More than a recession?: Discovering the new normal

Illusionists rely on diversions.  A flurry of activity from their right hand draws your attention while their left hand performs the trick.  In the same way, I think the current economic crisis might be diverting our attention from another, potentially more important issue.

The economic crisis is real and there's no doubt that irresponsible lending and borrowing in the mortgage market, selfishness and greed on Wallstreet, and other issues have combined to create a real economic mess.  But I think something more is going on.  If you're waiting for the economic tide to turn so that "things can return to normal," then you may be unpleasantly surprised.

I believe that a fundamental shift it taking place and that things will never return to normal.  They are, instead, moving relentlessly toward a new normal--one like we've never seen.

The Internet deserves the blame, or the credit, depending on whether you are inclined to cling to the past or embrace the future.  It is transforming politics and media and social organizational patterns.  For the purpose of this post, though, I want to focus on how it's changing the shopping process and, by extension, retail.

Before the Internet we shopped in physical stores staffed by dozens of clerks and sales associates.  The volume of help required meant that many were under-trained and under-paid. Those physical stores stocked multiple copies of a range of products limited by the store's square footage.  Products were displayed on shelves and also boxed in the storerooms.  The overhead was tremendous.

These physical stores were located in population centers and tended to attract business from that base.  Stores were distributed and so was demand.  If you lived in Grand Rapids Michigan, then you probably bought your new television from a store in that market based on advertising you caught in that city's media (local TV, radio, print, outdoor).  Location mattered...a lot!

A store in Nashville might be selling that same TV for less money, but people outside Nashville were unlikely to know because they didn't receive that market's media.  And, even if they did know about the better deal, the price difference didn't justify such a long trip.

But the Internet has destroyed the physical boundaries that once governed this process.

An electronics chain like Circuit City no longer needs stores in every market--each burdened with multi-million-dollar inventories, property taxes, light bills, staff, health insurance, OSHA compliance, etc. etc. It's inventory is no longer constrained by the store's square footage but expands as infinitely as the virtual shelf that holds it. Now, all Circuit City needs is one killer website and a UPS account.  It doesn't even need its own warehouse.  It can drop ship the TV you ordered directly from the manufacturer or ship it from a warehouse owned and managed by a shipping partner like UPS or FedEx.  It doesn't even display TV's any longer.  It displays photos and videos of TV's on its website.

That one website can serve every home in the United States--dramatically expanding Circuit City's reach--while slashing its costs.  It knows no physical boundaries or store hours.  It's open everywhere, all the time.  A small room full of highly trained, well-paid customer support people can field calls from customers, providing better answers at a lower cost than the brick and mortar staff ever could.

The Internet is disintermediating whole sections of the retail chain.  We no longer need many brick-and-mortar retail stores which means we don't need the warehouses that supplied them or the malls that housed them, or the media that advertised them.Someday the manufacturer will realize it no longer needs Circuit City and will consolidate the process further by selling direct.

This is why I say the recession is masking another, larger issue.  Are jobs being eliminated because the economy has slowed or because those jobs are no longer needed?

The current economic downturn may reduce TV sales in the short term and reduced sales may cause electronics chains to close stores and layoff staff.  But even should the economy rebound and should people flush with cash suddenly desire new TV's again, I doubt retail chains will return to the old model by reopening the stores they closed and rehiring the staff they laid off.  No, Those stores and those jobs and that way of retail life will be gone and it won't be coming back.

And now for the real shocker.  This is good news.  Yep.  Good news. And it's not the first time it's happened.  History is filled with these kinds of inflection points.  It took dozens of monks to transcribe books until Guetenberg gave us the printing press.  Suddenly one person could churn out more volume than a room full of scribes.  Those scribes lost their jobs, but they were also freed to do something else...something more important.   This is how progress is made.  We continuously find more efficient ways to do things so that people are freed to invent the next thing and move us all forward.

Progress is painful when you focus on what's lost, so don't.  Stop trying to preserve the old way, and focus instead on discovering the new normal.  Spread the fire.  GS

Comments

[Mark]

Good thoughts Greg. I can imagine around 40 or 50 years ago a bunch of Milk Deliverymen sat around in a bar, lamenting the death of their business...

[Greg Stielstra]

Imagine if the federal government had spent billions to bail out the buggy whip industry. Would we see that as wise or foolish?

[Steve Dragoo]

Well put, Greg. Certainly customers of "brick and mortar" establishments will seek higher levels of engagement and noteworthy experiences to warrant a trip - versus shopping via the net. -SD-