Being Remarkable · Small is the new black

Small is the new black: Nordstrom ‘micro-concept’ edition

Last week Nordstrom announced it will open its first “Nordstrom Local” in West Hollywood, California. The new venture is noteworthy on several dimensions. First, at 3,000 square feet, the pilot concept is dramatically smaller than a typical Nordstrom full-line department store. Second, it won’t stock any of the items that Nordy’s is best known for, such as shoes, clothing, cosmetics and accessories. Third, the focus will be on services: tailoring, manicures, style advice and cocktails.

Nordstrom joins a growing number of brands shrinking their footprints and once online only brands delving into the physical realm with small box stores. Of course, the reasons for the big guys going small and the little online brands getting into brick and mortar vary. The downsizing of traditional formats is often driven by a typically vain attempt to optimize productivity. With more business being done online the thought is that less square footage is needed to take care of the customer. The problem is that shrinking to prosperity rarely works.

Another big driver of smaller formats being promulgated by major retailers is the desire to get closer to the customer. Smaller versions of traditional format stores like Target’s urban concept allow the company to open many new more convenient locations at acceptable economics.

Most interesting–and probably the leading indicator of what’s to come–are the new brick-and-mortar “micro-concepts” that are designed from a customer point of view and rooted in the understanding of the interplay of online and offline. In announcing the Nordstrom Local test Nordstrom’s co-president Eric Nordstrom says it best: “There aren’t store customers or online customers—there are just customers who are more empowered than ever to shop on their terms.” What Nordstrom has understood for a long time–and what helps explain much of their success during the past decade–is that physical stores drive online and online drives stores. Ultimately, the retail brands that win create a highly remarkable and relevant experience that meets the customer where they are.

Digitally native brands that move into physical retail apply this thinking as well. While brands such as Bonobos, Warby Parker and many others initially believed they could build successful enterprises without pesky brick-and-mortar locations, they’ve come to realize that not only do many customers prefer to shop in actual stores, but also that physical locations bring many important economic advantages. The beauty of these brands starting with a blank sheet of paper when it comes to designing stores is that they can pick the best locations and create a highly experiential and remarkable shopping experience that leverages the best of online and offline into a more relevant and harmonious whole.

Clearly, the jury is still out on most of what’s in market today. Whether the movement of pure-play brands into physical retail will pan out remains to be seen as virtually all of these brands are hemorrhaging cash and reports of high sales productivity out of a few choice locations do not necessarily indicate profitable scalability. Nascent micro-concepts like Bodega are far from proven winners. And with Nordstrom Local it will clearly take some time to know whether it turns out to be a noble experiment or something that can be rolled out to a substantial number of locations.

While we are early in the move to micro-concepts I expect to see three things happen over the next year or two. First, is a dramatic uptick in new concept testing from both start-ups and traditional players. Small enables greater customer reach. Small makes more interesting site locations possible. Small lowers breakeven sales volumes. Small blends the best of online and offline. Second, will be the dramatic expansion of a few powerful formats where dozens, if not hundreds, of locations can be opened. Lastly, we are also likely to see some big flame-outs, particularly among the online only players that never had a viable business model in the first place.

Regardless of how this all ultimately plays out, from where I sit, Nordstrom is to be applauded for their willingness to take risks and to experiment. Many more retailers would be wise to follow their example.

Nordstrom Local Storefront

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 speaking gigs please go here.

Inspiration · Leadership

Mistakes oft repeated

Paolo Coelho suggests “a mistake repeated more than once is a decision.” And he’s definitely on to something.

Of course, sometimes mistakes are an intentional part of our path toward learning, innovation, growth. That’s called experimentation–and if failure is not an option then neither is success.

On the other hand, when we repeat destructive–or just plain foolish–behaviors, it’s often our unconscious habits taking over. The key here is mindful awareness and realizing that our fear doesn’t have to rule the roost. We always have a choice.

I like what Portia Nelson has to say about this in her “Autobiography In Five Short Chapters”

Chapter One

I walk down the street.

There is a deep hole in the sidewalk.

I fall in.

I am lost . . . I am helpless.

It isn’t my fault . . .

It takes forever to find a way out.

Chapter Two

I walk down the same street.

There is a deep hole in the sidewalk.

I pretend I don’t see it.

I fall in again.

