False Positives

In case you don’t know, a “false positive” is a result that is erroneously classified as positive—typically because of a flaw in testing methods or analysis.

False positives can cause major issues.  One obvious example is the concern that can be caused by a faulty medical test result.

In business this usually plays out differently.

Retailers that open their initial new retail concepts in only the very best locations declare the pilot a success and begin an aggressive store roll-out program only to discover they can’t replicate their results on a broader scale.

Recent press declaring that “luxury retail is back” is another example of a false positive.  Industry observers simply have the wrong reference points; they  mistake better performance for good performance.  A deeper dive reveals that sales and profit margins are still well below pre-recession levels.  But the easy year over year sales comparisons—and gross margin improvements driven by unusually lean inventories—make the results look better than they objectively are.

Declaring victory when you are still very much in the battle is a dangerous thing indeed.

The Stall at the Mall: Retail’s Tepid Bounce Off the Bottom

So last month’s retail comparable sales numbers are out and they are pretty bad.

According to Financo, the specialty retail sector (guys like Gap and Abercrombie & Fitch) was down 1.1% for May, despite comparing against a 7.3% decline last year.  Department stores fared better, up 1.8%–but that compares against a horrific last year when the group (which includes luxury players like Saks and Neiman Marcus) saw a staggering decrease of 12.4%.  And all this in a month where the late Easter was supposed to help.

In the words of that great retail strategist Dr. Phil, it’s time to get real.

A careful analysis of recent retail performance reveals some upward trajectory in sales, but only when compared to dismal results a year earlier.  This is the proverbial bounce off the bottom, not a sign of a true recovery.  Gross margins are improving as well, but we must remember that inventories were cut drastically, eliminating that last tranche of inventory that must be marked down dramatically to move.  Even in the face of reduced inventories many retailers are still struggling to get back to historical gross margin rates.  And that’s because many customers still require greater than traditional markdowns to be enticed to buy.  Again, not a sign of a lasting recovery.

The retail sales equation is really pretty simple.

(Capacity to Spend) x (Willingness to Spend) x (Spending Allocation) = Sales

For most sectors capacity to spend is barely budging given continued high unemployment, tight credit and slow disposable income growth.  In some areas we are seeing a bit more willingness to spend–if only in comparison to last year’s major pull back.  The inability of most retailers to raise prices–combined with many consumer’s willingness to selectively “trade down”–is tending to mix the allocation of spending to lower average retail prices.  You add it all up and the retail outlook remains pretty tepid.

So what does this mean for your business?

First, accept that your business is not likely to recover to 2007 levels any time soon.  Second, embrace the reality that most of your sales growth has to come from growing share of wallet with existing customers.  Third, aggressively seek to understand your customers’ needs (tangible and emotional) far better than your competition.  Next, let go of your product-centric ways and lean into that brave new world of customer-centricity .  And then focus and intensify your efforts to meet your customer needs in truly remarkable ways.

It may not be easy, but it’s what you know you need to do.

Market Share Growth: Get in the Car and Drive

Most retail, consumer and luxury brands are starting to report positive sales and profit margin growth.  This is good news, but let’s face it,  the sales growth is against terrible numbers last year and the margin growth is through tight inventories and aggressive cost reductions.  And with easy comparisons until October, the news is likely to look pretty good for the next two quarters.

Unless the economic outlook improves dramatically, for most companies it will become clear that they are not getting back to pre-recession levels of business any time soon.  Going forward, growth is likely to remain muted and margin rate improvements are going to be tougher to come by.  So the real question is what are companies doing to drive market share growth?  For many companies that reduces down to this: what are they doing to drive share of customer growth?

When it comes to taking action on share of customer growth there are only two types of companies.  The first is the company that may have a corporate strategy (often exemplified by big binders of strategic and long-range financial plans sitting on shelves), but does not have a customer strategy. That is, they don’t have deep consumer insight, they haven’t developed actionable customer segmentation, they don’t have segment specific marketing plans, they don’t have truly useful customer value metrics and they aren’t part of the conversation age.  For these types of companies they need to commit to developing a customer strategy and they need to move with great focus and commitment.  Now.

The other type of company has a reasonably well articulated, pragmatic customer strategy (or they are close enough that they can realistically move into action).  With business improving and many competitors still trying to figure out what to do, these players have a once in a generation opportunity to press their advantage, whether that is through opening new stores, creating a compelling multichannel experience, developing a leadership position in location-based marketing or through many, many other possible leverage points.

The answer for both is the same: Get in the car and drive!

Squeeze Play: The Luxury Off-Price Market Hits the Wall

During the past 18 months luxury retail consumers have come to enjoy wide-scale deep discounts.  Many of the deals came from established players such as Neiman Marcus, Saks, Barneys, who–stuck with inventory they could not sell when consumer demand dried up–resorted to extensive promotions to turn merchandise into cash.

