General merchandise, ridiculously broad and diverse, is one of the largest categories within retail, accounting for 65% of Amazon’s sales. As would be expected, industry dynamics in the category have been broadly reflective of those in retail, including the rise of omnichannel, the Amazon juggernaut, and more. What is interesting however, is that general merchandise has evolved further along some of the trend lines than the other clusters. For example, ecommerce penetration is somewhere between 25 and 40% of sales – way higher than grocery’s 5.5%, greater than apparel’s 27% , and at the liberal end of the estimate – nearly touching categories that have seen the highest level of disruption by digital, such as consumer electronics and office supplies.
The future will see an arms race around the trifecta that determines winners in general merchandise – namely assortment, cost, and convenience. The gap between “I want this” and “I have it” will plummet to a point where the mere articulation of a wish in the vicinity of a voice commerce device will set in motion a complex fulfillment operation that culminates in doorstep delivery in 120 minutes.
Assortment and price – most retailers will expand the marketplace component. Some of the largest incumbents are pivoting, from a proprietary merchandise model, to a marketplace model. In online SKU count – estimated at 400 million – Amazon still scores an order (or two) of magnitude higher than the largest incumbents. This is where marketplaces step in. In addition, marketplaces are a higher margin business than traditional retail. Omnichannel retailers need a high gross margin line item in their portfolio to compete with Amazon which owes a third of its valuation to the marketplace business.
Assortment and price (continued…): more Wish.com like experiments connecting consumers directly to Asian manufacturers. Wish.com’s rise has been meteoric (on the back of prodigious social media spends and aggressive discounting), illustrating how even the seemingly most mature (and supposedly staid) of markets can see the entry of new ideas. This isn’t to make the point that Wish.com is the future. There are too many product and delivery quality issues with its wild wild west model of retail. But Wish.com has found a way to connect the mecca of production to the mecca of consumption while disintermediating the supply chain completely, removing retail markups and advertising costs, and delivering unheard of price points. Sooner or later, someone would replicate the Wish.com with more reliable suppliers, and an assortment that goes beyond the whimsical and tacky.
Convenience – much of urban US will come under same day and two-hour delivery. The state of the art is fast moving – from two-day delivery to next day delivery, same day delivery, and finally – two hour delivery. For two hour delivery and same delivery the warehouse of choice is the store. That’s the broad principle – but the details lead to some interesting dynamics. A recent survey of 500 industry practitioners revealed the retail storefront is the preferred fulfillment hub for two-hour deliveries .However, for same day delivery the retail store backroom is optimum, according to 43% of executives polled. Therefore, over the next several years retailers will have to understand to what extent, and what degree of instant gratification is suitable for what kind of merchandise, and build store-based fulfillment mechanisms accordingly. The minutiae would be important. It is estimated, only 80% of the cost of fast delivery costs can be recovered, and that expedited delivery can reduce operating margins by up to 26% (for groceries).
Convenience will get to a point where commerce becomes invisible, potentially reducing the importance of retailers and heralding the rise of brands. The web will become a giant supermarket (note Google’s Shopping Actions).Voice commerce will become mainstream.Commerce on social networks will be mainstream.What has held back voice commerce is that the technology is yet to master the many nuances and idiosyncrasies of natural language. When users feel misunderstood they quickly settle into a pattern of low stakes engagement (such as playing music), and the only commerce that happens involves categories where auto-renewal is the norm. Accuracy, as measured by percentage of questions answered correctly, hovers between 60 and 85%.
Smart speakers/intelligent agents now have an installed based in the order of tens of millions of units. But only about 30% have used such devices for shopping (the percent of regular usage is an order of magnitude lower). That might seem high, until you note 70% use an Alexa or a Siri or Google Assistant to play music.
Voice Commerce is one of those technologies where an accuracy improvement of 85% to 95% radically changes the usage pattern (the 95% figure comes areas such as transcription where machine accuracy matches human accuracy). As soon as accuracy gets to a point where Alexa passes a (somewhat quotidian and domestic) Turing test, the levee shall break and a utopia of instant gratification will be upon us. A whim, a stray thought, will just have to articulated and the voice commerce genie shall deliver in 120 minutes.
This will have profound consequences. All kinds of retail, from Sear’s fin de siècle catalogues, to Walmart’s EDLP reign and the current digital hegemony of Amazon – retail has been about traffic, conversion, and average order value with distinct, and well-studied drivers for each. With voice commerce, and more generally – integration of commerce with web search and social – traffic and conversion are no longer as meaningful. Mindshare is everything. This dynamic could privilege brands that master emotional resonance over retailers. Consumers could circumvent retailers and go straight to the source, a trend has been underway for several years already with the rise of direct to consumer.
The direct to consumer movement will change the retailer-brand dynamic and also branding and merchandising. Direct to consumer is more than just a delivery model. It is a product design approach. Many direct to consumer stories are predicated on craftsmanship, customer centricity, and a conspicuous simplicity. Allbirds, Harry’s, Casper – have all grown on the design maxim “don’t make me think”. After more than a century of one upmanship among everyday brands, the proliferation of choices, categories, variants, and features have left most customers befuddled. The direct to consumer upheaval will change how retailers co-opt brands (expect more Walmart Bonobo-like acquisitions), the kind of private labels they build, and also increase the need for emotional resonance with the retailer’s own brand.
Sustainability and the circular economy will become a key aspect of retailers’ value proposition. Climate change has finally entered the mainstream discourse. Millennials – survey after survey says – are willing to pay more for sustainable products. The green demographics proportion, absolute numbers, and buying power are growing. With no sign of arresting atmospheric CO2 levels, and the rising incidence of extreme events (including some in the backyard of CTO class, namely the Bay Area) , it is all but guaranteed that environmental issues will not just remain in the news, but will also expand mindspace among CXOs who actually build long term strategic plans. Sustainability will increasingly be entwined with the retailers’ core value proposition.
We might already be on the long road to “peak ecommerce” for general merchandise. It might seem a little premature to declare the “end of history”. But consider a metric – the proportion of book sales that is ecommerce. It’s a category where the book title, the author, whether paperback or hardcover, the number of pages, can describe the product in its entirety. There is no necessary step of tactile experience that limits the scope of digital. In addition, ecommerce in the book market has been around for a quarter of century. And despite all of the above, the metric is at 60-70%. That could represent the possible upper limit of how far ecommerce could go in any category where the product is physical. If the number for general merchandise is at 30-40%, and growing at double digits, we are likely to see peak ecommerce by 2025.
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