I can’t believe I am in this same place.

But it isn’t my fault.

It still takes a long time to get out.

Chapter Three

I walk down the same street.

There is a deep hole in the sidewalk.

I see it there.

I still fall . . . it’s a habit . . . but,

My eyes are open.

I know where I am.

It is my fault.

I get out immediately.

Chapter Four

I walk down the same street.

There is a deep hole in the sidewalk.

I walk around it.

Chapter Five

I walk down another street.

Being Remarkable · Reinventing Retail · Store closings

The Retail Apocalypse And The Urgent Quest For Remarkable

Some love the “retail apocalypse” narrative. It’s great clickbait, makes for captivating keynote speeches and gives consultants a hook to peddle complicated strategic frameworks. Alas, it’s mostly nonsense. Physical retail is definitely different, but it’s far from dead. The fact is plenty of new stores are opening, many traditional retailers and — I hope you are sitting down — even quite a few malls are doing great. Brick-and-mortar retail sales are likely to be up this year, just as they were last year.

Some retailers love hearing this alternative narrative because they think it means they will be okay, that they don’t have to change, that there is some storm they just have to ride out. Unfortunately, that is not only nonsense, it is dangerous nonsense. While physical retail is not dead, virtually every aspect of retail is changing dramatically, as this excellent pieceby Doug Stephens points out. While I believe Doug overstates a few things, his underlying premise is on the money. Almost everything has to change and the key thing to understand is that the future of retail will not be evenly distributed. Stated simply: yes, some brands will do well. But many others will struggle mightily, others will be eviscerated and quite a few are dead already, they just don’t know it.

Physical retail is not going away but unremarkable retail is getting hammered. The brands that relied on good enough are learning the hard way that good enough no longer is. The mediocre brands that were protected by scarcity of information, distribution and access are getting blown apart as the customer can now get the same product anytime, anywhere, anyway — and often for less money. The brands that tried to stake out a place in the vast wasteland between cheap and special are losing as retail becomes more bifurcated and it’s increasingly clear that it’s death in the middle.

By now, a few things should be abundantly clear:

Just because physical retail isn’t dead doesn’t mean you don’t have to change.

On average, more than 80% of retail will still be done in physical stores in 2025. Unfortunately, you can’t pay your bills with averages and your mileage will vary. The way the migration of sales away from physical stores to online will affect your competitive situation and marginal economics can have devastating consequences. Even small shifts can require the need for radical reinvention.

Stop blaming Amazon.

hile there is no question of Amazon’s dramatic and growing impact upon the retail ecosystem, most of the retail industry’s problems today have nothing to do with Amazon. Overbuilding, excessive discounting, boring product, unremarkable experiences and a fundamental lack of innovation are the main reasons that most retailers are struggling today.

It’s not just about e-commerce. 

The most disruptive force in retail is not e-commerce but the fact that most customer journeys start in a digital channel. In fact, digitally-influenced brick-and-mortar sales dwarf online sales.

You can’t out-Amazon Amazon. 

Pop quiz: Are you Walmart or Target? No? Okay, then stop trying to out-price, out-assort and out-convenience Amazon. To paraphrase Seth Godin: the problem with a race to the bottom is you might win.

Choose remarkable. 

Unless you are on the short list of brands that can be just about everything to everybody (and actually make money) your task is to get hyperfocused on a set of consumers for whom you can be intensely relevant and remarkable at scale. That likely means being far more experiential and blending the best of online and offline in a compelling and harmonized way.

Be prepared to blow stuff up. 

Remarkable is easier said than done. And most retailers suffer from bringing a knife to a gun fight when it comes to innovation. Much of what got us any level of success in the past isn’t going to work in the age of digital disruption. New thinking, new processes, new technology, new metrics and new people are table-stakes on the path to retail reinvention.

Hurry.

As the Chinese proverbs says, “the best time to plant a tree was 20 years ago. The second best time is now.” Chances are you’re already behind and it’s far later than you think. The only choice then is to get started. Now. And go fast. Fail fast. Rinse and repeat.

The big problem is we think we have time.

purple cow

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 speaking gigs please go here.

