The return of one-to-one commerce

IN 1966 JEFF JOHNSON, Nike’s first-ever full-time employee, created the company’s first store in Santa Monica, California. As Phil Knight, Nike’s co-founder, recounts in his memoir, “Shoe Dog”, it became a “holy of holies” for runners. Mr Johnson was a bookworm, so the shop had shelves of books that he felt runners should read. Pinned to the walls were photos of runners and of Nike’s sneakers, then called Tigers. Mr Johnson kept card files of each customer, including their shoe sizes. He sent them Christmas cards and congratulatory notes if they won a big race. Many wrote back seeking Mr Johnson’s support and advice, which he gave, especially when it came to injuries.

When your correspondent told this story to Heidi O’Neill, now head of Nike’s consumer and marketplace division, she got “goosebumps”. It recalled a time, she said, when Mr Knight and his colleagues, struggling to get the business off the ground, put shoes on the feet of one runner at a time. For decades afterwards, she says, Nike was unable to replicate the intimacy of this one-to-one customer relationship, as it relied on rapid expansion of its wholesale business. Yet since 2017 the firm has been cutting the cord with many of its wholesalers, including Amazon, the world’s biggest online retailer, to focus on becoming a “direct-to-consumer” (DTC) company. DTC now accounts for 40% of Nike’s revenues. Its shoppers’ use of digital technology has enabled Nike to recreate that hallowed “one-to-one world”, says Ms O’Neill.

One-to-one is shorthand for today’s upheaval in the world of shopping. The consumer has never had so many things to buy, or ways to buy them. New forms of communication via social media, messaging services and apps have brought producers and consumers closer together. Using trillions of gigabytes of data, manufacturers know better than ever what customers want. Their products can be delivered direct to the doorstep. The traditional middleman, who for centuries piled hidden cost on hidden cost, is being squeezed out.

This has been especially visible during the covid-19 pandemic, as e-commerce penetration has in just a few months reached levels that had been expected to take years. Amid lockdowns and social-distancing measures, bricks-and-mortar retailers went bust in droves last year in America and Europe, continuing a long trend. Yet online platforms have thrived. Amazon exceeded $100bn in quarterly revenues for the first time in the fourth quarter of 2020. The share prices of some Chinese e-commerce giants doubled and even tripled.

DTC businesses have flourished. Early on in lockdown, Nike hit a target, which was originally set for 2023, of selling 30% of its goods online. Over the past year 70m people have become “members”, bringing the total to 250m. It connects to these loyal customers via apps offering everything from free running guidance to access to sneaker vending-machines.

Supermarkets, which had earlier hoped that a mass stampede online was still five years away, suddenly found that even grandparents were mastering the dark arts of ordering groceries and booking slots. Such was the surge in demand in the early days of lockdown that Ocado, a British online grocer, thought for a while that it was under cyber-attack.

The e-commerce explosion does not herald the death of the physical store, however. When lockdowns have been lifted, shoppers have flocked back to high streets and shopping malls. Even a digital evangelist like Nike inaugurated a flagship “interactive” store on Paris’s Champs-Elysées last year, one of several new stores it has recently opened. After covid-19 is tamed, the pace of e-commerce growth will moderate. As Mark Shmulik of Bernstein, an investment firm, puts it, generations of shoppers’ “muscle memories” will not vanish overnight.

Yet the data-driven shopping upheaval is unstoppable. It will change the nature of stores, so that physical and digital shopping seamlessly interact. It will disrupt marketing, because online ads target shoppers more accurately than any broadcast jingle or billboard. And it will lead to new forms of production. Nike offers an example. Thanks to its apps and interactive shops, it acquires reams of real-time data from its pavement-pounding customers. When it noticed that traffic on its apps was showing more people doing yoga, it swiftly produced new yoga gear, Ms O’Neill notes. Mr Johnson would have been delighted.

Revolutionary days

To understand the historic importance of such a shift, start in 16th-century England. As Dorothy Davis, a former Economist writer, explained in her book from the 1960s, “A History of Shopping”, the first retail revolution occurred in the Elizabethan era when craftsmen, who until then had traded one-to-one with customers, set up the first shops to peddle other people’s wares, earning mark-ups on what they sold.

