s Department Stores, and she also worked in advertising and sales promotion at the J.C. Penney Company.
A revolution is under way in the store-dominated world of retailing. The instigators are nonstore retailers who are appearing in new forms, proliferating in numbers, and gaining market share from store-based retailers. Although accurate sales figures for this nonstore growth are hard to come by, one source estimates that nonstore annual sales are expanding from three to five times faster than those of tradi- tional store outlets. 1 Here are some tangible examples of the rise of nonstore retailing: ¤ The increasing volume of telephone- and mail-generat- ed orders received by traditional store retailers such as Bloomingdale’s, J.C. Penney, and Sears, Roebuck & Co. ¤ The experimental use of interactive, two-way cable TV as a means of ordering merchandise; the Qube division of Warner Communications is one of the experimenters. ¤ The expanding selection of merchandise offerings made to credit card customers by VISA, Master Card, and Ameri- can Express. ¤ The increased popularity of in-flight shopping catalogs of major airline companies. ¤ The success of televised promotional offerings for records and tapes of popular music “not available in any store.”
We expect this trend toward nonstore retailing to accelerate rapidly with the development of telecommunication retail systems. Descriptions of how such a system may work have been offered by several experts. 2 Our version is depicted in Exhibit I.
- William R. Davidson and Alice Rodgers, “Nonstore Retailing: Its Importance to and Impact on Merchandise Suppliers,” The Growth of Nonstore Retailing (New York: New York University, Institute of Retail Management, 1979).
- See, for example, Alton F. Doody and William R. Davidson, “Next Revolution in Retailing” (Thinking Ahead), HBR May-June 1967, p. 4.
Retailing
without stores
Larry J. Rosenberg and
Elizabeth C. Hirschman
Will telecommunication
and related technologies
transform shopping?
Exhibit I “Shopping” at home
Technological advances
Concurrent with the sociocultural trends is the expansion of technological capability in retailing. This technology will play a central role in shaping retail competition, especially for mass-merchandised items. Mechanisms now exist for distributing almost any product directly from the point of production to the point of consumption. Severe problems remain to be solved, but they are not nearly so great as the problems that have already been solved. Traditionally, stores served as the primary distributors for retail products because consumers were accustomed to purchasing there, few acceptable alternatives existed, and the value of consumers’ money exceeded the value of their time. Nonstore retailing was hindered because of inade- quate systems for merchandise display, payment transfer, and purchase delivery. However, these impediments to the growth of telecom- munication shopping appear to be rapidly diminish- ing—and just at the time when increased energy costs are giving Americans an incentive to cut down on trips to retail centers. In various stages of development are several new methods of choosing, buying, and obtaining merchandise. The methods include specialty catalogs, catalog showrooms, electronic funds-transfer systems, interactive in-home television linkages, and electronic “mail” delivery. Signifi- cant as they are, though, these methods make up only part of the picture.
Conceptual leap
Telecommunication shopping is more than technological paraphernalia enabling revisions of buying habits. It represents a great leap beyond the conventional concept of retailing. Retailing basically consists of different types of institu- tions engaging in transactions with consumers. But over the years, perspectives of retailing have shifted in response to new conditions in distribution. Three major concepts are compared in Exhibit II. The initial concept of conventional retailing entailed a channel of independent participants with retailers sand- wiched between suppliers (producers and one or more levels of wholesalers) and consumers. Store-based retailing dominated, except for truck (or wagon) deliveries and mail-order merchandising.
While conventional retailing still abounds, since the late 1940s it has been gradually eclipsed by the vertical marketing system. This notion has viewed the distribution system partic- ipants as an interdependent set. Either retailers or suppliers take on the coordinator role—whether through corporate, contractual, or administered means--making decisions for the system and influencing its members. The store is still the scene of purchasing. On the surface, the telecommunication merchandiser, however innovative, resembles someone who might be in the vertical marketing system. But this is not the case. The telecommunication merchandiser is part of a system of creat- ing and distributing a total product-service offering to subscribing consumers. Such a system differs in kind as well as degree from the familiar vertical marketing system. We call the new system an offering system because of its different emphasis.
Unique features
How will an offering system differ from its predecessor, the vertical marketing system? It will have four distinguishing features:
- The principal commercial members will interact more simultaneously, rather than sequentially (or vertically), to accomplish the work of the system. Its success depends on the integration of several business functions—production, data exchange, warehousing, direct communication, and electron- ic payment. The system combines those capabilities currently possessed by manufacturers, retailers, and communication media. There is even reason to believe that computer software providers such as AT&T and IBM will become actively involved.
