The retail sector is exceptional for me in that my personal view of its future and success factors is something completely different from what many investors expect or what is discussed on these forums.
I believe a paradigm shift is very likely. There are major questions in the retail sector that operators often do not take a stand on—yet they are trends whose occurrence is highly probable, and even necessary.
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Overconsumption is perhaps the most difficult topic for retail. In almost all categories, global production is higher than ever. For clothing, for example, 100 billion garments are produced for 8 billion people. Do we really believe that volumes in different product groups will continue to grow from here? That in Finland, for instance, instead of the current 38 garments per year, we will eventually buy 45 garments per person? The outlook for mass-market fashion does not look good to me.
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Retail’s silent structural change, which traditional retail is not currently monetizing, and as a result, is losing its grip on customers. Retail faces a strategic challenge in how to participate in major structural and faster-growing trends, such as extending product lifecycles (value chains for second-hand trade and growing peer-to-peer exchange, lending, and repair). Retail’s current ERP systems, warehouse automation, or other processes do not support participation in any of these. If retail is not involved, someone else will take the fastest-growing part of the business. This is now happening at an accelerating pace as “replacement rates” for second-hand goods grow (i.e., the proportion of 2nd hand purchases that completely replace buying new).
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The trend toward marketplaces continues, with no end in sight. Every operator is looking for the most direct route possible to the end consumer, and removing middlemen is a clear business goal everywhere. For example, marketplaces that bypass importers and the cost structures of physical stores (e.g., the rapidly growing Shein and Temu) also have a competitive advantage legislatively, as they are free riders regarding many responsibilities. Technology also supports this development trend, but on the other hand, it will be cooled by tightening global regulation of the “junk trade.”
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EU regulation. The Commission is determinedly promoting the digital product passport. As it becomes mainstream over time, the hardest hit will fall on the lowest price categories and all kinds of junk. Tokmanni has an average gross margin of about 35%, to which many general merchandise categories contribute significantly higher figures—in clothing, for example, easily 60–70%. Thus, the digital product passport will specifically affect the product groups with the highest gross margins in general merchandise retail, such as textiles and many household items, where the share of private label products is also high.
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Idle capital and the circular economy in different parts of the value chain. People have more stuff in their closets than ever. As the circular economy becomes mainstream, consumers’ “goods balance” may start moving more fluidly, and secondary markets will grow. It has been predicted that as Gen Z’s purchasing power grows, the second-hand market will multiply by 2030. Second-hand marketplaces and operators also have a growing amount of data and a nearly ready-made machinery, which enables unique positioning over time if industry players want to expand into the trade of new goods using a so-called hybrid consumption model.
Not all of these developments will necessarily happen, but there are significant probabilities for all of them to materialize in some form.
Ps. Attached is a recent statistic from the Finnish Commerce Federation (Kaupan liitto) on the growth of discount retail (the discount retail chart includes 33 industry operators). Personally, I do not believe the development of discount retail will continue linearly from here into the future.
