e-commerce · Frictionless commerce · Retail

The de-schlepping of retail

Millard “Mickey” Drexler, the former CEO of J. Crew Group and Gap, is many things. Shy and retiring is not among them. To be sure, Drexler’s had his ups and downs, his victories and defeats. But he’s always interesting. In my only conversation with him (by phone when I was a responsible for strategy and multi-channel marketing at the Neiman Marcus Group), he had the attention span of a gnat on a 5 Hour Energy bender. Between barking orders to his assistant, he dictated a litany of things we were doing wrong at Neiman’s that I must address STAT (wait, do I work for you?). I left the call with a long list of items to discuss with my boss, more than ready for a nap. Good times.

Drexler has been mostly off the radar since stepping down from J. Crew, yet he re-emerged in typical style at the recent Annual Retail Forum/Retail Radicals event organized by the Columbia Business School and The Robin Report. Among his many provocative comments, the one that captured my attention was what he referred to as the de-schlepping of retail. “Why schlep paper towels from the supermarket? Why schlep dog food? Why schlep a lot of things?” he asked. And he’s right. Of course lugging heavy and/or bulky items home from a store has always been a hassle, particularly if you take public transportation or live in an apartment. The more powerful change is the number of companies that have emerged to address this pain point, including Boxed, Jet and Amazon.

I (and others) have made the distinction between buying and shopping, highlighting the fact that e-commerce is rapidly gaining share in the former, where the products are more commodity-driven and where price and convenience are paramount. Shopping, on the other hand, is more experiential and tactile, and as such, pure online shopping has not gained nearly as much traction. De-schlepping, as Drexler describes it, solves a very particular sub-set of customer needs, delivering clear and obvious value. From my own experience, once I discovered the ease of buying bulky and heavy items online, I haven’t turned back. While it’s not a huge amount of purchases, I’ve made a nearly complete shift of spending in certain categories away from traditional grocery stores to Amazon and others.  It’s clear from the data that I am far from alone.

At one level this dynamic is pretty obvious. At its core it merely explains some of the fundamental reasons that online shopping is now approaching 10% of all retail sales and continuing to grow much faster than brick-and-mortar retail. What’s relatively different about the de-schlepping phenomenon, however, is both the customer value and the underlying economics for the retailer.

There are plenty of retail categories where the customer may be largely indifferent between buying in a store or online—or where they regularly split their spending between the channels, based upon their episodic need for sales help, the desire to touch and feel the product or pure impulse. This is not true when we are motivated principally by our desire for de-schlepping. Once we know what we want and have a supplier we trust, there really is no reason not to buy online as a physical store experience adds little or no discernible value.

Yet from a retailer’s perspective, it’s often rather different. Since brick and mortar is largely a fixed cost business, the marginal profitability of a big bag of dog food or 48-pack of toilet paper or a case of S. Pellegrino sparkling water (my personal favorite) is usually good, even when heavily discounted. Conversely, for the online players the economics are generally terrible, owing to the variable cost nature of direct-to-consumer sales. The precise reasons customers love the de-schlepping of retail is why e-commerce sellers generally hate it. If it’s big, bulky and heavy, it costs a lot to store, handle and ship. The logistics costs relative to the gross margin dollars generated typically make these orders unprofitable. What’s great for consumers is lousy for online retailers.

So the question isn’t whether the de-schlepping of retail is good for consumers. The question is whether it can be economically sustained as it scales. The nature of Amazon’s Prime program means a decent percentage of the e-commerce behemoth’s orders are unprofitable. The prevalence of free-shipping and deep discounts to acquire new customers means that some online-only players have many transactions that generate negative cash flow. Ultimately it comes back to the interplay of unit economics and customer lifetime value. Most customers are smart enough to go where they will get the best deal. They will “overuse” retailers (online or offline) that consistently provide customer value that is too good to be true (see also Uber, Lyft and WeWork). In Amazon’s case, it has the benefit of comparatively low customer acquisition cost, supply chain efficiency and offering such a wide array of product and services that the vast majority of customers have good lifetime value even if it has a smattering of transactions that are money losers.

