Guest article by Tor Andreassen. This article is part of the CSI Annual Report 2016. The full report can be downloaded here.
In Norway, several industries are earmarked for restructuring. Two of them are the oil industry and retailing. Whereas the ongoing restructuring of the oil industry have received considerable political attention and media coverage, the awaiting restructuring of the retail sector does not receive much media attention. This is interesting as the potential loss of jobs in retailing may correspond to all who are employed in the oil industry.
The purpose of any business is to create, communicate and capture value. Some do this better than others. Harvard economist Joseph Schumpeter popularized the dynamics of the business world in a theory of economic innovation and economic cycles. Creative destruction is a process of change that constantly changes the constant restructuring from the inside were old businesses die and new ones arise. The relevance to society of this is that retailing is one of the biggest employers: in the USA, UK, and Norway 5 million, 3 million and 400,000 people are respectively.
With lower oil prices, the oil industry is facing a permanent loss of demand and managers are adapting by cutting costs and reducing capacity. In retailing the opposite is true: rising demand will be served with fewer employees because of technology and digital business models.
In February 2016, former US President, Barack Obama, presented to Congress an analysis that showed that employees who earns less than USD 20 per hour will be replaced by automation and robots with 83 percent probability. If 50 per cent of employees in Norwegian retailing is made redundant due to automation, i.e. 200,000 people – almost the entire oil industry – will lose their jobs. This will require a political vigilance.
Unlike the oil industry where restructuring occurred acutely, the creative destruction in retailing happens gradually. This is reminiscent of “The boiling frog” syndrome where the gradual heating leads to overheating and death. The evolution in the retail sector can be described over three phases:
1. Competition among physical stores
2. Competing against pure online stores
3. Competing against online stores’ physical stores
Physical stores have always competed against each other in a process where old stores was replaced by new ones if they forgot to innovate. In the US, Borders with its 510 bookstores and 19,500 employees closed their doors 31 December 2010. In the second phase, with the advent of pure online stores such as Amazon, physical stores lost their monopoly as an outlet for sales of goods and services resulting in an extensive downsizing of incumbents. In the US, SEARS, Macys, and JC Penny are loosing market share and are forced to reduce the number of stores. In the third phase, which is happening now, the pure online stores establish physical stores. Amazon Fresh, a grocery concept by Amazon, is planning to establish 2,000 new physical stores in the US.
5 December, 2016 Amazon launched a new grocery concept: AMAZON GO. Customers ‘check in’ at the store with their smartphone in the same way as you check in at the airport by scanning a QR code on your phone. From then on, advanced technology records all internal picking from the shelf to the basket – even when one regrets and puts things back. When leaving the store, without having been in contact with a single employee, the shopping cart is automatically deducted from the customer’s credit card. Amazon GO will expand to 450 stores around the US. Amazon has currently three physical bookstores in the US. The fact that pure online stores like Amazon, Warby Parker, and Dell establish physical stores documents that physical stores have a role and are important in creating value for customers.
To fight the creative destruction taking place in retailing and protect the many jobs, the incumbents must respond by building a culture of innovation matching the online companies. In addition, they must possess a significant technological expertise. Finally, they must be able to provide an excellent answer to the following questions: what are the physical stores’ unique contribution to value creation for customers? Why do customers visit stores and how can they convince more people to do it? In short: What is the job customers want to get done when they hire a physical store?
The research that takes place at CSI – Insight- driven service design and innovation – will support retail managers in better understanding these complicated questions and challenges.
Tor Wallin Andreassen
is Managing Director of CSI at NHH
