Retail Horizons: Does the sharing economy mean the end of retail?

This article is the 11th in a 12-part series about the future of U.S. retail for the Forum for the Future-led 2014 Retail Horizons project in partnership with Retail Industry Leaders Association. For more about the project and the toolkit available in October, read the first post, which also contains a table of contents for the series.

With the recent explosive growth of Airbnb and Uber, it seems likely that the sharing economy is here to stay. Collaborative consumption is past its infancy stage and, as I wrote about previously in “The Complexities of Sharing,” many companies that have succeeded with consumers are engaged in regulatory struggles with city and state lawmakers. Moreover, Forbes estimates over $3.5 billion was spent through sharing economy services in 2013 alone.

Sharing is changing the way people own and use goods. As Jacob Park wrote, more than a third of all millennials belong to a sharing platform, and more are joining. Sharing, particularly for people in urban areas, is becoming a way of life.

At the same time that the sharing economy has been growing, traffic to retail stores has been slowing down. During last year’s holiday season, retail foot traffic was roughly half of what it was in 2010. Many shoppers lost during the recession simply are not coming back to stores, preferring to buy online, or to buy less. While cold weather did play a role, retail numbers have slumped and retail chains saw the first profit decline since the recession.

Is the rise of sharing leading to the decline in retail? Yes, but not always. Take two classic examples of sharing: car rental services and libraries. Rental car companies started popping up shortly after the release of the Ford Model-T without affecting car sales. Libraries have been around for far longer. Neither cut into retail sales for cars or books. Renting products isn’t new, nor is it inherently threatening to the retail industry.

Sharing and renting only threaten retail when people rent what they otherwise would buy, although it is difficult to generalize this across all retail categories. Despite the success of many companies in adopting a sharing model, people don’t want to share everything. Blackjet and Higear, for example, are just two of the more notable failures in the sharing space.

When determining whether sharing and renting pose a threat to retail, it is important to consider these four points.

1. Asset use: How is the item used? Ride sharing became very popular because many riders, particularly in cities, were hesitant to invest in an item that would be unused most of the time. If a car is to sit idle for much of the day, sharing becomes more appealing. Additionally, car owners face several additional costs than just the asset itself. Insurance, parking fees and maintenance all add up. Renting allows owners to recoup some of these costs and take advantage of assets with low use rates. Items with higher use rates, such as smartphones, are less likely to be disrupted by the sharing economy.

2. Return on investment: For individuals to choose to rent their items, the return on investment must be high. This works well on big ticket items, such as designer gowns, cars and apartments, but perhaps less so on small appliances or basic tools. Transactions costs, including finding a match, shipping and returns, dominate the realized returns of renting cheaper items in these new ways.

3. Steady state consumption level: Despite a longstanding rental car industry, most Americans own cars and 86 percent of jobholders drive them to work every day. Rental cars serve as a substitute on specific occasions such as holiday travel, supplementing and not replacing the existing status quo.

For other goods, such as tuxedos, the steady-state consumption level is fairly low. Unlike cars, the availability of tuxedo rentals for most people is a complete substitute for ownership and thus rentals reduce the need to buy new tuxedos. Services that provide rental opportunities for goods that resemble tuxedos more than cars may disrupt retail in those markets.

4. Product use and timing: Most people know in advance that they will need a vacation rental apartment, so they can get online hours or days before to select and reserve a spot. For a product such as a first-aid kit, when you need it, you need it immediately. Millions of people have first-aid kits in their houses that sit unused most of the time, but this is seen as preferable to having to rent one on-demand. The same goes for items such as a freezer or a toaster.

Economics plays a large role into why people share and rent in the first place: You can get comparable or better products cheaper. Trust and accountability networks remove the risk of conducting business with a stranger.

In the years to come, more brands will enter the sharing/renting space. Retailers that wish to compete will have to closely examine their core product to see if it is something that could be displaced by a rental model. If the answer is yes, the best course is to adapt quickly and offer consumers a way to keep spending and keep consuming, even if that means they are not owning.

Top image of car with open door by Janez Habjanic via Shutterstock.