For brands that offer great customer value, yet suffer from challenging delivery economics and high customer acquisition costs (Boxed, Wayfair, among others), the path forward is far less certain. Sure it’s impressive to deliver consistently strong revenue growth. Yet it turns out it’s really not all that surprising when the service offering and pricing may be too good to be true. For consumers it’s great when investors are willing to subsidize a new business model that offers real customer utility. Whether that business model is ultimately economically sustainable is another matter entirely. Time will tell. In the meantime, as long as certain brands are willing to price in such a way that I can avoid the hassle of schlepping home the biggest and bulkiest of items I regularly purchase, I’ll keep buying. I’ll let them worry about whether they can sell at a loss and make it up on volume.

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.  

My speaking page has been updated with several new gigs. See the latest here.

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

JC Penney goes back to the future, but it’s likely too little, too late

At one level, the announcement that JC Penney was going to stop wooing younger customers in favor of focusing on baby boomer moms seems to make a lot of sense.

During the devastating Ron Johnson era, Penney’s was practically driven out of business by trying to execute what I call the customer trapeze way too quickly while simultaneously doing a number of other bone-headed things. In a bid to “contemporize” the brand, Johnson dropped many (it turns out profitable) lines that were deemed old and stodgy in favor of more fashion-forward assortments aimed at attracting younger customers. And sales promptly fell off a cliff. The more-than-a-century-old retailer has been trying to dig itself out of this hole ever since.

In the intervening five years, Penney’s has tried a more balanced approach. Yet despite adding back some customers’ preferred brands, launching new products and services, retooling many aspects of its go-to-market strategy and having hundreds of its competitors’ doors close, the retailer has failed to build any sustained momentum. As I wrote a couple of months back, clearly Penney’s needs to try something new, and unquestionably it needs to do it with great urgency. Unfortunately, this latest gambit is very unlikely to work.

The most obvious problem with a return to focusing on middle-age moms is that it is essentially the strategy Penney’s was executing against before Ron Johnson showed up. And while Johnson set the house on fire, Penney’s was far from lighting things up during the years leading up to the failed “transformation.” In fact, growth and profits had stalled, and the stock was selling at less than half its historical high.

So as Penney’s goes back to the future, the one thing we know for sure is that the market it was trying to succeed in almost a decade ago is now considerably smaller and quite different. On-the-mall, moderate apparel and home stores have been steadily losing share to off-price/value-oriented off-the-mall competitors for many years. More recently, Amazon and other online players have set their sights on the segment as well — and most department stores are struggling mightily to keep pace. By going back to its old customer focus in a market that has shrunk considerably, Penney’s would have to gain more market share than it was able to do when things were far less competitive. That strikes me as a very tall order.

Even under the assumption that a more tightly focused customer strategy has merits, Penney has plenty of other hurdles to overcome. Like most retail brands stuck in the boring middle, it continues to swim in a sea of sameness, with repetitive products, me-too promotions, mediocre service and mostly uninspiring stores. Going deeper on a particular customer segment may provide some incremental upside in the short term, but it is hardly sufficient to make it materially more relevant and remarkable.

The retail formula for growth is, at one level, simple. Target a big enough audience. Increase traffic. Increase conversion. Increase average spending. Increase frequency. Rinse and repeat.

Doubling down on any one customer cohort may hold the promise of performing materially better on one or more of these factors. But given how the particular part of the market Penney’s is returning to has contracted, one has to make some pretty incredible assumptions to believe it can possibly drive meaningful and enduring profitable growth.

Moreover, I would argue that no retailer can sustain itself over the long term without a powerful customer acquisition strategy. And here demographics are hardly JC Penney’s friend. A decade ago Penney’s was struggling partially because it had not done a good job of attracting new, younger customers. It’s no different today as Millennials are sure to become a more significant potential source of volume.

To survive, much less thrive, Penney’s must learn to walk and chew gum at the same time. It must avoid, as Jim Collins likes to say, “the tyranny of the or” in favor of “the genius of the and.” A portfolio approach to customer acquisition, growth and retention is at the heart of any good strategy, and Penney’s must find ways to both leverage its historical core and attract the next generation of customers.

Plenty of retailers have suffered from casting too wide a net and ending up not being relevant and remarkable to any group of consumers in particular. Yet brands can cast too narrow a net as well. My fear is that this is exactly what Penney’s is electing to do. From where I sit, it simply cannot afford any more strategic missteps.

180517180219-jcpenney-store-front

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.  

My speaking page has been updated with several new gigs. See the latest here.

