A really bad time to be boring · Death in the middle · Reimagining Retail · Retail

Better is not the same as good for department stores stuck in the middle

As most U.S. department stores reported earnings recently, a certain level of ebullience took hold. Macy’sKohl’s and even Dillard’s, for crying out loud, beat Wall Street expectations, sending their respective shares higher. J.C. Penney, which has failed to gain any real traction despite Sears’ flagging fortunes, continued to disappoint, suggesting that I probably need to revisit my somewhat hopeful perspective from last year. And in the otherworldliness that is the stock market, Nordstrom — the only department store with a truly distinctive value proposition and objectively good results — traded down on its failure to live up to expectations.

Given how beaten down the moderate department store sector has been, a strong quarter or two might seem like cause for celebration–or at least guarded optimism. I beg to differ.

First, we need to remember that the improved performance comes mostly against a backdrop of easy comparisons, an unusually strong holiday season and tight inventory management. There is also likely some material (largely one-time) benefit from the significant number of competitive store closings and aggressive cost reduction programs that most have put in place.

Second, and more importantly, we cannot escape the fact that mid-priced department stores in the U.S. (and frankly, much of the developed world) all continue to suffer from an epidemic of boring. Boring assortments. Boring presentation. Boring real estate. Boring marketing. Boring customer service. And on and on. For the most part, they are all swimming in a sea of sameness at a time when the market continues to bifurcate and it’s increasingly clear that, for many players, it’s death in the middle. It’s nice that some are doing a bit better, but as I pointed out last summer, we should not confuse better with good.

To actually be good — and to offer investors a chance for sustained equity appreciation — a lot more has to happen. And while being less bad may be necessary, it is far from sufficient. Most critically, all of the major players still need to amplify their points of differentiation on virtually all elements of the shopping experience. It’s comparatively simple to close cash-draining stores, root out cost inefficiencies and tweak assortments. It’s another thing entirely to address the fundamental reasons that department stores have been ceding market share to the off-price, value-oriented, fast-fashion and more focused specialty players for more than a decade. And now with apparel and home goods increasingly in Amazon’s growth crosshairs, there has never been a more urgent need to not only to embrace radical improvement, but to really step on the gas.

Without a complete re-imagination of the department store sector — and frankly who even knows what that could actually look like — near-term improvements only pause the segment’s long-term secular decline.

It’s unclear how much the eventual demise of Sears and the inevitable closing of additional locations on the part of other players will benefit those still left standing. It’s unclear whether the current up-cycle in consumer spending will be maintained for more than another quarter or two. What is crystal clear, however, is that incremental improvement in margin and comparable sales growth rates merely a point or two above inflation never makes any of these mid-priced department stores objectively good.

Ultimately, without radical change, it all comes down to clawing back a bit of market share and squeezing out a bit more efficiency in what continues to be a slowly sinking sector riddled with mediocrity. Boring, but true.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  


NOTE: March 19 – 21st I’ll be in Las Vegas for ShopTalk, where I will be moderating a panel on new store design as well as doing a Tweetchat on “Shifting eCommerce Trends & Technologies.”  

e-commerce · Retail

Wayfair, StitchFix And Pure-Play E-commerce’s Scaling Problem

Late last month, Wayfair, the leading online-only furniture brand, reported dramatic sales growth and yet year-over-year profits fell significantly. Unsurprisingly the stock took a steep hit. In its most recent earnings announcement, Stitch Fix, the online styling subscription service, reported sales up over 25%, yet profits were essentially flat. When they signaled that profits were expected to get worse as they grew, their stock also took a beating. Several non-public online-only retailers are said to be facing similar issues of growing sales and non-existent profits. We shouldn’t be surprised.

Not too long ago it seemed like e-commerce was going to eat the world. Pundits, equity analysts and venture capital seeking entrepreneurs alike declared the death of physical retail. Many even predicted online shopping would surpass 50% of all retail sales by 2025 (spoiler alert: it will be lucky to break the 20% mark by then).

What got lost in the hype were two fundamental things. First, in many instances, brick-and-mortar locations actually add value to the shopping experience. It turns out lots of consumers prefer going to a physical store for all sorts of reasons and for all sorts of products and services. So it’s hardly shocking that once digital-only brands are now opening stores and that many “traditional” retailers continue to add to their store fleets as well. Second, and more importantly, a great deal of e-commerce remains unprofitable and often struggles from significant diseconomies of scale. This latter factor likely helps explain what’s going on underneath the surface of recent earnings concerns, including from brands as disparate as Blue Apron and Walmart.

Without access to internal data it’s impossible to say for sure, but having analyzed several pure-play brands’ customer metrics over the years I can hazard a guess at the challenges these brands are facing. Here’s a typical growth pattern for a pure-play online brand and why most eventually hit a wall, some never to recover.

Phase 1: The Liftoff

Having identified an interesting market niche and put together a solid business model, the brand launches. The first tranche of customers are acquired relatively easily as they quickly “get” the new concept and are already comfortable shopping online. They tend to be acquired inexpensively as they are the quintessential “heavy users” who are apt to learn about the brand through social media and word-of-mouth. Accordingly, many are likely the perfect fit customers, likely to be loyal and less reliant on discounting. Lifetime value is very high, cost of acquisition low. Bingo!

