Metaverse and Physical Retail

Rendering the built environment into information and transaction costs

Existing information systems

At the beginning, culture and language shaped our reality. Wonders that awe us as a child are mapped to culturally validated words. Stories which string together these words translate and order raw reality by converting our experiences from one form into another. Conventions and social organisation thus emerge, coalescing into culture and other larger mythological and sociological structures. In other words, culture and language are humanity's first information system. 

With writing, the sacred written word which constituted foundational religious texts became the new cognitive foundation, the new information system. The advent of the printing press and rise of literacy more effectively democratised information. Books and pamphlets, and a whole system of vernacular public discourse, could compete with and replace the learned scholastic hierarchy. 

If television produced the global village, the internet produced the global psyche. Not unlike the palantír in Tolkien’s “Lord of the Rings”—the “seeing stone” that lets the wizards see the entire world. Nooks and crannies, previously unexplored, could now be rendered into information. The act of seeing, and being seen, has been accelerated by smartphones. Our lives are increasingly rendered into legible information. 

Metaverse as an information system

What is the metaverse even? Depending on who you ask, definitions differ. Matthew Ball, one of the leading theorist of this developing space, refer to the metaverse as "a massively scaled and interoperable network of real-time rendered 3D virtual worlds that can be experienced synchronously and persistently by an effectively unlimited number of users with an individual sense of presence, and with continuity of data, such as identity, history, entitlements, objects, communications, and payments." This is a dramatically higher standard than anybody might have access to today. As technology prowess and uptake is likely to vary dramatically across the planet, it is more plausible that the version we experience will not be a homogeneous experience. 

The given definition may give us a sense of what to expect, but let's take a step back. Without going into specifics, what if we simply think of the metaverse as the next instantiation of the internet, as the next information system? Even if we may not know what to expect, solely focusing on the informational aspect of the metaverse provides us with a useful framework to begin theorising about the metaverse, instead of getting caught up in the trenches of what it constitutes. For thinking about the metaverse along this line allows us to better map how it extends or amplify certain existing trends, and how it similarly causes a reversal (a reflexivity of sorts).

At its limit, metaverse, as the next information system will drastically unleash the fertile depth of our imagination by providing us with the tool to explore it to the fullest. Imagine how visceral any experience will be if our best artists' wildest dreams and fantasy could be yours to witness and partake in. Because it would be possible to render these previously recessed thoughts into information and a participatory medium which engages more of our senses. Instead of relying on our imaginations for the felt sense of participating in a story, we may want to flit in and out of the author's vision of what its mythical world is like (now available as a full body experience with that tactile suit), or further supplement it with commentary by other leading luminaries. Books, or even films, as informational systems are fundamentally less gripping mediums of informational transmission. The metaverse is arguably at the furthest limit of any informational transfer, for it can potentially engages all of our senses simultaneously; at least until the arrival of mediums which begin to interface with our neural circuitry. 

Mass-produced books narrowed the informational asymmetry between people separated by miles and miles of divide. Smartphones introduced the library of Alexandria into everybody's pockets. Yet, the knowledge transfer remains incomplete - there remains intellectual dark matter, such as the tacit knowledge that has yet to be conveyed. In place of the smartphone, the metaverse will likely shepherd the dawn of an instantaneous information society. What kind of world will arise from that? Consider for instance, Chobani, Meta or Keiichi Matsuda’s take. 

Metaverse and Physical Retail

Enter Ronald H. Coase. He won the Nobel prize in 1991 for the discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy. 

Let’s do a brief trace of the past. R.H. Coase pointed out that village fairs and markets in medieval England were set up to provide merchants with physical facilities, security, and a court for settling disputes under a franchise from the King himself. Why couldn’t each merchant simply set up a stall wherever he or she liked and start selling? Because it was too expensive to “advertise” across the sparsely populated countryside, for there was no way to verify the credit or trust-worthiness of the customers around. To add to that - the threat of theft with the presence of bandits and thieves. In other words, information to widely and safely transact was sparse, and therefore, transaction costs were high.

Modern department stores emerged precisely in response, bundling goods and services in a way that provided high-quality information, thereby lowering transaction costs. In essence, a physical retail space is a platform to facilitate transactions between sellers and buyers. With department stores, retailers did not have to oversee the sourcing of a location or the build-out of the entire shop. Likewise, consumers benefited from the clustering of retailers as they could compare prices and understand the market. Information flows were accelerated through the clustering of shops that altered how people shopped.