Customer Experience · Reimagining Retail

For a growing number of retailers, small is the new black

It’s hardly news that the retail industry is going through significant contraction of selling space as an uptick in bankruptcies and outright liquidations forces hundreds of locations to close en masse. In addition, dozens of struggling retailers continue to shutter outlets hoping to improve profitability or avoid a similar fate. In fact, there is a pretty good chance that the number of store closings this year will exceed last year’s record pace. While there are plenty of new store openings, the net downsizing of retail space in certain categories is clearly significant (for a deeper dive I recommend this excellent report by Coresight Research).

Another factor that is starting to affect vacancy rates is that some brands are “right-sizing” their prototypical store, in what I affectionately label the “Honey, I shrunk the store” phenomenon. Some of this is a sure sign that the retailer has run out of ideas for the space it has and is hoping to shrink to prosperity. Good luck with that. Others are wisely optimizing their footprints to address the rise of e-commerce and other fundamental changes in shopping behavior. I fully expect the large scale thinning of the herd to continue apace through (at least) next year, while the evolution of store models will take multiple years to play out.

What’s new—and fundamentally more interesting for retail’s future—is the rise of much smaller and very much reimagined formats from well-established brands. I first delved into this last year writing about Nordstrom Local, the storied retailer’s new service-focused micro-concept. Nordstrom has since disclosed plans to open additional locations and hinted in its recent investor presentation that Local could be a key part of the company’s portfolio strategy to drive market share on a city-by-city basis. And just this week Ikea joined Sephora, Target and others who are hoping to spur outlet growth by announcing a smaller format that holds the potential to unlock many additional urban locations by having fundamentally different economics and site-location requirements.

In some cases these retailers are dealing with the harsh reality that their concepts are maturing and it’s becoming impossible to find locations where they can generate an ROI from their traditional format. Without reengineering their underlying economics, their store growth plans come to a screeching halt. In other cases they are mirroring aspects of the playbook employed by many digitally-native brands as they began opening physical stores: locate closer to where the target customers live or work, make services a key component of the value proposition, harmonize the experience across digital and physical channels, minimize inventory and use technology as a differentiator.

Over the years, many retailers have chased the notion of a smaller store as the key to spurring outlet growth (I’ve personally worked on several of these initiatives). Where most went wrong was delivering a watered-down version of what the brand was known for. Saks’ Main Street strategy is an expensive lesson in what not to do. The smaller box did encourage them to open in locations that could not financially accommodate a “real” Saks store. In theory, this strategy held the promise of increasing the luxury retailer’s store count by some 50%. Unfortunately customers were underwhelmed by the offering, seeing it as a “baby” Saks. Eventually all the expansion sites were closed.

What savvy brands know is to avoid creating a new concept that is merely a smaller version of the core value proposition, designed by pruning all the “non-essential” elements. This top-down approach is likely to be seen as a compromise. And who wants the customer to feel like she is settling? Instead, any new offering should be built by leveraging what the parent brand is known for, while taking a bottoms-up approach to eliminating customer pain points and finding new ways to be intensely customer relevant. This is one way a brand that’s running out of gas can go from boring to remarkable.

It’s increasingly clear that when we get beyond the outlet growth we see in the off-price/discount segment, a lot of new store openings are being driven by the Warby Parker’s, Casper’s and Indochino’s of the world who have made this way of thinking central to their store expansion strategies. For legacy retailers hoping to stay relevant, well thought out micro-concepts have the potential to jump start growth by reaching new customers and getting closer to the customers they already have, while providing a measure of protection against often more nimble new competition.

Many mature retailers would be wise to follow Nordstrom and Ikea’s lead. Small is starting to become big.

back-to-the-1970s-lets-get-small

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.  

 

e-commerce · Retail

Amazon Prime Day: Don’t fall for the hype

It would be hard to calculate the crazy amount of media and analyst time spent anticipating, covering and then trying to dissect the implications of this year’s Amazon Prime Day event. In fact, each year it seems like the breathless coverage moves closer and closer to the media frenzy that surrounds Black Friday. It’s mostly a complete waste of time.

Here’s the thing: Going into this year’s Prime Day, there were a few outcomes we could easily predict. First, it was going to be a record day. Second, knowing virtually nothing, you could reasonably guess that the year-over-year growth was going to be materially higher than the general trajectory Amazon has been on this year. Why? Well that’s what happened each of the last several years, and that’s what almost always happens when any brand intensifies promotions around a particular event. Third, Amazon was going to distort efforts toward the strategic areas it’s focused on building (i.e., voice-activated commerce, its private brands and generally anything that reinforces why everyone on the planet should be a Prime member). Why? C’mon, you can answer that question for yourself. Fourth, major competitors were going to dial up their efforts to protect marketshare. Why? Because that’s what retailers always do, whether it’s rational or not.