Phase 2: Momentum Builds

With success in Phase 1, the buzz starts to build, and flush with a big round of VC money the website gets optimized, investments in branding are made and marketing is expanded. Growing awareness leads to the relative ease of aquiring “look-alike” customers at a generally attractive cost of acquisition. It may take a bit more promotion to incentivize trial, but hey you got to fuel the rocket ship right?

Phase 3: Time To Go Find Customers

In this phase it becomes readily apparent why building an online-only brand isn’t so easy. Here, in order to sustain hyper-growth, the brand must start moving beyond its obsessive bullseye core customer to the outer rings where, on average, the customer spends less per year, is less loyal and is more promotionally driven. There also tends to be more direct competition as a brand expands. It also turns out that to break through all the marketing noise and gain the attention (and first sale) from these more promiscuous shoppers, the brand has to start spending more on expensive highly targeted marketing channels (i.e., Google and Facebook). Cost of customer acquisition starts to escalate, gross margins start to be depressed and the average lifetime value of the marginal customer acquired declines.

Phase 4: ‘Ruh ‘Roh

Here despair starts to set in for many as it becomes apparent that the cost of acquiring a marginal customer is often greater than the lifetime value of the customers being acquired. In the initial stages of Phase 4, the best brands are playing around with their marketing mix, finetuning their assortments and generally optimizing all manner of things to try to see if they can change this trajectory and convince investors that they aren’t throwing good money after bad. Some conclude that the only way to sustain growth and have a chance at profitability is to open physical stores (oh, irony, you are a cruel mistress). This is also often the time someone calls Bentonville or other deep-pocketed “strategic partner” in hopes of securing a lifeline.

Phase 5: Crossroads

Quick, name the pure-play e-commerce brands that made it through Phase 4 and came out alive (it doesn’t count if they got acquired by Walmart). To be fair, it is still too early to say whether many of the brands that find themselves at this difficult crossroad will make it out alive or join the many others in the retail graveyard. And to be sure it’s certainly not unusual for customers that get added later in a company’s growth cycle to be less profitable. What is different for pure-play e-commerce brands is that it is almost impossible to avoid rapidly escalating marginal customer acquisition costs (which is only like to get worse as Instagram and Pinterest figure out how to raise their prices for targeted ads). Rising cost of acquisition with declining lifetime value is a difficult equation to work through.

When it starts to look like every incremental customer that gets added to a brand makes profits worse, investors might want to start think about heading for the door.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

For information on keynote speaking and workshops please go here.


The Ticking Time Bomb Of E-commerce Returns

Returns have long been the nemesis of many retail brands. When a product is returned or exchanged, not only does the retailer experience incremental supply chain costs, but often the item cannot be resold at the original price owing to damage, wear and tear, or obsolescence/devaluation given the passage of time — particularly an issue with fashion or seasonal merchandise. As I laid out in my 2018 retail predictions last month, the mounting cost of returns is a growing and scary problem for many retailers that simply cannot go unchecked much longer. As e-commerce continues to grab share, it’s going to get worse — perhaps considerably — before it gets better.

We’ve Created A Monster

Over the years, I have worked for two retailers with significant catalog businesses. I’ve also been the chief operating officer for a furniture brand. We worried about returns, which could often run in excess of 30% in certain product categories — quite a lot.

Of course, back in the day, outbound shipping was rarely free, and free returns and exchanges were virtually unheard of. Today, as the direct-to-customer business is almost entirely e-commerce driven, free shipping is nearly ubiquitous, and “hassle-free” returns and exchanges are increasingly common. So not only has the average net per-item cost of handling a return gone up, we’ve made it so easy to return and exchange products that frequently customers will order three or four of the same item in different sizes or colors to be sure they get one item that works.

By design, whether we like it or not, as retailers have become more customer responsive, they’ve driven return and exchange rates higher at the same time the cost of those returns has escalated. Whoops.

And It’s Only Getting Worse

It’s probably no shock that return rates for products purchased in physical stores are typically less than products purchased online — often radically so. As e-commerce captures a growing share of all retail sales, omnichannel brands that have high return rates and high return handling costs find themselves in the unenviable position of seeing their marginal economics deteriorate — what I refer to as the “omnichannel migration dilemma” — as their online business grows.

Conversely, for some “digitally native” brands that were starting to experience an unsustainable rate of returns, this has been a huge motivator for opening their own brick-and-mortar locations.

Moreover, given Amazon’s hyper-growth and its (and the U.S. Postal Service’s) willingness to massively subsidize delivery, many brands feel they have to maintain free shipping and liberal returns policies simply to remain competitive. None of this is all that new, but for many brands, it is fast becoming a huge issue.

Something Has To Give

Rumors abound that even Amazon is starting to worry about the escalating cost of returns and exchanges. Of course, as long as it continues to be valued based on growth instead of profitability, there can be no assurances of any major changes anytime soon. Yet we are seeing some small shifts.

Earlier this mont LL Bean announced a change to its (some would say ridiculously) liberal return policy. A number of retailers have quietly been raising their average minimum order sizes to qualify for free shipping or implementing more restrictive measures, including processes to combat fraudNew technology is being deployed to try to minimize returns upfront. And some retailers are waking up to the fact that their physical stores can actually be assets and are encouraging online shoppers to return and exchange products in their brick-and-mortar locations. It turns out that not only is it typically cheaper to handle returns in a physical store, but consumers often make incremental purchases when they come in.