- The offering system will create more rivalry in distribu- tion. In arranging the offering system’s resources, large manu- facturers, retailers, and communicators will vie for the coor- dinator’s role. This struggle for control generates new types of distribution conflict because of the new members (media and computer networks) and the sizable financial stakes. Rival systems, organized by the various participants, will strive to forge a distinctive character and competitive advantage. For example, the manufacturer-coordinated system will empha- size an assortment of its brands and rely on its existing ware house network, while the communicator-coordinated system will excel in merchandising through its televised catalog.
- The involvement of financial systems in retailing will be greater. It could result in the integration or merger of several retail and financial systems.
Exhibit II Changing concepts of retailing
“It seems that every ten years the ‘experts’ forecast the advent of electronic in-home ordering which is ‘sure’ to come during the next ten years. It has not happened yet, and frankly, we don’t see it happening anytime soon. Those who prefer to shop at home can use our catalog instead of their television set.” To be sure, a substantial proportion of consumers are using catalogs for retail purchasing assistance. For example, in 1977, 9.1% of Sears, Roebuck’s business originated from its catalogs, with a corresponding figure of 11.4% of sales coming from catalog counters in Sears stores, making a total of about 20% for catalog-generated sales. This sales propor- tion has remained constant at Sears for the past five years. A contrasting perspective is the belief of some retailers that telecommunication retailing will complement, but not replace, existing forms of nonstore retailing, such as catalog, door-to-door, and direct-mail selling. An executive affiliated with a communication corporation asserted: “We see telecommunication as one important way to extend retailers’ contacts with consumers. It can supplement their traditional promotion and distribution tools. Some retailers will find it of more use than others, depending on who their customers are, what products they are selling, and what other avenues are available to them.” Although, industry executives differ in their opinions of the applicability of telecommunication to their own retailing operations, most tell us they do not rule it out and state that alternative systems are under study. One manager of a specialty chain summed up this view: “Yes, we are actively considering telecommunication systems. We make every attempt to keep abreast of technological developments which may affect our business. One major factor in any decision we might reach concerning telecommunication would, of course, be competitors’ use of it. We don’t want to be the last to implement it.”
Will retailing be transformed?
What will be the specific effects on traditional retailing brought about by the emergence of offering systems? We foresee many important changes. It seems likely that tradi- tional retailers will become increasingly vulnerable as telecommunication shopping catches on.
First, the effects of current social trends should be perplexing for mass-merchandise retailers. As consumers crave more uniqueness and individuality, fewer and fewer products will be purchased as staples, that is, without regard to style, fashion, or social meaning. This implies that the present movement into apparel and soft lines by discount and mass-merchandise stores may be partially stymied by the consumer’s desire, backed up by affluence, to buy something that no one else has. The atmosphere and assortment in discount and mass-merchandise stores will fall far short of the individuality that consumers increasingly will demand. Small local stores will be at a disadvantage to diversify and individualize their merchandise mix. Second, the movement toward in-home purchasing will prey on traditional retailers. As consumers rely more on shopping at home to save time, the retail systems now in the direct marketing arena should prosper. Those retailers who refuse or are slow to develop to-the-home approaches will in evitably suffer. Third, as consumers become more discerning and produce a higher rate of product returns, repairs, and exchanges, many retailers will feel greater pressure on profit margins. The success formula of many retail enterprises requires high volume to offset low prices. Increased product returns effectively lower net volume and push up operating costs, perhaps substantially. While it is doubtful, for example, that many department stores will fold because of mounting product returns, it is likely that their profitability will be reduced. This problem should weigh more heavily on smaller retailers with fewer units over which to spread costs. Fourth, the key conditions underlying traditional retail- ing seem to be eroding. The lifeblood of many store-based companies is a steady stream of automobile-driving consum- ers who visit an outlet, select a product, and take it home. The waning of each of these habits seriously threatens the retailer’s competitive health. Consumers are more reluctant to spend time inefficiently searching for products among the long, crowded aisles typical of many stores, when instead they can order many of the same products from a catalog or by telephone. Similarly they are less inclined to view themselves as delivery systems for transporting products from the store to their homes when retail alternatives exist to take care of delivery. Energy shortages and costs, especially for gasoline, will serve to reduce further the willingness and ability of
consumers to shop as they traditionally have. Frequent trips to a store to restock a few items will be sharply curtailed. Major shopping trips will be more carefully planned. As the opportunity for comparison shopping by visiting multiple stores decreases due to energy restrictions, the in-home perusal of electronic catalogs becomes an increasingly valuable and desirable shopping alternative.