The last major thing we knew going into Prime Day is that, post-event, Amazon was not going to share anything especially useful or specific about its actual category or financial performance.

And, yes, that’s precisely what happened. Apparently my crystal ball remains in good working order.

So here we are looking back at the event, reading, watching or listening to folks like me — and hopefully some real journalists from time to time — trying to make sense of it all, which leaves me inclined to ask three questions. First, did we learn anything substantive that we didn’t already know beforehand? Second, more specifically, does any of the information gleaned from Prime Day help us make a more accurate prediction about what’s next? Third, if you work at a retailer (or supplier), now that are you armed with any incremental and actionable knowledge gained, are you going to do anything different in the future?

Now here’s where I need to briefly make the comparison to Black Friday. Since I’ve worked in retail, which is now more than 25 years, Black Friday has become a bigger and bigger deal, both in terms of the media attention it garners and the time and energy most retailers put against it. And the two things that have become clear over time is that most of what happens on Black Friday is completely predictable in advance and that actual performance on Black Friday is a poor indicator of how the industry will do that overall holiday season and how any given retailer’s results will turn out. In other words, it’s mostly much ado about nothing.

So with regard to my first two questions, I’m struck by how Prime Day is becoming more and more like Black Friday — and, for that matter, the unfortunately named Cyber Monday. Sure, they will be huge volume days. Sure, they will rack up bigger numbers than last year. But did we really learn anything that we didn’t already know, other than it turns out Amazon’s website also crashes from time to time?

Which brings me to a follow-on to the third question I posed: As a retail leader (or someone who provides services to the industry), regardless of whether you actually gained any new knowledge and insight this week, what is it you are actually doing to fight and win in the age of Amazon?

From where I sit, many of us (myself included) spend way too much time watching things happen, rehashing things we already know and staying stuck in judgement and critique.

Don’t fall for the hype. Don’t get sucked into the media vortex. It may feel like it’s useful to watch the talking heads on CNBC. You might feel like you are learning something poring over various articles and newsletters. But it’s a distraction and a trap. Most of us already know what we need to do.

The hard part isn’t the analysis. The hard part is the doing.

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.  

On October 3 I’ll be doing a keynote at the ICSC Canadian Convention in Toronto. Hope to see you there.

Harmonized · Omni-channel · Retail

Many retailers still need a ‘Chief Silo-busting Officer’

For the last five years or so much of retail has been obsessed with becoming “omni-channel.” As I pointed out in Forbes piece last year, this ambition sounds good, but is often ill-defined and poorly focused. The point is not to be everywhere, but to eliminate friction and be remarkable and relevant in the places along the customer journey where it really matters. It’s why, as one of my 7 Steps to Remarkable Retail, I encourage brands to design and execute a “harmonized” shopping experience. Harmonized retail requires the important aspects of the customer’s journey to sing beautifully together, regardless of touchpoint or channel, completely devoid of discordant notes. It also requires that we let go of the dualistic notion of e-commerce and physical retail. In most cases, it’s all just commerce and the customer is ultimately the channel.

Beyond the semantics of “omni-channel,” “harmonized,” “unified” or “frictionless” commerce, it turns out that when brands garner deep customer insight around the shopping experience it’s not all that hard to figure out which pain points to eliminate and which product or experiential elements to amplify. Unfortunately many retailers have not even gotten all that far, as this recent eMarketer reportilluminates. That’s likely to end badly.

Yet even armed with this insight and a well articulated roadmap, many well intended “customer-centric” efforts fail. The primary culprit is usually the deeply ingrained silo-ed behavior endemic to many retailers’ operations. Most brick and mortar dominant retailers have developed intensely product-centric cultures where the merchandise (and merchant) is king. And if they had a catalog business it was run largely independently of the physical stores division. As e-commerce became a thing, it was typically bolted onto the existing mail order division (e.g. JC Penney, Neiman Marcus). For companies that needed to get into the direct-to-consumer world anew, the so-called dot-com business was often established as a completely separate entity, typically located away from the core business (in Sears’ case, for example, in a different part of its sprawling campus; in Walmart’s case, on the other side of the country). Either way, channel-centric silos were put in place or reinforced.