While Amazon has added to the problem, there are dozens of other venture-capital-funded pure-plays that have made free and easy returns a centerpiece of their value proposition. The good news (for traditional retailers, not consumers) is that it is increasingly clear that many are having difficulty profitably scaling and are not viable enterprises over the long term. As more of them fail completely, scale back or get acquired by a traditional retailer, the pressure to maintain unsustainable pricing and policies will subside. I predict we will see a lot of this activity over the next year or so. Whether this will have a dramatic effect on mitigating the escalating costs remains to be seen.

A Delicate Balance

Legacy retailers like Neiman Marcus, Nordstrom and Lands’ End have made liberal return policies a key part of their value proposition for decades. Newer brands — think Bonobos, Zappos and dozens of others — have leveraged hassle-free returns and exchanges as a key component of their growth story. Now it’s increasingly hard to put the genie back in the bottle.

Brands that seek to materially lessen the blow from the unsustainable cost of returns will have some harsh realities to deal with, not the least of which is that research shows consumers will often shun retailers that don’t maintain generous policies. Chances are that any brand that decides to revert back to “the good old days” may suffer from first-mover disadvantage.

But let’s be clear. While some brands have the financial wherewithal to absorb the greater and greater hit — or will mitigate the costs in a way that does not materially impact the customer experience — most cannot. And when the bomb finally goes off, we should all be prepared for a fair amount of collateral damage.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

For information on keynote speaking and workshops please go here.

A really bad time to be boring · Being Remarkable · Omni-channel · Reinventing Retail · Retail

Upcoming webinar: “Omni-channel is dead. Long live omni-channel.”

Please join me next Wednesday February 14th at 1pm US Eastern for a free 30 minute webinar on the future of omni-channel retailing. I’ll be joined by Rob Poratti from IBM Watson Commerce. You can pre-register here.

In other news, I’ll be heading to Melbourne, Australia at the end of the month for InsideRetailLive.

I’ve also recently added two new keynote speaking gigs, both in Chicago. I’ll be sharing thoughts from my forthcoming book “A Really Bad Time To Be Boring: Reinventing Retail In The Age Of Amazon.”

June 13-15   Shopper Insights & Activation Conference 

November 7-9   eRetailer Summit

For more on my speaking and workshops go here.

Webinar_Omnichannel-Dead_1-12-2018 (2)

Convergence · Omni-channel · Retail

The reinvention of retail demands new metrics

This post was co-written by Brent Franson and Steve Dennis

Recent retail earnings, as well as various industry reports, continue to support three continuing and profound trends. First, those retailers stuck in the vast and largely undifferentiated middle (think Macy’s, JC Penney, Gap and Sears) continue to struggle and, in some cases, face existential crises. Second, physical store traffic remains down almost entirely across the board, with little prospect of reversing. Third, e-commerce continues to gain overall market share at the expense of brick & mortar.

Given this new reality, this new retail world order, it’s time re-think what future success looks like and develop a set of new metrics.  Same store YoY as the metric of choice is a decision to hold onto the past, to refuse to accept that the metric was built for a world in which we no longer live. Retailers who refuse to change, to evolve to this new reality, further their risk of irrelevance.

While the future of retail will be unevenly distributed, it’s clear that the shopping process for both industry and consumers is evolving rapidly and is far more nuanced than many realize. While the growth of online shopping seems to get the most attention, the far more important dynamic is the degree to which most consumers’ shopping journeys start via a digital channel, regardless of where the ultimate transaction is rung. Retail brands as diverse as Target, Nordstrom and Neiman Marcus indicate that more than 60% of physical store sales are influenced by a digital channel. Data from Deloitte not only bears this out more broadly, but also affirms the rapid pace of change.

As much as we commonly talk about brick and mortar retail and e-commerce as if they are two distinct concepts, the fact is increasingly this is a distinction without a difference. The demarcations between channels has been blurring for years. Consumers no longer go online – they live online. Smart devices are increasingly constant companions in the shopping process, serving to blur the lines further.

With few exceptions, there really is no such thing as pure e-commerce any more, it’s all just commerce. For most brands, online drives offline, offline drives online, and most customers are active in multiple channels, often during the process to buy just one item. The key now is to execute a channel-agnostic, one brand, many channels strategy.

Traditional retail metrics have worn out their usefulness.

Given all this, most traditional retail metrics are increasingly irrelevant. While some focus on same-store sales is helpful, for most omni-channel retailers the historical relationship between store traffic and sales rung up in that location is irretrievably broken. For many retailers, traffic growth will never return, yet conversion and transaction value tend to be rising. This is often because customers are more intentional in their store visits, having done their research first in a digital channel. Yet at the same time, customers may traffic a store for research purposes – only to buy the product later online. As BOPIS (buy online pick-up in store) expands and more retailers take online returns at their brick & mortar locations, the store plays a critical role in overall volume and operating efficiency, even though the store may not get direct credit for improving the customer experience and overall economics.

Even if retailers knowingly temper their expectations for comp store performance, thinking about a store as a distinct economic entity is fraught with peril. Labeling a store as a poor performer because of declining sale productivity and/or low or even negative four-wall contribution can backfire. Leaders should view the store as the hub of a brand’s performance in a given trade area (i.e. the zip codes that account for the majority of a particular store’s volume). It’s a place where, yes, sales are rung up, but also top-of-mind awareness is created and e-commerce sales are generated. Instead, the instinct for many is to close a store, after concluding they will improve financial performance when actually in many cases it only make matters worse. Closing a store almost always harms e-commerce performance in that trade area, just as add adding a brick & mortar location tends to grow online sales in the geography served by a new outlet.

