Small is the new interesting

It’s been at least 20 years now that most value creation in retail has been driven by big. Big stores–both physical and digital. Big assortments. Big advertising.

Walmart and Target. Home Depot and Lowes. Amazon and eBay. Best Buy, Ikea, Office Depot and on and on. Superstores, category killers and the “endless aisle” online guys have won big (heh, heh) on scale, efficiency and low prices.

There’s a lot to be said for pushing the frontiers of big. When your goal is to be the “we have everything store” your marching orders are pretty clear. When you have to be the winner in a price war, your focus is obvious.

The problem is that big has its limits. And a closer examination of many “winning” retailers’ strategies reveals that big is losing momentum.

It turns out that a strategy of big eventually faces diminishing returns. It turns out that most of the winners of the past decade or so are running out of new stores to build. It turns out that many of the mass promotions that drive incremental business lose money. It turns out that for most of these brands e-commerce growth is unprofitable. But mostly it turns out that big is boring. And consumers are starting to notice.

There’s no question that big is here to stay. There’s little doubt that for many consumers–and a vast number of purchase occasions–the quest for dominant product selection, convenience and great prices will remain paramount. But that doesn’t mean that’s where the future opportunities lie or that your strategy shouldn’t shift.

Shift happens. And it’s a shift away from mass marketing to becoming more personalized. Away from overwhelming assortments to editing and curation. Away from products that everybody has to items and experiences that the consumer creates. Away from the seemingly inevitable regression towards the mean to a deliberate choice to eschew the obvious and explore the edges.

Many brands will have a hard time breaking out of the pursuit of big. They are too vested in building scale, too scared of Wall St.’s reaction to a strategy pivot, too addicted to mass advertising.

Of course, therein lies our opportunity. Maybe it’s time to embrace small while the rest of those guys continue to flog big.


Whose idea of stupid?

Since we seem to be a society that judges quickly, we often waste little time affixing all sorts of labels to all sorts of people and all sorts of situations.

That guys a loser (not to mention low energy).

We tried that before.

This will never work.

Your idea is stupid.

To be sure, there’s no shortage of dumb ideas. Yet sometimes stupid wins.

Facebook and Amazon were once pilloried as concepts that couldn’t possibly work. When Google started it was the 20th search engine to launch and completely lacked a revenue model. It also followed in the footsteps of several high-profile flameouts.

Tesla, Instagram and PayPal were all once seen as pretty ridiculous business models by just about everybody.

Psychologists talk about “projection”–the notion that when we feel the need to point out the failings of others it’s often rooted in our own insecurities. “If you spot it, you got it” as some like to say.

Sometimes there is stupidity in the world that needs to be called out and confronted.

But sometimes it’s better to judge slowly.

Sometimes it’s better to realize innovation frequently happens at the razor’s edge of stupidity.

And sometimes you just need to consider the source.

Creating meaning at scale

In case you haven’t noticed, there is a whole lot of bifurcation going on. And in many markets, the middle is all but collapsing.


At one end are the Walmart’s, the Home Depot’s, the Amazon’s–the low price, vast assortment guys. Their pitch is easy to understand. We have just about everything you could possibly want, virtually anytime you want it, at the low, low price. Operationally this is incredibly difficult to scale. But from the customer’s perspective, it couldn’t be more simple to grasp. Dominance and value (defined by price) creates meaning.

At the other end of the spectrum are the brands built around market niches, product differentiation and the somewhat intangible “brand personality.” What defines meaningfulness here is built on deep customer insight, emotional connection and, more and more, the ability to treat different customers differently.

Historically, luxury brands thrived by merchandising exclusive products in spectacular settings delivered face-to-face by well-trained sales associates. To the extent companies could replicate this model as they added stores, they could continue to create meaning and deliver it at scale. Yet, as all things digital become increasingly important, the notion of what constitutes a meaningful one-to-one “luxury” relationship is being challenged.

The best specialty stores have succeeded by curating merchandise for a particular “lifestyle” and presenting it in a distinctive environment that reinforced a unique brand image. These companies created a business model that was simple to replicate and led to the ubiquity of many of these brands in affluent malls and upscale shopping areas of most major cities. Now, with product choice and availability exploding and new micro-niche brands emerging online, the concept of “specialty” is being redefined.

The hyper-growth, venture-backed “pure-play” brands that have launched over the past few years–think Gilt, Bonobos, Warby Parker–found it comparatively easy to scale at first. They exploited many of the advantages of a direct-to-consumer model and employed low-cost acquisition techniques to build an initial base of customers–what I like to call the obsessive core.

But it turns out that creating meaning at the scale that will lead to profitability isn’t so easy (or economically viable). Too many newer customers of these high-flying brands have started to equate meaning with discounts. Others, it turns out rather predictably, need the meaning that comes from a physical presence to derive theirs. Many see this hybrid-model as an exciting new area of growth. Others see it as clear evidence that most e-commerce only brands are finding it very difficult to deliver meaning at scale.

