..and when the sun rises again tomorrow, we'll see how far we've come ...

..and when the sun rises again tomorrow, we'll see how far we've come ...

... just to remind myself why I'm doing this ...

Depending on our personalities, the world can be a crowded place or a very lonely one. For those who seek comfort in numbers, there is no shortage of hangers on, but for those who avoid that circus, keeping thier own counsel can leave them feeling quite alone and disengaged from the mad place we call home. Life is a trade off and most of us choose how we live it.

For me, I'd rather work things out as best I can, using my own thoughts and feelings to sort things out. Following the crowd has never been a temptation to me, but that has its price, one that I'm totally comfortable with every day I get to stand up and be the person I aspire to be. When I sometimes lose track of who that is, I come here to remember, to reconnect and to resume my quest.

These posts are a reflection of some of what matters to me and it's a privilege to have the opportunity to collect these thoughts as they form in my head, as they prepare the way for my life, as it evolves from one day to the next. They re-inspire me when things seem to be floating about, with no particular aim or purpose, and it does happen from time to time.

So, today I had these thoughts that I think are worth writing down for the future me to look back on when I need to ...

Sunday, January 15, 2012

Today's 'Retailing' model may be approaching a catharsis of sorts

·         74.1% of all electronics are bought online,
·         74.0% of all music and videos are bought online,
·         67.8% of all office supplies are bought online,
·         65.9% of all clothing sales are bought online,
·         65.8% of all furniture sales are bought online,
·         61.4% of all games and toys are bought online.
And of course, being U.S. sales, we're talking some big numbers here. For instance, translated into dollars, the percentages above mean that people bought $8.4 billion worth of electronics online as opposed to $2.9 billion in store, and $13.6 billion worth of clothing online vs $7.0 billion in store.
To put this into a Canadian perspective, recall that all Canadian ecommerce was worth $15.3 billion in 2010. This Canadian Ecommerce By the Numbers Infographic from CreditCards Canada (prepared from information provided by Statistics Canada) gives the details on Canadians' online buying habits.

The state of Retailing today
Jan. 7, 2012
As most commonly practiced today, Retailing is moving towards an eventual collapse of that model.The world “manufacturing” engine (taken in a broader sense), runs at a production rate built on the need for profits, employment levels and revenue creation required to provide and sustain endless growth. Essentially, it has to keep producing at ever growing rates just to keep up. When the market is no longer hungry enough nor capable enough to absorb all the output produced to maintain that rate of production, the decline will rapidly recede through the entire production chain, right back to the harvesting of raw materials. Moreover, it’s no coincidence that management levels keep expanding while labour-intensive segments appear to keep shrinking. Declining output must carry ever-increasing costs of maintaining operations, creating output of decreasing intrinsic value but at increasing prices. As the need for associated labour declines, the essential resource, viable consumers of the production output also declines (as a percentage of consumer to output).  Add to that, the rising costs associated with selling or retailing that kind of output and you have a tipping point where it no longer sustains itself. Collapse is the default. Rather than into over-production, employment has to be channeled into producing non-consumptive output, actual assets and support mechanisms.

The presently most common Retail model is itself defective and self-destructive.

Retailing is not cheap, easy or a guaranteed successful venture. It can be profitable but often, in the long term, is not because the known final cost of sales has to be paid entirely by the buyer. That means the actual value of the purchase is diminished by the overhead costs which it must also bear. There are, in too many cases, some unknown costs, which, because of their nature, are omitted from the recovery process. Once discovered, they also become part of the burden that the buyer must bear, further affecting the demand and consumption.

Ours is a world that depends on selling and buying; we call it the “economy” and it now occupies third place in our daily dialogue, not far behind talk of wars and strife far away, in the neighbourhood and our homes , and of course sports, which seems to be an economy all on its own. The trouble with Retail is that it adds NO realizable value to the transaction, only costs, and thus raises the price of everything transacted by retail; a simple pass-through to whatever is being sold. Any additional costs are only a reduction of net value. I think that Retailing needs to re-evaluate itself and its role in the economy if it is to continue to serve a useful purpose, particularly one with actual value. For some insight, we just need to look at the food chain, and the AVOIDABLE costs that are borne entirely by the consumer. One day, that BUYER will rebel by refusing to buy anything at retail, especially bricks and mortar based, as we know it today.

The nature of Retailing today
Retailing, and its next-of-kin, Wholesaling, take a variety of approaches; I can think of brand-based, category-based, product-based, theme-based and volume-based. None of them are mutually exclusive and they all tend to overlap somewhere and to varying degrees, mostly due to a pursuit of more market exposure. Left to evolve along that trend, the eventual result would see all of Retail selling everything to the world market all the time. In that event, it is likely that the only difference among them would be “price”. We’re already beginning to see the emerging impact of this by watching the latest inhabitant in the retail jungle, the “On-line re-sellers”.

It’s easy to see that this model has its advantages for the buyer, but it also introduces some new problems and makes some disadvantages more significant. What it gives with one hand it seems to take away with the other. First off, you need internet access, and that can be more expensive than we realize when all the associated fees attributable to such communication costs are factored in. Then you have only 2-dimensional access to the products, depriving the buyer of all the other sensual aspects of choosing and deciding on a purchase. There are the strict limitations of payment methods and their inherent insecurities. First hand inspection and quality assurance are impossible, and time delay has its frustrations, and in many cases, transportation costs become a factor not previously a part of the overall common retail transaction cost.While it is a model that can reduce the base price, it does not guarantee a net reduction of the final transaction price. In the longer term, the tradeoffs may keep this model from gaining the upper hand, assuming it does not mitigate the negatives that exist now.

