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Know your niche, know your customer

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The explosive growth of niche retail has been fuelled by demographic, cultural, economic, and technological factors, and it is still only in its infancy.

While the days of the mass market merchant are not yet at an end, the broad scale offerings of department stores, supermarkets and ‘big box’ retailers have now been augmented and in many cases supplanted by niche retailers tapping into very specific marketplaces.

The trend towards niche has been around for several years now and continues apace in the light of online commerce gaining further traction, especially with the increased popularity of two-sided marketplaces focused on niche lifestyle categories.

An IBISWorld report from 2014 signalled this development, with IBISWorld analysts forecasting that niche retail industries will outperform the wider retail industry in the five-year period up to 2019.

“Retailers are undergoing one of the biggest transformations in the industry’s history. As our disposable incomes increase, our tastes and buying behaviour change too,” said IBISWorld Australia general manager Mr Daniel Ruthven.

“In many areas of retailing, the industry is fragmenting. Fast fashion business models, which have been harnessed particularly well by overseas retailers, are benefiting from our desire for up-to-the-minute and affordable fashion. Luxury retailing has been buoyed by Australia’s relatively stable economy, high disposable incomes and increasingly discerning consumers,” Mr Ruthven said.

This trend towards niche was identified clearly in a PricewaterhouseCoopers and TNS Retail Forward report released in 2007.

The report, titled Retailing 2015: New Frontiers, singled out the opportunities presented by niche markets as one of the greatest challenges the retail industry would face over the next decade: “The challenge for retailing in 2015 will be to manage complexity and diversity businesses that span the globe while reaching out to the niche of one.”

An even earlier prediction of the evolution towards niche markets was penned by Chris Anderson in 2004, Wired magazine’s editor-in-chief at the time, with his Long Tail theory, which outlined the coming dominance of niche consumerism.

The theory of the Long Tail is that our culture and economy is increasingly shifting away from a focus on a relatively small number of “hits” (mainstream products and markets) at the head of the demand curve and toward a huge number of niches in the tail. As the costs of production and distribution fall, especially online, there is now less need to lump products and consumers into one-size-fits-all containers. In an era without the constraints of physical shelf space and other bottlenecks of distribution, narrowly-targeted goods and services can be as economically attractive as mainstream fare.

Marketplaces such as Bike Exchange, launched in 2007, have been able to tap into this shift, which has allowed niche retailers to scale their business into global marketplaces – selling to more customers – while maintaining a deep focus on specific categories and developing even stronger relationships with customers through shared communities of interest, fostered increasingly through content and social media engagement.

As the PwC-TNS report presciently stated: “Niche concepts will flourish on the Internet, benefiting economically from an environment that effectively aggregates far-flung, widely dispersed, even global demand.”

The example of Bike Exchange shows the strength in specialisation (felicitous coincidence perhaps that one of the best-known bike component manufacturers is called Specialized) retailers in a niche field have when they connect to a community of consumers driven by a particular passion, in this case cycling. The bond is further cemented by the existence of an established marketplace that caters especially for cyclists.

The evolution to niche marketplaces is still only gathering pace, as consumers continue to identify their specific needs and wants in relation to specialised interests; as retailers recognise these consumer demands; and the next phase in this development, as marketplaces bring the two even closer together in shared communities of interest.


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