January 27, 2005
The Retail Morph
By Evan Schuman, eWEEK
Opinion: Will retailers and consumer goods companies morph into each other? And if they do, what will it mean for the retail status quo?
In many ways, CIOs are in the prediction business.
They must make one-, two- and sometimes even five-year plans for technology buying, when even a two-month prediction in many sectors—especially retail—is barely more accurate a predictor than a dice toss.
And, yet, predict they must, so out come the projections, the theories, the hypotheses and the assumptions. In that narrow context, CIOs are like columnists. We must predict the future, with not a money-back-if-we're-not-right guarantee in sight.
It's in that light that I've been trying to figure out what the next big shakeup will be for the retail technology space. What could send some unknown tiny startup to multi-billion-dollar dominance and send Wal-Mart to has-been territory?
The PC world knocked Digital Equipment from its perch in the 1990s. The Web almost did in Microsoft, which quickly churned out Internet Explorer after far too many months of ignoring the obvious signs. The compartmentalization of the mainframe almost did in IBM and it took a helm change for Big Blue to retain its dominance. And General Motors' execs still shudder when they remember how Americans fell in love with small cars when they came out of Japan.
At the National Retail Federation show this month, I asked many executives and CIOs what they thought would be the next change-everything move in retail.
The best answer came from Esther Lutz, who is the senior industry executive for retail at SAP America. Lutz made a powerful and self-serving argument that the morphing of retail and consumer goods companies would likely be the next big thing.
Cynical Note: I no longer take points away from an argument when it's self-serving, having concluded that every industry argument to an editor is invariably self-serving. (This differs, by the way, from when my wife argues with me, a situation that I now consider a punishment for some unspoken transgression of mine that she can't yet prove but that I undoubtedly have committed.)
Lutz pointed out that retailers are shifting more and more of their merchandise to their own private-label items, cutting their consumer goods partners out of those dollars and boosting their margins. Indeed, unlike the typical private label of years ago, these retailers aren't merely outsourcing the product's creation to some no-name manufacturer. No, they are now seriously toying with doing their own manufacturing.
At the same time, manufacturers—in numbers that are also larger than ever—are trying to sell and distribute their products themselves. And this is not merely a reference to e-commerce. No, we're talking about CG players like Nike and The Limited setting up their own storefronts.
This is certainly not a new trend, but the number and diversity of the efforts on both sides of the aisle is indeed startling.
Is this the start of a CG war against retailers, who have made their margins on CG backs too long? Or is this a retailer war against CG players, who question if the CG players are delivering anything the retailer couldn't make themselves, with a lot more margin?
Either way, Lutz argues, both sides are discovering that the grass is a heck of lot greener when it's on the other side of the supply chain-linked fence. And SAP is only too happy to sell more products to both sides, as retailers buy manufacturing apps and manufacturers start shelling out for retail apps.
There are other reasons for both sides to be exploring their opposite number. On the CG side, many manufacturers have been expanding their product lines in an attempt to attract more—and more diverse—customers. This product line expansion raises the prospect of having certain products no longer in synch with a retailer partner's base.
Wal-Mart, for example, has been offering many higher-end items from some of their traditional suppliers. That has caused some uncomfortable moments when customers who would typically never shop in a Wal-Mart are hesitantly going there for particular products.
"What you get is the disconnect of the Mercedes parked outside the Wal-Mart," said Marshall Gordon, a Lutz colleague at SAP who is the company's industry principal for consumer products.
Gordon cites another good example: QVC. "It's no longer necessarily the mother that's home in rural Wisconsin that is purchasing their products," he said. "The channels that people use today do not necessarily align with conventional wisdom."
Fair enough. And when Gordon argues that the number of companies that will remain pure-play retailers—or, for that matter, pure-play CG manufacturers—is likely to plummet, I'm inclined to agree again.
But where does this all lead? Is Procter & Gamble going to start buying malls and using each storefront to sell one of its products? Unlikely, but it does raise questions about what this industry will look like come 2009.
But if this trend forces both retailers and CG players to treat each other a little more respectfully (read: fearfully), that wouldn't be entirely a bad thing.