Sunday, March 8, 2015

WWCF: Ultra-Luxury Shopping Malls or Widespread, Pervasive Free Samples?

Which will come first?

Ultra-Luxury Shopping Malls

or

Widespread, Pervasive Free Samples

We've been hearing about the death of malls for some time.

Evolution of shopping: It used to be an expensive luxury to go shopping--imagine Christmas shopping downtown in the big city in a black and white movie. The economies of scale both in production (better machines allowing low-cost labor to be more productive) and marketing (a big umbrella venue in the form of the traditional mall) worked for decades to make shopping more and more affordable. Malls couldn't exist until these factors reached a critical threshold. Then they became prolific. But something funny happened on the way to the Ridgemont Mall stereo store. 

Now shopping is again becoming too expensive for malls to provide it but not because of resource limitations but because of better alternatives. In both cases (the pre-mall and soon post-mall eras) opportunity cost are high (remember, opportunity cost is the only economically meaningful way to look at cost). It used to be that one needed to purchase a lot and purchase wisely given one's time investment in going shopping along with the goods offered for sale being a relatively big sacrifice. In steady progression the falling cost of goods and the improved experience meant that malls could command our shopping attention because they lowered the opportunity cost. Malls generally offered a more efficient alternative; although, the entertainment value of the mall cannot be overlooked. The mall was a big tent, bundled package much like a newspaper. It had a little bit of everything and could afford to accommodate nearly every taste because of the volume. Certain high-margin sales, which translated into profitable leases for the landlords, created opportunities for many low-margin sales--the marginal cost of adding costume jewelers and Orange Julius is pretty low once the mall is built and being paid for by anchor department stores.

However, today we have reached a state in which the alternative method of shopping, ordering online, dominates the efficiency of physical shopping by many orders of magnitude.* Compounding this problem for malls is the fact that there are many alternative forms of entertainment that make hanging out at the mall seem fairly dull. Hence, today the resource limitation is the ever-growing value of our time.

Are malls dead? Only malls as we knew them and in such numbers as we knew them. I predict a resurgence of destination shopping with and because of vastly enhanced luxury experiences. The retailer or landlord who masters this will enjoy rewards some will find surprising. These may not be the one-stop shop where "this mall has everything" and "the people of today's world hang out," but they will attract our time and wallet in a way that today's shopping malls cannot. I am thinking the magnitude of these differences will approach the differences between a day at Harrod's versus a trip to Wal-Mart and the experience at Bass Pro Shops and Cabela's versus the local bait shop. 

To be clear a qualifying "luxury mall" would have the following qualities:
  1. It would be a destination unto itself not just a shopping trip--many customers would go for the experience with no expectation of buying anything.
  2. It would offer a large variety of goods rather than a single theme.
  3. It would have a significant common space independent of any particular retailer.
  4. It would make past generations of mall goers feel completely out of the shopping league.

That was a long way to go to get to the first half of this WWCF. The second half will come quicker. Goods are getting fantastically cheaper as is shipping. Our time and attention continues to be scarce--in fact, it grows more scarce as our options of what to do with our time improve. One solution for marketers is simply giving the goods they wish to sell away for trial. Instead of targeted advertising to demographically attractive households, how about targeted distribution of the goods themselves? I am thinking a $100 purchase of household items from Amazon will come with a curated box of complementary items for free. The first of the month brings an unsolicited trial supply of "things you never knew existed and cannot possibly live without." Eventually, many households will come to expect this as the primary way to discover new, perishable goods. 

Which comes first? The adaptations to the mall experience have a bit of incumbency advantage being that the mall has a more symbolic and established position in our shopping lives. However, the sampling idea may have a faster ramp up. To make the competition more determinable I'll say the creation of the fifth luxury-type mall (new construction or massive renovation of existing space) competes against the regular delivery of unsolicited free sample goods to >500,000 households. These thresholds hopefully capture an established trend rather than a one-off beta test. I predict the free sample idea to come within 10 years and just before the luxury mall idea can qualify, but I believe both will spur along the other making it a quick finish. 


*Don't be misled by statistics that show only a small effect coming from online sales. I contend that heterogeneous-consumer, high-fixed costs businesses are generally very sensitive to small decreases in demand because they rely on a diverse, network-effect customer base that is harder to understand (hence, harder to regain once it begins to slip) and they cannot scale downward effectively.