Retail devastation is a classic example of technology disruption

The UK retail sector is in crisis, it should come as no surprise, and the implications are massive. There are lessons investors can learn about how technology disruption works and what this means for investing.

Article updated: 24 July 2020 8:00am Author: Michael Baxter

Back in around 1994, I read a report on the future of retail. It was a long time ago, the report I saw was published in a magazine that no longer exists, and I am afraid I can’t cite the source. It’s a shame because I think the report is incredibly relevant to today.

You are just going to have to take my word for it when I say that the report predicted that online shopping’s impact on the high street would be comparable to that of multiple bombs, detonating regularly.

This was such a long time ago that it wasn’t clear at that point whether online shopping would be conducted via the internet or some other means.

And the report was dismissed. Shopping is a social pursuit, they said; people will never do their shopping sat in front of a computer.

Well, it is increasingly looking as if the report was about right (a little exaggerated, maybe). The cynics were wrong.

However, what the report got wrong was the timing.

Levi warning

Recently, the boss of Levi Strauss, Chip Bergh, said that the recent run of bankruptcies in retail in the US was just “the tip of the iceberg.”

Well, don’t say you weren’t warned. The rise and further rise of online fashion was predicted a quarter of a century ago.

Hype cycle

The consultancy group Gartner says that new technology often follows what it calls a hype cycle, falling into into five phases.

  • Technology trigger.
  • Peak of inflated expectations.
  • Trough of disillusionment.
  • Slope of enlightenment.
  • Plateau of productivity.

I think that when we get to this trough of disillusionment phase, many see it as evidence that this new technology is overhyped and was never going to have the impact that its supporters predicted.

In fact, such a phase is often temporary.

We saw it with dotcoms, they boomed in the late 1990s, crashed and then changed the world.

In the immediate aftermath of the dotcom crash, many saw it as vindication that the potential of the internet had been exaggerated.

Just as getting sucked in by a hype narrative can cost an investor dear, it can be perilous not to spot that a technology is merely going through the trough of disillusionment stage.

Out of town retail

What were the ladies and gentlemen who supported the out of town shopping phase with their money, thinking?

Sure it made big bucks for a short while, but now such shopping areas seem more like out of town empty buildings.

It seems unlikely that the initial investment will be fully recovered.

Wider trend

The Levi Strauss boss, Mr Bergh, also said: “The days of fast fashion are gone. We already saw it with Gen-Z, but [the trend] is going to go mainstream.”

I think internet shopping is playing a role here too. I believe clothes shopping on the internet is more considered. Fashions are being changed.

Covid not the reason

Clearly, Covid-19 and related lockdowns have hit retail hard. But I think that Covid has accelerated a change that was going to happen anyway. Covid is not the reason why retail is facing a crisis, but maybe it has brought the crisis to a head much sooner.

The wider impact

The combination of the decline in physical retail and remote working will have a devastating effect on commercial property values and probably on house prices in city centres.

It will also free up real estate. Warehouses required to support online shopping need less space than shops. More remote working will free up office space, and it makes it available for alternative purposes.

I expect the long term trend to be a dramatic increase in the availability of real estate to meet housing demand, with house prices falling as a result.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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