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.

It’s the Experience Stupid! Why Retailers Need to Move Away From Product-Centricity

As I approach my 20th anniversary in the retail industry I continue to be amazed at the number of senior retail executives who go on and on about how “it’s all about the product.”  Nonsense.

Don’t get me wrong, product is anywhere from pretty important to very important depending upon the particular retail concept and the consumers they target.   But the total customer experience is the most important driver of success in retail.   Think about the last thing you bought.  Chances are there were multiple places you could have gone to buy that product.  Why did you end up buying where you did?  Price?  Convenient location?  Great customer service?  Compelling environment?  Easy returns?  Informative web-site?  One-stop shopping?  Loyalty program points?

At Neiman Marcus one of the things we looked at is why customers, when faced with identical product and identical prices from multiple retailers in the same mall, ended up buying an item at a particular retailer.  With rare exception it was some aspect of the customer experience–customer service or store environment–that was the differentiating factor.

It’s easy to understand why most retailers are product-centric.  They are run by merchants, and merchants spend their life picking product, allocating it and monitoring sales, margin and turnover.  Few have any background or experience with marketing or customer insight.   Retailers are organized by product category, not customer segments.

More and more we see retailers that emphasize customer-centricity over product- centricity–whether it’s Zappo’s, Nordstrom, Best Buy or Coach–leading the way.

How’s your company doing?

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!

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.