In an anything, anytime, anywhere, anyway world, it’s getting harder and harder to break through the clutter, to win the battle for share of attention, to create the all essential meaning that matters for customers.

If you seem to be stuck in a sea of sameness, selling average products to average people, relentlessly promoting just to stay even, it’s time to get off the bridge. The collapse is near.

If your customer is choosing you mostly on price, you had better be the low-cost provider. Otherwise you will lose the inevitable race to the bottom.

If you believe you have the ability to be meaningful to a well-defined set of customers who choose you over the competition for specific, sustainable reasons, good on you.

Just remember, as Bernadette reminds us, it’s not so easy to create meaning at scale, particularly if you need that scale to stay in business.

Why go to the store?

There are some who think that most brick & mortar stores are eventually going away and that e-commerce can have a compound annual growth rate of 15% until the end of time. To which I answer, “don’t be silly” and “of course not.”

There are many powerful reasons for physical retail locations to exist. In fact, we are already witnessing the limits of pure-play models as online only players are opening more traditional store-fronts (Warby Parker, Bonobos, Amazon and many others). Well established direct-to-consumer brands like LL Bean are doubling down on a commitment to retail store expansion. And even with the explosion of online shopping, close to 95% of transactions still take place in a traditional store.

When you take out products that can be delivered digitally (books, movies, games and the like) in most cases, for most consumers, there is value in being able to go see, try on, or touch the actual product. Having a live conversation with a well-trained sales associate can be extremely helpful. Physical stores offer a social experience that can’t be readily duplicated via the web or smart phone. And, typically, you can take the product with you, rather than having to wait.

Having said this, digitally enabled business models ARE disrupting every category and chipping away at many historical advantages of bricks & mortar. Websites often have better information than in-store sales people. Assortments can be much wider and prices are often sharper. Next day delivery may be either good enough or simply more convenient than having to drive to a mall and deal with the crowds. And we can be certain that future innovation will further eat away at traditional store advantages.

The fact is, in most instances, the future winners will be retailers that blend digital and physical offerings. They will deeply understand customers wants and desires and build a tightly integrated, highly flexible hybrid model rooted in treating different customers differently. That means a transformation, but not the elimination, of physical stores.

By contrast, the losers will be those that blindly adopt all things omni-channel.

The losers will be those traditional retailers that continue to run a bolted on and siloed e-commerce channel.

The losers will be those who fail to see the interplay between digital and physical stores and close too many doors–and turn the remaining ones into boring museums of best-sellers and “me too” products.

The losers will be those who hold on to one-size-fits-all customer and marketing strategies.

Consumers will continue going to stores for many, many years to come. Whether they will come to your store is a different question.

When the land grab ends

There is no question that e-commerce has transformed the way virtually everyone shops today. And to say that digital marketing and online shopping has been disruptive would be an understatement.

Much of retail’s market value created over the past decade has been driven by Amazon and other pure-play brands. Dozens of once powerful retail names have been hammered or completely felled by the advent of e-commerce. Many are now closing stores and desperately seeking to re-invent themselves to stay relevant or merely survive.

The digital darlings have a huge advantage over traditional retailers. As they seek to scale their claimed game changing model and to build a brand, profitability is not only a secondary consideration it is often eschewed entirely. For most, there is a land grab mentality, a semi-blind quest to acquire customers at almost any cost for fear that a more measured approach will allow new entrants to emerge or established competitors to respond more effectively–or, more cynically, will cause investors to wise up to the limitations of the underlying business model.

The number of times investors have been seduced into a growth at any cost scenario that stalls are beginning to mount. Many piled into flash-sale deals when the shake-out in that sector was totally foreseeable.’s recent collapse won’t be only major e-tail meltdown. A shake-out is starting to happen as it’s becoming more and more clear that too many customers are being acquired at costs well above their potential life-time value. And while many are lauding the move of Warby Parker, Bonobos and others into physical stores, this evolution is borne less of brilliant insight and more of the realization that their land grab marketing efforts were rapidly losing altitude and new customer acquisition strategies were needed to maintain expected growth.

This is not to say that some of the highly valued and increasingly respected e-commerce brands don’t deserve our accolades and won’t turn out to be fantastic investments. But three things need to kept in mind as we move forward:

  1. Virtually no e-commerce only retail brands of any size have consistently made any money, including Amazon
  2. Most digital retailers will need a physical store presence to optimize their brand potential
  3. It’s comparatively easy to cost effectively acquire and retain early adopters in a digital-only model. It’s the marginal cost vs. the lifetime value of the next tranche of customers that provides real insight into the ultimate validity of the concept.

Adopting a land grab mentality is not inherently bad. In some situations it clearly is warranted. The problem comes when we don’t have a clear view of how far to push it and what we’re left with when it ends.



Everywhere. And nowhere.

You’ve probably read the admonishments. You must be everywhere your customer is: online, bricks & mortar, mobile, Facebook, Twitter, Pinterest and on and on.

You’re told the future is now and that future is all about allowing the consumer to shop anytime, anywhere, anyway.

You’re urged to create a seamless experience across all channels and touch-points.