Thinking about e-commerce as a distinct concept is similarly unhelpful. The impact of a retailer’s website and mobile presence on store performance – plus traffic and marketing engagement – is far greater than converting customers to online transactions. Focusing entirely on online shopping centric measurements like conversion rates and average order value greatly undervalues digital’s role in brick & mortar success. Too many companies measure online as a separate P&L and push siloed and isolated performance measures that cause brands to underinvest. It’s therefore not at all surprising that retailers that have failed to evolve are also laggards in omni-channel performance and are desperately trying to catch up.

Further exacerbating these issues is the tendency for many retailers to manage their store organization and digital operations as distinct entities. Siloed organizations, data, performance metrics and financial incentives create huge barriers to becoming customer-centric and keeping pace with evolving customer dynamics. Silos belong on farms and any CEO who doesn’t see his or herself as the “Chief Silo-busting Officer” isn’t stepping up as they should.

New metrics are needed to better reflect retail’s new reality

Clearly not all traditional metrics need to be jettisoned. Net Promoter Scores and other measures of customer acquisition, engagement and loyalty can be extremely helpful. The same holds true for lifetime value calculations. But a select group of new metrics can shed light on what’s really going on in a digital-first, omni-channel world.

  • Same (comparable) trade area sales-growth. Given the growing influence of online and the store’s role in supporting e-commerce, combined year-over-year sales growth in a defined store trade area best measures the overall health of the brand and whether share is being gained or not on a location by location basis (as well as for the chain overall). It may well be the case that sales literally rung in a brick & mortar location may be down a bit, but the overall market area may be up given the strength in online shopping, assisted by a visit to the store. It would also be relatively simple to measure trade-area profitability, making it easier to determine which stores merit closure.
  • Same (comparable) customer segment growth. Actionable customer segmentation is at the heart of being more customer-centric and companies that are committed to this path should have specific acquisition, growth and retention goals for each of its major customer cohorts (or personas), in total and by sales channel. Being able to dissect performance by stage of engagement, by channel, and overall is enormously beneficial in unpacking overall performance drivers.
  • Customer journey performance levers. While this will vary depending upon category dynamics, retailers need to map out the customer journeys for key customer segments and major purchase occasions to gauge performance at key moments that matter across the journey. This needs to be married with an understanding of places where retailers could eliminate friction or amplify performance to be truly relevant and remarkable.

In conclusion

The role of the store is changing. Forever. Brick and & mortar locations must complement digital channels. And, in turn, digital must add value to the physical experience. Stores must be more than a place to simply buy things, to execute a transaction efficiently at the lowest price. Instead they must be remarkable and relevant. They must deliver the best of what shopping entails: a differentiated experience, a product playground, an interactive billboard, a social connection, a relationship.

The best retailers will deliver a harmonized experience that eliminates pain-points and amplifies special qualities along the customer journey. The best retailers will deliver intensely personalized experiences based upon a deep understanding of customer needs, wants and desires. The best retailers will see sales associates not as costs to be reduced, but assets to help move a brand from boring to remarkable and intensely relevant. The best retailers will organize around the customer, not product categories or sales channels.

It’s not easy. Yet advances in technology are making it more cost effective and simpler to execute. The retail brands that will not only survive, but thrive, are those that will aggressively and confidently leap into a world of retail reinvention.

My co-author Brent Franson is the CEO of Euclid (full disclosure: a client of mine). 

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

For information on keynote speaking and workshops please go here.


e-commerce · Personalization · Retail

Retail’s ‘Big Show’: A few key takeaways

Every year 35,000 or so of my closest friends assemble in New York City for the National Retail Federation’s “Big Show”–a three day extravaganza featuring dozens of presentations, a huge technology EXPO and networking, networking, networking. During my 25+ year career as an executive (at Neiman Marcus and Sears) and now as an independent consultant, author and speaker, I have attended at least a dozen times.

This year three major things struck me. First, there was a giddy optimism as the industry convened on the heels of the most robust holiday season in more than a decade. Second, attendance was up considerably. No matter that the Javits Convention Center is ill equipped to handle the growing throngs. Third, much of the main stage content was steeped in overly self-promotional messaging; heavy on the “what” and largely devoid of any useful “how’s”. Organizers need to take note of how the audience regularly voted with its feet, leaving en masse during several sessions where the speaker failed to provide any truly useful or relevant content.

Yet moving past some of the limitations seemingly inherent to most large industry conferences, there were a few major themes and takeaways from the event.

The end of e-commerce.

Anyone who has been paying attention (or who has been following research from folks like Deloitte Digital) knows that the distinction between e-commerce and physical stores is increasingly a distinction without a difference. Digital drives brick & mortar shopping and vice versa. It’s all just commerce now and the customer is the channel. As outgoing NRF Chairperson and recently retired Macy’s CEO Terry Lundgren put it “retail is retail” wherever it occurs. It’s not clear to me why the industry has been so slow to embrace this reality, but various speakers seemed to finally acknowledge what I’ve been writing about since 2010–and what many winning brands having been putting into practice for years. Retailers need a one brand, many channels strategy and silos belong on farms.