While there may have been initial merit to allowing the e-commerce business to get speed and traction absent the interference of the mother ship, over time the result is that executing against a well harmonized experience is fundamentally hindered by silos: silo-ed customer data. Silo-ed inventory. Silo-ed supply chains. Silo-ed metrics. Silo-ed incentives and compensation schemes.

As it turns out, most customer journeys that end up in a physical store transaction start in a digital channel. It turns out that some of the best enterprise customers get acquired in a physical store but then end up doing the bulk of their shopping online. In fact, it turns out that over the past 15 years, for every retailer where I have seen the actual data, customers that shop in multiple channels are the most profitable and loyal customers. And it turns out that customers don’t care about channels. Retailers that continue to organize, measure, pay and execute their operations as if this weren’t true are, unsurprisingly, falling further and further behind.

As others have pointed out, digitally-native brands that have moved into physical retail have largely avoided the silo issue, and therefore are often perceived as having an advantage over legacy retailers. Conceptually they do have an edge: partially because they did not have a culture to undo, partially because they had better customer data from the outset and partially because their technical infrastructure was built with a digital-first orientation. It’s also important that they decided to add stores because many now understand the amplification power of physical and digital convergence.

But let’s be clear. You don’t have to be some new disruptive brand like Warby Parker or Indochino to get this, act on it and perform well. Williams-Sonoma, Sur La Table, REI and a number of other decades-old retail brands never established the silos in the first place as they moved from direct-to-consumer into multi-channel. Nordstrom operated in a more silo-ed way in the early days of e-commerce. Yet more than a decade ago, they made the decision to break down the silos and began implementing process and technology changes necessary to lead in customer-centric, channel-agnostic, harmonized retail. As far as I can tell, they are the only multi-line mall-based retailer to gain meaningful share during the past decade. Coincidence? I don’t think so.

Now it’s true that plenty of retailers have put senior executives in charge of “omni-channel.” Others have named chief digital, chief customer or chief experience officers. Good for them. Necessary perhaps, but hardly sufficient if those executive don’t have the authority to break down the silos and drive the major cultural, process and technology changes that delivering on a harmonized retail experience demands.

The fact is that to survive, much less thrive, under-performing retailers need a “chief silo-busting officer.” And until the CEO sees that as his or her job, fully supported by the Board, all the talk about omni-channel, customer-centricity or a seamless shopping experience is really just that. Talk.

Silos belong on farms.

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.  

 

Reimagining Retail · Retail

Nordstrom and retail’s growing urgency to rethink performance metrics

Last week Cowen and Co. retail analyst Oliver Chen downgraded Nordstrom shares, and the stock promptly tumbled. Among the concerns he cited were declining comparable store sales at both Nordstrom’s full-line department stores and the Rack off-price division. There’s a real risk to misunderstanding what is really going on.

One of the things were going to need to get used to, not only with Nordstrom but with many other brick-and-mortar-dominant retailers, is a new way of thinking about performance — and much of this has to do with letting go of comparable stores sales as a key indicator while fundamentally thinking differently about the role of physical stores.

We know that e-commerce is growing much faster than physical retail. That’s not changing anytime soon, if ever. But there is a huge difference between online brands stealing share from industry incumbents and sales that are transferred within channels of “omni-channel” retailers. Nordstrom is a great case in point.

It’s hard to make a case that Nordstrom has been appreciably damaged by the disruptive impact of e-commerce. It’s easy to make the case that the company has done a heck of a job responding to these changes and capturing the digital-first customer, both by developing superior online shopping capabilities and executing a well-harmonized experience across digital and physical channels.

While most of its department store brethren are losing market share, experiencing significantly compressed margins and closing stores in droves, Nordstrom has consistently driven strong overall results despite being a rather mature brand. In recent years, this has mostly played out in strong e-commerce growth and tepid physical store performance.

A world of declining traffic

Last year I posed the question “what if traffic declines last forever?” While I was intentionally being provocative, for many retailers it is far more reasonable to assume that this will be the case going forward than not. There will always be hot retail concepts that will go through a growth cycle of opening plenty of locations and experiencing strong same-store sales growth. The off-price segment is a great example of that right now. But for the most part, the shift away from brick-and-mortar to online shopping will continue unabated. And that means most retail brands, particularly those that are relatively mature, are looking at an almost impossible task of driving consistent positive same-store sales as e-commerce gains share.