And much of this is valid. If you don’t meet your customer where she is (and is headed), you’re very likely to be yesterday’s news (RIP Radio Shack). More and more, the consumer IS everywhere and channel hop is becoming the norm.

But for those who think that all they need is a little omni-channel pixie dust and a side order of frictionless commerce, think again.

In the rush to embrace all things digital, integrated and omni-channel, far too many brands have lost sight of the need to be relevant and remarkable. Most of the capabilities that industry white papers wax eloquent about–and consultants relentlessly peddle–are merely the new table-stakes. And, quite frankly, your mileage will vary. Perhaps a lot.

Sears has made huge investments to create powerful digital and integrated commerce capabilities. In fact, they are regularly recognized for their leadership position in many aspects of what industry pundits describe as the holy grail of everywhere commerce. So how’s that working out? Oh yeah, they forgot to sell stuff people want in the way people want it. This is certain to end badly.

On the other hand, Amazon has managed to become a retail industry behemoth, crushing competitors in its wake and continuing to gobble up market share, all without physical stores and, in many cases, putting forth a pretty lackluster mobile and social presence. Their lack of “omni” doesn’t seem to be slowing them down too much.

As I’ve pointed out before, the future of omni-channel will not be even distributed. For those brands that rush eagerly into the “everywhere retail” world without a clear view of the customers they wish to serve and how they wish to serve them in a relevant and remarkable way, don’t be surprised when you don’t get the ROI you hoped for.

It’s quite possible to be everywhere and nowhere at the same time.

E-commerce’s pesky little profitability problem

Online-only retailers have attracted huge amounts of investment capital during the past decade. Flash-sales sites such as Gilt and RueLaLa have collectively raised hundreds of millions of dollars. Rather small, but rapidly growing, specialty players like Bonobo’s, Warby Parker, One Kings Lane and Birchbox have all recently raised tens of millions of dollars and now have valuations approaching $1 billion or more. Net-a-porter, perhaps the strongest global fashion e-tailer, was purchased by luxury powerhouse Richemont for more than $500 million in 2010 and is reportedly being shopped for a multi-billion dollar price tag.

And on and on.

The pesky little problem–the seriously nagging and increasingly pressing issue, is that the vast majority of even the most established players don’t make any money and few have any prospect of doing so any time soon.

The bulls say that all trends point to the eventual dominance of e-commerce and that these brands must invest heavily in critical infra-structure, acquiring new customers and building their brands. Today’s heavy losses will yield category dominance and ungodly riches just a few years down the road. While I’m fairly certain that this will be true for a handful of today’s industry darlings, for most it’s likely to end badly.

Aside from consumer preference shifting toward online shopping, e-commerce seems to have important economic advantages, most notably avoidance of capital investment in physical real estate. In addition, by centralizing inventory in a few locations–or having a “buy it only when you sell it” model–the potential to streamline logistics costs and generate very high inventory productivity is significant. Digital-only marketing strategies also create the opportunity to serve customers more cost effectively than traditional sales and marketing tactics.

But here’s where reality starts to set in and why many e-commerce only models are profit-proof at any kind of reasonable scale.

While fixed costs are lower for pure-plays, marginal costs can be very high. Most hyper-growth companies find it initially fairly easy and cost-effective to acquire their “best fit”and most loyal customers. Consumers that are prone to gravitate to a disruptive business model often “get it” quickly and are great at spreading the word. They tend to return fewer items and aren’t as likely to need a deep discount to spur a purchase.

Unfortunately, growing beyond what I call the obsessive core, tends to be much more expensive and difficult. Acquisition costs rise dramatically. Big discounts are needed to drive conversion. Return rates are much higher. Assortments need to expand to create greater interest. Cost and complexity follows. Many of the new customers that contribute to higher sales, never have the potential to be profitable.

In fact, one of the reasons we are seeing many of these high growth brands now aggressively investing in physical stores is that they are finding it too difficult and expensive to acquire and serve new customers purely online.

So while it’s true that fixed costs are favorable in a pure-play model, it’s the dynamics of marginal profitability (and the associated variable costs) that ultimately determine the long-term viability of an e-commerce brand. And this will prove to be the Achilles Heel for many of today’s highly valued players.

It’s easy to extol the wonderful customer service delivered by Zappos, the incredible marketing and design from Bonobos or the overall awesomeness of Amazon. But lest we forget, it’s not that hard to be awesome if you aren’t required to make any money. It’s one thing to love these brands for the experience they deliver (which I do). It’s an entirely different thing to earn a return for the risk you are taking as an investor.

So far, the only winners from the advent and rapid growth of pure-play online shopping have been consumers and a small group of investors and entrepreneurs lucky enough to cash out at the right time.

Certainly Amazon could be profitable tomorrow if they wanted to (well, more accurately, if they could deal with a collapsing multiple). And a few e-commerce only companies ARE building strong brands and appeal to enough target consumers to eventually make real money. For this short list it is, in fact, just a matter of time.

But for the rest, don’t believe the hype. And proceed with caution.