No new stores ever!

What if your company could never open another store? I’m not talking about relocations. I mean a truly new unit that adds top-line growth for your brand.

That’s pretty much the case in the US department store sector. Macy’s, JC Penney, Dillard’s and Sears (obviously) are closing far more full-line stores than they will open.

The generally more resilient luxury sector isn’t exactly booming. Nordstrom will open only 3 new stores in the US over the next 3 years. Neiman Marcus will open 2 full-line stores over 4 years. Saks is probably done finding viable new locations. It’s hard to imagine how this current outlook will get better.

Major sectors like office supplies and specialty teen are going through wrenching consolidations and hemorrhaging sites. And for every Dollar General, Charming Charlies and Dick’s Sporting Goods that have decent opportunities for regional expansion and market back-fill, there are far more that have overshot the runway.

“But Steve”, you say, “we’re seeing great growth in our online business. That’s our future.” That may be true, but how much of that is actually incremental growth? For most “omni-channel” retailers–particularly those that aren’t playing catch up in basic capabilities (I’m looking at you JC Penney)–more and more of what gets reported as digital sales is merely channel shift.

In fact, you don’t have to be Einstein to understand what’s going on when brands report strong e-commerce growth, yet overall sales growth is barely positive. For a great discussion of this check out Kevin’s blog post on hiding the numbers.

The fact is we have too many stores and most consumers have too much stuff.

The fact is the retailers that operate the most stores and sell the most stuff are rapidly reaching the point where, for all practical purposes, they will never open a new store.

The fact is very few large retailers are experiencing much incremental growth from e-commerce and, either way, that growth is small relative to their base and beginning to slow substantially.

The fact is, going forward, most brands will only grow the top-line above the rate of inflation by developing strategies that steal market share. And the me-too tactics and one-size-fits all customer strategies that currently account for the bulk of most brands time and money simply won’t cut it.


All about that base?

When politicians start a campaign one of the first questions they ask is how they can appeal to the base. Mainstream candidates lock into the usual suspects for rally turnout and fund-raising. The reformers struggle for voter attention and ways to tap into the key PAC’s and the Koch’s and Soros’ of the world.

Traditional brand marketers usually start here as well. We focus on more and better ways of activating existing consumers where the investment to acquire them is sunk and where we already know that they like us and buy often. It seems like a perfectly logical place to concentrate our efforts.

Except where those cohorts are aging out of maintaining their spending. Think Sears.

Except where their needs have shifted and we are no longer their brand or store of choice. Think Barnes & Noble.

Except where a new disruptive model has come along and is doing things we can’t while gobbling up our core customers’ share of wallet. Think Warby Parker and LensCrafters.

Except where we are not replenishing defectors or downward migrators with enough new profitable customers. Think JC Penney.

Good customer analysis always starts with the base. Better customer analysis is focused on a deep understanding of the leverage and limitations inherent in our core segments and yields the insight required to know where to go next and how urgent and powerful any shifts need to be.

It’s all about that base, until it isn’t.



The problem with saying “no”

During the past 25 years Sears had at least three opportunities to transform itself by entering the home improvement warehouse business (I worked on two of them). This was probably the only way Sears was going to ultimately survive and unlock the value of its franchise Kenmore and Craftsman brands. Each time the answer was “no.”

When I headed up strategy at the Neiman Marcus Group (2004-08), we evaluated building a leadership position in omni-channel by consolidating our disparate inventory systems, we recommended moving from a channel centric marketing organization to a customer and brand focused one, we proposed aggressively expanding our off-price format and, having understood the share lost to competitors like Nordstrom, we analyzed improvements to our merchandising and service models to become a bit more accessible. Ultimately we said “no” to moving ahead on all of these. Years later, these strategies were ultimately resurrected. But the opportunity to establish and extend a leadership position may have been lost.

Obviously there are plenty of times when either the smart or moral thing to do is to say ‘no.” Obviously it’s easy to look back and say “I told you so.”

Yet systemically, most organizations are set up to reward the status quo (often cost containment and driving incremental improvement) and punish the well intended experiment. So it’s easy to say “yes” to the historically tried and true and “no” to just about everything else.

Of course we don’t have to look very hard to come up with brands that have been struggling for many, many years (Sears, JC Penney, Radio Shack) or have completely imploded (Borders, Blockbuster, etc.). All of these said “no’ to any number of potentially game-changing strategies along the way. Care to hazard a guess at how many long-term Board Members of these perennial laggards and outright losers got pushed out for saying grace over a series of crippling “no’s”? How many CEO’s had their compensation whacked for never missing an opportunity to miss an opportunity?

