In 1886 a box of watches was accidentally sent to a jewelry dealer who didn’t order them. Instead of sending them back he sold them for a profit which eventually led him to start a watch distribution company. Seven years later he found a partner who helped him use catalogs to sell watches by the mail to people in rural towns who didn’t have enough selection.
Those men were Richard Sears and Alvah Roebuck and that company became Sears, Roebuck and Co.
Eventually, they expanded beyond watches and into home goods for individuals and businesses. By 1906 their mail order warehouse became the largest business building in the world. Sears’s revenue grew by a factor of 50 from 1895 to 1905.
The Sears catalog was an incredible invention for farmers who may have had one general store that was miles from their land. The Sears Wish Book was the size of a phone book and included 200,000 items. This gave rural America a thousand-fold increase in the goods they could buy from a local store and even when factoring in the cost of shipping a savings of around 50% or more depending on the item.
The urbanization of America in the 1920s forced Sears to expand into physical stores, the first of which opened in Chicago in 1925. By 1927, they had 27 stores with an enormous selection of products and low prices. By 1929 they were up to 300 stores.1
In his book The Long Tail, Chris Anderson discusses how Sears basically got the American consumer addicted to choice through this model:
America was hooked on choice. The superstores offered huge selection at low prices. They preached the religion of economies of scale, a concept (bigger stores are more efficient) that required no more than a price-tag comparison between traditional merchants and superstores to understand. How much farther could it go?
Wal-Mart took the baton from Sears while Amazon is currently figuring out how much further things can go.
Last year Derek Thompson from The Atlantic wrote about some of the lessons Amazon can learn from Sears. In his piece he detailed how difficult the retail space can be:
First, retail is in a state of perpetual metamorphosis. In the last 150 years, the locus of American shopping has moved from small supply stores, to mail-ordering, to department stores, to chain stores, to big-box superstores, back to mail-to-consumer shopping, and then, perhaps, onto some combination of pop-up retailers and national online behemoths. People are constantly seeking more convenient ways of buying stuff, and they are surprisingly willing to embrace new modes of shopping. As a result, companies can’t rely on a strong Lindy Effect in retail, where past success predicts future earnings. They have to be in a state of constant learning.
I actually think Amazon’s biggest threat comes not from a company misstep but from government regulation that seeks to slow the company down or break them up but the fickle nature of consumer taste can never be ruled out.
The sheer number of choices available to consumers these days has opened up a world of niches where there’s now a demand to meet a supply that didn’t exist before.
Anderson relayed a story in his book which shows how things have changed in a world where there’s an abundance of choice.
At a meeting with the CEO of a digital jukebox company, he learned the average digital music player offers around 10,000 different albums. The CEO asked him what percentage of the 10,000 albums sold at least one track per quarter. Using the 80/20 rule where 80% of sales tend to come from 20% of the products, you would assume the number is fairly small.
Astonishingly, the answer was 98%!
The more songs that were added the more songs that sold. So the demand for different styles of music is seemingly endless.
The paradox of choice can make it difficult to make decisions in certain areas of life but there are some clear benefits to this new world.
- The opportunity set is expanding. Technology will continue to open up opportunities in the future that few people and businesses will foresee ahead of time. But those who have an open mind and the ability to provide value can thrive. Anderson says, “It’s clear that the story of the Long Tail is really about the economics of abundance—what happens when the bottlenecks that stand between supply and demand in our culture start to disappear and everything becomes available to everyone.”
- More choice means less standardization. In the 1950s, an astonishing 74% of U.S. households watched I Love Lucy on Sunday nights. The series finale of Mad Men, one of the most critically acclaimed shows of this century, drew roughly 1% of households. The era of everyone being on the same page because there are no other options available is over.
- Niche down to stand out. One way to stand out in any crowded field is to niche down your strategy as much as possible. It may be more dangerous to be in the middle in many businesses going forward where you’re out of luck if you’re not at the top of the heap or don’t have a specialization. Even if you don’t command a large market share you can be a tiny slice of the pie but still prove to be valuable.
The Long Tail
1Following the Sears bankruptcy news from earlier this month, many people focused on what led to their downfall. There were plenty of mistakes to dig through, many of which were self-inflicted by the hedge fund manager who bought out the company. But you also have to appreciate how long they were able to stay relevant in the fickle world of retail.