By Geoff Colvin and Ryan Derousseau
January 5, 2017

“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten,” Bill Gates famously said in his book The Road Ahead. Exhibit A, which hadn’t even occurred when Gates wrote that sentence, was the 1998-99 Internet bubble. His wisdom is on display again as traditional retailing melts down before our eyes. Macy’s announced yesterday it will cut 6,900 jobs on top of 3,200 already scheduled to be cut this spring – more than 10,000 in all, and it will close about 100 stores. Also yesterday, Sears Holdings said it would close 104 Sears and Kmart stores in addition to 46 previously set to close and 50 closed in the past 12 months. For perspective, the company had over 3,500 stores in 2011; in a few months it will have fewer than 1,500. Plenty of other major retailers – Walmart, Limited Stores, CVS – have closed stores or are planning to.

What makes all this activity disorienting is that the recent holiday season was excellent – total revenue up by the largest margin in five years. Yet retail analysts say we should expect plenty more store closings this year.

We all know the explanation: e-commerce, loudly hyped since the Internet’s dawn but only now crashing through the ramparts of big traditional retailers. Leaders can draw two broad lessons:

-As friction comes out of an industry, it might just get smaller. Digital technology reduces information costs, transaction costs, and switching costs in every business it touches, and that’s a problem for companies that make money on the friction. In retailing, that includes companies that profited because customers couldn’t easily find a better deal or get to a competitor’s store. Amazon is the world champion at taking friction out; no other company comes close, and Amazon is lengthening its lead. The industry’s overall growth rate could slow even as consumers keep buying more stuff – and get more value as friction comes out.

-Many retail leaders fell into Gates’s trap, and you could too. When e-tailing’s early hype proved unfounded, concluding that online shopping would be just a niche was seductively easy. Many retailers, in line with Gates’s observation, then underestimated what would happen in ten (or 20) years. It’s understandable; pursuing a vision that won’t pay off for a decade or more will be unpopular with investors and the board, and many top executives know they’ll be gone in ten or 20 years. But good excuses don’t prevent industry carnage like we’re watching now.

What’s the next-decade revolution you’re underestimating?

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