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Can Blockchain Save Struggling Retailers?

By Sean Williams - Updated Feb 5, 2018 at 4:38PM

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Could brick-and-mortar retailers revive their businesses with the help of blockchain and an initial coin offering?

As an investor who's on the outside looking in, I can truly say that the cryptocurrency market has been something to marvel since the beginning of 2017. Last year alone, the market cap of all digital currencies added together surged higher by more than 3,300% to $613 billion. It then vaulted higher by another $222 billion in the first week of January 2018 before finally cooling off a bit. Still, the increase in value for virtual currencies would have otherwise taken the broad-based S&P 500 decades to accomplish. It's been unlike any asset class we've ever seen.

Ushering in the era of blockchain

At the heart of this rally is blockchain technology. Blockchain is the digital, distributed, and decentralized ledger that underpins cryptocurrencies and is tasked with recording all transactions without the need for a financial intermediary. In plainer English, think of blockchain as the foundation upon which virtual currencies are built upon.

A person touching an encrypted block on a digital screen that's part of a larger encrypted blockchain.

Image source: Getty Images.

The evolution of blockchain derives from a number of perceived flaws with the current banking system, such as having banks act as a third party in all transactions, and potentially taking days for payments to settle, especially if they're sent across borders. The purpose of blockchain is to reduce transaction costs, while expediting the settlement of transactions without sacrificing security.

The first advantage of blockchain is its decentralization. Rather than storing transaction data at a single location, this information is found on hard drives and servers all over the globe. Doing so prevents a single entity or hacker from gaining control of a network and virtual currency.

Second, there's the expectation that transaction fees could decline. Since there is no bank involvement with blockchain-processed transactions, there are fewer mouths to feed, so to speak.

And most importantly, since blockchain transactions are being proofed 24 hours a day, seven days a week, the settlement time for many of the hottest blockchains is a few seconds to perhaps a few minutes. This would knock the socks off of traditional banks that can take up to five days to verify cross-border transactions.

In short, blockchain could offer sweeping improvements to the financial services industry. However, its application may go well beyond currencies.

Could blockchain save struggling retailers?

The application of blockchain technology is currently being tested in the logistics, healthcare, energy, and retail industries, all with unique purposes.

Boxes on conveyors waiting to be shipped out.

Image source: Getty Images.

You see, blockchain data is considered immutable, which is just a fancy way of saying it can't be changed or altered. Blockchain ditches clumsy paper documents and digitizes things to make them more efficient and legally binding. Hospitals like the idea of blockchain, since it could mean a safer place to store health records, while the logistics companies could consider blockchain as a means to more efficiently and transparently track the location and performance of goods through a supply chain.

But among the aforementioned industries currently piloting blockchain projects, it's retail -- specifically brick-and-mortar retail -- that could have the most to gain.

First, retailers would be able to take advantage of the efficiency and transparency of blockchain-supported supply chains. Being able to track a good from the factory to the store would allow that retailer to precisely pinpoint where things are going wrong (if they're going wrong). It may also act to reassure consumers by noting the specific region or country where a product originated, and maintaining records of certain quality specifications a product may have undergone during its manufacturing process. This added transparency could be the trick that allows brick-and-mortar retailers to lure consumers away from the impersonal, but often cheaper, internet-based shopping experience.

The other possibility here is that a tethered cryptocurrency could be created and used in place of a current loyalty program to create a value-based rewards system that keeps consumers coming back. In other words, remove the current loyalty programs that can result in adverse errors for a business (e.g., extra rewards handed out to consumers), and implement a virtual coin-based reward that can only be redeemed within a store or chain of stores.

A Sears storefront.

Image source: Sears Holdings.

These retailers might be able to use blockchain and cryptocurrencies to their advantage

Recently, a report from ValuePenguin examined a number of retailers that could consider an initial coin offering to create a loyalty program that would boost foot traffic, consumer interest, loyalty, and even investment in the brand.  Topping its list was struggling retailer Sears Holdings (SHLDQ).

Sears has more than $4 billion in net debt, has closed hundreds of its Kmart and Sears locations to reduce its cash burn, and has on multiple occasions borrowed directly from its CEO, Eddie Lampert. Adding fuel to the fire, Sears jettisoned nearly all of its rights to the Craftsman tool brand to Stanley Black & Decker, and last summer it agreed to sell Kenmore products on, the e-commerce giant that's effectively killing Sears. But an initial coin offering could buy the struggling retailer more time to figure out how best to transform its business.

Creating a "Sears coin," or whatever it would want to call it, could potentially replace some the steep discounts it has been passing along to bring consumers into its stores. By instead offering coins with each transaction, and perhaps stepped-up coin values based on the size of the transaction, Sears could create its own "currency" that consumers could then come back and spend. Plus, it eliminates the hassle on the employees' end of having to keep track of these virtual coins, as the blockchain data would be immutable.

Another potential beneficiary is video game and accessories retailer GameStop (GME -1.22%). Though GameStop is in far better shape than Sears and remains very profitable, all things considered, it's expected to continue losing ground to streaming gaming services. The days of buying hardware and physical CDs may dwindle further, pressuring the brick-and-mortar gaming model that it's built. Though GameStop has pushed solidly into digital gaming, it's still a somewhat small percentage of total sales. A blockchain-backed gaming coin, however, could flip its fortune.

A group of teens holding their controllers and playing video games.

Image source: Getty Images.

Just thinking off the cuff here, GameStop could reward customers who purchase new titles with virtual loyalty coins that can be used for in-game software upgrades and accessories. It could also choose to provide virtual coin bonuses for used games, which have traditionally been high-margin bread-and-butter for GameStop.

The big blockchain question yet to be answered

The real issue at this point is whether blockchain is ready for real-world application. It's undergone plenty of demos and small-scale tests, but it's an unproven technology on a large scale. There's also the issue that the barrier to entry in blockchain is pretty low, meaning today's top-tier networks could become obsolete overnight.

It wouldn't surprise me one bit to see retailers leapfrog the financial services industry in using blockchain on a broader scale. However, I'm worried that by the time blockchain is ready to make that leap, many of today's struggling brick-and-mortar retailers will have succumbed to the Amazons of the world and crumbled to the ground.

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