Customer Growth Strategy · e-commerce · Marketing · Retail

Unsustainable Customer Acquisition Costs Make Much Of Ecommerce Profit Proof

As much attention as both the growth and disruptive nature of e-commerce receives, few observers seem realize that often the economics of selling online are terrible (what I often refer to as “the inconvenient truth about e-commerce”). The fact is only a handful of venture capital funded “pure-plays” have (or will ever) make money and most are now embarked on a capital intensive foray into physical retail that even Alanis Morissette would find deeply ironic. Amazon, which accounts for about 45% of all US e-commerce,  has amassed cumulative losses in the billions, and even after more than 20 years still operates at below average industry margins. And while I have yet to see a comprehensive breakout, it’s clear that the e-commerce divisions of many major omni-channel retailers run at a loss–or at margins far below their brick & mortar operations.

So why is this?

Last month I wrote a post pointing out how high rates of returns, coupled with the growing prevalence of free shipping “both ways”, makes certain online product categories virtually profit proof. While the impact of this factor tends to be isolated to categories with relatively low order values and a high incidence of returns or exchanges (e.g. much of apparel), a different dynamic has wider ranging implications and profit killing power. I’m referring to the increasingly high cost of acquiring (and retaining) customers online.

Investors have been lured (some might say “suckered”) into supporting “digitally-native” brands because of what they believed to be the lower cost, easily scaled, nature of e-commerce. Seeing how quickly Gilt, Warby Parker, Bonobos and others went from nothing to multi-million dollars brands, encouraged venture capital money to pour in. What many failed to understand were the diseconomies of scale in customer acquisition. As it turns out, many online brands attract their first tranche of customers relatively inexpensively, through word of mouth or other low cost strategies. Where things start to get ugly is when these brands have to get more aggressive about finding new and somewhat different customers. Here three important factors come into play:

  • Marketing costs start to escalate. As brands seeking growth need to reach a broader audiencethey typically start to pay more and more to Facebook, Google and others to grab the customer’s attention and force their way into the customer’s consideration set. Early on customers were acquired for next to nothing; now acquisition costs can easily exceed more than $100 per customer.
  • More promotion, less attraction. As the business grows, the next tranches of customers often need more incentive to give the brand a try, so gross margin on these incremental sales comes at a lower rate. It’s also the case that typically these customers get “trained” to expect a discount for future purchases, making them inherently less profitable then the initial core customers for the brand.
  • Questionable (or lousy) lifetime value. It’s almost always the case that customers that are acquired as the brand scales have lower incremental lifetime value, both because on average they spend less and because they are inherently more difficult to retain. It’s becoming increasingly common for fast growing online dominant brands to have large numbers of customers that are projected to have negative lifetime value.

So it’s easy to see how an online only brand can look good at the outset, only to have the profit picture deteriorate despite growing revenues. The marginal cost of customer acquisition starts to creep up and the average lifetime value of the newly acquired customer starts to go down, often precipitously. Accordingly it’s not uncommon for some of the sexiest, fastest growing brands to have many customers that are not only unprofitable, but have little or no chance of being positive contributors ever.

While it’s not the only reason, this challenging dynamic explains in large part the collapse of valuations in the flash-sales market in total, as well as several major flameouts like One Kings Lane. It also helps explain why so many pure-plays are investing heavily in physical locations. To be sure, opening stores attracts new customers that are reticent to buy online. But another key factor is that customers can often be acquired in a store more cheaply than they can be by paying Facebook or Google.

Slowly but surely the world is starting to wake up to this phenomenon. The nonsense that is the meal-kit business model is finally getting the scrutiny it deserves as people start to question whether Blue Apron is a viable business if it spends $400 to acquire new customers. Spoiler alert: the answer is “no.” Increasingly, many “sophisticated” investors are backing off the high valuations that digitally-native brands are seeking to fuel the next stage of their growth, leaving these companies to thank their lucky stars that Walmart seems to relish its role as a VC bailout fund. More folks are starting to realize that physical retail is definitely different, but far from dead. And, in another bit of irony, some even are starting to see that many traditional brands (think Best Buy, Nordstrom, Home Depot and others) are actually well positioned to benefit from their stores and improving omni-channel capabilities.

It may take some time, but eventually the underlying economics tell the tale.

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 speaking gigs please go here.

