Five Trends Driving Traditional Retail Towards Extinction

The e-commerce behemoth is coming, but that’s no longer news. Amazon is nearly 20 years old now, eBay just a year younger.

What is news? The behemoth is arming itself. New tactics, new friends and a hefty war chest mean that the old defenses insulating traditional retailers are no longer enough. Venture funds dished out $242 million to online retail startups in the last quarter alone, more than any other period since 2000. E-commerce, meanwhile, is now a $200 billion-plus industry in the U.S., set to ratchet up 15% a year as consumers realize there’s no reason to trek out to the local strip mall anymore.

In the retail arms race, e-commerce is winning. Here are five trends driving traditional retail towards the grave:

1.) Voluntary Conversion

The smart brick-and-mortar players recognize the inevitable rise of online shopping and are adapting to the new realities. Take Macy’s: The 154-year-old retail chain saw online sales rise 40% in 2011 while same-store sales grew just 5.3%. The company is transforming nearly 300 of its stores into distribution centers to speed up shipping for online consumers. Expected to do more than $2 billion in online sales this year, they’re even toying around with in-store online kiosks to help customers scan and compare prices.

Nordstrom, a whippersnapper compared to Macy’s at 111 years old, is taking an even more aggressive approach. With free shipping and free returns in its online store, the company has notched three straight quarters of 35% gains in online sales. Nordstrom is integrating its online and in-store strategies by introducing mobile point-of-sale systems–modified iPod touches–that eliminate lines while helping sales clerks sell customers out-of-stock items. According to Barron’s, the company plans to invest $1 billion (one third of its capital expenditures) into online efforts over the next five years.

While adapting their own infrastructure to serve online consumers, Nordstom is also keeping pace with innovation in the space via acquisitions and investments. Last year, the retailer spent $180 million on flash sales site HauteLook and led a $16.4 million investment in Bonobos, an online retailer of men’s clothes.

The online practices of veteran players validate e-commerce in the minds of older consumers while accelerating the industry’s growth. It also means they get to survive.

2.) A Losing Cost Structure

When you purchase an item at Bloomingdale’s, odds are that it’s been marked up at least three times. Once when it changed hands from the factory to the brand, again as it passed from the brand to Bloomingdale’s, and once more as it goes from Bloomingdale’s into your shopping bag. The result is a purchase price that’s some ungodly multiple of the item’s actual cost, usually between 2x and 5x.

Brands that operate exclusively online–Frank and Oak, Bonobos, or ModCloth for example–eliminate that last markup by selling directly to consumers. By taking ownership of the design, curation and retail aspects of the business, these companies can keep hefty margins for themselves while still undercutting brick-and-mortar competitors on price. And because their stores are made out of bits instead of stone, they don’t face the costs of maintaining unwieldy networks of physical locations.

As for the legions of sales clerks that retailers pay? A single web developer probably replaces twenty of them.

3.) Free Delivery, Free Returns

Even if shipping costs don’t negate the price savings of online shopping, they’ve long acted as a source of friction. Asking consumers to factor in some uncertain, variable transaction cost is never a good way to do business, and asking them to pay for returns is even worse. The experience of returning an online purchase, paying two-way shipping costs and ending up with nothing–except $15 in the red–is enough to make anyone wary of online shopping.

Tony Hsieh and Zappos figured this out long ago and built a $1.2 billion business on the idea of free shipping and free returns. This policy is now de rigeur for serious, full-price e-commerce companies. (Flash sales is a different beast.) The reason is very simple. According to Amanda Bower, a business professor at Washington and Lee University, online shoppers given free returns increase their spend on the same site by 50 to 350 percent in later purchases. When they had to pay for return shipping? The value of their purchases decreased.

Free shipping and returns will be standard for e-commerce companies from now on. One less reason to schlep to the mall.

4.) Subscription Commerce

Call it the “set it and forget it” school of business. The bottom line: People are lazy and certain items just make sense to receive once a month. At the danger of touting a model that has already become a cliche (flash sales was a cliche until it proved itself), I should point out that only certain categories of products work for this model. (Battery Ventures partner Brian O’Malley wrote a fantastic post on this topic.) Razors, as you might imagine, make much more sense as a monthly delivery item than sweaters.

The foundation of the model is recurring revenue, where customers sign up to receive a monthly shipment for a set monthly fee. This is attractive to companies because it creates a steady, predictable revenue stream, not unlike SaaS businesses. It’s attractive to consumers because the system is convenient and usually cost-efficient compared to alternatives. Dollar Shave Club, for example, ships men’s razors to customers once a month at a fraction of the cost of an in-store purchase. Men save money and a trip to the convenience store. And because DSC sources their razors directly from the manufacturer and sells them directly to the customer, they still enjoy comfortable margins.

Frank and Oak deploys a more complex model that attempts to coax volume from loyal customers. The company allows shoppers to choose three items of clothing from a monthly collection. After receiving the items, customers try them on at home, then decide which they’ll keep and which they’ll return–all for free of course. Customers then pay for the clothes they want and return the others. Other notable subscription companies include BirchBox,Manpacks and JustFab.

There will be losers in this space as mindless copycats go out of business. But as sensible companies hone their models, subscription commerce will take a dent out of categories previously deemed safe from the digital threat–toiletries, cosmetics, pet food and groceries to name a few.

5.) Fit Without The Fitting Room

There are two categories of players here: Companies that offer custom, tailored clothing online, and those that rely on new technologies to guide customers to a better fit.

The first is popular with men’s clothing companies, with startups like J. Hilburn, Indochino and Blank Label selling tailored suits and shirts at a discount to conventional custom options. The appeal here is the sudden accessibility of tailored clothing, both in terms of price and convenience. Because of the price structures discussed above, they can get away comparable quality at reasonable prices while still making a profit.

The second category is more interesting and will have more far-reaching consequences for the future of retail. First we have the incremental innovation of companies like Clothes Horse and True Fit, which ask shoppers for their measurements, along with a tally of their best-fitting clothes, to match them with the right sizes. Frank and Oak, Bonobos and women’s retailer Nicole Miller use Clothes Horse while Macy’s employs True Fit to increase conversions. True and Co. uses similar methods to match women with well-fitting bras.

Even larger leaps in sizing technology are being made by companies like Acustom Apparel, which uses 3D body scanners along with pattern-making software to scale the creation of custom-fitted clothing at a digestible price point.

At some point, data about your body type will be saved along with your credit card information and you’ll never have to visit a fitting room again.

Bonus Trend: Crowdfunding

Secure, widespread group-paying and crowdfunding applications will make it easy to split the cost of large ticket items over the web. These will also introduce new forms of commerce which have yet be seen. Here’s a hint of what’s to come.

Forbes