Building Luxury Loyalty – Ditching the One-Size-Fits-All Strategy

I recently became Colloquy’s luxury retailing contributing editor.

As you may know, Colloquy is the go-to resource for loyalty intelligence with a publishing, education and research practice that brings together more than 50,000 loyalty practitioners from around the world. Colloquy is a division of Loyalty One.

Check out my first column by clicking on: Building Luxury Loyalty – Ditching the One-Size-Fits-All Strategy.

 

Neiman Marcus & Target: A glorious failure

“Ever tried. Ever failed. No matter. Try again. Fail again. Fail better.”

-  Samuel Beckett

If you pay attention to this sort of thing, you know that several months back Neiman Marcus and Target made a big splash when they announced a partnership to jointly market a limited collection of fashion items for the holidays. This announcement was followed by a lot of PR hoopla and a high-profile television and social media advertising campaign.

And guess what? It was a bust.

The product offering failed to generate the sales frenzy that past designer collaborations from Tar-zhay have, and the merchandise has been marked down 50 – 70%. The media are now out with their post-mortem bashings, many taking the “I knew it was a bad idea all along” route.

Having previously led strategy and corporate marketing at Neiman Marcus for several years, I’ve gotten plenty of questions about my take on the strategy and its execution (NOTE: full disclosure, I remain a Neiman’s investor). Frankly, I think much of the criticism misses the mark entirely.

Clearly, a lot of the execution was messed up. Prices were generally too high, designer brands were extended too broadly and some of the product was just plain goofy: a $50 Rag & Bone boys’ sweater? That was never a good idea.

Big picture, however, the concept was fundamentally good for both Target and Neiman’s. Target is well-known for enhancing its fashion cred with such partnerships; so for them, this was a no-brainer. If they made any money on it, all the better. But the real value is in brand enhancement.

For Neiman Marcus, the strategic value may be less obvious but, in essence, their foray into “mass-tige” is no different from Karl Lagerfeld or Jimmy Choo doing their special offerings at H&M. The goal is to generate buzz and expose their brands to a demographic that they need to cultivate for the long-term. Forging a longer-term and/or more broad partnership would be dumb. But experiments, such as what was tried here, can be shrewd moves indeed.

Which brings me to my last point. What gratifies me the most is that Neiman’s actually tried something bold and, arguably, counter-intuitive. Neiman Marcus’ last CEO–and my former boss–Burt Tansky was a brilliant merchant and remains a luxury and fashion industry icon–and rightly so. But he was hardly a risk-taker and fundamentally not wired to say ‘yes’ to strategic innovation. Kudos to Karen Katz and her team for being willing to push the envelope.

It’s so very easy to label something a failure after the fact and to castigate management for its ineptitude. The far easier path for leaders of course is to never try. You rarely get criticized for the things you didn’t do.

It’s a terrible strategy to eliminate the possibility of failure. Great companies and great leaders are not characterized by an absence of failure.

Without trying, there is no growth. Without failure, there is no learning. The key is to fail better.

So was the Neiman Marcus and Target partnership a failure? In the immediate-term, definitely. But the overall grade from where I sit is “Incomplete.”

If the lesson Neiman Marcus takes away from this project–and it is a project, not a strategy–is to pull back on innovation, to stop experimenting, than it will be a huge waste of time and resources. If it strengthens their resolve, if they apply their learning to improve the process of innovation, than it will be the most glorious of failures.

Out of Barneys’ rubble: What’s next for luxury fashion’s biggest boutique

Yesterday Barneys New York averted yet another trip to bankruptcy court through a major restructuring deal that converted most of their debt to equity (http://bloom.bg/IUyHir).

Unless you work at Istithmar–the PE firm that paid more than $940MM for Barneys in 2007 (oops!)–or owned Barneys debt, this is a big deal (pun intended). Barneys no longer has to divert the majority of its cash to service debt and now has greater capacity to improve existing operations and focus resources on growth.

So we’re good now, right? Not so fast.

To be sure, buying a marquee brand at fire sale prices sets up Barneys new class of equity owners for potentially high returns. And newish CEO Mark Lee has done a solid job of executing the basics and going after the proverbial low-hanging fruit. But we need to deal with a few facts.

We should not forget that Barneys recent improved performance comes at a time when virtually all luxury brands have performed well as the US market recovers from the devastating effects of the recession. As the market returns to 2007 levels–and we’re pretty much there–the reality is that the US luxury market is pretty mature.  Maintaining outsized revenue growth in the future is mostly going to need to come from market share gains and/or new stores.

The more looming reality is that Barneys is basically a 2 1/2 store chain. It’s no big secret that the New York and Beverly Hills stores drive the majority of profits while the Chicago flagship is a solid, but way less significant contributor. But expansions of flagship stores to markets like Scottsdale and Dallas have been disasters, and the Co-op stores have had decidedly mixed results.

Yes, Barneys expanded to markets like Las Vegas at precisely the worst time and yes, there have been execution follies along the way. But the bigger issue is that Barneys, as currently envisioned, is basically a big boutique. Unlike Neiman Marcus and Saks, which play in a full-range of affluent customer price points and target multiple lifestyles, Barney’s is tightly focused on a more specific customer from both a fashion point of view and price range.  In huge fashion markets like New York and LA, they can thrive. In smaller markets, faced with long-standing department store and boutique competition, it’s much, much harder.

