Brick-and-mortar stores battle online counterparts

To capitalise on growth in Asia and Singapore, our retail sector must address two key challenges.

The first pertains to labour productivity – a national concern. Singapore faces supply constraints in manpower, and there is a limit to how much we can supplement our workforce with foreigners. As a result, we need to learn to do more with less. Otherwise, the lack of labour could become a binding constraint on growth.

This challenge is especially salient to our retail sector. In 2009, our retail productivity was only 41 per cent of the national average. Comparing across countries, in 2007, our retail productivity was about half that of the US, and two-thirds that of Hong Kong. Clearly, there is scope for improvement.

The second challenge concerns disintermediation in the retail value chain with the advent of e-commerce. In the past, bricks-and-mortar stores served as the end node in the supply chain network. Their key value proposition lay in making final goods and services accessible to consumers. However, disintermediation in the form of electronic commerce has emerged as a keenly competitive alternative channel because of the convenience it offers, and the cost savings it affords.

In the US, for instance, e-commerce accounts for an increasing share of shop and non-shop retail sales. According to the US Census Bureau, this figure rose from 1.8 to 4 per cent in the 6 years from 2003 to 2009. Anecdotally, travel agencies and bookstores have figured among the biggest losers. In 2009, researchers from the University of Chicago found that the number of travel agencies in the US had dropped by 36 per cent from 1997 to 2003. For bookstores, the corresponding figure was a decline of 10 per cent. This coincided with a period when the proportion of survey respondents who had made online purchases increased from less than 4 per cent to more than 40 per cent.

The divergent paths of Amazon and Borders offers a salutary lesson, and other retailers ignore it at their own peril. We must expect e-commerce to become more widespread as electronic transactions become more secure and available on multiple platforms. Already, young people – Singaporeans included – are increasingly buying fashion apparel, jewellery, and even fast food through the Internet. To compete, retailers must carve a competitive niche for themselves by going beyond a physical destination to provide a high-touch, unique retail experience.