09 September 2014

Will local come back ?

Is the age of the local services company over? Outsourced call centers, online help tickets and IVRs have been around for decades, but the progression towards centralized support has now moved into the once untouched neighborhood service provider. Rapid consolidation and the introduction of technology into fragmented service industries have brought about some positive changes, but has the pendulum swung too far the other way? Or is Joe the Plumber on his way out?

To be sure, many of the local businesses you normally frequent are consolidating at a fast clip. Local auto repair concerns like Service King, for example, have been recently purchased by PE firms with large expansion plans. The last three pest control companies that serviced my house have all scooped up by Terminex, a subsidiary of publicly traded Servicemaster. Even the local medical providers and lawn care concerns have become targets of consolidators. All of these companies employ similar playbooks: cut costs, centralize functions, and grow a small menu of highly controlled services into new locations. In many instances, even if customers want more beyond the 800 number, there are very few options on the table.

Walmart and Amazon has trained us to think that only price matters. Big business wins when we as a society expect no frills, price matching, and a ubquitious customer experience. I think this is helpful for some things, but not all of it. Today’s airline experience is very uniform - it sucks. Online shopping has gained mass adoption in commodity items, but still only represents 8% of total retail purchases. People still stop at local stores and want customized solutions and local touch points.  There is probably a finite saturation point.

Many of the big entrants try to delicately balance the best of both worlds. Whole Foods has done a good job of localizing their stores to cater to its serving area. Nordstroms and Best Buy have been successful at an omni-channel solution brings both the power of scale and good customer service. But local players are responding using similar playbooks as evidenced by the emergence of multi-location local restaurants and retailers.

But the current trend is real.  A recent study conducted by HBS highlights, for the first time, the diverging performance of small business compared with its larger peers in the most recent economic turnaround. Simply put, big business is taking market share and jobs away from small business. However, I think there are cyclical trends at play here and pockets of the small business sandbox that wont't get "rationalized." As I like to say, Dallas has cheaper food at the chains, but I don’t mind paying extra for the PHD wait staff at Shady Grove.

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