Why Brick and Mortar Ecosystem Should Adopt Innovations First

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Long sales cycles. Cheap, unsophisticated customers. Anachronistic systems. These truisms have made brick and mortar a low margin industry that scares away innovation. Put yourself in an innovator’s (or investor’s) shoes:

Would you want a promising idea chasing the aforementioned customers, jeopardizing your upside? Or would you put your effort in somewhere else?

This alone should be why the brick and mortar ecosystem adopts innovation: it comes along so infrequently that any proffered improvement should be celebrated.

Yet we all know the truth: innovation here is hard to come by. Even solutions marketed as innovative leave much to be desired. Brick and mortar merchants can’t even be bothered to learn from methodologies proven over 40 years ago. Womp, womp.

So we thought we would approach the topic from a different angle. Why adopt innovation? What’s in it for the ecosystem?

Imagine innovation as a stepwise function. At the beginning we start on the bottom left. As time goes on a new innovation comes to market (Innovation 1 on the chart below). The market slowly adopts the innovation over a period of time. Then the next innovation comes around (Innovation 2) and the market again responds. In the end, society ends up in a better place than where it started: up and to the right. If you don’t believe us then why are you reading this on a computing device connected to the internet and not some stone tablet?

The interesting thing that happens here is the delta created between early adopters and laggard adopters. Laggard adopters are people who would still use leeches for headaches if doctors hadn’t stopped carrying them. They comprise, by and large, the brick and mortar ecosystem. In the chart below, the laggard adopters are the blue line and the early adopters are the red line. The green triangle is the value between the two positions, with the early adopters benefiting from an innovation’s improvements before the laggard adopters are forced to make the change.

 

That green triangle, the delta, may not seem like much, but it’s HUGE in a low margin environment. To put it in perspective, we’ll work through two examples.

There are two competing merchants across the street from one another. A new strip mall gets built, and both merchants view the location as the perfect spot for their new stores. They both apply for a loan but only one of them has shown a consistent improvement in growth, revenue and profit margin by adopting innovation. Guess which one is the riskier bet for the banker?

Now there are two merchant software companies – let’s call them both point of sale providers for the sake of argument. Both approach a large account, but one of them is able to connect the merchant to Google and Amazon via innovative partnerships, driving more customers. Further, that same POS provider has a lower asking price because they’ve figured out how to earn unconventional revenue streams through innovation. Which POS is likely to win the deal?

These are important learnings because brick and mortar is under assault. The US restaurant market has been saturated for years. Retail is being disrupted by more sophisticated ecommerce companies. Legacy technology providers are seeing newer, better entrants backed by millions in investment. If brick and mortar doesn’t adapt it will be replaced by those that do.

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