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.

 

 

 

The confidence of brands

There is plenty to ponder when the subject is branding. Lots of agencies, consultants, marketing gurus and academics have frameworks and models for assessing a brand’s strength. Varying definitions abound. I like Seth‘s:

A brand is the set of expectations, memories, stories and relationships that, taken together, account for a consumer’s decision to choose one product or service over another. If the consumer (whether it’s a business, a buyer, a voter or a donor) doesn’t pay a premium, make a selection or spread the word, then no brand value exists for that consumer. 

Therefore a brand is a promise, a pledge of trust. Without the buyer’s willingness to believe in the delivery of that promise, the brand is irrelevant. So confidence in the minds of consumers is essential.

But so is confidence in the mind of the marketer.

Confident brands lead from a position of authority. They take risks. They don’t need to over-explain or hard-sell their customers. Options are abundant. This is a brand playing offense.

We can easily sense the brand that lacks confidence, that sadly has lost–or never had–its mojo.

Unconfident brands are defensive. They cast too wide a net for customers. They compete too heavily on price. Their advertising lacks focus and nuance and instead is characterized by shouting and bludgeoning. They default to one size fits all marketing.

The real tragedy is that what flailing brands need the most is precisely what they lack. Without the confidence to face the realities of their situation and to take the bold actions to get on a path to prosperity, their ultimate fate is sealed.

JC Penney: The way, way back (Part 1: The challenge)

Yesterday JC Penney reported its first quarterly same store sales increase in more than 2 years.

Given the free fall the company found itself in during the Ron Johnson era, this news provides a measure of hope. After all, there can be no ascent from a dive without passing through stabilization. And even though the gain was paltry–about 2%–it came during a period of consumer ennui, crappy weather and intense sales promotion throughout the industry. Later this month, when Penney’s reports quarterly earnings, we’ll get a clearer picture of the toll aggressive discounting took on margins.

Unlike some doom-sayers on Wall Street, I am cautiously optimistic about Penney’s near-term. Product assortments are improving, which bodes well for continued top-line growth. While the company still has a bit more work to clear all of Johnson’s merchandise debacles, I expect improving margins as the company better matches inventory to consumer demand. A return to more typical promotional marketing has Penney’s back in the competitive mix. E-commerce improvements are starting to make meaningful contributions. 

But of course better is not the same as good.

First of all, we should not lose sight of the fact that even before Johnson’s messianic arrival, JCP was struggling. Despite many attempts to re-invent itself, they remained a middling performer at best, stuck in neutral, in a moderate department store sector that continues to shrink. A transformation was, in fact, needed. Just not the one Johnson and team inflicted upon them.

Second, during the past 2 years Penney’s has lost roughly 1/3 of its sales. That means they need to increase revenue by well over 40% just to get back to where they were in the pre-Johnson, more than a bit mediocre, days.

Retail is still largely a high fixed cost business, and even with some additional pruning in real estate and a shift to more e-commerce, there is simply no way to earn an adequate return without dramatically improved brick and mortar sales productivity. And of course they must accomplish this in an environment of lackluster consumer spending and intense battles for market share. Though, Sears’ slow slide into oblivion should be the gift that keeps on giving.

To be sure, there is much of the proverbial low hanging fruit to be picked. Basics of execution were lost during the past two years. The Johnson merchandise and marketing strategy showed a poisonous contempt for Penney’s core customer. New product concepts were rolled out that were dead on arrival, creating many pockets of incredibly low sales productivity (I’m looking at you Bodum!). The increasingly critical digital channel was left  twisting in the wind. 

Addressing many of these glaring gaps should come fairly easily and quickly. Crafting a winning, long-term strategy is a totally different challenge.

Coming in Part 2: The action plan

Untethered

In the first decade of e-commerce’s ascension, with rare exception, the consumer was sitting in their home or office using a desktop computer to do their online shopping. It was a completely virtual experience where the advantages were clear: 24/7 access, wider selection, often lower pricing and so on. So were the disadvantages: inability to try on the product, no instant gratification, no sales help, etc.

Even as e-commerce began to chip away at brick & mortar stores’ dominance, the physical retail experience stayed basically the same. To reap the advantages of in-store shopping you had to travel to the store. Once there, if you wanted product information you had to track down a sales associate and hope that he or she knew what they were talking about. What you could buy had to be in-stock in that particular location. And when you wanted to buy something, you went to a sales register at the front of the store or located in a merchandise department.

With the explosion in mobile devices and smart phones the consumer decision journey is rapidly becoming untethered. Previously a digital shopping experience by definition meant you weren’t in (or close to) a store. But, more and more, what we once counted as an e-commerce shopping trip or sale, versus one made in a physical store, is a distinction without a difference. It’s now a bricks and mobile world.

Increasingly, store sales associates are untethered from their POS registers, lending them the ability to work with a consumer at the real point of sale and arming them with the digital tools that can meaningfully enhance the customer experience.

Today’s omni-channel leaders are keenly aware of how the un-tethering of retail is profoundly altering the consumer and competitive landscape.

For others–the relentless defenders of the status quo–it’s their thinking and willingness to act decisively that needs to be untethered. Hopefully that occurs before their business model becomes unhinged.

 

 

Living la vida local

Until the end of the 19th century virtually all retail was local.

There was no such thing as a chain store or a catalog merchant. Most raw materials were locally or regionally sourced. The local shopkeeper predominated.

For centuries, the typical merchant specialized in a particular area of expertise–butcher, baker, cobbler and so on. He knew most customers by name and understood what they liked. With the ability to get instant feedback on his offering he could readily curate his offering to local tastes. He didn’t have to learn 1-to-1 marketing. It was his lifeblood.

