The re-fragmentation of retail

The nature of competition in the retail industry is not what it used to be. Decades of consolidation concentrated sales among a top tier of mega-retailers fueled deal-making among product manufacturers and others who serve the retail industry.

The top 10 U.S. retailers now account for more than $1,200,000,000,000 (zeroes added for effect) and that figure swells to $1.5 trillion if the next 10 largest are include. The big have gotten bigger and will continue to do so in the near term, however there is also a dramatic “re-fragmentation” of the retail industry underway.

Re-fragmentation may not be a real word, but it is the best way to describe a phenomenon that is gathering momentum and in the process changing the competitive environment and the nature of retailer and supplier relationships.

In its simplest form, sites like Craigslist and eBay allow individuals to unlock the value of their personal inventory, negating the need for an individual to buy new. Third party marketplaces on sites such as eBay and Amazon provide a means for small retailers and branded suppliers to reach huge audiences.

The marketplaces themselves and software providers such as ChannelAdvisor provide sellers high degrees of sophistication and fulfillment capabilities. On a more sophisticated level, startups such as Jet.com are poised to make a major splash this summer. Jet is a members-only shopping club with a business model similar to Sam’s Club and Costco in that it changes a $49.99 annual membership fee. It is expected to launch this summer with great fanfare to recruit paying members and promises, “the best price on more than 10 million products, every time you shop. No gimmicks.”

With Jet gunning for a slice of major retailers market share, another unique competitor is looking to use mega-retailers size against them. The best example here is Etsy. The 10 year old company, which went public earlier this year, describes its value proposition as, “connecting people, reimagining commerce,” and President and CEO Chad Dickerson is taking on the mass market.

“For decades now, the conventional and dominant retail model has relentlessly focused on delivering goods at the lowest price, valuing products and profits over community, short-changing the future with the instant gratification of today,” Dickerson explained to prospective investors in the company’s registration statement filed with the Securities and Exchange Commission. “I do not believe that this race to the bottom is a sustainable, successful model. Our growing community has made it clear that they desire thoughtful alternatives to mass commerce and impersonal retail and products that better reflect their personal style and values. Person by person, sale by sale, we are building a new model to replace the old.”

Etsy has a long way to go considering it is 10 years old and last year lost $15.2 million on revenues of $195.6 million. However, it derived those revenues from nearly $2 billion in gross merchandise sales transacted on its marketplace so clearly its approach is resonating with folks. More evidence of re-fragmentation comes courtesy of Internet Retailer.

The publication produces an annual Top 500 report and recently came out with what it calls the Second 500 Guide. E-commerce retailers on this list grew their online sales to $6 billion in 2014 from $5.3 billion the prior year. The retailers that grew the fastest were the 289 who only sell online and their sales grew 15.6% to account for $3.5 billion. That’s a big number. Maybe not relative to the $1.5 trillion in sales generated by the 20 largest U.S. retailers, but in a world where basis points matter those $6 billion in sales represent a lot of lost trips and reduced transaction sizes.

And it’s not just traditional retailers who are under pressure. Suppliers are faced with their own challenges as upstarts spring from nowhere to challenge category dominant brands.

The best example of this situation exists in the men’s grooming category where Gillette has been pummeling Schick for years. Then along comes Dollar Shave Club in 2012 with a low cost convenient alternative that tapped into men’s frustration with the price of blades and dislike of shopping. Dollar Shave Club is approaching two million subscribers and it is not alone in pressuring Gillette. Another direct competitor, Harry’s offers a more upscale product while the MicroTouch Toughblade product endorsed by former NFL great Brett Favre appeals to the price sensitive shaver with its “$20 for a year’s supply, not a month” value pitch.

With its brand under attack, Gillette responded by offering its own direct sales subscription service which, just guessing here, led to some pointed conversations about category growth and channel conflict with major trading partners.

The Internet allows anyone anywhere to be a retailer while changing demand patterns and consumer expectations are giving rise to new business models. Established retailers are surrounded by re-fragmentation which is a little like an odorless, colorless gas. It’s hard to detect, but you know it’s there, creating a literal headwind to growth.