This particular configuration was disrupted by the proliferation of vehicles and the rise of the suburban mall. Fundamentally, cities are shaped by the transportation costs that are dominant in the era in which they are created. This explains the walkability of old European cities and how dense they are. The attainability of personal vehicles for the working class proliferated its existence and drastically reordered our expectations by drastically changing the transaction cost of traversing the city. Gone are the constraints of physical proximity. Retail stores no longer have to be within walking distance from each other to ensure a stream of customers. This birthed new urban forms like the suburban strip malls situated at the outskirts of the city. 

The instantaneous feed of information provided by the metaverse will mean that all forms of physical reality have to accelerate in response, intensifying our demands on the built environment. Undifferentiated and uninspired spaces (also known as junkspace according to Rem Koolhaas) will be further left in the dust as consumers actively seek out tailored and customised ones. We already see this in the rise of design-focused malls with curated tenants to improve footfall. See Showfields, Simon Property Group and CapitaLand, where landlords move beyond the mere provision of commoditised retail space to potentially equity partners in supporting business success within their spaces. Physical retail’s death has also been greatly exaggerated - with brick-and-mortar commerce still representing 84% of total sales in the US in 4Q 2022. Even China, with the option of same day delivery, has the figure at 72.8%. It seems that the common mental picture of a e-commerce tide that consumes the commerce landscape is still a fair distance away. But how may this go further? Consider unmanned stores equipped with a metaverse-augmented experience such as a virtual assistant that promise a much higher quality of service through a white glove service. We have already seen the possibilities of ChatGPT in responding to our enquiries.

Supplanting manned stores with unmanned ones will significantly alter the economics of operating within the built environment by reducing the marginal cost of operating storefronts, thereby moving the unit economics closer to that of tech. Consider the existing landscape, where any physical storefront comes with a fixed cost in terms of the number of employees that has to man the shop. If this component is significantly reduced, scale starts to matter as the marginal cost of operation begins to reduce. This is not unlike software companies today, where the marginal cost of onboarding an additional customer is minimal since the bulk of the cost goes into the upfront development of the software. Retailers may find an increasingly large proportion of their cost shifted towards the development of a metaverse experience, at the expense of any retail employees. With this possible shift, the value of a physical space becomes dependent on how, and to what extent it is integrated within a larger digital ecosystem. Think of how cloud kitchens are only valuable as an integrated component of the food delivery ecosystem, and would have little standalone value. 

What if the digital turn becomes more important than our physical reality? It is not unheard of for NFT holders to base their core identity around the digital ownership of a Bored Ape Yacht Club. The act of buying followers or going to expensive parties or festivals just for social media photos is already a manifestation of the idea that digital appearance is a form of capital and worth spending money on. If online consumption feels more consequential than physical consumption, that is where resources will be funnelled. Physical reality could find itself being abandoned, turning into a ghetto due to a brain drain towards the digital plain.

Without indulging in dystopian scenarios, let’s look at the development of the existing retail landscape for a sense of what may be around the corner. The good news so far is that even the biggest online retailers have realised that they need physical space. With the saturation of the online marketplace, companies have realised that the customer acquisition cost (CAC) might be lower with a physical storefront, in place of trying to stand out amidst the sea of competitors on facebook or instagram advertisement. Consider Dirty Lemon's honour-system store or Amazon's introduction of two-hour deliveries. The latter's deliveries are based out of branches of Whole Foods, a grocery chain Amazon acquired in 2017. Whole Foods branches also double up as pickup locations for non-grocery items purchased online on Amazon. What were natively e-commerce brands, such as Glossier and Everlane, have also swung back into the physical world with the realisation setting in that it is (counterintuitively) harder to sustainably scale a brand through ecommerce alone (omni-channel, baby!). The economics of physical retail remains difficult to replicate or entirely replace - in-store customers are far more profitable than ones that shop only online: they spend 83% more and return 64% less.

Fundamentally, the existing landscape of physical retail emerged according to a set of transaction costs that pertains to information - the high costs of finding customers or retailers, and the trust necessary to transact and to honour the sales. These transaction costs are increasingly made redundant as the metaverse and other online platforms gain traction. What will the physical retail landscape look like? Only time will tell, but it may be safe to say that it is likely to see greater changes in this arena compared to other aspects of the built environment, such as in housing, which has to conform to our existing living patterns which are less subject to fundamental shifts.