Change is the essence of capitalism

Back in 1942, Joseph Schumpeter popularised the idea that creative destruction of economies, and/or sectors of economies, was critical to prosperity and growth. He posited that progress in a capitalist system relied on the destruction of an existing economic order to make room for the next. Capitalism was, essentially, an evolutionary process of continuous innovation.

Agents of this creative destruction range from the opening up of new markets to revolutionary technologies like steam engines, electricity, the combustion engine, and the internet.

Right now, creative destruction is very evident in retail as more and more shopping moves online. Businesses with old fashioned bricks and mortar models, like the book seller Borders or clothing retailer Fletcher Jones, are history, while mainstays like David Jones and Myer are playing catch up in a game with all-new rules.

But these guys are not alone. The rise of online shopping has caught many other major retailers by surprise. It was only six years ago that one such retailer, let’s call him Norman Harvey, assured investors that the internet would never significantly impact his business. After issuing those words of wisdom, he persevered with selling flat screen TVs, mobile phones and appliances over the counter. The rest is history.

With capital now moving into the next wave, and away from these “old models”, we have a classic example of creative destruction. Old, inefficient businesses are being outsmarted by new, better, more innovative business models, unshackled by bricks, mortar and leases.

Added to this structural change in how we shop is a growing frugality amongst consumers who are putting more of their disposable income into debt reduction and less into keeping up with the Jones’s (see Is savings the new black?). Recent RBA figures show that over the past year the average credit card limit only grew by 0.7%—the lowest figure in 20 years.

If you’re reading this and you’re in retail, I feel your pain. The only consolation I can offer is that if you can survive, you’ll be one of only a handful left standing.