Published in LinkedIn, on February 16, 2019. Read it here.
The evolution of retail through the centuries is well documented and widely known. The basic concept that existed through the centuries is of customers purchasing their needs from a shop which displays them, or has access to them (perhaps in an offsite warehouse). The growth of this business was largely dictated by where the shop was located. The greater the ease of access, the more the people who visited the store, the bigger the business could grow. This was why cities and towns ended up on main highways and waterways providing unhindered access for larger numbers of people and for the establishment of market places within them.
Fast forward to the 20th century and the pattern remained largely the same with the difference that market squares moved into plazas and shopping centers. Cities and towns with greater rail, road and air connectivity continued to grow with the increase in the number of visitors. The fundamental mantra for retail success did not change – location, location, location.
In his fascinating new book called The Square and the Tower, Niall Ferguson explores the role of human networks and hierarchies and how they have affected the course of history. He explains that a network consists of clusters, nodes and connections, which are arranged in various types of structures or patterns. Some could be scale free with no central hub but with groups of nodes forming hubs which connect with other hubs; others flow from the top down (oligarchic), or are hierarchical with one direction of communication. Some could be modular with nodes grouped into a number of clusters which are connected with others through bridges, while others are completely free and unregulated or random. Networks are a product of their need and keep evolving and changing.
It occurred to me that if you apply the same thinking to retail business through the years, the networks in retail have also been slowly growing in complexity with an increasing number of nodes, clusters and connectors. The earlier hierarchical structure has been evolving towards free flowing and modular structures. A business with a larger number of retail branches (sometimes across geographies) created connections with different client bases giving access to more markets and buyers. The relationships with the customers who were within the network remained extremely strong. The basic limiting factor however continued to be the physical location of the stores and their accessibility to customers, which also decided the extent of the communication network.
The people who first broke out of this restraint moving towards modular networks with hyper expanded clusters, nodes and connections were probably fast food chains through their use of telephones. Call centers were clustered by region with each hub serving as a node. Connectors communicated both ways. One node was able to have multiple connections (and therefore customers) far exceeding those of one physical store. Multiply this by the number of nodes and clusters and it is no surprise that dial-in orders and then home deliveries quickly multiplied the size of these businesses and their markets dramatically, with the location of the outlet often becoming insignificant. Other retailers tried to adapt to this process with varying degrees of success.
This location driven structure has fundamentally changed now with the introduction of Ecommerce networks. ECommerce creates endless clusters, nodes and connections with open and physical site agnostic communication. Highly valued locational advantages such as accessibility and ease of finding the physical store become irrelevant and the scope of the market becomes national, regional and even global.
Furthermore, as Ferguson points out, networks never sleep, they are constantly evolving, dynamically developing and changing. As they interact with other networks they disrupt and innovate in order to give life to hierarchies which have ossified or are losing steam.
This creates a different set of challenges for existing retail structures that have to compete not just in terms of price and product range with online competitors, they also have to fight to protect and expand their communication links. Some retailers have been able to overcome locational limitations to some extent, others however are still bound by physical predilections.
The disruption of existing retail hierarchies is inevitable. While in terms of communication Ecommerce businesses may seem easy and democratic, indications are though, that they may not necessarily be egalitarian. What is to be seen is what the new hierarchies will look like.