The death of physical retail has been greatly exaggerated.

NRF CEO Matthew Shay was among several speakers who challenged the “retail apocalypse” narrative, pointing to the large number of retailers that continue to open stores (including many once online-only brands) and the fact that overall shopping in brick & mortar store has not declined. He won’t get any argument from me. Lost, however, in debunking the high-level narrative is any level of nuance. The fact is retail’s future is not being evenly distributed. On average physical retail is doing okay, but it’s fair to say that individual retailer’s mileage will vary–often considerably. The middle continues to collapse and many retailers’ existence is being challenged by the seismic shifts in retail. Physical is not dead, but boring retail is.

This time it’s personal.

A strong theme, both from speakers and from various exhibitors in the technology EXPO, was personalization. More and more retailers are finally accepting that one of the best paths to being more intensely relevant and remarkable is to treat different customers differently by using data and advanced technology to tailor marketing messages and the overall experience. Finding ways to be compelling, rather than creepy, annoying or just bad, isn’t easy, but retailers from emerging (Stitch Fix) to legacy (Neiman Marcus) are finding ways to make it work.

Artificial intelligence is ready for its close-up.

While still relatively early in its deployment, AI was at the center of major technology announcements, including IBM’s new V9 Watson-enabled commerce platform (full disclosure: I’m a member of their Influencer program). A wide range of companies, from Alibaba to eBay to Williams-Sonoma, also discussed how artificial intelligence, machine learning and related advanced analytics tools are enhancing their ability to execute marketing and merchandising strategies. Clearly, use cases are being proven out and momentum is building.

The false ebullience of the holiday season.

Coming off of a robust holiday season, optimism was definitely in the air. I hate to be cynical (though it IS one of my super powers), but there are at least two things to bear in mind as the industry moves forward. First, a month or two of above average sales is no guarantee of sustained momentum. Any euphoria from tax cuts and a buoyant stock market is likely to be short-lived as the realities of a largely dysfunctional US government and ballooning deficits become more apparent. Second, the gulf between the have’s and have not’s continues to widen. A great quarter for the industry in total does somewhere between little or nothing for failing retailers. Arguably, for a few, it may give them a tiny bit of breathing room. But the long-term prospects of brands like Sears, Macy’s and JC Penney are not meaningfully better because of the overall strong holiday season. We went into the season with a mixed-bag of performance and we’ll come out of it with the same exact mix.

The best time to plant a tree.

Nobody needed to attend the NRF show to be reminded that the retailers that have gone out of business–or are struggling mightily–suffer(ed) from two main root problems. First, they did not focus enough time and energy on deeply understanding their customers and evolving with those changing needs and wants. Second, they fundamentally failed to embrace a culture of innovation and experimentation.

In addition to hearing from numerous fast-growing disruptive retailers, XRCLabs sponsored the Innovation Lab which showcased 25 emerging technology companies. There was plenty of variety to choose from in the booths and among the various talks. Both were typically packed. Of course the real question is how many were there as spectators versus how many will actually have the courage to act on what they saw and learned.

For retailers that have a hard time keeping pace with change, it’s worth remembering the Chinese proverb: “The best time to plant a tree was 20 years ago. The second best time is now.”

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

For information on keynote speaking and workshops please go here.

A really bad time to be boring · Reinventing Retail · Retail

Retail 2018: Now Comes The Real Reckoning

There is some dispute over whether more stores opened during 2017 than were closed. IHL says yes. Fung Retail Tech says no. Mostly I say “who cares”?

Either way, it’s clear that the retail landscape is changing rapidly, causing some retailers to prune their store counts, shutter locations en masse or liquidate entirely. What’s unfortunate–and not the least bit useful–is the tendency to declare that physical retail is dying and that we are going through some sort of “retail apocalypse.” The facts clearly do not support this notion. Similarly devoid of substance and nuance is the proclamation that e-commerce is eating the world and that virtually all “traditional” retailers are falling victim to the “Amazon Effect.”

What IS occurring at the macro-level is three-fold. First, the irrational expansion of retail space during the past two decades is finally correcting itself. Second, as retailers better understand the physical requirements to support a world where online is a significant and growing sales channel, many are optimizing their footprints to better align space with demand. Third, and far more important, is that retail brands that failed to innovate and create a meaningfully relevant and remarkable value proposition are rapidly going the way of the horse-drawn carriage.

A look at either the IHL or the FRT data reveals precisely the same picture. Lots of physical stores are being opened on the part of brands that have a winning formula, both in the value sector (think TJX, Aldi, Costco, Dollar General) and at the other end of the spectrum (think Nordstrom, Sephora, Ulta). Overwhelmingly, the retailers that are closing large number of stores are those that have operated in the vast undifferentiated middle. And it’s becoming increasingly clear that it’s death in the middle.

Physical retail is not dead. Boring retail is.

I believe the majority of over-capacity from excessive building has now been dealt with (or will be as retailers do typical post-holiday store closings). I believe most sophisticated retailers have a clear understanding of the go-forward physical requirements to best support a harmonized (what some prefer to call “omni-channel”) strategy.  They get the critical role that physical stores play in supporting the online business and vice versa. This implies that retailers that have fundamentally sound value propositions won’t be closing very many stores this year. And the best positioned brands will defy the bogus retail apocalypse narrative and continue opening stores–in some cases large numbers of them.

