This is from the July 1994 issue of Digital Media, the newsletter I ran back in the mid-90s. I mentioned this piece in my Red Herring posting yesterday.
Factory To Consumer By Network?
Nolan Bushnell prophesies a doubtful future devoid of retail outlets
Nolan Bushnell’s always had strong beliefs. He charted the future of a $7.5 billion interactive game business when he founded Atari in 1972. Since then, he’s probed unsuccessfully for the font of a new interactive entertainment industry. This year he was back at Digital World with some radical ideas about the future of retailing.
Contrary to the cautious tone of Digital World’s many speakers, he projects rapid deployment of interactive networks, and equally fast adoption of technology by consumers hungry for direct access to discounted products. Bushnell believes that the traditional retailer will soon by wiped out by discount shopping via digital networks.
“I think it is going to happen so easily, particularly in the very, very large areas where it’s cheap,” Bushnell said of two-way, broadband networking. “But fundamentally, I think the TV and the computer become also tremendously irrelevant.”
After the network and home information appliances are identified and perfected comes the next step, one presaged by Bushnell’s entrepreneurial investments in interactivity: Pizza Time Theatre Inc., the pizza-and-video concept that failed in 1984 and his campaign to bring toymaker Hasbro onto the digital gaming scene in the mid-eighties. Networked distribution of products will result in an all-out assault on retail outlets.
“Just like what has happened to the toy business in the past 20 years, i.e., there used to be a huge jobber and distribution environment,” he told the Digital World audience, “today, if you’re a toy manufacturer, you sell directly … to retailers. Directly. No middleman allowed. In fact, WalMart doesn’t even want the manufacturers to go through manufacturers’ representatives. Today’s manufacturers are telling retailers, ‘Come to us directly instead of giving the rep three percent; we want it’,” Bushnell said.
The trends eroding the distribution ladder will continue until, at last, only the consumer and manufacturer are left, he said. That rather barren economic landscape creates new pressures on companies to develop product demonstration centers, where consumers will go to get hands-on experience before buying. Retailers, who will be unable to compete on price, because of the advertising and other overhead costs, will retire to the sidelines.
“As we approach a more perfect information society, the economic model collapses into ‘from-manufacturer-to-consumer’,” said Bushnell. “I don’t believe there are going to be places in the middle for a tremendous amount of shopping fun and games. I believe that’s all going to have to be provided as part of the transport structure … supplied by the manufacturer, because only the manufacturer will be able to control pricing.”
Bushnell said the trend was nearly inescapable. Even if a retailer can create an effective “entertainment concept,” which he said is critical to commercial success these days, it won’t be able to compete with manufacturers who put their product catalogs online. Not even the home shopping channels will be safe from the onslaught of technology, since their networks depend on huge profit margins for survival.
“The minute you decide on a product you say, ‘I am now going to unleash my product Archie to find the cheapest price,” Bushnell said, describing a simple search mechanism that would connect the buyer to the the cheapest seller.
NO PROFIT FOR ADVERTISERS
“I believe that a tremendous amount of shopping that goes on through the newspapers is price shopping,” Bushnell said. “Price becomes particularly important when you’re talking about grocery stores and some of those other areas.”
“The problem is, how does the advertiser get paid when there’s someone out there who [can sell] the product … for [a] five percent [profit]? Five percent just covers overhead, it doesn’t cover advertising costs,” Bushnell said. “[Retailers] will advertise, advertising will create demand [and that] demand will go to the low-cost producer who doesn’t advertise. There’s a disconnect.”
Bushnell’s argument is an intriguing one, but it is built on an overly generalized view of consumer behavior. For example, examinations of technology adoption in corporations point to increased, rather than decreased, interaction between the parties in an electronic relationship. It seems that electronic markets will actually require greater retail participation in the sales cycle, because consumers will depend upon the human salesperson to interpret the increased information available to them.