So what? 

It’s one thing for physical store sales to go to an online competitor; it’s another to transfer sales to your own captive websites, as Nordstrom has been able to do (for the most part). The problem with the relentless focus on comparable store sales as a key metric is it treats the store as a discrete economic entity, which it clearly is not. This in turn drives the nonsense around closing stores as the silver bullet for fixing what ails traditional retailers. It’s certainly reasonable to assume that physical assets can be better configured to deal with changing shopper behavior and the shift to online selling. And clearly, when a retailer is losing massive share to competitors, a wholesale re-think is in order. But the idea that comparable store sales are the best indicator for a retailer’s brick-and-mortar deployment is simply no longer valid in most cases.

A new role for the store: the heart of a brand’s ecosystem

For most traditional retailers, we must stop thinking about stores as liabilities but rather as assets that, yes, in many cases need to be transformed — often radically. But we must acknowledge that from Target to Kohl’s to Sephora to Neiman Marcus and beyond, the store is typically the heart of a brand’s ecosystem. This means that for many, if not most, if the store goes away many customers’ relationships — and therefore future spending — will be compromised. It’s not brick-and-mortar or e-commerce. It’s both, together, that ultimately drive customer loyalty.

In many categories, physical locations perform key roles in the shopping journey that online simply cannot duplicate or come close to mimicking — at least with current technology. For retailers that put a premium on creating a harmonized experience across channels, e-commerce is a sales channel, but it is also a major complement to the stores, and vice versa. It is therefore not surprising to discover that many brands that have shuttered stores have seen their e-commerce get worse in the trade areas once served by a closed location.

The big move of once-online-only brands into brick-and-mortar locations reinforces the unique and important role of physical stores. Most of these brands are approaching the limits of online growth and see stores as a way to acquire customers more inexpensively, serve them in unique ways and forge more comprehensive relationships through the unique combination that digital and physical can provide. One Warby Parker customer, for example, might be completely comfortable buying a new pair of glasses online, but will turn to a brick-and-mortar location for an optician’s adjustment. Another Warby Parker customer might need to see and physically try on their first pair in a store, but will make future purchases online going forward.

The reinvention of retail demands new metrics

In light of the differing underlying economics and category dynamics faced by any given retailer, there is no one-size-fits-all metric to perfectly define success. But it should be clear that same-store sales is an increasingly irrelevant metric. As it gets harder and harder to truly credit a particular channel for a sale or its role in acquiring, growing and retaining a particular customer, the delineation of channels becomes more of a blur. Retailers (and the analysts who love them) need to evolve their measurement focus.

Since customers typically do most of their shopping (whether online or in store) in a relatively narrow geographic region, there is a strong case to be made for seeing a trade area as the more relevant economic entity compared with a store or e-commerce in isolation. Given what was discussed earlier, and knowing that e-commerce sales tend to go up in a trade area when a brand opens a new store, we cannot ignore the inherent interdependence of the channels in retailer metrics any longer.

Spoiler alert: Many brand are already looking at performance this way internally. It’s time for Wall Street to catch up. Here’s my and Euclid’s Brent Franson’s suggestion on some other things to consider.

Of course, none of this is to say that Nordstrom doesn’t have some work to do or that its shares were not overvalued. Yet the inexorable shift to digital and the resulting difficulty in driving what gets counted as comparable store sales does not get addressed in any useful way by defaulting to store closings, leasing out excess space or hyper-focusing on misleading metrics.

Nordstrom is only the latest retailer to be misunderstood. More are sure to follow.

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.  

Just  announced: I will be keynoting the NEXT Conference in Austin, TX on September 24.

Digital-first · e-commerce · Retail

5 big myths and misunderstandings about e-commerce

Much of what gets written about the retail industry centers on the notion that e-commerce is changing everything and that traditional retailers and malls will soon be obliterated in a tsunami of disruption. Alas quite a bit of this is just flat out wrong or widely misunderstood.

The seismic forces being felt throughout most sectors of retail are undeniable. While the overall retail apocalypse narrative is nonsense, a harsh reckoning is befalling those retailers that failed to act in the face of significant change and shifting demographics. The ridiculous overbuilding of retail space during the past decade or so is finally being corrected. And, to be sure, the rapid growth of e-commerce—and Amazon in particular—continues to transform consumer behavior and wreak havoc with many legacy brands’ boring value propositions and challenged underlying economics.