Changing landscape
In the territory of retail markets, the arrival of offering systems will have some impact on the downtown competitive structure. But many types of stores in the suburbs will fare worse. As for downtown areas, a historic relationship has linked the prosperity of a city’s main commercial district to the activity of its cluster of downtown stores, especially depart- ment stores and major specialty stores. The ascendancy of offering systems could jeopardize efforts to revitalize down- town areas by reducing the need to construct new urban retail areas. While it is improbable that offering systems will halt downtown renewal, they will force store developers to enhance the attractiveness of urban retail centers. This can be done by emphasizing a unique shopping experience, more akin to entertainment than shopping. Notable examples of the successful implementation of such urban centers include the Faneuil Hall Marketplace on the Boston waterfront, the Peachtree and Omni Centers in Atlanta, the Renaissance Center in Detroit, and the Galleria in PhilaIelphia. A less successful example (at least, as of early 1980) is the imagina- tive Williams Plaza and related projects in downtown Tulsa; so far, shoppers have not been attracted in large volume. In the suburbs, on the other hand, offering systems will probably imperil traditional retail stores. Regional shopping malls—composed mainly of efficient, integrated chain retail- ers—already cater aggressively to the lifestyles and wants of their customers. These large, recreation-oriented shopping environments are filled with a broad and balanced assort- ment of “ego-intensive” goods and services—fashion cloth- ing, home furnishings, leisure products, and the like. Yet their niche in the competitive structure is not guaranteed. We fear these stores may be undercut by rising operating costs and customer reluctance to drive great distances, except for high-priority shopping expeditions. Also, the nonstore systems are exhibiting considerable flair in merchandising ego-intensive goods to well-to-do consumers
who are pressed for time. Examples of this flair include the enormous array of specialty catalogs mailed directly to consumers, such as the Dallas-based Horchow Collection, Talbot’s of Massachusetts, and New York’s Hammach- er-Schlemmer. The outlook appears bleaker for stores in smaller and older community shopping centers. Such stores are conve- nient and good for routine purchases. They will be hurt as consumers place more value on their time and as telecommu- nication retail mechanisms spread, because their products will be easy to order from home. Many stores in smaller shop- ping centers, on shopping strips, and of the free-standing type may fold. In this endangered group will be chain and independent outlets such as discount stores, supermarkets, dry cleaners, convenience stores, and potentially a portion of the staple-products volume of the national chain merhandis- ers (e.g., Sears, K mart, J.C. Penney). Especially hard hit, we think, will be small, independent stores selling routinely purchased products. Such stores usually are located in strip shopping centers. They cannot match the prices, decor, merchandise variety, and depth of the larger chain competition. Those stores most likely to survive will be small retailers who take shelter in franchised or affiliated systems, thus benefiting from computer hook- ups, large-scale buying economies, mass advertising, and management expertise.
As the doors close
Offering systems will require sizable amounts of capital and equipment, skilled management and staff, and disciplined administration of all marketing functions and member companies in the coalition. Once formed, these systems should be large, powerful, and quite stable. As a result, new and smaller retailers, wholesalers, and manufacturers will find it increasingly difficult to enter the competitive struc- ture once the offering systems are in place. Barriers to entry may be erected comparable to those in the chemical and automotive industries. This would be a substantial reversal for retailing, traditionally one of the industries most open to new competitors. Even certain larger retailers, wholesalers, and brand-name manufacturers may be excluded from participation. Those who maintain a cautious attitude toward starting or joining one or more major offering systems may later find themselves shut out from full membership; once completed, the systems will not be interested in more members.
and equal access. (In this respect, it is worth noting that the offering system linkage with financial systems could aid disadvantaged consumers by helping them manage and budget their limited funds. Consumers who have trouble keeping accurate records of their spending on several credit cards could be aided by a system that consolidates all their bills and keeps running tab of expenditures.) The potential for both harm and help is present in these systems. Which potential becomes reality can only be answered by management.
Conclusion
We see as a virtual certainty that the era of widespread telecommunication shopping is approaching. We predict
that this era will witness significant alterations in the concept of retailing and the nature of retail competition. Like all predictions of great change, this forecast is subject to uncer- tainties. However, it is worth stressing that our picture of the post-revolution retailing scene is based partly on evidence available today, as well as our reasoned opinion of probable outcomes. Corporations involved in any way with retailing cannot afford to ignore the developments described. Nor can execu- tives of storebased retailers, shopping center developers, brand-name manufacturers, broadcasters, computer manu- facturers, telecommunication suppliers, banks, and credit-card companies wait for the future to unfold before formulating appropriate strategies. The challenge to manage- ment in all these retail-related industries is to grasp the dimensions of the coming telecommunication revolution. Soon it will be time to participate in that revolution.