In the 1880’s, Richard Sears and Aaron Montgomery Ward launched their catalog businesses, and in the decades that followed, consumers began to have greatly expanded choices. As the 20th century unfolded, the transportation infra-structure improved dramatically, creating greater opportunities for sourcing product from around the globe. Multi-unit retailers proliferated and eventually the bulk of retail shifted to regional malls, mass discount stores and dozens of national “big box” retailers and specialty chains.

In the last 15 years, the advent of e-commerce, along with incredibly efficient direct to consumer supply chains, have made it possible for the individual consumer to have virtually infinite choices available to them. The local shopkeeper model has become largely extinct.

Now it’s come full circle. Retail, like politics, has always been local. The winners have always been those that bring the most remarkable and relevant solutions to individual consumers. But over time what was possible shifted. Those that failed to keep pace lost out.

Today the retail world is becoming increasingly bifurcated. A few players are winning by riding the long tail and by offering low prices and efficient shopping. For everyone else, the world is a lot more complicated. Right now the challenge is to differentiate your brand in a sea of sameness. Right now the goal is to curate your offering–or make it incredibly easy for the customer to do it for herself–to a specific set of consumer needs and wants. Right now your mission is to know your customer better than the competition and to leverage that insight to craft more unique and personalized solutions.

Sounds familiar right?

Advances in technology make it possible for your brand to provide value in much the way the shopkeepers of yesterday did. To know me, to understand my individual preferences and to use that information to tailor your offering to my specific requirements is the formula for winning.

You can keep chasing price and remain wed to mass approaches to marketing, customer service and operations. And you can hope to beat Amazon and Walmart at their own game. Let me know how that works out. Or…

Or you can commit to treating different customers differently and invest in a strategy steeped in localization and personalization.

The choices are increasingly clear. The commitment to one path or the other is becoming more urgent. You need to choose.

Ultimately it’s death in the middle.

 

 

 

 

Dead brand walking

The business graveyard is filled with brands that have gone from the lofty heights of recognition, stature and profitability to flagging relevance and, ultimately, complete extinction. For every long-standing, legacy brand that continues to thrive (think Kraft or Coca-Cola) there is a former high flier that is now gone (think Borders or Oldsmobile).

Sometimes companies are hit by a largely unexpected exogenous force that sends them reeling. More often than not, the company’s ultimate demise surprises no one.

For some of us–investors or potential employees, for example–the key is to separate out the walking dead from the exciting turnaround story or the metaphorical Phoenix.

For business leaders, the obvious implication is to become aware of the early warning signs of decreasing brand relevance, accept the need to change and take the requisite actions. The obvious question, of course, is why are there so very many strategy meltdowns?

In my experience, brands go from healthy to critical in one or more of three ways.

First, you can’t fix a problem you aren’t aware you have. Many dead or dying brands lacked a fundamental level of customer insight. So not only did they not appreciate their vulnerability early enough, they didn’t focus on the important things quickly enough.

Second, just because you know something, doesn’t mean you accept it as the new reality. When I was a senior executive at Sears–the poster child for dead brands walking–we had tons of evidence that clearly showed our weakening relevance and declining profitability in our core home improvement and appliance businesses. Did those that could have changed Sears’ destiny truly accept that without aggressively attacking these issues it would eventually be game over? Sadly, then, as it is now, the answer is “no.”

More recently, when I ran strategy and multi-channel marketing at Neiman Marcus, we had plenty of customer research and analytics that our strategy of narrowing our assortments and pushing prices ever higher was losing us valuable customers to Nordstrom (among others). Did we accept that it constrained our growth and made us increasingly vulnerable in an economic downturn? Fortunately the harsh lesson of the recent recession–and a new CEO–“forced” Neiman’s to address these problems before they became crippling.

Lastly, even with keen awareness and complete acceptance of new realities, we regularly fail to take the (often radical) action needed. This is mostly about fear. Fear of being wrong. Fear of looking stupid. Fear of getting fired. Fear of risking one’s legacy or resume value.

In fact, history teaches us that it’s far more common to see executives holding on to a mediocre status quo rather than risk competing with one’s self or making a big bet on that new technology or innovative business model that is ultimately used against them by an upstart competitor.

Frankly, if your inability or unwillingness to act on saving your brand is rooted in fear, don’t hire McKinsey or Bain (or me for that matter) to help you with your strategy. My advice would be to get yourself a new management team and/or go see a therapist. It’s far cheaper and more likely to work. And do this before your Board figures it out.

Dead brands almost never die by accident. They die by leaders failing to see the signs of terminal illness while there’s still time to save them. And they die by management teams’ inability or unwillingness to take the necessary and decisive action before it’s too late.

Hopefully dead brands walking can be a lesson to us all.

 

 

Easy or good?

It’s far easier to run your business with a paint-by-numbers operating model.  Why risk the vagaries of human interaction?

It’s far easier to craft a one-size fits all marketing plan. Why invest in complicated customer analytics and the complexities of managing vast numbers of different campaigns?

It’s far easier to focus on efficiency rather than effectiveness. Doesn’t Wall Street reward brands that run a tight ship?

It’s far easier to remain product or channel focused. Organizing your business around customers–and the realities of the omni-channel blur–means blowing up many existing processes, metrics, incentives systems and management structures.

It’s far easier to focus on the certain short-term fix, rather than commit to a long-term program of testing and learning and building foundational capabilities. After all, how can we be sure we will ultimately generate sufficient ROI?

The problem is that easy is not the same as good.

And good enough is rarely good enough anymore.

Remarkable. Relevant. And built for me, rather than built for everyone, is what it will take for just about any business that cannot win by price alone.

And like it or not, easy is not going to cut it.