The Democratization of Local Commerce and the Future of Physical Exchange

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This is the first in a three-part series on the “Democratization of Local Commerce.” 

In 2011, Om Malik, the founder of GigaOm and one of the early pioneers of blogging on the web, wrote a short but influential essay introducing the concept of a distribution democracy in media. He argued that universal access to broadband networks would eviscerate the long-time role of the media industry as gatekeepers of information, forcing these companies to compete with hundreds of thousands of new competitors.

Today, the media industry continues to see the “democratizing” effects of the web. A few upstart media brands have grown into larger organizations, but the legacy media industry is largely struggling — trying to fit into a new, smaller identity. The big, growing companies in media today — like YouTube, Facebook, WordPress — sit below the waterline, helping thousands of smaller firms package and deliver content in new ways. They facilitate as much as they create.

In many ways, media was an ideal candidate for disruption. Media companies sold information and audience, and the web excelled in producing both. What’s more, the media industry already peddled a virtual product. The growth of film, radio, record and television industries did the hard work of transitioning consumers from an in-person consumption experience to a largely virtual one. Once we accepted a recording or film over a concert or play, the question of disruption became a process issue — not necessarily user experience one.

The growth of virtual commerce
To an extent, the same can be said about the ecommerce industry. Companies such Amazon grew out of a catalog and mail order sector that introduced virtual, or what the census calls “nonstore,” purchasing to Americans at the turn of the 20th century (with equally ambitious offerings.) In fact, between 1908 and 1940, Sears Roebuck delivered 75000 pre-fab houses to customers who picked out a style and shape through a catalog.

Needless to say, the reach and quality of the web dramatically expanded this, creating a much larger — but still very virtual — ecommerce sector. Adjusted for inflation, the ecommerce and mail order industry, measured by the US census, has grown 9% annually over the last 22 years. The share of retail spending going to nonstore business doubled from 4% in 1992, when the census began measuring monthly sales data, to roughly 9% last year.  Altogether, nonstore commerce was the single largest driver of growth in the retail economy over the past two decades.

As the ecommerce industry’s share of consumer spending approaches high single digits, the pressure on the traditional local brick-and-mortar retail model has reached a tipping point. The prospect that some of the main characteristics of 20th century American commerce may no longer exist is becoming a reality. Real estate developer Rick Caruso told an audience earlier this year that the mall could become a “ historical anachronism — a sixty-year aberration that no longer meets the public’s needs, the retailers’ needs, or the community’s needs.” Facing slowing foot traffic, one research firms expects that 15% of malls will fail in the next decade.

Ecommerce may gain ground, but physical selling still matters
Technologists may opine about the end of physical retail, but the data and trends suggests otherwise. Even if non-store commerce doubled the gains it made last decade in the next 10 years, it still account for a little less than 17% of spending by 2023. A 10% gain will undoubtedly spell the end for a large share of the incumbents, but it will also open an opportunity for a new era in physical selling

Meanwhile, the ecommerce model also faces a tipping point of its own. The growth of a strong local technology ecosystem, capable of connecting consumers with products already in market, offers a viable, and more efficient alternative to centralized distribution. Consumers simply do not want to wait a day or two when a local store can deliver at a fraction of the cost in a matter of hours.

While the analyst community obsesses over the share of spending that physical stores are losing to ecommerce, they overlook the vast transformation in the business of stores itself.  There’s a deeper shift underway in the way we sell and consume products locally that could have a substantially larger impact on the wider economy.

Thinking about commerce beyond virtual markets
In considering changes within the physical marketplace, we return to Malik’s democratization thesis. The idea, again, that widespread access broadband information networks tends to reduce the competitive advantage large sellers once gained from systems that could be reduced to information. In his essay, Malik centered on the disruption underway in media, but the concept is applicable to physical retail as well.

In physical retail, a product or service sold in stores cannot (at least, yet) be reduced to bits. But large brands rely on other parts of the business stack — not just the product — to sustain  a competitive advantage.  A brand name may have helped attract consumers or the scale at which they operated have allowed them to outprice smaller competition.  These advantages often can be reduced to information.

That’s the takeaway. The structural dynamics of the physical marketplace, the stuff that goes on underneath the waterline, is poised for transformation. As the web works its way into the daily lives of buyers and sellers, those systems will become widely accessible and relatively undifferentiated — or, as Malik put it, democratized.

In a three-part series this week, I will detail the declining value of brand in selling locally, and then offer an explanation of why software will replace the chain and franchise model that has dominated the retail industry since the second world word. The result is a shift that will parallel the flattening already at work in information industry, but could shape the look – both figurative and literal — of the physical world.

Steven Jacobs is Street Fight’s deputy editor.