Retailers, beware of the middle.

A thought experiment, what if the middle was the worst place to be in retail?

This is an early draft of a piece I'd welcome thoughts on. One day I'll write it for a proper outlet.

Middle Income= bad news.

In terms of profitability and sales growth retailers aiming for middle America or the middle class in the UK seem to be suffering the most. 

In the UK grocers aiming for the low end of the market like Aldi saw profit growth of 65% in the UK in 2013, likewise Lidl is opening hundreds of new stores. Similarly bargain basement Poundland see's year on year profits rise. At the high end of the market stores like Waitrose and the food unit of Marks and Spencer all seem to be performing well.

Yet in the middle, the likes of Tesco, Sainsburies, Morrisons, Asda and even the Co-Op are all seeing market share losses.

It's not just Grocers, we've John Lewis performing brilliantly in department stores while Debenhams in the middle suffers, Primark's perfected discount retailing for those seeking bargains, while Arcadia that owns a whole tranche of mid market stores see profits slide and widespread job losses.

In the US we see similar extremes, luxury retail continues to accelerate, discounters perform well, but everyone in the middle suffers.

Chapter 11 bankruptcy strikes Brookstone, sales languish at American Eagle, Kroger, Target and Gap. We've JC Penney dying and and food outlets like Olive Garden and Red Lobster suffer. It's easy to call this the effect of online retail or the Chipotle effect, but this doesn't explain the frothyness at the top end, we've Nordstrom's, Four Seasons hotels,  the Capital Grille all see business better than ever. 

But you've heard most of this before. The other middle is different.

Middle Service= The worst of both.

Vertical and Horizontal integration are not new terms, but they are being applied to business in more extreme ways.

In my oddly famous battle for the interface piece, I quoted the importance of the interface for Airbnb, Facebook, Alibaba and Uber, how they can scale faster and more cheaply than ever before. I also mentioned the value in the opposite, how companies can spread vertically to own more parts of the value system and therefore protect themselves.

Retail seems the perfect embodiment of this, we've the thinnest retailers we've ever known.

The Thin.

eBay sells products it never touches, Alibaba, the world's largest retailer has no inventory and Etsy is the same. Even Amazon makes far more money selling items it doesn't own than bothering to keep it's own products. From the grocery stores of Instacart ( that don't exist)  to the luxury shopping of Yoox ( as a thin fulfillment provider). 

The most perfect example of thinness and it's scalability is Jet.com, here a company that has existed for a few months is able to offer a massive range of discount products by merely being a shopfront to other businesses. It appears like any other retailer, but like Style Smart or a million other referral or affiliate models it's merely passing information from customers to fulfilment partners. 

The Thick.
It's not all about Thin, Warby Parker succeeds in eyeware because it owns everything. It designs, makes, retails and ships the products, it controls everything and keeps all profits from the entire ecosystem.

Tesla is the same, they shun the idea of other companies as dealerships, they design, build and market themselves. Apple does the same, it's a total obsession of control and it gives these retailers the highest profit margins in their respective industries. 

It's not easy to scale, it's capital intensive, but I'd favor the chances of long term defendable profitability this way. I'd sooner take on Jet.com or Instacart than Tesla or Warby Parker, and of course Apple. 

Yet it's the millions of retailers in the middle that suffer. We've the Walmarts desperately attempting eCommerce, we've Urban Outfitters suddenly opening to Mobile commerce, we've click and collect, we've buy online return in store, we've CRM programs, but all retailers in the middle are open to being the worst of both.

Solutions.

The death of the Middle Class has been a pretty popular topic over recent years, but I think few people have given this movement the thought it deserves.

The reality is that income inequality is growing and that pace of change is faster than ever and accelerating. If you look around the current business and political world there seems to be nothing on the horizon that will change this.  If anything technology in the form of marketplaces like Amazon or Uber, or automation like robots, and self driving cars, seems to have a greater chances of reducing middle class jobs than creating a wealth trickle down.

The solution to this must be to accept this reality and be ready for the modern consumer. To offer high end products or low end bargains, and to accept this is part of the new business world.

The thinness is easier.

You either compete with thinness or thickness.

If you want to get thicker then work hard to find exclusive products, or to own better retail experiences, find something that makes people choose you above anyone else.

If you want to get thinner than use the brand and interfaces that you have to work in directions you've never thought about. Why can't a department store be a storefront for things from other companies? Why can't a boutique offer designer goods from Etsy? 

We've fixed a lot of barriers and assumptions in our heads from an era that no longer exists, for example the internet makes all shelves infinite.

Thoughts?