Retail Blog

The prognosticators say that Main Street retailing is dead. The big box stores have ruthlessly driven Mom and Pop out of business to the ultimate detriment of consumers everywhere. The prognosticators are wrong. To see why, take a look at something going on in between retail and wholesale. First, let’s look at their tails. Their long tails, to be exact.

The ‘long tail’ is a statistical concept recently popularized by Chris Anderson in articles and his book “The Long Tail: Why the Future of Business is Selling Less of More”. Being the editor-in-chief of Wired magazine, and having skills that include rigorous mathematical chops, Anderson demonstrates a recurring phenomenon in markets across many industries. Namely, he shows that very often in demand curves one sees that the majority of sales are accounted for by small, niche products or companies. Large sales volumes are predominated by large numbers of small sales added up.

For a particular company, the long tail consists of products that sell individually in low volumes. Amazon is the poster child of long tail business planning. Josh Peterson, now a former Amazon employee, summed it up this way: “We sold more books today that didn’t sell at all yesterday than we sold today of all the books that did sell yesterday.” That is, Amazon makes most of its money selling books every day that no one has ever heard of, and that hardly anyone reads.

For a given industry, the long tail is comprised of companies that individually have low sales numbers. In the $3.5 trillion retail industry it is Wal-Mart, Target, and Home Depot who get all the attention. Indeed, those three themselves account for $500 billion in sales. However, the top 100 retailers have combined sales of just $1.5 trillion. And the top 1,000 retailers have under $1.6 trillion. Most of the rest - almost $2 trillion in sales - goes to everyone else. This is a classic long tail, and it is overwhelming comprised of small, independent businesses. Mom and Pop aren’t doing so badly.

Whether a long tail exists in a company depends mainly upon inventory and distribution costs. Where those are high, sellers will tend to focus on stocking items that have high sales volumes, ignoring the slow movers. Where inventory costs are low, distribution and access to markets become key. Even if it had them all in stock, Amazon couldn’t sell the long tail of books if it couldn’t reach the massive market of low-volume niche buyers interested in them. Of course, the internet is the driving technology that makes that market efficiency possible.

Whether a long tail exists in an industry depends mainly on market efficiency and barriers to entry. For instance, there is no long tail in the cable industry. It’s simply too hard to start your own cable company. It’s also a relative hassle for consumers to make switches, assuming they have a choice. Retail has a long tail because practically anyone can open up a shop, and consumers can shop anywhere they like. Wholesale goods is another industry with a long tail. With some 100,000 wholesale suppliers, most of the $2.3 trillion sold at wholesale goes to the bottom 99,900 businesses.

Wholesale suppliers sell to retailers. To what degree do their two long tails intersect? Again, it depends on market efficiency. Large retailers find it ridiculously easy to find suppliers, who line up at their doors hoping for a chance to sell. Small retailers don’t have it so easy. For decades their main way of finding suppliers was through aggregation services like rep firms and trade shows. These are expensive and/or time-consuming, and ultimately meant they did business with a relatively small number of large vendors. It was only the larger guys who could afford to have many small vendors. The two long tails didn’t meet.

In much the same way the internet enabled the long tail phenomenon of Amazon, it is also enabling the intersection of the long tails of retail and wholesale. With vertical search engines like ProductBlazer, small retailers have access to tens of thousands of small suppliers and their products. With credit card transactions and email communication, the cost for small retailers of doing business with a larger number of small suppliers has fallen.

This is nothing short of a mini-revolution. Consumers can now go to a big box store to buy all the things that everyone else buys, at competitive prices. They can also go to their favorite small retailer and get something that no one else buys, at great margins for the retailer.

Mom and Pop will never again sell Ivory soap as cheaply as Target, but then again, they should be smart enough now not to try. Instead, they are thriving by having a detailed, intimate knowledge of their customers and the ability to find and deliver unique, niche products to them that Target would never touch. This is Mom and Pop’s own niche, and their access to the long tail of wholesale suppliers ensures they’ll occupy it for years to come.