In a world where change is coming at us faster and faster, we need to be challenged just as much on what we are saying ‘no” to as we are on what gets a “yes.”

And If you think there is always time to fix the wrong “no” decision, you might want to think again.

You can’t own ‘discount’

As we enter the holiday season, retailers are already guns ablazin’ with sales and promotions. Like all price wars, this will end badly for just about everybody. Spoiler alert: if you don’t have the lowest cost position you can’t win a price war.

Now don’t get me wrong, I get that promotional marketing is part and parcel of most retailers’ business models. I’ve been around the block a time or two (or three). You may recall that I was in that Johnson guy’s face big time for pulling the plug on discounts at JC Penney. Sales and promotions aren’t going away any time soon, nor should they.

And I certainly understand that retail competitive dynamics are such that if you aren’t aggressive early and often you risk losing out on market share, which is critical in a largely fixed cost business where slow-moving inventory may start to lose value rapidly.

Yet if you look at most retail marketing–particularly during the holidays–you’d think that % off was the entire basis for competition.

The simple fact is that very few players can successfully build their brand positioning around having the lowest prices or the most aggressive sales. Very few.

If you aren’t in this elite group, the bottom line is that you can’t own discount. And chance are you’re just chasing your tail when, instead, you should be laser focused on other dimensions where you have the potential be relevant and remarkable and to build a differentiated, defensible position.

No you can’t own discount. But discount can sure own you.

Wall Street’s simple, surefire–and mostly wrong–strategy to fix retail

Show me a struggling retailer and I’ll tell you what many Wall Street analysts will say is that company’s quickest path to new-found prosperity. Close stores. Or better yet, close a whole bunch of stores.

This was supremely evident with the frenzy that erupted on Twitter prior to JC Penney’s Analyst Day last week. Here’s a paraphrased exchange I had with one “famous”–mostly for posting photos of crappy Sears stores–Wall St. type.  Note: this is highly edited and paraphrased for brevity (and perhaps levity).

HIM: Penney’s is about to announce a bunch of store closings.

ME: I doubt it.

HIM: But they must close stores, lots and lots of stores!

ME: No they don’t. (I proceed to tell him why).

HIM: You don’t understand. They must close stores, lots and lots of stores! They need to have the same number of stores as Macy’s!

ME: That’s dumb.

HIM: You’re dumb.

The Analyst Day presentation concludes. Penney’s announces no store closings.

ME: I don’t want to say ‘I told you so’ but…

HIM: Hey, want to see my photos of really crappy Sears stores?

Now don’t get me wrong. Overall, the retail industry is over-stored. And the growth of e-commerce is causing a fundamental re-think of the number of stores a retailer requires, the size (and configuration) of these stores and how these stores need to operate. A contraction and re-working of gross retail space is inevitable.

But the knee-jerk reaction in favor of wholesale store closings is focused on the wrong problem. Struggling chains like Radio Shack and Sears aren’t in dire trouble because they have too much retail space. They are struggling because their overall value proposition isn’t working. If Radio Shack and Sears had a business model that was fundamentally sound, their needed store count overtime wouldn’t necessarily be dramatically different from what they have today. Show me a nationally branded, omni-channel retailer that is closing a lot of stores and I’ll show you one that is likely on the way to extinction.

What many on Wall Street often don’t get is that the cost of real estate for many of these established retailers is really quite low, making it easy for even chronically low productivity stores to be cash positive. And while Wall Street likes to cite the growth in e-commerce as the reason why store counts need to shrink dramatically, the reality is that for any decently integrated retailer, stores help drive the online business–and vice versa. Total customer and cross-channel economics need to be taken into account when doing a store closing analysis. When you do this analysis, along with the cash flow calculations, it turns out that closing a lot of store often makes things worse.

As for JC Penney, they are certainly far from out of the woods. They have a ton of work to do to refine and execute a merchandising and customer experience strategy that can regain share in an intensely competitive sector of the market. They are rightly focused on honing a new brand positioning and strengthening their omni-channel capabilities. My educated guess–having done this sort of analysis for other department store retailers–is that with conservative sales growth assumptions, only around 5% of Penney’s stores would be sensible candidates for near-term closure. Penney’s management is likely watching this list closely as they see how new strategies take root and they better understand the omni-channel effect.

