The future of global retail will be local

When I covered retail for the FT in the early 1990s, industry bosses would often recite their three secrets of success: location, location, location. Back then, retail was largely a property game. Companies would make huge efforts to analyse local demographics, economics and infrastructure to estimate potential footfall and spend small fortunes to acquire the most promising sites. Stick your stores in the right place and customers would be ensnared in your web, just like spiders catching flies.

That retail model, which clearly favoured capital-rich incumbents, has had holes ripped in it by the explosion of the internet. For most digital transactions, store location became irrelevant. With no bricks-and-mortar outlets at the time, Amazon delivered goods directly to your door. The secret of retail success was increasingly redefined as logistics, logistics, logistics.

The next evolution came when consumer brand companies and smaller merchants chose to bypass traditional retail outlets and ecommerce platforms and go straight to consumers themselves. This led to the direct-to-consumer craze, which was boosted by Shopify, the innovative Canadian firm. Widely seen as an anti-Amazon, Shopify provides the back-office logistics, payments and delivery infrastructure services that smaller independent merchants cannot afford to build themselves.

Investors poured money into DTC companies such as glasses retailer Warby Parker, exercise bike company Peloton and clothing service Stitch Fix. The strategy was to use social media to build brand awareness and attract consumers and to ship to them directly. For a while, the playbook worked swimmingly and several DTC companies floated on the stock market at eye-popping valuations. But investors now seem to have concluded that this DTC model is severely compromised, if not mortally wounded, and have massively marked down the sector. Shopify’s share price has fallen 73 per cent over the past year, too. Last week, the company announced it was cutting 10 per cent of its workforce. What next for retail?

Tobi Lütke, Shopify’s chief executive, has argued that his company’s contraction is just the result of its earlier over-optimistic overexpansion. Shopify had assumed that ecommerce would leap five to 10 years ahead as a result of the Covid pandemic and expanded too fast in anticipation of higher demand. “It’s now clear that bet didn’t pay off,” he wrote in a regretful note to employees.

But the company’s breezy optimism about its longer term prospects disguises some deeper flaws with the DTC model. Like other retailers and consumer goods firms, DTC companies are struggling with surging cost inflation, higher interest rates and weaker consumer demand. In addition, many of them are trying to deal with higher shipping costs, supply chain disruptions and their over-reliance on an increasingly uncertain Chinese manufacturing base.

But they are also facing particular pressures of their own. The cost of customer acquisition has rocketed as Facebook ads have increased in price. Identifying a target audience via social media has also become trickier following Apple’s decision to allow users to opt out of app tracking services. Moreover, DTC companies sometimes face cut-throat competition from knock-off merchants.

The big traditional retailers and consumer goods companies, including Walmart, Heinz and Nike, have also learned the tricks of the DTC trade and are increasingly becoming omnichannel operators while Amazon is expanding its network of physical stores. Although Amazon has also been suffering from the harsher economic climate, it remains the dominant ecommerce operator in most of its markets. It is easier for consumers to use one frictionless platform than to engage with different sites for different brands. Short of decisive, and unlikely, regulatory intervention to split its third-party marketplace from its own sales and delivery operations, it is hard to see how competitors can usurp the ecommerce giant. But in business, as in politics or sports, the appearance of invincibility is often the moment of maximum vulnerability. Everyone wants to knock you off the throne.

One experiment worth watching closely is in India, where a fascinating initiative has just been launched in 100 cities to provide publicly backed digital infrastructure for the retail trade. The Open Network for Digital Commerce aims to create an interoperable collective network for ecommerce rather than a closed private platform, enabling millions of small merchants to connect with suppliers, customers and delivery firms. Its ambition is to bring 30mn sellers and 300mn shoppers on to its network by the end of 2024. Never one for understatement, Nandan Nilekani, one of the founders of IT company Infosys and an architect of India’s public technology stack, calls it the “most exciting business transformation happening in the world”.

India has long championed public digital infrastructure. Its digital ID system Aadhaar is now used by 1.3bn people, while its UPI payments interface enabled 6.3bn online transactions last month. The vision of ONDC is to empower millions of small neighbourhood merchants to take on Amazon and Walmart-owned Flipkart. If the experiment works, as well it might, the mantra of the next era in retail might well be localisation, localisation, localisation.

john.thornhill@ft.com