Barneys has tried to correct for this by building smaller stores. While the stores are beautiful and contain a lot of great product, they mostly end up looking like a smaller boutique concept trying to fill up too big a space. So far, in markets like Dallas and Scottsdale, customers seem to agree.

For Barneys to profitably and meaningfully move beyond more than a handful of cities they are going to have to address a wider market while still maintaining a strong sense of their unique DNA and brand image. Faced with strong omni-channel competition like Saks, Neiman Marcus and Nordstrom–not to mention a whole host of e-commerce only players and local boutiques–that is no easy task.

 

 

It’s time to let go of that hammer

You probably know the saying: “If all you have is a hammer, everything looks like a nail.”

This explains a lot of behavior we see with the leadership at struggling retailers.

If you came up through the merchant ranks, chances are you obsess about product–rather than the consumer–and fall woefully behind in creating a compelling omni-channel shopping experience. Today, you are desperately playing catch-up.

If the only way you know to drive revenue is through relentless price promotions, you now sit lamenting the lack of customer loyalty and your shrinking margins.

If you made your money through financial re-engineering and scorched earth expense reductions, you assume your latest investment will cost cut its way to prosperity, rather than realize that your overwhelming issue is top-line growth (I’m looking at you Eddie Lampert!).

If you drove same-store sales through price increases rather than customer and transaction growth–as the US luxury retail industry did for many years–post-recession you find yourself with too narrow a customer base to sustain profitable growth. You now are working overtime to win back customers you priced out of your brand.

All of these problems were caused by a monolithic view of strategy and a failure to gain deep insight into customer behavior. Most were preventable.

Of course, the past is history and the future is a mystery.

But there is no mystery in the failed wisdom of clinging to the past and continually wielding the hammer that got you into trouble in the first place.

Let go.

Move on.

Get some new tools.

 

 

 

My top 10 blog posts of 2011

#1  “Crazy Eddie and Sears’ Hail Mary Pass.” http://bit.ly/e0p88l.

#2  “The end of same store sales.” bit.ly/vlUXVO.

#3  “Luxury’s back! Uh, not so fast.” bit.ly/rFrgNj.

#4  “Let’s get small.” bit.ly/mT63sD.

#5  “Get over it. Get used to it. Get on with it.” bit.ly/dFn1wf.

#6  “The showroom of death.” bit.ly/tJPfoZ

#7  “Me-tail.” bit.ly/rfBu1B

#8  “Zip it, your generation is showing.” bit.ly/e77Cs4

#9  “Playing not to lose.” bit.ly/sjOTQN

#10  “The endless aisle and the world’s smallest parking lot.” bit.ly/ryxv3C

Don’t confuse members with customers

Thanks to the so-called flash-sales sites we now have a distorted definition of what being a member means. Before Gilt, RueLaLa and the myriad “private” e-commerce business wanna-bees, gaining membership in something typically meant you needed to actually do something more than have an email address and a pulse.

By now it should be clear to everyone that membership to these sites is simply a marketing gimmick. And an effective one at that.

But beyond semantics, the key issue is really how many of these members are actually customers? And of the actual customers, how many have bought more than once in the last year and how many are actually profitable (or have the potential to be)? You don’t have to tumble too many numbers to realize how shallow the customer base for most of these sites must be.

With competition heating up, and overall core sector growth flattening, it won’t be long before some investors become quite unhappy indeed.

Competing with yourself

One of the biggest mistakes companies make strategically is failing to compete with themselves.

The only reason Sears is no longer the leader in the retail home improvement industry–and now on a slow slide into oblivion–was their unwillingness to build or buy an off-the-mall response to Home Depot when they had the chance. Having personally participated in 2 separate strategic studies in the early and mid 1990′s, I can tell you that the big hang up in making the plunge was leadership’s fear of sales diversion from the “core” mall-based department stores.

Whoops.

So it was refreshing yesterday to see Nordstrom’s acquisition of HauteLook, one of the leading flash-sales sites.

The luxury/fashion off-price market has exploded in the past 3 years with upstarts like HauteLook, GiltGroupe, RueLaLa, et al creating a $1 billion+ (and growing) sub-segment through daily online sales. And it’s clear that a lot of that business has come at the expense of traditional players like Nordstrom, Neiman Marcus and Saks.

It remains to be seen whether the price Nordstrom paid was sensible. And time will tell how well they will be able to leverage their capabilities and customer database to accelerate HauteLook’s growth and profitability. But one thing is clear. The other industry incumbents have been slow to react–or have responded with utterly unremarkable tactics–and have let many start-up companies steal market share and attract new customers in a space they could have easily dominated.

Retailers are pretty good at firing people when they don’t make their seasonal sales plan or manage their budgets well. When they let hundreds of millions of dollars of potential shareholder value slip through their hands by failing to act on business that is rightfully theirs, you rarely hear a peep.

That needs to change.