For me, if Penney’s were to announce a large number of stores closings in the next year–say 75 or more–it wouldn’t be evidence that they are smart managers, it would be a sign that their overall strategy isn’t working.



JC Penney: Better isn’t the same as good

I bought some JC Penney shares on Thursday in advance of their earnings announcement.

I almost never buy individual stocks, but this was an easy decision. Penney’s execution has improved dramatically since Ron Johnson’s departure. Two major competitors–Sears and Kohl’s–are flailing. The year-over-year comparison is absurdly easy. Inventory seems to be tightly managed, which virtually guarantees a solid lift in gross margin. But mostly importantly, negative Wall Street sentiment has been fueled by much fundamental misunderstanding–as evidenced by the large amount of short interest.

My hunch was right. Penney’s reported better than expected performance. And the stock has popped some 15%.

Yet I am keenly aware that better is not the same as good. Penney’s has a huge amount of work to do just to get back to the performance level of the pre-Johnson era which, frankly, was solidly mediocre. The moderate department store sector has basically become a zero sum game where top-line growth must come from stealing share from the competition. And competition is, and will remain, intense.

I am, however, optimistic about the immediate-term. The self-inflicted wounds of the Johnson era are gone. Marketing and merchandising are moving in the right direction. Appropriate attention is now being placed on e-commerce and omni-channel capabilities. As Sears sinks into oblivion, JCP is poised to gain market share and leverage their real estate position. Mike Ullman’s back-to-basics strategy is appropriately conservative and should result in steadily improving gross margins.

It’s also important to note that a year ago Penney’s had done virtually everything one could think of to chase customers away. Importantly, a significant percentage of their stores were off-line in preparation for the home re-launch. Gross margins were getting pummeled by clearance markdowns. Lastly, retail remains a relatively high fixed cost business. As sales improve (both in-store and on-line) Penney’s will start to see tremendous operating leverage.

So for me, better is a virtual certainty for Penney’s–at least for the next few quarters. And those who see the brand at the brink and in need of massive store closings are going to be disappointed (and, as an aside, they also fail to understand the importance of physical stores in driving the online business and overall omni-channel strategy).

Better is easy.

Good? That’s a whole different question.

Attraction, not promotion

If you are familiar with 12-step recovery programs you know that most employ the Eleventh Tradition of Alcoholics Anonymous, which goes as follows: “Our public relations policy is based on attraction rather than promotion.”

The obvious reason for this practice is that 12 Step programs have the anonymity of their attendees at their core. Moreover, AA–and its many spin-off programs–reject self-seeking as a personal value. But it goes deeper.

Most people do not wish to sold to or want to heed the clarion call of “pick me, pick me.” If I have to hit you over the head again and again with my message, perhaps you are not open to hearing it. Or maybe what I’m selling isn’t for you. Constantly reducing your price or pitching me all sorts of deals may be an intelligent way to clear a market, but all too often it’s a sign of your desperation.

12 Step programs are among the first viral programs to scale. They gained momentum through word of mouth and blossomed into powerful tribes as more and more struggling addicts came to be attracted to and embraced the lifestyle of successful recovery. No TV. No radio. No sexy print campaigns. No 3 suits for the price of 1. When it works it’s largely because those seeking relief come to want what others in the program have.

In the business world, it’s easy to see some parallels. Successful brands like Nordstrom and Neiman Marcus run very few promotional events, have little “on sale” most days of the year and have very low advertising to sales ratios. Customers are attracted to the brands because of the differentiated customer experience, well curated merchandise and many, many stories of highly satisfied customers. Net Promoter Scores are high.

Contrast this with Sears and JC Penney who inundate us with an onslaught of commercials, a mountain of circulars and endless promotions and discounts. How many of their shoppers go because it is truly their favorite place to shop? How many rave about their experience to their friends? Unsurprisingly, marketing costs are high and margins are low.

Migrating to a strategy rooted firmly in attraction vs. promotion does not suit every brand, nor is it an easy, risk-free journey. Yet, I have to wonder how many brands even take the time to examine these fundamentally different approaches? How many are intentional about their choices to go down one path vs. the other? How many want to win by authentically working to persuade their best prospects to say “I’ll have what she’s having” rather than keep beating the dead horse of relentless sales promotion.

Maybe you can win on price. Maybe you can out shout the other guy. Maybe, just maybe, if you can coerce just a few more customers to give you a try you can make your sales plan.