The biggest change in our markets over the last 40 years is that the classic business school model of the Product Pyramid, typically built on top of the similarly entrenched Demand Curve, is crumbling before our very eyes. In its place, we are seeing an entirely new Hourglass-shaped model emerge.
Here’s what is happening. The top of the Pyramid, traditionally focused on rarified, high-margin, low-volume products and companies, has been growing like crazy for the last decade or so. Meanwhile, the base of the pyramid, typically full of low-margin, high-volume businesses and their products and services, is also widening and spreading out. But the middle, where most of today’s companies sit, is disappearing faster than many of us can count to three. Companies and products in the middle of the old product pyramid are battling to survive. Many are shrinking slowly but surely, while others are disintegrating dramatically or are already bankrupt.
At be radical we have been studying this trend for years now and coined the term “Hourglass Economics” to describe this massive shift in markets. We have gained a detailed understanding of the core factors leading to this development and created a framework to help companies not only understand this shift but capitalize on it. In essence: The winning companies at the bottom are deeply vertically integrated to leverage enormous economies of scale and scope. Companies at the top of the hourglass serve niche markets (differentiated products for specific customers) and do so, typically, with very low overhead. Outsourcing is the name of the game for these companies.
The two first paragraphs of this briefing are from a book which we have nearly finished and were ready to publish.
And then COVID–19 happened.
The pandemic is wreaking havoc on many aspects of our daily lives and business as we know it. And it is pouring gasoline into the fire that is ripping through the B2C landscape; accelerating the trend toward a fat bottom, blossoming top and disappearing middle.
At the moment we are witnessing the swelling of the bottom — at the expense of the middle: Online retail giants like AMAZON, Instacart and Walmart can’t hire workers fast enough to fulfill demand. Small, specialized retailers are suffering but find solace in their loyal customer base, their typically low cost-base and agility. We spoke to many specialty retailers across the US who all see their online sales soaring with customers turning into fans. Brand loyalty is strong and consumers continue to look for authentic brands providing differentiated products. Meanwhile malls and their key tenants, the eponymous department stores, are dying faster than some presidents can tweet.
We always looked at retail as the “canary in the coal mine”: The early indicator for things to come. And we see the acceleration of the hourglass hitting sector after sector: From services, to products to experiences — the bottom provides cheap and good, the top a niche experience and the middle… the middle just disappears.
This trend is further accelerated by the mandated closure of small- and medium-sized businesses (hitting the middle harder than the top as the top can, and is, acting fast and shifting to eCommerce and delivery/pickup or an online delivery of their services). Combine this with a crumbling global supply chain — one where you either need to be big enough to make things happen or small enough to be nimble and agile, and you have the perfect storm.
Without a doubt it is a worrisome trend as most of the economic activity for the last 50 years was in the middle. And yet an opportunity for everyone who knows how to either go up or down the hourglass. Just don’t stay in the middle.
Pascal and the be radical team
P.S. Stay tuned — we will run a radical Learning Exchange on Hourglass Economics soon.