In many ways, the impact of digital transformation and disruption on the retail industry is ahead of similar changes happening in distribution. Distributors can learn from retail and then upgrade their strategies and operational plans to be better prepared for changes that are certain to come. Distributors that fail to learn from retail’s transformation risk being blindsided by predictable changes that will come to distribution. Forewarned is forearmed, and in the war for digital dominance, every distributor must strive to be armed to the teeth and ready for battle.
As I’ve been watching changes in the retail industry, I’ve come across a podcast series, HBS Managing the Future of Work, which provides invaluable ideas and experiences for turbocharging innovation initiatives. One episode, “From Opt-In to Check-Out: How Digital Platforms Are Transforming Retail,” explains the evolution in the retail industry. Just as in distribution, the emergence of mega platforms, including Amazon and Alibaba, are forcing supply chain consolidation and gathering mountains of customer data. These changes are driving the evolution of traditional retailers and providing a rich tapestry of experiences, business strategies and competitive dynamics for distributors to consider.
As I listened to the episode, three insights stood out and I’ve summarized them below. Your takeaways and analysis may be very different, so listen for yourself and extract insights for your business:
- Four generations of retail (G1, G2, G3 and G4). This is a framework for mapping the transition of the retail industry as it moves from one way of doing business to another. G1 is the industry when characterized by mom-and-pop retailers and national brands. G4 is the future of retail dominated by large-scale, multi-marketplace platforms.
Insight #1: Distribution is on a parallel track, although behind the pace of change in retail. By creating a similar framework for distribution’s generational evolution, we in distribution can have a more thoughtful discussion of our industry’s evolution and then develop a more robust foresight for the future.
- The algorithmic economy. As the retail value chain and platform businesses operate in a connected enterprise environment, innovations emerge. One critical innovation involves machine-to-machine decision-making, which enables hyper-efficient logistics, predictive new product development and digitally native microbrands. Human roles evolve to monitoring data flows and extracting information for optimizing business results.
Insight #2: In the traditional value chains, manufacturers and distributors fight over data that is considered proprietary. The emergence of B2B platforms may change this dynamic through rules created by disruptive players, or the incumbent linear value chain may evolve to unforeseen data collaboration in response to disruptive threats.
- Re-architected balance sheets and new operating expense models. Price transparency leads to margin compression. Retail CEOs and boards force leadership changes and organizational re-skilling to shift investments for optimal returns and to operate businesses under new financial models. Large brands are hit the hardest with up to 50 percent margin compression as the share of digital commerce grows from 0 to 25 percent.
Insight #3: Distributors are margin-savvy businesses, and similar financial predictions likely exist. All distributor leaders must consider the required leadership and functional capabilities for operating under new economic models, and lay the groundwork for change by considering the evolution of retail management and fiduciary practices.
This podcast is full of facts, figures, ideas and experiences. I urge you to listen to it and consider how the ongoing retail industry’s e-commerce evolution can be a model for the future of the distribution industry and, specifically, your company’s unique strategy, leadership development, data investments and talent management. Distribution is not retail, but retail can provide insights for exploring distribution’s future. Listen and learn, and then plan.
If you have observations or questions about this podcast and implications for distribution, I would be happy to discuss them with you. As a Fellow for the NAW Institute for Distribution Excellence, I am committed to helping distributors come out of COVID-19 stronger than before it. My latest report, Innovate to Dominate: The 12th Edition in the Facing the Forces of Change® Series, is a roadmap for innovation by distributors; it provides additional tools and insights for helping distributor leaders plan for the future. I welcome your feedback about it at email@example.com.