Marc Andreessen and Reid Hoffman recently debated whethersoftware would eat traditional retail, leaving no brick-and-mortar presence behind. Both articles noted that e-commerce is currently only 5 percent of retail in the U.S., while the other 95 percent is brick and mortar.
While Andreessen holds firm that e-commerce will completely overshadow physical retail, the debate missed why some industries will never go completely online.
Some industries will have a hard time competing as more consumers embrace online shopping, but some industries will do just fine. I have constructed a simple formula that can show that the magnitude of offline local commerce is likely to be larger than e-commerce for a long time. These calculations could have predicted that Amazon was going to do very well in categories like books and iTunes in music, but the $300 billion clothing industry is going to stay mostly brick and mortar for the foreseeable future, as are many service-driven local businesses.
One quantitative way to gain an understanding of which local businesses will be eaten by software and which will live on is to understand the local coefficient. The local coefficient (L) attempts to define how “local” each category of product or service must be, normalized on a scale of 0 to 1. You could even pick a number from 0 to 1 for each category (e.g. 0.2 for books, 0.9 for restaurants, 0.6 for clothing, etc.) based on your own intuition of how “local” it must be, but I tried to make the assessment more granular by breaking it down into three parts.