Aug 29 2019

Is an online walled garden right for your business?

The adoption of proprietary online shopping venues should be carefully considered.

By Mike Massey   Founder / President

The promise of stealing shoppers out of malls, convincing riders that taxis are expensive and inconvenient, and helping homeowners rent unused bedrooms seems to be presenting a gold-rush opportunity in the form of an “on-demand future." But who and what is really driving that trend?

It’s not surprising that in recent years investors have rewarded disruptive digital technology firms with enormous valuations based on absurd multiples of top-line revenue. Nor is it surprising that those investors have empowered internet behemoths to focus entirely on KPIs that drive stock price; growth of top-line revenue and consolidation of shoppers (vs profitability or channel health). But as these digital walled gardens emerge, is there an opportunity for you? Your store? Your brand?

Over a decade ago, I started out with an eye firmly on that golden nugget. As one of the very first sellers on the Amazon marketplace, an early e-commerce merchant, and a third-generation retailer, I helped pioneer marketplace sales for my retail company and made strenuous arguments to my brand partners and retailer peers in the 00's that Amazon and eBay just represented the digital version of a high-quality mall. The ‘always-on’ future where the convenience of shopping 24/7 would overcome the obvious logistical and environmental (and economic) challenges was inevitable. (And, hopefully profitable)

And it was a good bet. Until it wasn’t.

I was sure that aligning my interests with a shopper-loved, money-losing internet giant would eventually produce a net-positive economic benefit, but not surprisingly, I soon found myself in lockstep with the now-infamous paradigm: increased sales and decreased profits. Frustratingly, it became obvious that I wasn’t just losing money on most of the sales I was making in the marketplace (which I erroneously justified as marginal increases and one-time customer acquisition costs). I was also cannibalizing healthier aspects of my retail business by drop-shipping my best-selling products and brands to anonymous non-repeat customers at a significant hit to my margin.

Still, during this time, something became glaringly obvious: shopper behavior had changed. Just like hailing a taxi with an app or booking a movie ticket or dinner reservation online had become the norm, shopping 24 hours a day with convenient logistics and a huge selection was here for good. How had it slipped past the attention of most brands and retailers?

In retrospect, it seems like the news of this “new” consumer behavior hit the mainstream media in a single news cycle. Suddenly, less than 5% of retail sales (at the time) wagged the entire shopping dog, and every player in a decades-old retail/wholesale ecosystem adopted an “every man for themselves” attitude; they hired “a guy” who once worked at an e-commerce startup for a year or so to lead the digital marketing revolution at the company and set out to strike digital gold.

Many years in the future, I will sit down and write an article about where all of this disruption has led us…. (flash to today)

On the retailer front, some of our peers are gone. Legendary specialty shops who worked hard to build emerging brands from seven to eight to nine —and even ten— digits of revenue? Poof! They toiled to create the brand affinity that fuels today’s digital consumer-acquisition ecosystem but missed the memo to stop building goodwill and start burning it. They also missed the part where having consumer "data" (such as knowing your customers personally) was going to be valuable. /Irony

Some mediocre and truly terrible retailers are also gone, but that so-called retail apocalypse has been happening to them since there even was retail. So, no big surprise.

”Your margin is my opportunity.”

And, while brands may have initially dismissed the woes of their shrinking wholesale network, they finally started seeing exactly who Jeff Bezos was referring to when he said: “Your profit is my opportunity.” Them.

Because while nimble specialty shops constantly tweak their promoted product/brand mix from season to season, tech companies tend to thrive on discounting a brand’s hard-fought-for brand premium. Accumulated goodwill is the perfect bait for acquiring shoppers and turning them into one-time buyers.

One of the problems with this trade is that while those heirloom specialty shops rarely drive quarterly sales goals, giving them up is often the same as parting ways with yet-to-be-gained consumer enthusiasm and handing it to your future competitor. A brand isn’t a brand without shoppers who are excited about it. And, excitement relies on the exact type of social influence that brick-and-mortar brings to the table. Bottom line: Internet giants are notoriously terrible about squandering precious social capital. Local, word-of-mouth experts are great at building it. Your brand's lifecycle dictates which side you're on.

And, once your brand is compromised with consumers, there’s no barrier for a new brand with a remarkably similar product, possibly owned by the company that squandered your goodwill, to emerge, triumphantly at the top of every online search. Just ask Vlasic how this works.

The reality is that if your company is valued as a multiple of top-line sales, exhausting a supplier’s profit margin to drive top-line revenue and market cap is a smart move. Working capital is coming from investors, not consumers. Actually making money isn’t even a tertiary goal. Saying you are destroying your competition is. And, everyone is your competition.

What happens next?

Looking ahead might start with a glance at the past.

Forty years ago, specialty retail was also “about to be destroyed" by an emerging threat: big-box stores. And, while Wal-Mart etc did do lasting damage to general merchandise sellers on Main Street, most industries responded with a bifurcation of mass-market products and specialty products: more premium and service-intensive products headed toward full-service specialty, and more commoditized merchandise ended up on the shelves of self-service warehouse stores.

While this lesson is easily observed, it doesn’t bode well for brands that try to have it both ways. Specialty retail is an intolerant half of the ladder; without their expertise and connection to shoppers, the brand itself becomes faceless — an anonymous commodity that’s easily interchangeable with a knock-off. The more your specialty network withers and your distribution becomes less diversified, the more opportunity an e-commerce partner has to tilt the relationship to their strategic interests.

Finally, we’ve already had a digital “everything” company: AOL. I’m unfortunately old enough to remember when “being online” almost entirely meant AOL. Their rise (on the back of similarly absurd investment enthusiasm) created the exact same news cycle of doom for almost every business. AOL was going to clean house on every industry, from news to retail to food. Everything. So, investors gave them an unlimited amount of money to do it.

But then, people who bravely chose to not be part of the walled garden or hitch their fortunes to a proprietary platform took what they could glean from the company and what its customers loved and built non-proprietary solutions: websites, blogs, e-commerce sites, and marketplaces. New, open connections with customers thrived, while the giant stayed trapped behind the wall it built for itself - largely abandoned. (Although, somone you know probably still has an @aol email address)

Today, we see something similar: a Cambrian explosion of shopping solutions aimed at re-democratizing the relationship between stores, brands, and shoppers. Curbside pickup, same-day delivery, online-to-nearby shopping, digital advertising for local stores, and more… is all just emerging.

As shopping paradigms rapidly shift, it's shoppers who will continue to drive retail technologies forward. They're the real leaders among us, and their behavior will be what shapes the future of retail. Companies that focus their energy on building their brand while also meeting shopper expectations will thrive. This is how it has always worked.

About Mike Massey

Mike is a third-generation specialty retailer and owner of [Massey's Outfitters]( in New Orleans. He pioneered both e-commerce and marketplace sales before realizing that shopper behavior was changing and brick and mortar needed a paradigm shift to keep up. At Locally, Mike is the head of strategy, operations, and [partnerships](  View all posts by Mike

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