The flip side is that retailers with unremarkable concepts will continue their march toward oblivion. Some will hang around longer than they should–I’m looking at you Sears–because they have assets to sell off to raise cash, all the while delaying the inevitable. Store closings are a panacea, not a fix.

Similarly, many pure-play online brands with unsustainable economics will either figure out a viable bricks & clicks strategy (e.g. Warby Parker), get acquired by the digitally-native brand bail out fund known as Walmart or go ‘buh ‘bye having burned through both their cash and all the greater fools.

For me, last year was a large scale, inevitable pruning away of the brush. Now in 2018, with the obvious losers having been closed in 2017, we get to see far more clearly the brands that truly have longevity, be they omni-channel” or pure-plays.

Now we get to witness the real reckoning.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

For information on keynote speaking and workshops please go here.


Fashion · Luxury · Retail

A tough agenda faces Neiman Marcus’ new CEO

Late last week the Neiman Marcus Group named former Ralph Lauren executive Geoffroy van Raemdonck as their new CEO, replacing company veteran Karen Katz (full disclosure: once my boss). While not terribly surprising given the company’s struggles under a mountain of debt, extremely rocky “NMG One” systems implementation and largely stagnant growth, the move does come at a critical time for North America’s leading luxury retailer.

As van Raemdonck takes the helm next month (and Katz moves to a Board position), he will be faced with addressing several important and vexing challenges. As I was SVP of strategy, business development & multi-channel marketing for the Neiman Marcus Group from 2004-08 (most of that time reporting to then CEO Burt Tansky) I have a somewhat unique perspective on what requires intense and urgent focus. Here’s my take:

Growing share in a mature and shifting market

As I wrote nearly a year ago, much of luxury retail has hit a wall. Many brands, including Neiman Marcus and its most direct competitor Saks Fifth Avenue, have struggled to grow both top and bottom line as core customers “age out” of peak spending years and very few new store locations exist. Neiman’s also has one of the highest e-commerce’s penetration in the industry and much of that growth is now merely channel shift.

Competition is also intensifying. In addition to the myriad online competitors, many of Neiman’s key vendors wisely continue to invest in direct-to-consumer growth strategies as they recognize the advantages of forging a direct relationship with consumers, the strategic brand control that operating their own stores and website affords and the opportunity for greater margins. Some are even pulling back from wholesale selling to create more exclusivity and more tightly managed distribution.

Affluent consumer behavior is also evolving markedly. After the financial crisis fewer customers seem willing to spend as conspicuously as before– despite a booming stock market and growing wealth inequality. Moreover, younger customers are starting to represent a growing percentage of the potential target market and clearly they are more digitally savvy, less logo conscious and don’t (yet?) seem to value the core elements of the luxury department store experience. All these factors create strong headwinds for Neiman Marcus’ hopes to restore significant revenue growth.

An overplayed hand

The work my customer insight team did on customer segment performance in 2007-08 revealed several alarming trends. While we were doing well with the uber-wealthy who tended to pay full price and were largely impervious to our raising average unit prices 7-9% per year, the rest of our business was weakening considerably and steadily. For customers who represented more than 2/3 of our profits, we were experiencing decreasing customer counts and lower transaction levels every year. In fact, literally all of our comparable store growth in the prior 5 years could be explained by the growth in average unit retail. While this was tolerated (and maybe even appreciated) by our very best customers, we were leaking business to Nordstrom (and others) as many very good customers found our ever increasing prices to be too high and our customer experience frequently lacking.

The strategy that had gotten Neiman’s to a leadership position was starting to run out of gas. Until the financial crisis hit (and Burt Tansky retired) little of substance was done to address this growing issue. While Karen Katz has made some inroads during her tenure, the brand still suffers from too narrow a customer base and little demonstrated ability to grow customer and transaction counts. This is the single biggest strategic challenge facing the company over the long term.

Unsustainable debt load

Neiman’s private equity owners paid way too much and saddled the company with a debt level that, unaddressed, will bring the company to its knees. There is simply no way for the brand to earn its way out of the problem. It is merely a matter of time before a significant restructuring of some sort must take place. The sooner this gets resolved the better, but thus far, despite the obviousness of the issue, neither the equity or debt holders have been willing to take the necessary haircut. Hope is not a strategy.

Limited degrees of freedom and flexibility

While Neiman’s has seen their operating performance improve somewhat, macro-economic factors explain much of it and there can be no certainly of that continuing. The fact is that the only way Neiman’s performance improves markedly is for them to start gaining significant share in a mostly flat market. That will almost certainly require substantial investment in new technology, re-inventing the customer experience at retail and extending their digital capabilities. Saddled with large debt and interest payments, the company will be severely constrained in having the cash to do what it will take.

Attracting younger customers and executing the ‘customer trapeze’

While demographically oriented strategies are typically overly simplistic, demographics ARE destiny over the long-term. For Neiman Marcus to thrive in the future they must navigate what I like to call the ‘customer trapeze.’  They must deftly do their best to optimize value from their historical high spending core customers–who tend to be older, love the traditional in-store shopping experience and prefer the highest end brands– while simultaneously doing a much better job of attracting new customers who are largely “digital first” shoppers, prefer more relaxed and democratic personal service and tend to spend considerably less on average. Getting this portfolio right isn’t easy and will require Neiman’s to literally take significant share away from some very formidable competitors whose brands’ are currently better aligned with younger, more aspirational shoppers’ needs and values.

