Retail : The Final Frontier?

Maximize the Internet’s best tools, because fixed asset distribution is becoming a dinosaur

Historians eventually will look on last year as the beginning of the end for retail stores (aka fixed asset distribution) as we know them. Holiday ’08 retail sales dipped 5.5 percent to 8 percent from the previous year, the most dramatic decline in decades. Few, if any, retailers projected such drama.

Retail operating margins were extremely low coming out of the holiday season. There have been boatloads of red ink, numerous store closings and high-profile bankruptcies. And as we all experienced, merchants practically gave their goods away at heavily discounted prices.

Does this signal the end of the retail model as we know it? Despite the fact it’s been the dominant paradigm since The Crusades, retail is inherently inefficient. It’s all fixed expense (vs. variable). Retailers have to bank a whole set of decisions — including how much inventory to stock, space to lease, sales staff to employ, etc. — on their abilities to stimulate and project demand.

Consider the fate of the now-defunct F.W. Woolworth chain. At its peak, Woolworth’s numbered more than 1,000 retail sites and had become the largest department store chain in the world by 1979. But in the late ’80s, Woolworth’s tried to develop multiple specialty store formats within an enclosed shopping mall, a concept that failed. By 1997, Woolworth’s was gone.

Eleven years later, The Sharper Image, the high-tech gadgets retailer founded as a catalog in 1977 and built into a store chain, met a similar fate. Although The Sharper Image’s life as a cataloger/retailer was considerably shorter, its fate was similar.

Rapidly growing and highly profitable when its focus was on marketing products directly to consumers through its innovative catalogs, an aggressive strategy of retail expansion led to The Sharper Image’s downfall. The company at one point operated 186 retail stores nationwide.

Both these stories expose the vulnerability of fixed asset distribution. In simple terms, the cost of doing business in a traditional retail environment is fixed: It doesn’t vary with volume; it’s independent of the revenue required to support it. Over the years, our retail distribution systems simply have been overbuilt.

Certainly, the sheer cost of leasing real estate is a huge factor contributing to the decline of retail businesses. Inventory management also has been increasingly costly as warehouse space, inventory management systems and personnel expenses have increased.

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