Shrinking to prosperity: The store closing delusion

Yesterday Radio Shack announced it’s closing 1,100 stores, nearly 20% of their total. Earlier this year, JC Penney took the axe to 33 units, amidst a rising call of analysts pushing for more aggressive real estate pruning. Sears has closed some 300 units across the last 3 years, including recent decisions to shutter its downtown Chicago and Seattle “flagships.”

For those pushing a shrinking to prosperity agenda, the rationale is that eliminating the weakest units in the portfolio improves overall productivity. Well, yes, that’s just math. Unfortunately you don’t make money on ratios.

They also claim that with the growth in e-commerce fewer stores are needed. While there is an element of truth to this, it ignores the vital inter-relationship between physical stores and digital channels. For the vast majority of multi-channel retailers the web drives store traffic and stores drive e-commerce. Close stores and you hurt your e-commerce business because your brand become less accessible, and therefore less relevant.

Now don’t get me wrong. If a company is hemorrhaging cash and the data show that a given location cannot be made cash positive quickly (including the effect on the digital business, net of closing costs), it needs to go. Marginal economics 101. And certainly with shifting populations, rapidly evolving consumer behaviors and changes in real estate conditions, there is always going to be a steady stream of real estate rationalization.

Yet the heart of the matter for all the retailers at the center of the store closing debate is this: their value proposition is not working. Unless you shift your business model to becoming more destination driven–or somehow more regionally focused–closing a bunch of stores is likely to make things worse in the aggregate. You lose economies of scale and scope. You become less convenient to your target consumers. Your brand visibility declines.

Brick and mortar retail is not dying. But it certainly is becoming different. Yet it’s not hard to find many examples of winning brands that continue to open plenty of stores (e.g. Walgreen’s, Michael Kors). In fact, in the face of all this talk about mass store closings, formerly e-commerce only players like Warby Parker and Bonobo’s are now opening physical locations. I guess they must be really stupid.

I cannot recall a single retailer that engaged in large-scale store closings in the last decade that is thriving today. Actually every one I can think of is either gone or gasping for breath.

For Radio Shack and Sears, the hacking of their store count signals that they don’t have a viable strategy to survive and that their store closings are more rooted in desperation and the desire to keep the wolf from their door. For Penney’s, if they are able to craft (and execute) a value proposition that fights and wins in the middle market–no easy task–chances are they can support more stores, not fewer. If they announce plans to cut more than 10% of their units, it’s likely the beginning of their slide into oblivion, not a sensible bit of financial engineering.

 

 

 

My Top Ten Blog Posts of 2013

As I take a break until the end of the year, here’s a recap of my top 2013 blog posts, in order of popularity.

1.   Neiman Marcus & Target: A glorious failure.

2.   JC Penney: Trouble on the home front.

3.   Math is hard, for JC Penney.

4.   Sears: The world’s slowest liquidation sale.

5.   JC Penney: Gloat edition.

6.   The multi-channel customer is your best customer. Duh.

7.   No pottery, no barn, no crates, no barrels.

8.   The world’s first omni-channel executive.

9.   Blaming the hole.

10. Silos belong on farms (redux). 

On a special note, my most viewed post of the year was actually from 2010. Fail better got a huge boost from being featured in Seth Godin’s Krypton course. Thanks Seth!

Thanks as well to everyone for reading my blog, challenging it, promoting it and just simply paying attention to my ramblings. It means a lot.

May you and those closest to you enjoy a wonderful holiday season.  Namaste.

 

 

 

 

Maybe it’s a fact

“If you have the same problem for a long time, maybe it’s not a problem.  Maybe it’s a fact.”

-Yitzhak Rabin

“Facts are simple and facts are straight
Facts are lazy and facts are late
Facts all come with points of view
Facts don’t do what I want them to”

Talking Heads, “Cross-eyed and Painless”

I’d wager that the vast majority of business failures are rooted in a profound denial of reality.  The demise or persistent flailing of Borders, Blockbuster, Sears–and many other current or future residents of the retail graveyard–stems largely from a lack of awareness and acceptance of the unassailable facts of shifting consumer behavior.

It’s far too easy to dismiss an industry upstart or new technology as a fad or hype, until it’s too late.  It’s common to worry more about protecting your turf rather than embracing a product or service for yourself that you fear “cannabilizes” your core.

Of course this is commonplace in interpersonal relations and communications as well.  I know I can be quick to defend my behavior when I know deep down I’m the one who made the mistake, I’m the one who needs to change.

The next time someone challenges your business or your point of view, maybe your first reaction shouldn’t be to dismiss or defend.

Facts may not do what you want them to.  But that doesn’t make them untrue.  Ignore them at your own peril.

