Is Your Company Experiencing Good Times? Time for a Plan B30 November, 2016 / Articles
Disruptors should know better than anyone that we are all vulnerable to being disrupted ourselves, and often faster than we imagine possible. Everybody needs an Act II and maybe Act III and beyond. One act plays have their place in theater, but are generally not a desirable descriptor for a career or business. The challenge is timing: often we need to be moving on to Plan B while Plan A is still in full hyper-growth swing. By the time another disruptor actually arrives at the door of our dream house, if we haven’t already have moved on to conquer new territory we will be trapped.
Take Costco, the super successful warehouse store that operates under the shelter of the umbrella corporation called simply COST or even Sam’s Club as well, the similarly modeled business arm of Walmart. Both of these “big-box” chains have been around for three or four decades now, disrupting the retail tradition and forcing competitors to adapt.
But there’s a red flag of warning for these popular shopping destinations. For those who frequent these stores, the experience of parking lot warfare without, and bumper-to-bumper shopping cart traffic within, might make you wonder how anyone could think there is trouble brewing in our lifetime. For those of you not familiar with these businesses, the basic premise is that shoppers purchase an annual membership to the ‘club’ and can then enjoy discounts on a wide array of groceries, household and other goods. You have to be willing to buy in bulk, but if you are, the savings can be substantial. What’s not to love?
Several things, apparently.
First, these stores are destinations. They are mostly located in suburban areas, within easy access of freeway on- and off-ramps and cater to the shopping interests of the often larger families living in the typically larger homes that populate suburbia. But they are not as easily accessible as the neighborhood market. This didn’t matter during the heyday; shoppers were willing to drive a few extra miles, particularly since Costco and Sam’s Club both sell gas at attractive prices, to stock up and take advantage of the discounts.
Now we’re well into the second decade of the 21st century, however, and demographics are shifting in ways that don’t favor these stores. The original loyal customers are getting older, the younger generation is migrating back toward the urban center, where homes/apartments are smaller, as is family size, and bulk purchasing does not appeal. If you have minimal storage space you probably don’t buy dozens of rolls of toilet paper—Costco’s perpetual bestseller—at one time. At least some element of every demographic, from recent college grads to the empty nesters, is beginning to appreciate the advantages of living “smaller.” It’s less taxing on resources: those of the individual, the family and on the world as a whole.
These evolving preferences of subsequent generations, or even in the same generation at different life stages, are subtle but powerful. They are one of the major drivers of innovation and disruption; new priorities arise, creating unmet needs and open playing fields not yet overrun with competitors. But such changes also pose a significant challenge to established businesses settled comfortably in a mode that is not evolving to keep pace. Recently, I wrote about the longevity of McDonalds, and particularly the Big Mac, soon to turn 50; shortly thereafter I encountered the foreboding data that only one in five millennials has even tried a Big Mac. American institutions of even greater longevity than McDonald’s have been displaced; no one is invincible.
Costco’s demographics problem is surmountable; suburbia is not going to disappear overnight, leaving open a window of time for adaptation, and in fact it may well experience its own resurgence, just as the once nearly abandoned urban centers are. Not everyone loves “small,” especially in the U.S., where the average new home size is 1,000 square feet larger than it was in 1973, just a few years before the box store model began its rise. Clearly, there are still spaces to stash all that toilet paper, and therefore, a niche for those who sell it in abundance.
But that brings us to the second problem facing the warehouse clubs: they are a destination. The disadvantages remain, regardless of where the destination is located relative to the customers. Would you rather go out to stroll through many acres of unadorned warehouse to shop or order from Amazon Prime? They’ve brought the shopping opportunity once only available at places like Costco to your home. And even if you are a dedicated suburbanite, buying from the comfort of your armchair is often preferable to the various efforts and expenses required to shop anywhere but online. Amazon has also figured out a way around Costco’s big advantage of bulk buying: the subscription plan, in which you can get a new (smaller) package of toilet paper on a regular basis. Storage and convenience problems solved.
And yet even Amazon Prime is being challenged by newcomers. Boxed.com is poised to be a low-end disruptor, offering the same sort of on-line bulk shopping opportunity. Though they presently have a much more limited selection, it is expanding, and there is no membership fee to shop. Shipping is free on purchases over a modest minimum dollar amount. There are other online newcomers with shopping variations on this theme. In a climate in which even Amazon Prime should be worried, how are the brick-and-mortar warehouse stores adapting to the changing marketplace?
They’re not. Which brings us to their third major problem: analysts are beginning to notice that new membership numbers are declining— membership fees are a huge revenue stream—not to mention that sales are obviously less robust if there is a shrinking clientele. The biggest criticism and concern seems to be that there is no Plan B. Based on the data, and the absence of change, there are increasing warnings to investors about the future health of the Costco business model. Disenchanted investors are accelerators for business decline, driving things into the ditch far faster than a shift from suburban to urban population concentration ever could.
There’s a lesson here for all of us: the time to formulate, and even launch, Plan B is before we need it. If we wait until growth slows or stagnation sets in or the future is beating down the doors, we’re in danger of being left behind. It’s while the First Act is in full swing, well before the curtain falls that Act II needs to be donning its costumes and lining up the props. Think of the musical artists known to history as One Hit Wonders. Perhaps the fleeting success was better than no success at all, but it’s not the awesome outcome most are hoping for.