Moreover, value added through personal support for the customer through a local business is substantial, and will probably be more important in the information age. Consider the immense success of Nike Corp., which maintains a large product support force known as the “Ekins.” This fit lot of tanned, outdoorsy young people travel the country training shoe retailers to sell the special features of the company’s shoes. The Ekins’ personal appearance and style reinforce the Nike marketing messsage, which emphasizes the purity of spirit in athletic attainment.
A retail experience that includes a wide selection of products and informed salespeople who help make sense of choices looks more powerful than the allure of discounts offered to the consumer via digital networks. As products become more complex and choices more varied, companies benefit from skilled retail representation. Look at computer companies: They depend on extensive training for computer resellers and system integrators, who in turn pass that knowledge value along to consumers.
Likewise, Bushnell’s analysis of the importance of discounting runs contrary to the findings of several recent studies.
Even if manufacturer trade discounting has grown from $12 billion to more than $36 billion in the past ten years, according to American Demographics, price doesn’t play a large part in consumers’ minds. A recent study by Prof. J. Patrick Kelly of Wayne State University in Detroit shows that only 14 percent of shoppers enter a store with the intention to buy products only if they are discounted. By contrast, 60 percent of shoppers interviewed planned to make all their purchases at full price.
In fact, everyday low pricing can actually drive sales down. According to a Nielsen Marketing Research report cited in American Demographics (January 1994), Procter & Gamble’s Dawn liquid detergent sales volume fell four percent (with sales revenues down 12 percent) after the company adopted an everyday low pricing strategy in 1992.
Likewise, discounting has increased, not diminished the power of the retailer. Sophisticated product-tracking systems combined with the individual store managers’ ability to feature items that are showing signs of increased sales over a very short time drive impulse purchasing.
And, perhaps the most fatal error is his lack of appreciation for the increasingly social nature of shopping—it’s one of the few public behaviors shared by all Americans—and the critical nature of impulse purchasing.
“Understand that when you go to a mall, you’re really buying entertainment, your not buying a product,” Bushnell said. “When you buy over the superhighway, you’re buying on price, not entertainment.”
DREAMS OF ENTREPRENEURIAL ASCENDANCY
“I actually think we’re going to be finding the All-Ideas Channel,” Bushnell said, “where entrepreneurs climb in and give their ideas, and people come along and give their bids on engineering it, and other people come along and bid on marketing it, and people bid on manufacturing it, and none of those things happen if the people watching it [don’t act]—I mean, this is the ultimate in early adopters—they will order the idea based on a speculative price.”
The early adopters aren’t price shoppers, because they don’t concentrate on just one aspect of a product or market. Instead, early adopters are eclectic consumers who base their buying decisions on many different variables. The equations they apply are dynamic, changing on a purchase-by-purchase basis. They gamble on high paybacks on the premium prices they pay for prices.
An SRI International study of early adopters and new media described in American Demographics by Bruce MacEvoy, a senior research psychologist at the Menlo Park, Calif.-based company confirms that these consumers almost always look above the bottom line when considering the value of a purchase. A key theme for advertisers using new media, MacEvoy wrote, is that their messages should emphasize that the purchase is the beginning of a long-term relationship. Clearly, price-driven marketing will provide insufficient margins to support the ongoing interaction between seller and consumer.
Bushnell’s suggestion that manufacturers will set up product demonstration centers is a valuable insight, but it doesn’t jive with consumers’ capricious buying habits. Fewer than 50 percent of shoppers actually buy everything they intend to when they enter a store, according to the Wayne State University study. The study also found the reason most consumers don’t actually buy the items they plan to when entering a store is a lack of selection.
Product demonstration centers that offer access to a single company’s products are not likely to draw the attention of comparison shoppers seeking stimulation and value at a fair price. When one imagines what a robust comparative shopping environment looks like—whether it is supported by an on-site sales capability or digital networks and order fulfillment systems—the image that springs to mind bears a striking resemblance to the modern retail environment, where technology helps the sales force interpret the differences between products while delivering them at competitive prices. — Mitch Ratcliffe