The evolution of retail is well documented. The basic concept has been of customers purchasing their needs from a shop that displays them, or has access to them, perhaps from an off-site warehouse.
The growth of the business was largely dictated by where the shop was located. The greater the ease of access, the more the people who visited the store, the bigger the business could grow. This was why cities and towns were built on highways and waterways, providing unhindered access for large numbers of people and for the establishment of market places within them.
Fast forward to the 20th century and the pattern remained largely the same, with the difference that market squares moved into plazas and shopping centres. Cities and towns with greater rail, road and air connectivity are the ones that grew with the increase in the number of visitors. The fundamental mantra for retail success continued to be — location, location, location.
In his fascinating new book called “The Square and the Tower”, Niall Ferguson explores the role of human networks and hierarchies and how they have affected the course of history. He explains that a network consists of clusters, nodes and connections, arranged in various types of structures or patterns.
Some could be scale free with no central hub but with groups of nodes forming hubs connected to other hubs. Others flow from the top down (oligarchic), or are hierarchical with one direction of communication. Some could be modular where nodes are grouped a into numbers of clusters connected to others through bridges, while others are completely free and unregulated or random.
Networks are a product of their need and keep evolving.
It occurred to me if you apply the same thinking to the retail business through the years, the networks in retail have also been slowly growing in complexity with an increasing number of nodes, clusters and connectors. The earlier hierarchical structure has been evolving towards free flowing and modular structures.
A business with a larger number of retail branches — sometimes across geographies — created connections with different client bases resulting in access to more markets and buyers. The relationships with these customers within the network remained extremely strong. The basic limiting factor, however, continued to be the physical location of the stores and their accessibility to customers, and this decided the extent of the communication network.
The people who first broke out of this restraint, moving towards modular networks with hyper expanded clusters, nodes and connections, were probably the fast food chains through their use of telephones. Call centres were clustered by region with each hub becoming a node.
Connectors communicated both ways. One node was able to have multiple connections (and therefore customers) far exceeding those of one physical store. Multiply this by the number of nodes and clusters and it is no surprise that dial-in orders and then home deliveries quickly multiplied the size of these businesses and their markets dramatically, with location often becoming insignificant.
Other retailers tried to adapt to this process with varying degrees of success.
This location-driven structure fundamentally changed with the introduction of eCommerce networks. eCommerce creates endless clusters, nodes and connections with open and location agnostic communication.
The earlier valued locational advantages such as accessibility and ease of finding the physical store become irrelevant and the scope of the market becomes national, regional and even global.
Furthermore, as Ferguson points out, networks never sleep, they are constantly evolving, dynamically developing and changing. As they interact with other networks they disrupt and innovate to give life to hierarchies that ossified or were losing steam.
This creates a different set of challenges for existing retail structures that have to compete not just in terms of price and product range with online competitors, they also have to fight to protect and expand their communication links. Some retailers have been able to overcome locational limitations to some extent, others are still bound by physical predilections.
The disruption of existing retail hierarchies is inevitable. While in terms of communication, the eCommerce businesses may seem easy and democratic, indications are that they may not necessarily be egalitarian. What is to be seen is what the new hierarchies will look like.
Ajai Kumar Dayal is a senior executive with a large retail and eCommerce business in the UAE.