An inevitable merger with Saks?

Many people believe that both Neiman’s and Sak’s fundamentally have too many stores. They are wrong. Because of incredibly favorable rent deals and developer capital contributions, the break-even volumes for most stores are very reasonable. Even if their physical stores were to lose 10% of their volume you could count the number of stores that would be cash negative on one hand. More importantly, stores are critical to helping support the online business, which is nearly a third of Neiman Marcus’ total volume. We understood this relationship well when I worked there–and this dynamic has only gotten far stronger. Closing stores, for the most part, would weaken the brand, not help it.

Having said that, a long rumored merger with Saks holds the potential for value creation. There are some geographies where having Saks and Neiman Marcus duke it out directly only leads to mediocre profits for both, particularly as more business moves online. Rationalizing locations would increase the overall profit pool. Opportunities for eliminating redundant overhead are hardly trivial. Alas, the challenges of both companies’ current capital structures make this conceptually valid merger more complex than it might otherwise be.

Cultural pushback

When I joined the Neiman Marcus executive team one of the first things I noticed was how strong the culture was. This was good and bad. The good part was that most folks had worked together for a long time and the company was a well oiled execution machine. The bad parts were exactly the same thing. Strategy played second fiddle to execution, many senior managers lacked the requisite external perspective and, consequently, there were many blindspots.

Innovation as a discipline was also incredibly under-valued. Karen Katz deserves praise for moving the company forward on many of these fronts, but some of what is needed to take the company to the next level is not inherent to its DNA. van Raemdonck is the first outsider to run the company in some time. I expect a rocky road generally, as well as some departures of high level, long-tenured executives.

Unlike many decades old brands that are struggling mightily, Neiman has many strong core elements. And that’s clearly an advantage as van Raemdonck sets his agenda. Unfortunately, Neiman’s historical strengths are also at the center of many of its go-forward challenges. Until the debt issue is resolved, even under a best case scenario, their new leader will likely be hamstrung to move as quickly as he would like, not to mention at the pace that the company desperately needs.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

For information on keynote speaking and workshops please go here.

A really bad time to be boring · Reinventing Retail · Retail

Where in the world is Steve?

I’ll be traveling quite a bit over the next few months attending major industry conferences and (often) delivering my latest keynote “A Really Bad Time To Be Boring: Reinventing Retail In The Age Of Amazon.”

January 14-16  New York  NRF’s Big Show
February 6  Boston  MITX e-Commerce Summit
February 13 Dallas  FEI Dallas
February 28  Melbourne, Australia  Inside Retail Live
March 18-21  Las Vegas  ShopTalk
April 17-19  Madrid, Spain  World Retail Congress
May 1-2  New York  Retail Innovation Conference

Additional dates will be announced shortly.

If I’m in your town I hope we’ll get a chance to connect.

 I’m doing a webinar on February 14 “Omnichannel Is Dead. Long Live Omnichannel.”
Being Remarkable · Digital-first · Omni-channel · Retail

A baker’s dozen of provocative retail predictions for 2018

2017 was one of the most transformative years for the retail industry that I can remember. 2018 is likely to be just as wild and woolly, albeit in somewhat different ways. Here’s my attempt to go beyond the obvious and go out on the limb just a bit.