And you need to be willing to compete with yourself. Last time I checked you don’t any credit for your competition’s sales.

 

The showroom of death

Maybe you have noticed that e-commerce has been growing far faster than brick and mortar retail. That’s been true for years and it’s not changing any time soon.

Maybe you have noticed the explosion in comparison shopping sites that allow customers to easily search for the merchant with the best price. The number and quality of these sites will continue to grow, with powerful mobile applications right around the corner.

Maybe you have noticed that as more retailers cut back on sales associates–or fail to train them so that they become merely order takers, baggers or direction providers–the “value proposition” of actually buying something in a physical store becomes less and less attractive.

So I have to ask you, is your store a relevant, differentiated and remarkable experience for your target customer?  Or is it slowly, but inexorably, becoming a showroom; a place for the customer to see, touch and feel your product, but less and less a place to actually buy stuff.

The economics of leasing a store, fixturing it, filling it with inventory and staffing it are untenable if an increasing percentage of your customers are only there for research and will ultimately buy elsewhere because the experience or price is better.

Blockbuster and Borders may well be on the way to insolvency because they botched this transition. Best Buy is doing far better, but faces significant risks of their physical stores becoming more and more a showroom every day. And this is just the “B’s.”

Becoming a showroom is death.

Do you know what percent of your traffic uses your physical stores mostly for research purposes, only to buy elsewhere?  I bet it’s higher than you think.

 

 

 

Luxury’s back!!! Uh, not so fast.

With last quarter’s improved earnings–and a string of positive same-store sales reports–many have declared that the luxury market is once again booming.

While there is no question that business is on fire in developing luxury markets like China, the results in mature markets suggest a business that IS dramatically improved–and on a much more positive trajectory–but recovered? I beg to differ.

Better is not the same as good.  Let’s look at a few examples.

Neiman Marcus (full disclosure: my former employer and I still own an equity stake) is the clear leader in full-line luxury retail and today reported a December sales increase of 4.7%  In their most recently released quarterly earnings, Neiman’s reported a 7% same-store sales increase and a 33% increase in operating earnings compared to last year.

Today Saks reported a 11.8% increase in December sale-store sales.  In their last quarterly report, they showed a year over year sales increase of 4% and a doubling of their operating income.

This is all sounds pretty good until you compare these results to the same period just before the recession started.  Compared to the comparable quarter in 2007, Neiman’s sales are 18% below where they were–and this is after opening several new stores and having a rapidly growing e-commerce business.  More dramatically their quarterly earnings are still only half of what they were at their 2007 peak.

Same basic story at Saks: their sales are still down some 17% compared to 2007 (though they have closed a few full-line stores) and pre-tax operating earnings are down 30%.

Nordstrom–the best in class “accessible luxury” player–was affected less during the recession and has bounced back more strongly.  Their overall sales are pulling ahead of 2007, buoyed by new store openings, a leading omni-channel capability and a more broadly accessible offering.  While they have clearly gained market share, their earning are still about a third less than they were three years ago.

I have little doubt that virtually every player catering to the high end will report significantly improved earnings this next reporting period. And I’m delighted to see this positive trend.  But very few will have truly recovered.

A complete recovery will require more than just return of the ultra-high net worth customers and a bounce off the bottom.  It’s going to take a broader consumer recovery.  It’s going to take a better in-store customer experience.  It’s going to take building in more tangible value to the merchandise offering.  It’s going to take making the brand more accessible, while preserving the core customer.  It’s going to take a more compelling omni-channel strategy.  Fundamentally, it’s going to mean that all these players become more customer-centric rather than product-centric.

It can happen–it needs to happen–but it won’t fully happen anytime soon.

I had some surgery a couple of years ago and for some time I was hobbling around, feeling a fair amount of pain.  I realized–as did those around me–that each day I was feeling a little bit better.  And that was good.  But while I was still limping, nobody was deluded that I had completely recovered.

When it comes to the luxury recovery, let’s not kids ourselves either.

 

Luxury’s Flight to Quality

Hermes. Bulgari. Louis Vuitton. PPR (owner of Gucci and Bottega Veneta). Richemont.  All have recently reported strong profits.

Clearly, these firms have benefitted from their growing presence in the booming Asian luxury markets. But something else is going on. I believe this dazzling performance during a worldwide recession is about more than their global footprint.

All of these brands represent a powerful legacy of craftsmanship, of superior materials, of timelessness.  Unquestionably these products are expensive, yet time and time again, consumers choose them over much less costly options or similarly priced more trendy alternatives.

Because the affluent consumer’s capacity and willingness to spend remains constrained, brands must work even harder to capture a disproportionate share of the available wallet.  These heritage luxury brands are getting more than their fair share in a flight to quality.  They have taken a purchase which could be seen as a splurge and made it a seemingly sensible choice.

Of course, regardless of the price point, any brand wins because the consumer sees a strong price/value relationship.  And let’s face it, it’s easy to run a sale, offer extra loyalty points or give away a gift with purchase to drive short-term revenue.

Spending the money, making the hard choices, having the patience to build an investment quality to your brand–well that takes something extra.  It takes leadership, vision and courage to build something truly remarkable and enduring.

What’s your choice?