Being Remarkable · Omni-channel · Retail

Reports Of JC Penney’s Death Are Greatly Exaggerated

The last several years have not been kind to JC Penney. Not only have they been swept up in the long-term decline of the moderate department store sector, but they also hemorrhaged huge amounts of market share during Ron Johnson’s failed re-boot. Under current leadership, the picture has not improved much. In fact, last week shares sank again after a disappointing earnings report. The stock is off nearly 90% in the past five years and some 40% year to date.

Many observers have concluded that Penney’s is on a slow slide to oblivion. And while I agree that much more needs to be done to right the ship, I am cautiously optimistic. In fact, full disclosure, I bought some Penney’s shares last week. While investing in the company is clearly not for the faint of heart, I believe there are a few reasons to conclude that the news on Penney’s going forward is more likely to be positive than not.

Store closings muddy the picture. The biggest reason for the miss on gross margin was from unusually high markdowns. Both Penney’s own store closings and those of competitors put pressure on pricing as stores liquidate merchandise. While clearly the industry is facing a great deal of promotional intensity, margin pressures should subside a bit as the pace of store closings slows.

New initiatives are gaining traction. Penney’s continue to expand its partnership with Sephora, opening 32 new locations and expanding 31 others. The beauty category is key to driving incremental traffic. The company also is growing its appliance showrooms and seeing positive sales momentum. The repositioning of its critically important apparel business also seems to be going well, with most categories seeing positive comps despite a difficult market.

Gaining share in a down market. Wall St. is overly focused on same-store sales growth, which I continue to deem retail’s increasingly irrelevant metric.  With nearly 20% of sales in Penney’s core categories occurring online it’s more important to understand combined e-commerce and physical store performance on a trade-area by trade-area basis. If Penney’s closed a bunch of stores but overall sales grew, it suggests that they gained omni-channel share, which speaks to their improving digital commerce capabilities. While there is considerable room for improvement, that’s still encouraging. And unlike some, Penney’s seems to get that stores drive e-commerce and vice versa–and they are acting accordingly and wisely.

Well-positioned to gain from Sears demise. While Sears may still technically survive as a holding company for intellectual property, it seems obvious that most of their mall-based department stores will be shuttered within the next year or so. That will give Penney’s a crack at hundreds of millions of dollars of home and apparel business, not to mention solid upside from their expanding appliance presence.

Maybe Amazon buys them? Amazon clearly has its eyes set on growing market share in traditional department store categories. And the reality is a physical store presence is going to be required to access the majority of the business. Both Macy’s and Kohl’s market caps are around $7b. Penney’s is under $2b. You do the math.

Of course, even if my prognostications prove accurate, I know other risks exist. JC Penney’s is highly leveraged. The Amazon Effect remains real. The off-price sector continues to steal share away from department stores. The full effect of retail consolidation is yet to be realized

However, the broader “retail apocalypse” narrative is nonsense and the notion that mall-based retail is doomed is overblown. Physical retail is different but far from deadMost malls are not going away. And recent earnings reports from many “traditional” retailers suggest the broader market is beginning to stabilize. Either way, more capacity needs to come out of the market before any of the struggling retailers have any shot at significantly improved performance. For Penney’s in particular, they need further work to make their assortments and experience more relevant and remarkable, while right-sizing their store fleet for optimal performance. They need to reduce their debt burden.

Perhaps it’s wishful thinking on my part, but I think they are fundamentally pointed in the right direction. Only time will tell.

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

Retail · Store closings · The Amazon Effect

Department store quarterly performance: Better isn’t the same as good

Last week we had five major department stores report their quarterly earnings: Macy’sKohl’sNordstromDillard’s and JCPenney. It was a decidedly mixed bag relative to both expectations and absolute performance. Yet many observers seemed encouraged by the overall improvement in sales trend. Yet the overall sector is still losing market share, just not at quite as fast a rate. Which begs the question, is less bad somehow good?

It’s clear that one must pull out of a dive before an ascent can begin. It’s also obvious that reducing the rate of descent is no guarantee of a resurrection. Better is simply not the same as good. So to understand whether recent results provide a dose of optimism or are merely noise, it’s worth looking more closely at a few key considerations.

More rationalization must occur. The sector has been in decline for two decades–and not because of Amazon or e-commerce. The main reason is that department stores failed to innovate. They focused on expense reduction and excessive promotions, instead of being more remarkable and relevant. That won’t be fixed easily or quickly. So, in the meantime, there is simply too much supply chasing contracting consumer demand. Sector profitability isn’t going to improve much until Sears goes away and additional location pruning on the part of remaining players occurs.