The real sizzle to the story, however, came from the so-called “sample sale” or “flash-sale” sites such as Gilt, Rue La La and Haute Look.  These new companies came to market in a perfect storm setting

  • They offer an innovative, fun, convenient new business model (well, to the US anyway, they really just “borrowed” Vente-Privee’s formula)
  • The recession handed them millions of deal seeking high-end consumers
  • There was a glut of inventory available as manufacturers and retailers get caught off guard by the recession.

So things got off to a really good start and the flash-sales sites grew like topsy, with U.S.  industry leader Gilt Groupe quickly gaining more than 2 million members and said to be on track to do some $500 million in sales this year.

Industry incumbents suddenly woke up to the fact that there is a large segment of affluent consumers who really like to get a deal and don’t necessarily want to head out to the sticks to the factory outlet mall (Nordstrom–you get a pass because you figured this out a long time ago with your Rack stores).  So Neiman’s and Saks started experimenting with their own “flash” sales (though, shockingly, neither has yet to mount a serious online counter attack) and announce plans to accelerate the opening pace of their clearance stores.  Lord & Taylor and Bloomingdale’s announce their own forays into the off-price channel.  More “flash sales” sites get launched.  And just yesterday EBay (yes, EBay) launched their own entry into the market.

But here is the problem: the supply of excess merchandise is dropping dramatically just as the consumer offerings–both online and in bricks and mortar stores–are increasing.  The competition for authentic luxury merchandise that can be sold at discount levels that are truly attractive is becoming increasingly intense.  Something has to give.

The reality is that, going forward, there is no way for all these guys to meet their product needs by buying true clearance merchandise (that is, product that was originally meant to be sold at full price in traditional retail channels).  In the near future they will have to have the majority of their product made specifically for their channel (what I like to call “faux clearance”).   Now this is not an impossible hurdle.    Nordstrom, Saks and Neiman’s do this already for their own clearance stores (trust me, I worked on this strategy at Neiman’s).  And you may not realize it, but most of that stuff in those manufacturer’s factory outlet stores is made for those channels as well.

The strategic challenge is that the price value equation for the consumer is changing.  Last year, manufacturers were desperate to unload product and in some cases would unload it to the Gilt’s and Rue La La’s of the world for below cost.  This is turn allowed the flash sales sites to promote product at very deep discounts and still make a solid gross margin.  However, when product is manufactured specifically for these channels the manufacturer is not selling at fire-sale prices, but rather is looking to make more of a regular margin.  Plain and simple, this adds to the acquisition price of the merchandise and that means that the resulting price for the consumer is going to be higher.

The result of all this is that the consumer offering is going to look a lot different in the future: fewer unbelievable deals on true designer product and more faux clearance.  This is certain to change the customer mix for these players as well; fewer well-heeled Fashionista’s looking for a great deal and more aspirational customers taking advantage of lower prices to buy from well-known retailers and brands.

This is not necessarily a bad thing. But it will be a different thing.  And the companies in this arena will have to deftly manage the transition very carefully or the shake-out could be quite traumatic.  Stay tuned.

A Rebound is Not a Recovery

The news during the last few days has been rife with stories heralding that the consumer is back!   Yesterday one story’s headline opined: “March Retail Sales Surge As Long-Cautious Shoppers Splurge.”

Splurge?  Really?

Clearly retail sales are getting better, and there is some evidence that momentum is building.  But the improved comp. store sales that most retailers posted last month must be put in perspective.  First and foremost companies are comparing against last year’s dismal numbers.  Case in point: Neiman Marcus and Saks DID post solid increases in March (9.6% and 12.7% respectively).  But these increases were against substantial declines the year before–in Neiman’s case almost 30%–as panicked affluent shoppers dramatically cut back their spending.  So even with strong increases this year the overall revenue base is still much smaller today than it was two years ago.

Same story on gross margin.  As earnings have come in over the last few months, the vast majority of retailers are showing significant increases in gross margin rates.  But they are comparing against last year’s markdown-o-rama.  Few retailers–particularly those on the high end–have been able to get close to their pre-recession rates, as many consumers remain unwilling to buy unless they get some sort of deal.

There are two other factors that are worth watching before we declare the retail recession over.  First, it should be noted that March had very favorable weather in most cities and Easter was earlier this year, so the increases weren’t really as good as appear at first glance.  Second, many consumers have been sitting on the sidelines for some 18 months.   The increases in spending may be what some pundits refer to as “Frugal Fatigue.”  I’m sure some of that is true.  I also know that it’s true that as time goes on, things wear out and fashions change.  You can’t shop your closet forever.

So, yes, with the economic picture brightening, and a replacement cycle starting to take hold, business should continue to get better.  But we have quite a ways to go before we really can say we have a recovery, not the inevitable bounce off the bottom.