It’s also true that a lot of commonly held beliefs—and what is put forth as “futurist” prognostication—ranges somewhere between rank hyperbole and outright distortion. So here’s my take on the five big things many often get wrong about e-commerce in particular—and the impact of digital disruption more broadly.

E-commerce will soon represent 50% of all retail

Forever is a long time, so it’s impossible to say definitively that e-commerce will never represent half of all industry sales. But I’m absolutely willing to take “the under” from those that are predicting it will get to 50% within the next decade. That’s not to say that certain categories won’t make it—books and music are already there. Certain retailers might grow to (or maintain) that penetration level as well; the most obvious being brands that started as pure-plays but are rapidly expanding into brick and mortar (e.g. Warby Parker, Indochino). Well differentiated brands with a strong legacy in direct-to-consumer that wisely invested ahead of the curve and that operate relatively few physical stores (e.g. Williams-Sonoma, Neiman Marcus) can get or stay there as well.

The reason it won’t happen is two-fold. First, you don’t have to be a mathematician to see that we are not on a glide-path to make it. To achieve 50% share would require a far different growth rate than current trends suggest. Rates are moderating, not accelerating. Indeed there remain large categories with comparatively low e-commerce penetration (home furnishings, grocery, home improvement, et al) but there are inherently sound reasons for this, mostly tied to the experiential nature of the vast majority of these purchases. When the customer is inclined to see, touch and feel the product, brick and mortar is likely to stay overwhelmingly favored. This is a prime (heh, heh) reason why Amazon bought Whole Foods, why Wayfair is struggling and why so many once online only brands find themselves rapidly (and rather ironically) opening stores.

It’s all about new disruptive models

With all the hype surrounding the brands the cool kids like—and the VCs seem to enjoy pouring money into with reckless abandon—you might think they are big contributors to e-commerce’s massive growth. Turns out, not so much. First of all, when we say e-commerce we mostly mean Amazon, as it accounts for nearly half the entire sector. But here are the leaders that come right behind them, in rank order: No. 2 Walmart, No. 3 Apple, No. 4 Home Depot, No. 5 Best Buy, No. 6 Macy’s, No. 7 Target, No. 8 Kohl’s, No. 9 Costco. No. 10 is Wayfair, which I doubt will stay much longer in the top ten, but that’s another story.

So despite the bright and shiny nature of the latest brand to “disrupt” the sock, lingerie or luggage market, when you add them all up they don’t account for all that much market share. Instead the $100 million plus e-commerce club is filled with old school brands like Lowe’s, Staples, Nordstrom, Neiman Marcus and (shudder) Sears.

Online shopping is easy to scale

Among the key reasons that investor dollars flooded into pure-play e-commerce over the past decade was the belief that these new and innovative brands could scale quickly and efficiently. While it’s turned out that the technology is generally quite scalable—and that impressive numbers of customers could be acquired far faster than a typical brick and mortar roll-out strategy—the path for many, if not most, has been far more difficult than anticipated. Much of this can be traced back to the ridiculously high (and generally unsustainable) costs of customer acquisition, as well as what often turn out to be expensive and/or complicated issues stemming from the high rate of customer product returns. Pure-play e-commerce can be extremely capital efficient. Until it’s not. See One Kings Lane, Gilt.com and a growing list of pure-play flameouts.

Online shopping is more profitable than brick & mortar

Amazon has barely made any money in retail in its more than 20 year history. In its most recent earning quarter report (which delivered record profits), Amazon’s margins remained below industry averages (fun fact: Apple made more money in its recent quarter than Amazon has made in its entire history, and that includes AWS). When you consider that Amazon represents nearly half of all e-commerce, and the majority of hyper-growth digitally-native brands (Wayfair, Bonobos, et al) lose money, it’s hard to believe the sector is more profitable. For traditional brick-and-mortar-dominant retailers with fast growing e-commerce businesses we can reasonably infer from publicly available information that for many the growth of e-commerce is dilutive to earnings. It’s not surprising, particularly for low average ticket online purchases, where order fulfillment costs eat up a large percentage of margins.

Many have criticized brands like Walmart, Pier 1 and H&M for being slow to develop their online capabilities. And they did get some things wrong, mostly around not understanding the role of digital in the overall customer journey irrespective of the purchase channel. But it’s also likely true they were slow because they knew that given the characteristics of their product lines they were signing up for deteriorating margins.