Yet physical retail is not going away. Brick & mortar retail is becoming very different, but it’s far from dead. There is no fundamental reason why any given department store cannot not have a viable operation with hundreds of physical locations, particularly when we realize that some 80% of all products in core department store categories are purchased offline.

You can’t shrink to prosperity. Wall Street seems to think that store closings are a panacea. They’re wrong. It’s one thing to right-size both store counts and individual store sizes in response to overbuilding and shifting consumer preferences. It’s another thing to make a brand’s value proposition fundamentally more relevant and remarkable. Department stores must spend more time working on giving consumers reasons to shop in the channels they have (note: excessive discounting doesn’t count) and abandon the idea that shuttering scores of locations is a silver bullet.

Same-store sales are an increasingly irrelevant metric. Wall Street needs to let go of its obsession with same-store performance as the be-all-end-all performance indicator. Any decent “omni-channel” retailer should be on its way to–or as is already true with Nordstrom and Neiman Marcus well past–more than 20% of its overall sales coming from e-commerce. So unless a retailer is gobbling up market share most of that business is coming from existing stores. The reality is that shifting consumer preferences are going to make it nearly impossible for many retailers (of any kind) to run positive store comps. That does not mean a brand cannot grow trade area market share and profits. And it doesn’t mean that a given store is not productive even if sales keep trending down. Stores drive online, and vice versa. Smart retailers understand this and focus on customer segment and trade area dynamics, not merely individual store performance in isolation.

It is going to take more than a couple of quarters to fully understand whether the department store sector has stabilized, much less turned the corner. As we look ahead, of the five that reported, Nordstrom is clearly the best positioned, both from the standpoint of having relevant and differentiated formats and possessing physical and digital assets that are the closest to being “right-sized” for the future. And call me crazy, but I sense that JC Penney is actually starting to gain some meaningful traction. Dillard’s is a mess and Macy’s and Kohl’s remain very much works in progress.

Regardless, with tepid consumer demand and over-capacity, no department store brand (and I’d include Neiman Marcus and Saks in the mix as well) does especially well until we see further consolidation. And even when that occurs, if department stores keep swimming in a sea of sameness and engaging in a promotional race to the bottom, they have zero chance of getting back to a sustainable, much less interesting, level of performance. Better is nice. Encouraging even. But it is simply not the same as good.

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

Customer experience · e-commerce · Omni-channel

Many unhappy returns: E-commerce’s Achilles heel

It’s a common misconception that e-commerce is inherently more profitable than brick & mortar retail. The fact that very few online dominant brands’ profit margins exceed those of “traditional” retailers is one clue that this isn’t true. But a better way to understand the longer-term outlook is to look at the underlying economic drivers.

Above a basic level of scale, online retail is largely a variable cost business, whereas physical stores succeed by driving sufficient revenue to leverage their mostly fixed costs. At the risk of oversimplification, this means that to make money online gross profit/order needs to exceed the variable costs associated with that order. The reason that many eCommerce companies (or the e-commerce divisions of “omni-channel” retailers) don’t make money is that the marginal cost of acquiring a customer, plus the supply chain cost of fulfilling that order, exceeds the gross profit (essentially, revenue less the cost of goods).

The challenges of profitably acquiring customers online is an article for another day. But even where that hurdle can be overcome, e-commerce is often unprofitable due to high supply chain costs–and a huge driver is the high rate of returns. Consider this quote from Michael Kors’ CEO John Idol in a 2016 Bloomberg story: “Unfortunately today, e-commerce generates a lower operating profit for us than four-wall, brick-and-mortar. We think over time that will reverse itself but…when the consumer requires free delivery, free return, wonderful packaging, plus there’s a new trend that people are buying multiple sizes of things to try them at home and then return them, that all is a negative headwinds for us.” Bear in mind, this comes from a brand with significant consumer awareness, a sizable online operation and a high average transaction value.