  1. Physical retail isn’t dead. Boring retail is. A lot of stores closed in 2017. Often forgotten is that a lot opened as well. Many stores will close in 2018. Many will open as well. By this time next year roughly 90% of all retail will still be done in physical stores, so please can we shut up already about the “retail apocalypse.” The train left the station years ago on products that could be better delivered digitally. What’s happened most recently has everything to do with a long over-due correction of overbuilding and the collapse of irrelevant, unremarkable retail. The seismic changes in retail have laid waste to the mediocre and those that have been treading water in a sea of sameness. Great retail brands (Apple, Costco, Ulta, Sephora, TJX, etc.) continue to thrive, despite their overwhelming reliance on brick & mortar stores. Ignore the nonsense. Eschew the boring. Chase remarkable.
  2. Consolidation accelerates. In many aspects of today’s retail world, scale is more important than ever and this will continue to drive a robust pace of mergers and acquisitions. In some cases, capacity must come out of the market to create any chance for decent profits to return. The department store space is a great example. Moreover, large, well capitalized companies will take advantage of asset “fire sales” or technology plays to complement their skills and accelerate their growth.
  3. Honey, I shrunk the store. Small is the new black in many ways. Many chains will continue to right-size their store fleets to better align with future demand. Others will reformat or relocate to smaller footprints to better address the role of online shopping. We can also expect to see more small format stores as a way to cost effectively extend customer reach and further penetrate key customer segments.
  4. The difference between buying and shopping takes center stage. Buying is task-oriented, more chore than cherished, and is typically focused on seeking out great assortments, the lowest price and maximum convenience. This is where e-commerce has made the greatest inroads. Increasingly, Amazon dominates buying. Shopping is different. It’s experiential, it’s social, tactile–and the role of physical stores is often paramount. The trouble is when retail brands don’t understand the distinction and invest their energies trying to out-Amazon Amazon in a race to the bottom. And, as Seth reminds us, the problem with the race to the bottom is you might win. Or worse, finish second.
  5. Amazon doubles down on brick & mortar. For Amazon to continue it’s hyper-growth–and eventually make some decent profits–it needs to go deeper into the world of shopping vs. buying (see above). And this means greater physical store presence, particularly in some key categories like apparel and home. In addition to opening its own stores I expect at least one major acquisition of a significant “traditional” retail brand.
  6. Private brands and monobrands shine. A key part of winning in the age of Amazon and digital disruption is finding ways to amplify points of differentiation. Most often this can be done through product and experience. With the over-distribution of many national brands and the ease of price comparison, more and more smart retailers are looking for ways to differentiate on unique product. For some–including Amazon–deepening their commitment to private brands can be a source of competitive advantage. Well positioned monobrand retailers like Uniqlo, H&M, Primark and Warby Parker also will continue to steal share from less compelling multi-brand stores.
  7. Digital and analog learn to dance. As much attention as e-commerce gets it turns out digital channels’ influence on brick & mortar shopping is far more important for most brands. In fact, many retailers report that more that 60-75% of their physical store sales are influenced by a digital channel, hence the rise of the term “digital-first” retail. Side note: anyone who has adopted this term in the last 12 months has simply informed us that they were paying no attention to what has been going on in retail for nearly a decade. Regardless, clearly in-store technology must evolve to support this rapidly evolving world. Yet as much as technology can enhance the shopping experience the role of an actual human being in making the customer experience intensely relevant and remarkable should not be forgotten. Many retailers would be wise to see sales associates as assets to invest in, not expenses to be optimized.
  8. The great bifurcation widens. And it’s death in the middle. It’s been true for some time that the future of retail will not be evenly distributedWhat became abundantly clear in 2017 is how different the results have been between the industry’s have’s and have not’s. At one end of the spectrum retailers with a strong pricing story, from dollar stores to off-price to Costco and Walmart, did well. At the other end of the spectrum, many luxury brands and well focused specialty retailers continued to thrive. Meanwhile the fortunes of Sears, Macys, JC Penney and others who failed to get out of the undifferentiated and relentlessly boring middle diverged markedly. This will end badly.
  9. Omnichannel is dead. Digital-first, harmonized retail rules. Too many retailers chased being everywhere and ended up being nowhere. The search for ubiquity led to disjointed, poorly prioritized efforts that fattened the wallets of consultants but often did little to create what most customers want and value. The point is not to be everywhere, but to be relevant and remarkable where it matters, to understand the leverage in the customer journey and to root out the friction and amplify those elements of the experience that make the most difference. Most customer journeys will start in a digital channel (and more and more this means on a mobile device) and the challenge is to make all the potentially disparate elements of the shopping experience sing together as a harmonious whole.
  10. Pure plays say “buh-bye.” With rare exception, so-called “digitally native” brands were always a bad idea. Despite venture capitalists initial enthusiasm–and Walmart’s wet kiss acquisitions–only a handful of pure-play models had any chance to scale profitably. And many arrogantly declared they’d never open stores (I’m looking at you Bonobos and Everlane) when anyone who understood the high cost of returns and customer acquisition saw a physical store strategy (or bankruptcy) as inevitable. We’ve already seen some high profile blowups and more are surely on the way (Wayfair? Every meal delivery company?). This year the shakeout will continue and it will become clear that for the brands that survive most of their future growth will be driven by brick & mortar stores not e-commerce.
  11. The returns problem is ready for its close up. Product returns were the bane of direct-to-consumer brands well before e-commerce was a thing. Lands’ End, Victoria’s Secret, Neiman Marcus and many others regularly experienced return rates in excess of 30% from their catalog divisions. When you could actually charge for delivery this was a problem, but not necessarily the achilles heel. The near ubiquity of free returns & exchanges may be a consumer bonanza, but it drives a lot of expensive behavior and makes much of e-commerce unprofitable. Customers regularly order multiple colors and/or sizes of the same item hoping that one of them will fit or be to their taste. The retailer then eats the expense of some or all of the items coming back, including handling costs and often additional merchandise markdowns (which can be especially ugly for seasonal or fashion items). The disproportionate growth of e-commerce means outsized growth and expense for retailers. It’s not sustainable. Consider yourself warned.
  12. “Cool” technology underwhelms. There is plenty of incredibly useful technology that continues to transform retail, notably around mobile, predictive analytics and the like. There is also a lot that ranges between gimmicky and not yet ready for prime time. Augmented and virtual reality? Wearables? IotT? Blockchain? Digital mirrors? Someday, maybe. 2018? Not so much.
  13. The search for scarcity and the quest for remarkable ramps up. As most things came to be available to just about anyone, anytime, anywhere, anyway, access to great product was no longer scarce. As various marketplaces, peer-to-peer review sites and various forms of social media made data about product quality, reliable alternatives and pricing universally available, information was no longer scarce. As various tools emerged to put the customer in charge, the retail brand’s advantages were diminished and the power of the channel started to evaporate. It’s really hard to get folks to pay for what is widely available for free. And it turns out the moat that protected a lot of brands has dried up and been paved over. Good enough no longer is. The brands that will not only survive, but actually thrive in 2018 and beyond, will deliver consistently and remarkably on things that are highly valued by customers, can be seen as scarce and can be made proprietary to that brand. It’s not easy, but frankly, more times than not, it’s the only choice.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

For information on keynote speaking and workshops please go here.