Monday, January 19, 2009

Three’s Definitely A Crowd—Perhaps Two Is As Well

Nearly a decade ago, we published a somewhat controversial article entitled Three’s A Crowd. The simple premise—the retail world was getting cluttered with too many also-ran retailers and that it was getting increasingly difficult to survive if you had the third, fourth or fifth market share in a particular category.

Come 2009, this premise seems wistfully nostalgic. While we were prescient at the time, it is now obvious that only the top retailers in a category will survive. But, the last six months brings an even scarier premise—what if there’s not even room for two? The very high profile bankruptcies and subsequent liquidations of Circuit City and Linen’s & Things are stories of the demise of the number two specialty players in their respective categories. In categories as large as consumer electronics and home furnishings, we are now left with just one (albeit sizable) specialist. Kay Bee Toys is now also completely defunct leaving us with one standalone toy big box retailer. In book retailing, the troubles at Borders perhaps challenge whether there is still room for two brick and mortar book retailers.

What’s changed? There are two significant factors that appear to be at work outside of a historically dismal economy. The first is that competition has been redefined by the tremendous influence of mass retailing. In just about every category, Wal*Mart and Target wield enormous influence and market share. The second key factor is the Internet, which offers customers instant access to dozens of choices. While market share may not be huge yet in any given category (books are a notable exception), it is growing fast and absorbing demand.

We are about to enter a period of significant closures and consolidations as retail spending contracts and we work our way through an excess of retail stores. Survival needs to be foremost in any retailers minds. But, at a minimum retailers need to think now, more than ever, of creating innovative strategies that are not simply trying to copy the competition. The ultimate failure of Circuit and Linens had much to do with the inability to carve out unique space relative to Best Buy and Bed, Bath & Beyond.