Brick and mortar industries have never been known as innovative agents pushing boundaries of what’s possible. And why should they: they earn very low margins if they’re lucky, have high rates of failure, experience difficulty finding and attracting quality employees, and see very little economies of scale that other industries – like manufacturing – enjoy.
It’s why few investment dollars chase brick and mortar innovation.
It’s why ivy leaguers work someplace else.
It’s why low quality products continue to exist a full 30 years later.
In the 1970’s the first real pen-and-pad replacement arrived on the market. It was an electronic cash register (ECR), and it coincided with the growth of desktop calculators. By the 1980’s ECRs were given computing guts and useful memories. Systems became faster and more reliable. In the 1990’s register companies started releasing software to work on the Windows operating system.
It’s now 2016. It’s been at least 35 years since the first ECR hit the market. It’s been 25 since point of sale software has been available. Yet it’s speculated that 25% of restaurant operators still use cash registers (we don’t really know because the industry is so damn fragmented nobody can share a good number). Knowing that a POS and the data it generates are integral to running a successful business, how is it that 25+ year old technology is still being used?
There are a few distractions to my point, so let’s get them out of the way.
1. Cash and tax. If you use a cash register, you can avoid paying ungodly sums to the government.
2. Cost. POS was not cheap until Cloud arrived. Asking a merchant to spend $10-20K, plus support, when they only earn $100k/year is a little ridiculous.
3. Something else I haven’t thought of.
The reason there’s been such a slow migration of common-sense operational technology in brick and mortar is because the only entity that’s affected is the business. If the business decides to use a cash register instead of a POS, does the customer know? No. Do the business’s owners, employees, suppliers and partners suffer because there’s no objective data to determine how to improve the business? Sure. And maybe the business goes under faster. But ultimately the only real stakeholder in the leap to POS is the business owner.
That’s why we’re here, 30 years later, wondering how the hell it is that so many brick and mortar merchants use comically-inane solutions that other industries jettisoned decades ago.
But cloud POS is going to bend the adoption curve like you won’t believe. And to demonstrate my point, we’re going to use an example everyone should relate to.
In 1985, as the oil industry took a nose dive, a businessman named David Cook opened a movie rental store in Dallas, TX. He decided what movies to stock based on geographic trends, and soon had a handful of locations across the state. In 1987 he sold a large portion of the business to Wayne Huizenga, the founder of Waste Management. Wayne moved headquarters to Fort Lauderdale, FL in 1988 and had opened more than 400+ locations. By the early 1990’s, the company had grown to 3,400 stores. A 1994 merger with Viacom put the combined entity at a staggering $8.4B market cap.
In 1997 a particular customer, Reed Hastings, received a $40 late fee for his rental of Apollo 13. In true entrepreneurial fashion, he launched a by-mail DVD rental service on April 14, 1998. Under his model, customers would pay a monthly subscription and DVDs would be mailed with free return shipping; customers could return them whenever they wanted. Reed called this company Netflix.
In 2000 Netflix approach Viacom to sell its assets for $50M. Viacom laughed: it’s movie rental business earned $800M on late fees alone. Reed left with his tail between his legs, and in 2004, Viacom announced it had grown to 9,000 global movie rental stores with 60K employees. That was getting to be even too much for Viacom to manage, so it spun the movie rental company back out at a separate market cap of $5B.
Luckily Mr. Hastings did not give up, and at this point Netflix was really humming. In February 2007, they announced they had delivered their billionth DVD and started streaming content online as DVD rentals slowed. The $5B movie rental company? They stocked bluray DVDs in-store, killed their online rental efforts, and doubled down on physical retail.
Unfortunately the market was not so rewarding. On February 10, 2010 the company ceased operations in Portugal. An audit in March of 2010 showed a billion dollars of debt. Board members started resigning, the stock price fell to less than a dollar per share, and it was delisted from the NYSE. In August their CFO resigned with a pending bankruptcy.
That is the tale, and forewarning, of Blockbuster.
What’s the learning?
First, it’s that brick and mortar still takes a long time relative to other industries. Google reached a billion in revenue in just about 4 years (founded in late 1998).
Second, and most importantly, it’s that even brick and mortar changes can be expedited with customer pressure.
Unlike the decision of upgrading from a cash register to a legacy POS, where we agreed the beneficiary is less notably the customer, in the battle between Netflix and Blockbuster the customer was key. Blockbuster ignored what was best for its customers at its own peril (though in reality the bloated corporate culture, egos and physical assets made the tough decisions impossible). Consumers were more inclined to opt for the convenience of mailed DVDs and online movie streaming than they were for the hassle of visiting a physical location.
Cloud POS companies will leverage consumers with their connectivity, making it obvious that non-cloud merchants are creating additional barriers for customers. Just like Netflix vs Blockbuster, leveraging entities outside the merchant will create additional market pressure to expedite change.
It’s no secret that convenience is driving more and more of the economic stack. This means a growing trend in last-mile delivery, online ordering, and enabling commerce from an aggregate platform. For instance, looking at a list of the top Android apps shows that Walmart is the first retailer on the list, coming in at number 83. Nobody wants to use an application for only one brick and mortar merchant; the scale just isn’t there. Instead, consumers are finding businesses through apps like Google Maps, Yelp and others.
Cloud POS companies will use all of this to their advantage and start syndicating merchant information to drive more commerce. Updated menus and item pricing. Updated hours of business. Updated specials and promotions. Online ordering. Reservations. Delivery. All of this will start to become available from the apps that consumers actually use, resulting in new revenue for cloud POS merchants while the merchants of legacy POS scratch their heads and wonder why they’re being left out.
You’ll see a compounding effect where it’s not just the operational benefits cloud POS brings, but market pressure from customers to interact with merchants “above store” on consumer platforms like Google, Yelp and Apple. Whenever something is consumerized at scale, merchants adopt it in droves – even if it’s at their own detriment a la daily discount phenomenon of 2009.
It took Netflix roughly 12 years to replace Blockbuster. What Blockbuster did have in its corner was money and market share: it was a $5B company after its Viacom spinout. With the exception of Micros and NCR (whose entire organization is not worth $5B, let alone its POS division), most POS providers are much smaller. They might have 20,000 installs on revenues of $4M, and no POS company has the market share that Blockbuster commanded.
Given that we’re already 3 years in on cloud POS, and that legacy POS providers don’t have the balance sheets to artificially dyke the natural evolution of the POS market, I feel comfortable saying that we’re 5 years away from cloud POS representing more than 50% of the market.
The consumer platforms have enormous marketing budgets, and they will wield them to educate merchants on the value of choosing POS solutions that work with their platforms. After all, more merchants = more users = more money for the platform. When you size up the market potential of the outcome in having more merchants on their platforms, the legacy POS companies are fighting a battle that’s already been lost.
But I’ve been wrong before. I’m still amazed at the infinitesimal progress brick and mortar industries have made relative to their peers. Maybe a recession or two changes the timeframes. But make no mistake about it: the market is forcing brick and mortar’s hand. If it were up to them they’d still very much be renting movies down the street.