 

JC Penney: Trouble on the home front

Ron Johnson’s tenure at JC Penney is the (horrible) gift that keeps on giving.

Amidst recent rumors of another CEO change, continuing Board drama and potential liquidity issues–not to mention the little challenge of pulling the core business out of its steep descent–now we have Johnson’s much vaunted Home strategy landing with a resounding thud.

And this blunder is, in many respects, the most misguided element of the “transformation”, the biggest opportunity wasted and the most vexing to fix.

The boldness of the new strategy was admirable: rip-up a chronically under-performing large section of the store, add new experiential elements, upgrade presentations and, most critically, bring in exciting, differentiating brands. Yet here too the misguided thinking evident in Johnson’s vision for the rest of the store is made abundantly clear.

After months of construction, tens of millions of dollars in investment and lots of hype, what we discover is a well-organized, beautifully designed space with lots of unproductive, poorly conceived merchandise. And don’t get me started on the Martha Stewart, Macy’s fiasco.

As I’ve opined before, at the core of Johnson’s erroneous strategy was trying to change Penney’s customer base too quickly. That huge miscalculation is evident in spades in the Home re-think. Brands like Jonathan Adler, Bodum, Conran and Ordning & Reda may have immediate recognition and appeal to some affluent consumers and design aficionados, but the notion that they would quickly be relevant to the Penney customer is simply nuts.

Even a brand like Michael Graves, which certainly had some success at Target, might be expected to convert reasonably well at the outset, but it’s hard to imagine it has much drawing power in the grand scheme of what is desperately needed.

Aside from these broader strokes, there are many major tactical blunders. The Bodum shop is a case in point. While the section is distinctively and attractively presented, much of the product is way too expensive. Did somebody really think many people were going to buy $200 coffee makers at Penney’s from a brand they’ve never heard of?  Other choices would be funny if they weren’t so costly. The Bodum shop (and website section) seems to believe the world is ready for a French press revolution. Maybe Williams-Sonoma or Sur la Table can lead that movement, but at Penney’s it’s just a big mark-down waiting to happen.

The Happy Chic by Jonathan Adler shop is also eye-catching, but the product assortment is way too specific to have the impact and productivity it needs. The Michael Graves and Martha Stewart shops are filled with a bunch of random stuff at odd price points.

Throughout the rest of the home section there is ample evidence of Johnson’s specialty store strategy taken too extremes. Some product is just too expensive for Penney’s core (Conran), some product is so narrowly focused in design point of view it can’t possibly be productive or contribute to a coherent view of Penney’s desired positioning.

Another issue throughout much of the new areas is lack of product density. The design does a nice job of showcasing product, but it’s Retail 101 to be mindful of having enough product and enough transactions to give yourself a chance of being profitable on the space. At Apple this “negative space” mentality works when you have strong traffic and products that cost hundreds (or thousands) of dollars.  But when one is selling $15 picture frames, $20 throw pillows and $3 dinner plates, well, not so much.

The investment in space for product demonstrations, design advice and customer service is just sad. It’s clearly an expensive exercise in productivity drain and customer irrelevance.

Some Wall Street analysts have been acknowledging the serious problems with Penney’s home business, but minimizing its magnitude because home represents “only” about 12% of revenue. And given the damage that’s been done to the rest of the business it’s fair to say that in the immediate term it’s hardly the #1 priority. But that misses the broader point.

Let’s remind ourself that prior to the Ron Johnson fiasco, Penney’s did not have a sustainable long-term strategy and plays in a retail market sector that’s been growing slower than inflation. They need a ~30% sales increase and vastly improved margin performance just to get back to where they started pre-Johnson. That means that all aspects of the store have to work. It’s also important to note that the Home store represents more than 12% of the space, and even though Penney’s has a huge opportunity in e-commerce, the reality is that today they have a relatively high fixed cost business and there is tremendous financial leverage in making the brick and mortar Home business productive.

For any department store developing top-of-mind preference and driving cross-shopping is paramount, so success in Home–or any department for that matter– is about more than traditional financial mechanics.

The most vexing issue of course is what does new (kind of) CEO Mike Ullman do now? In the immediate term he’s been focused on the right issues: trying to pull a rabbit out of the hat for the Fall season, driving more urgency and impact through promotions and creating near-term financial flexibility.  And to be fair, it will really be the Spring season before we can get a good read on whether Penney’s is getting any real traction on un-doing the mess that Ullman re-inherited.

Unfortunately for Penney’s the home category may well be the hardest and costliest piece to fix. Going back to where they were (which is largely the path they are now on for the apparel business), is not a viable option. More investment will be needed, either to build consumer interest in the new brands while they evolve the assortments, or to re-envision the space to be consistent with whatever JC Penney 3.0 turns out to be.

