Virtual Business vs. Brick and Mortar

You’ve probably heard the recent news, Borders is closing all of its remaining stores and the company could go out of business by the end of September. This creates an interesting double entendre, thus the article title, a world without Borders. When I think of Amazon, a thriving non brick and mortar firm (at least non retail) it seems like they can sell anywhere, anytime, like a business operating without borders. Whereas, Borders, as in Borders book stores, a bastion of brick and mortar, will now vanish from the world. Today this obvious metamorphosis deserves both mention and contemplation.

Retail is a tough business for any line of products or services. The creeping incremental costs and overhead of retail stores insidiously and perpetually attack retail profits. The list of retail bankruptcies and closures is long, with well know names Hollywood Video and Blockbuster, Tweeter, Ritz Camera, CompUSA, Tower Records, Linens ‘n Things, Circuit City, etc. When it comes to industries or niches that can morph to virtual or digital, traditional brick and mortar businesses must transition very quickly or face a certain fate. This is an Amazon versus Borders and Netflix versus Blockbuster story. Barnes and Noble, the surviving big box book store still remains a question mark in my mind. Every time I wander into their local store I witness a retail paradox. In the huge bookstore section there is usually a modest number of people browsing, with perhaps one or two buying, and rarely a line at their register. However, in a tiny corner of their bookstore is a coffee shop we all know called Starbucks. I’d estimate Starbucks represents 5% of the total space, yet there is always a line at their register even though they are well staffed, and well run. Furthermore, everyone in Starbucks is buying, as opposed to browsing. Perhaps this model is working in reverse, the Starbucks store could be much larger, and the bookstore area much smaller, offering a plethora of digital book samples, or a computer kiosk point of sale for traditional books, allowing shoppers to sip their latte’s and order the books online.

The magazine area in this store is also a source of business fascination. There are often several people in this area, one of the busier sections of the store on many days, sitting on benches, reading through the litany of magazines offered. Arguably Barnes and Noble has a very worthy selection for their enjoyment, everything from automobile to fitness and gardening to zoology.  When I stroll by, with my Starbucks coffee in hand, it reminds me of a library. I rarely to see anyone grabbing a magazine and walking toward the checkout counter, rather I see people reading, then returning the magazines to the stand. This model seems to be rewarding for the browser and even for the Starbucks consumers, but not for the bookstore. Whenever I stroll through this very nice bookstore, I do make note of interesting books, but then I download them on my Kindle, definitely not a shopping experience which will prove profitable for their brick and mortar infrastructure.

This by no means implies all retail is doomed. There are many retail operations which require infrastructure, from groceries and coffee to furniture, home repair and haircuts. When it comes to digital, however, a virtual spin on the business model or dramatically adapted retail will be necessary. What’s an example of dramatically adapted retail? Redbox comes to mind. At one time Blockbuster Video had a large store, let’s estimate six thousand square feet, about a mile from my house. People could browse their shelves and select a video in the traditional sense, carrying it home to watch on their DVD players. Redbox is a video store in a box, sitting inside 27,000 existing retail locations, like the grocery store I frequent. They rent movies for a $1 a day in a small kiosk that takes up 12-square feet. They advertise that these red boxes have up to 200 titles and 630 movies. Redbox is a fully automated video rental store, meaning no staffing and very limited labor (someone has to stock and service the machines).  Compare that with 6,000 or 8,000 square feet consumed by a Blockbuster store, along with 15 hour a day staffing. Of course even the Redbox model faces the inevitable pure virtual and digital threat. After all, shouldn’t all video be truly digital, streaming directly to your TV or PC monitor? Those days are here for some, coming very soon for many, and it will be interesting to see if and how Redbox and Netflix adapt to this change.

The cheaper, faster and better distribution system will prevail. Whether we’re morphing from clipper ships to steam boats, from the horse drawn wagon to the locomotive, or from the retail bookstore to eReaders, the only constant in business, is change. Businesses must innovate or perish.