Centuries later came the Industrial Revolution, which led to the second big retail transformation. This was a new system of factory-produced goods that a growing number of working-class shoppers could afford. Supported by a blitz of advertising, these goods were distributed by shops that grew in size to benefit from economies of scale. The set-up is familiar to many today: mass production supports mass consumption.

The third retail revolution, today’s digital age, turns that model on its head, creating, in retailers’ jargon, a consumers’ “pull” system rather than a producers’ “push” one. As Mark Cohen, director of retail studies at Columbia University Graduate School of Business in New York, says: “At the turn of the 20th century, the commander-in-chief of commerce was the retailer, with the manufacturer as equal partner. Today it’s the customer who’s in charge.”

In the West, this upheaval causes trepidation. That is because the retail infrastructure was not built for the digital age. America has 24 square feet of retail space per person, according to Bernstein, three times as much as Britain and six times as much as China. In America more than 8,700 stores closed last year, says Coresight Research, a data firm. In Britain 16,000 stores shut and 183,000 retail jobs were lost, estimates the Centre for Retail Research. Pace Nike, one of the worst-hit sectors has been clothing and footwear. Those opening stores are mostly discounters.

In parts of Asia, however, this is a time of exuberance. China’s embrace of e-commerce reflects the ubiquity of smartphones, the shortage of attractive shopping centres beyond the big cities, and high urban density, which cuts the cost of delivery. Yet China also stands out for a level of innovation, such as live-streaming by celebrity lipstick-sellers, that few saw coming. Like Nike, some Chinese tech firms are taking advantage of people’s digital trail to change the way goods are produced—and even to produce high-tech ways to improve fruit and vegetable yields on farms.

Yet even in China, the ultimate goal is not to leapfrog the store. Alibaba, China’s biggest e-commerce firm, has brought the latest digital razzmatazz, such as cashier-free shops and video promotions, to its supermarkets in the biggest cities. Along with JD.com and Pinduoduo, its closest rivals, it is working with grocery shops in the farthest-flung villages to make distribution of goods cheaper and more efficient. Daniel Zipser of McKinsey, a consultancy, says 374 large malls were opened in China last year. Prices for retail property in city centres have shown no meaningful fall.

In both East and West, such an amalgamation of the offline and online worlds is widely referred to as “omnichannel”. This is perhaps the most tangible trend affecting the future of shopping. The future will be both online and offline.

For consumers the benefits are obvious. They will gain greater convenience from being able to shop either physically or virtually, depending on their mood and circumstances. But for retailers, the challenges are immense. They have to pay not only for the costs of their stores but also for a form of digital “rent” to display their goods high up on online search channels such as Facebook. They must not only pay for delivery but also allow customers to pick goods up in their shops. And they face a growing nightmare of processing returns that now cost retailers more than $1trn globally every year, says Shopify, a big online platform. The struggle will be to find ways to make omnichannel more profitable.

It may yet become more lucrative simply because of the sheer size of the market left to conquer. According to Benedict Evans, who writes a tech newsletter, e-commerce sales globally in 2019 amounted to some $4trn. That was less than a fifth of total retail sales, and a smaller fraction of overall consumer spending, which the World Bank estimates at $65trn. There are tens of trillions of dollars of extra spending left to battle over.

Yet concerns are already growing that a few behemoths, such as Amazon in America, Europe and parts of Asia, and Alibaba in China, will hog the bulk of that. Regulators in America, the European Union and China are keeping the industry leaders under scrutiny. To keep the future a renaissance not a digital autocracy, this report assesses how entrepreneurs can stand up to and even overcome the supremacy of the digital incumbents.

In the midst of the covid-19 pandemic, with shops shut and doorsteps under siege from the latest Amazon delivery, the world may seem to be on the edge of a digital dystopia, with shops losing their age-old role as a place of social interaction, banter and succour for the lonely. But that is too pessimistic. Even a time traveller from Elizabethan England would find a lot to recognise in the commerce of the future. As this report will argue, the itinerant peddlers, merchants, food stalls, crafts, salespeople and shoppers will all continue to exist—albeit in new forms. The biggest difference will be the marketplace, the digital architecture dominated by the tech giants that in future will underpin our urge to splurge. ■

Cover illustration: Skizzomat/Marie Emmermann