Regardless, a few things are clear. First, there are no easy or quick fixes. Second, immediate concerns over leadership (CEO and Board) and liquidity aren’t making the task any easier. Third, and most critically, for Penney’s to claw back lost market share and have any chance to fight and win in an intensely competitive omni-channel world, patience, new thinking and significant investment will be required.

Let’s hope they get that chance.

 

Become a curve ball hitter

If you ever played baseball at any competitive level–as I did many, many years ago–you know that there comes a time when succeeding as a pitcher becomes less about throwing hard and more about mastering different pitches. In particular, you must learn to throw a curve ball.

Now I was never a pitcher (well, except for one brief shining moment at the age of 11. Glory days, yeah they’ll pass you by…), but as more and more pitchers figured out how to throw an effective breaking ball the implication for me was clear. I needed to learn how to hit it.

This took concentration. This took practice. This took perseverance. And along the way there were plenty of embarrassing times when I went down swinging, completely fooled by a pitcher’s improving delivery.

In your business you’ve probably noticed how quickly the world changes, how your competition continually ups their game, how what once worked well for you no longer gets the job done.

Here too the implication seems clear.

When life throws you more curve balls, you must learn to become a curve ball hitter.

 

 

 

Honey, I shrunk the store

Until Amazon–and a handful of other pure-play concepts–emerged as power-house brands, a retail growth strategy largely consisted of two major components: build bigger stores and create a bigger retail footprint.

Whether you were Walmart, Office Depot, Coach or Lowe’s, your strategy was mostly about pushing the limits of market dominance: expanding your assortments to cover every related purchase occasion and expanding locations to cover every trade area perceived to be viable.

Then digital happened, and if a large part of your product offering could be delivered without the need of a physical location (think Best Buy, Blockbuster or Borders–and that’s just the “B’s”) this has proved to be a big problem indeed.

And show-rooming happened, and if you were in categories where the consumer likes the research service found in a brick and mortar location, but ultimately buys on price, you were losing a lot of business to direct-to-consumer players not burdened by your overhead structure.

Then there’s the emergence of omni-channel retailing, and if you aren’t making it frictionless for your customer to shop anytime, anywhere, anyway, you were losing share to those who have truly embraced customer-centric retailing.

Last, but not least, the recession happened, and many of the consumers you were counting on–you know, the ones that had become weapons of massive consumption fueled by easy credit–suddenly pulled back big time, and many of the locations you opened in the last five years or so are dead in the water.

So for most, it’s time to shrink.

Fewer, more productive stores. New, smaller formats that resonate more strongly with today’s blended channel realities and that can work in different kinds of trade areas.

But if you think getting smaller is just about physical space, think again.

When you think smaller, think more intimate. Become more personalized, more intensely relevant. Treat different customers differently.

In the future the customer shouldn’t walk away from interacting with your brand thinking that you have down-sized. They should feel that you know them, you get them and that your brand was built with them at the center of all that you do.

Understanding your brand’s ecosystem

Your brand, if it has any depth or breadth at all, can be seen as an ecosystem of sorts–an inter-related set of processes, relationships and perceptions that ultimately determine its relevance and health.

When you don’t see your brand as an ecosystem, and neglect to accept how you must co-evolve with your customers while fighting off hostile organisms, you miss emerging problems and nascent opportunities.

Witness Sears. When I joined in 1991, major appliances and home improvement products were king, defining the brand for most consumers and contributing an overwhelming majority of profits. Until Home Depot and Lowe’s emerged as major competitors the ecosystem we played in was a relatively straightforward one. Your appliance breaks, you get a new one. You need to hammer a nail, tighten a screw, cut some wood, we had the Craftsman tool for you.

Of course, the customer was always solution focused: as the old adage goes, you don’t buy a drill because you really want a drill, but because you really want a hole.  When new brands emerged to address a broader set of needs, consumer wants became articulated as home solutions–kitchen remodel, new home construction, DIY projects and the like.  The Sears (and Kenmore and Craftsman) brand needed to evolve as well. But didn’t.

During the nineties we worked hard to improve within our narrowly defined ecosystem (existing product focus, mall-based distribution), rather than see how the ecosystem was evolving. If we had truly understood and accepted the evolution of the ecosystem we had dominated for years, it would have been clear that we HAD to be in the home improvement warehouse business.

You know how this has played out. The fundamentally stronger organisms began to win out. Sears’ failure to participate meaningfully in the evolved ecosystem has doomed them to mediocrity at best; eventual demise in the most likely scenario.

Sears is just one high-profile case, but there are many other brands that have become extinct or largely irrelevant by neglecting to truly understand the ecosystem in which they live. Or die.