In today’s predominant Retail model, it’s pretty much indeterminable what the ratio of buyers to traffic would be in an overall perspective. The operational costs incurred by Retail are the result of servicing the total traffic at retail, not just the buying portion. Distributing that cost over all traffic reduces significantly the share per body served as compared to the share per transaction. As the business world inches more and more towards any number of user-pay models, Retail refuses to even look at the idea for fear of discouraging potential for sales. This is where the content of the sale comes into play.

As I said at the beginning, production is more sensitive to labour and sustainability pressures than to what the market can absorb indefinitely. We produce too much unnecessary output and force the market to deal with it. Dealing with those excesses wastes resources and increases costs in a number of ways (such as advertising, what I call ‘enticing’). Those costs become part of the buyer’s end costs, unnecessarily raising the price of every buyer’s transaction. This is not equitable because the buyer is paying for unwanted and unneeded product and for the cost of further enticement to buy yet more. Meanwhile, the non-buying traffic keeps adding to those costs being borne only by the buyers.

It seems reasonable to assume that lower prices overall will increase buying transactions, be they planned or spontaneous. Increasing transactions could be categorized as an economic stimulus. The real benefit comes when the price of necessary goods declines and the number of transactions increases as a result. Such stimulation in the economy can only be a benefit to all, and improve the true and realistic sustainability of the production and manufacturing engines.

As it operates now, Retail’s operational costs are borne exclusively by the buyer, the key resource on which the operation depends entirely for its income and derivative incomes. The more buyers, the lower the attributed operational cost per transaction; conversely, the fewer the buyers, the higher those per transaction cost attributions become and consequently adversely affect the final price for every transaction. That suggests that regardless of the traffic through an operation, the key number is the actual transactions.
This introduces the “rate of conversion” factor, turning traffic into buyer. Generally speaking, conversion requires additional resources to be employed, ie advertising, promotions, sales, etc., because non-buyers are being enticed to buy what they had no intention to buy at the outset or more of what they actually are buying. These additional resources must also be derived from the final sales revenues, which obviously reduces the net effect as well. Expending resources on conversion strategies does not provide a 100% return on those resources so there is yet more collateral drainage, and likely involves the principle of diminishing returns if too much is spent on that. Adding costs without adding value contributes to the eventual collapse.

The face of Retailing to come
BUT, what if the operational costs were distributed over the overall traffic as opposed to just the buying segment? What if the cost of operations were spread much thinner by distributing them over every single body through the retail door, thereby reducing the impact on the actual resulting transactions? The result would naturally be lower prices, lower transaction dollar values AND better value for the buyer, the most important piece in this process.

What if EVERY visitor through the door were to provide a share of the resources needed to pay the operating costs? As it is now, the more the buyer spends, the greater the contribution to the payment of operating costs. On the surface, this seems to me to be penalizing the most important resource, the buyer, and the penalty increases with the increase in the amount of the purchase, the higher that gets. Unless the margin calculations are applied in a reverse formula, where the lower the purchase, the higher the attribution of costs, (resulting in abnormal prices for minor transactions), this system forces the better buyers to contribute the lion’s share of the costs. This is surely not a preferred objective or outcome.

Costco has redirected some of its costs through its membership component and reduced the pricing of their products, thereby presumably increasing the number of transactions. However, their model requires that more product must be added to the transactions to compensate for lower margins, margins which were downsized because of the redirection of overhead now being addressed by membership revenue. (That’s strictly my analysis and conclusion.)

Retail has to stop making ONLY the Buyer pay for the operational costs, which is what happens when they include those costs ONLY in the sale. Not doing so will actually reward the buyer for purchasing instead of penalizing them for buying more of what they need and may want.

User-pay is a theme that’s popping up ever more frequently in reasonable and many unexpected places. It’s also being used to disassemble transactions into smaller components to render them less objectionable to the consumer, albeit making it more of a distraction than a reality. The present reality is still that ALL costs must be wrapped into the final transaction with the buyer. You can disguise them but you can’t avoid the costs.

Why doesn’t the “looker” pay their share? After all, the cost of providing the opportunity to “look” is very real, and in the present model, it’s paid for by the BUYER, not the “looker”. Marketing says that’s OK but economics says that’s fiscally wrong. Marketing claims success when it creates “traffic” but “traffic” simply adds costs. Conversion of that traffic also adds more costs. At present, all those costs have to be paid for by the end buyer. To me, that’s counter-productive; it can have the underlying effect of discouraging a purchase because of the inflationary affect on the transaction. Rather than penalize the decision to buy, Retail has to reward it. Marketing has to take responsibility for its cost and for its failures to convert by putting that cost directly on its own product, “traffic”. Marketing has to become self-sustaining, a free-standing component of Retail that covers its costs with its own revenue, rather than simply imposing (disguising) its costs in the seller/buyer transaction. Perhaps Marketing needs to provide “value” in its offering to the “looker” and show further “value” in the purchase for a realized double benefit to the buyer. That’s how Marketing can do the job it’s supposed to do. That’s how it will have to perform to stay relevant in the marketplace.

Ultimately the buyer has to reap the benefit of a transaction if there are going to be more transactions in the future. Heaping undeserved costs onto those transactions will have the opposite effect and will work towards the failure of the present Retail model. Today’s Retail model would be wise to find a way to fix itself before it falls flat on its face and finds itself relegated to the fringes of commerce.