While returns are not an issue for products that can be delivered digitally–or for many commodity items–in categories like apparel, accessories, footwear and home furnishings, where fit, coloration, fabrication and the like determine whether the consumer ultimately keeps the product, return rates between 25 and 40% are often the norm. When retailers pay for free shipping & exchanges handling costs can quickly erode any chance for a profitable transaction. We must also consider that returned or exchanged product often cannot be sold at the original gross margin, either because it is shop-worn (or otherwise “defective”) or because by the time it comes back the retailer has taken seasonal markdowns.

Some analysts have taken certain retail brands to task for their failure to aggressively invest in e-commerce. Yet many dragged their feet (or were rather deliberate about how they invested) quite intentionally because they understood that aggressive online growth was detrimental to their profitability. The fact is that unless returns rates can be mitigated significantly and/or the cost of handling returns can be lowered dramatically, some retailers will continue to suffer from what I call “omni-channel’s migration dilemma.”

While outside observers may gloss over this phenomenon, brands that face this growing profitability menace are taking action. One trend flies in the face of the retail apocalypse narrative. It turns out that physical stores can be incredibly helpful in lowering both the rate of returns and supply chain costs. While it is not the only reason that formerly digital-only retailers like Bonobos, UNTUCKit! and others are opening stores, it is a key driver. Large omni-channel brands have also tried to make it easier to return online orders in their brick & mortar locations. Not only are handling costs typically lower, but–surprise, surprise!–driving store traffic often leads to incremental sales.

Another avenue for taming the returns monster is using new technology and processes. TrueFit is a venture-funded company that uses artificial intelligence (among other tools) to help consumers choose the right product during the ordering process. Happy Returns is a more recent start-up that has also attracted solid VC funding. This expanding brand focuses on reducing consumer friction in the returns process and helping lower the cost of eCommerce returns for brands by operating “return bars” in major malls. The malls may also benefit by seeing incremental traffic.

Clearly e-commerce will continue to grow at much faster rates than physical retail. And with Amazon and newer disruptive brands helping drive the share of apparel, accessories and home furnishings that is sold online, the impact of high returns rates will become a bigger and bigger issue for many brands. Industry analysts would be wise to dig into this more deeply. Consumers can continue to enjoy the free ride until some rationality takes hold. Retailers would be well served to not gloss over this growing problem.

Taj Sims

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

Being Remarkable · Forbes · Omni-channel · Store closings

Honey, I shrunk the store

While the “retail apocalypse” narrative is nonsense, it’s clear that we are witnessing a major contraction in traditional retail space. Store closings have tripled year over year and more surely loom on the horizon. The “death of the mall” narrative also tilts to the hyperbolic, but in many ways it is the end of the mall as we know it, as dozens close and even larger number are getting re-invented in ways big and small.

While the shrinking of store fleets gets a lot of attention, another dynamic is becoming important. Increasingly, major retailers are down-sizing the average size of their prototypical store. In some cases, this is a solid growth strategy. Traditional format economics often don’t allow for situating new locations in areas with very high rents or other challenging real estate circumstances. Target’s urban strategy is one good example. In other situations, smaller formats allow for a more targeted offering, as with Sephora’s new studio concept.

By far, however, the big driver is the impact of e-commerce. With many retailers seeing online sales growing beyond 10% of their overall revenues–and in cases like Nordstrom and Neiman Marcus north of 25%–brick & mortar productivity is declining. It therefore seems logical that retailers can safely shrink their store size to improve their overall economics.

Yet the notion that shrinking store size is an automatic gateway to better performance is just as misunderstood and fraught with danger as the idea that retailers can achieve prosperity through taking an axe to the size of their physical store fleets. To be sure, there are quite a few categories where physical stores are relatively unimportant to either the consumer’s purchase decision and/or the underlying ability to make a profit. Books, music, games and certain commodity lines of businesses are great examples. But brick & mortar stores are incredibly important to the customer journey for many other categories, whether the actual purchase is ultimately consummated in a physical location or online.

Often the ability to touch & feel the product, talk to a sales person or have immediate gratification are critical. In other cases, lower customer acquisition and supply chain costs make physical stores an essential piece of the overall economic equation. Shrinking the store base or the size of a given store can have material adverse effects on total market share and profit margins. For this reason, retailers are going to need (and Wall St. must understand) a set of new metrics.

