Over time, many retail sectors have been preyed upon by new types of competitors with superior economics. 

Over time, many retail sectors have been preyed upon by new types of competitors with superior economics.

So department stores consumed the independent specialists, only in turn to fall victim to the mass merchandisers and supermarkets, who are now vulnerable to online players. The wheel of retailing continues its steady revolution.

But could the entire retail industry now be just a marginal morsel for bigger strategies being played elsewhere?

Three global players Apple, Amazon and Google, are each pursuing the goal of building the leading ecosystem. The idea goes like this: own every piece of the value chain from content creation and web services through to the handheld device (whether iPad, Kindle Fire or Android). 

Control the user experience and collect every piece of information from it. Develop all the elements of the transaction, such as app stores, advertising, social commerce, payment systems, identity and data analytics.

As each part of the offering falls into place, the hold which these three have over their users strengthens. When the cloud stores your music collection, photo albums, e-book library, your contacts with your friends, when it understands and anticipates your shopping habits better than you do, then switching becomes inconceivable.

Each of these three giants started at a different point on the chain – whether devices, retailing or search – but is converging on a similar end-to-end offering. Probably China’s Baidu and Facebook (expect it to use its newly-raised cash to launch a smartphone) will follow. Few others have the scale or resources to attempt an ecosystem strategy.

Once in place, the options for monetising the ecosystem are very broad. Selling the initial handheld device will be minor compared to a lifetime revenue stream of services. Other ecosystem partners – advertisers, retailers, content owners, mobile networks, banks – will need to pay richly to participate.

Under this future, the margins for conventional product retailing are pretty thin, whether offline or online. Selecting great products and selling them efficiently is no longer sufficient for success.

There is much focus now on how to compete with Amazon as a retailer, and competitors are inclined to envy Amazon its shareholders for taking a generously relaxed view on its timescale to profitability.  But Amazon is not a retailer and it may never need to generate full retail profits. For each of these giants, retail will be just one contributor to overall ecosystem economics.

If the entire industry of retailing becomes like milk in a supermarket – just a weapon in a greater game – then how do conventional retailers avoid falling the way of the dairy?

Honing differentiation is still critical. Exclusive product, top service, convenience, and added value are all essential. But retailers need to consider whether they can become ecosystem partners as well as competitors. 

As Apple, Amazon and Google race towards their end game, each needs to attract and align the best constellation of ecosystem participants. Finding ways to join the ecosystem may be much more important than trying to defend the status quo.

  • Michael Jary, Partner, OC&C Strategy Consultants