The worst case scenario is that a brand makes itself increasingly irrelevant by having neither reasonable market coverage with its physical store count nor a compelling experience in each and every store it operates. Managing for sheer productivity while placing relevance and remarkability on the back burner is all too often the start of a downward spiral. Failing to understand that a compelling store presence helps a retailer’s online business (and vice versa) can lead to reducing both the number of stores and the size of stores beyond a minimally viable level. But enough about Sears.

In the immediate term, we may feel good that by shooting under-performing locations and shrinking store sizes through the pruning of “unproductive” merchandise we are able to drive margin rates higherAlas, increasing averages does nothing if we are losing ground over the long-term with the customers that matter.

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

 

Being Remarkable · Inspiration · Leadership

“We’ve read enough books”

Last week in a private speech to congressional interns, presidential son-in-law (and, given his wide-ranging set of responsibilities, apparent superhuman) Jared Kushner was asked how he will fix the Israeli-Palestinian conflict despite decades of failures on the part of experienced diplomats.

His answer? “We don’t want a history lesson. We’ve read enough books.”

To which I say, “Uh, no you haven’t” and “who cares?”

Perhaps you’ve seen the New Yorker magazine cartoon that depicts a man standing before two doors, seemingly confused about which to go through. One door is labeled “Heaven” and the other is labeled “Books About Heaven.”

And while the religious example may not resonate with everyone, the metaphor is apt, our choices are clear. Knowledge is necessary. Doing is what counts.

Read the book. Or have the actual experience.

Stay in the stands, rendering judgment. Or be the person in the arena.

On the shore. Or in the boat.

Gathering knowledge. Or doing the work.

 

Digital · Innovation · Retail

For many retailers it’s later than they think

There is a lot we know about what innovative companies do–and way too much to go into here. But it’s readily apparent that most traditional retailers have ignored a great deal of it and are paying the price right now.

While no one has the gift of prophecy–and most would likely agree that few could have imagined the degree and speed of disruption we are experiencing–there are plenty of things that should have been obvious years ago to anyone paying attention. Here are just a few that were being actively discussed at the retailers I worked with at least five year ago and, in some cases, over a decade ago:

  • Physical retail space was being overbuilt and a consolidation needed to occur
  • Customers who shopped in multiple channels were far more valuable than single channel shoppers
  • Emphasizing the growth of e-commerce without tight integration with the overall brand experience would have unintended negative consequences
  • Shopping influence of digital channels was critical to physical store success, and vice versa
  • Data, organization and process silos needed to be busted to provide an integrated (I like to call it “harmonized”) experience
  • High rates of returns and high customer acquisition costs would make most pure-play brands profit proof and unsustainable
  • You can’t out-Amazon, Amazon and the middle is collapsing. The focus needs to be on remarkable, scalable, “ownable” experiences, not engaging in a race to the bottom
  • More innovation and experimentation is essential to stay ahead of the curve and best manage risk
  • A premium needed to be placed on deeper customer insight and on translating that insight into more personalized offerings and experiences.

I have no idea what percentage of retailers were aware and accepted these emerging truths. I do know that very few acted on them. I do know that very few retail brands have anything that looks like a robust innovation process. I do know that the notion of an R&D budget and having a senior executive responsible for driving innovation is absent at the vast majority of top retailers.

If I told you I was going to successfully run a marathon next year without doing any training you would tell me that I was crazy and wouldn’t be surprised in the least if I failed miserably. Yet apparently most Boards and CEO’s thought that somehow all this innovation would magically appear without a strategy and the resources to make it happen. Hope is not a strategy and counting on a time machine to go back and fix things doesn’t seem all that workable either. It’s easy to blame Amazon for the problems of most retailers, but that would be wrong. Most of the wounds are self-inflicted.

For quite a few retailers the bullet has already been fired, it’s just that the full impact has not been realized yet. Unfortunately they are in a dive from which they will never recover. Dead brand walking.

Others stand at the precipice, where their fate is not yet sealed, but the pressures to radically transform grow stronger by the day. The answer will not be to try to out-Amazon Amazon, to finish second in a race to the bottom. The answer lies in striving to be more intensely relevant and remarkable, to get out of the stands and into the arena, to understand that it is far more risky to hold on to the status quo than to embrace radical experimentation and transformation.

As the Chinese proverb says “the best time to plant a tree was 20 years ago. The second best time is today.”

plant-a-tree-today

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