The focus on transaction channel is important

Retail industry folks like to talk about channels. There is little evidence that customers care. Wall Street likes to know how fast e-commerce is growing and what’s going on with same-store sales. The fact is those channel-centric metrics are increasingly useless. Many retail brands are organized by channel, allocate inventory by channel and analyze customer behavior exclusively by channel. Many still have separate marketing budgets, performance indicators and incentive schemes based upon purchase channel. In almost all cases this is not only wrong but dangerously misleading as it encourages behavior that is not customer-centric, while undermining overall brand objectives.

While there are customers who are literally online-only shoppers, the vast majority of customers are regularly active in digital and physical channels. They think brand first and channel second (if at all). To them it’s all just shopping—and for brands it should be seen as all just commerce. One brand, many channels. Digital influences brick and mortar and vice versa. In fact, both Deloitte and Forrester studies indicate that digitally-influenced physical store revenues are far bigger than e-commerce sales, suggesting anyone who attributes all digital spending to online channel revenues is likely to widely miss the mark on their investment strategies. Except for the few brands that remain online only (which is a rapidly dwindling number), the focus on e-commerce versus brick and mortar is fast becoming a distinction without a difference.

Clearly shopping behavior continues to evolve rapidly. Short-term strategies that look to be burning cash today may turn out to be wildly profitable tomorrow. Amazon obviously has the potential to improve profitability if they choose to focus on margins over growth. A shakeout of profit proof business models is likely in its early days. Much more of this history is yet to be written.

Nevertheless, when we advance click-bait worthy stories as real analysis, we do a disservice. When we broad brush industry trends, rather than dig deep into the idiosyncrasies and nuance of particular sectors and categories, we are likely to miss what’s really going on. And understanding the dynamics of a complicated, ever-changing industry is hard enough to do without getting confused or distracted by the hype cycle.

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 more on my speaking and workshops go here.

A really bad time to be boring · Innovation · Retail

Will Macy’s ignite a new era of legacy retailer innovation?

The moderate department store sector has been struggling for some two decades; first losing share to category killers and discount mass merchants, then to off-price retailers and now, increasingly, to Amazon. Since 2008, department stores’ share of total retail has sunk from 2.8% to about 1.7%. Over 1,000 stores have been shuttered during the past few years with more sure to follow. J.C. Penney and Sears have seen their market values collapse, while Kohl’s, Dillard’s and Macy’s have significantly underperformed the market.

Recently, however, a certain ebullience has returned to the sector as financial performance has improved. Some observers now see a rebirth, while others are a bit more skeptical. It may well turn out that the past few months’ gains are more dead cat bounce than renaissance. Yet Macy’s has garnered considerable attention by stepping up its growth efforts under CEO Jeff Gennette. The first big step was announcing its Growth 50 Strategy earlier this year. Then, in just the past six weeks, two significant deals were announced. In early May, the company acquired Story, the Manhattan-based concept store, and made its founder Rachel Shechtman Macy’s new “chief brand experience officer.” And then just over a week ago Macy’s entered into a strategic alliance with b8ta, the experiential retailer and technology platform.

It remains to be seen whether these initiatives help relieve the epidemic of boring that struck Macy’s and its brethren years ago. Materially and fundamentally altering Macy’s stuck in the middle trajectory will take more than a couple of deals that look to affect a small percentage of its total business. The operational, experiential and product changes that are part of Growth 50 appear solid, but are far more evolutionary than revolutionary. And all of this comes against a backdrop of increasing competition from off-price retailers that are opening substantial number of stores (and aren’t yet close to mastering digital commerce), along with Amazon’s growing push into fashion.

Macy’s improved financial performance has to be put in the context of the broader market (Macy’s is barely keeping pace) and these innovation moves must be put in the context of their potential materiality (they aren’t likely to be). Still, Macy’s is to be applauded for its willingness to act and to embrace what I call a “culture of experimentation.” Given that the sector Macy’s competes in is virtually certain to keep shrinking, the only way for Macy’s to drive consistent, material profitable growth will be for them to steal significant market share. That will take more than incremental improvements or a random set of experiential pilots. These moves seem like a good, albeit limited, start.

While it’s easy to blame Amazon (and others) for the troubles that have befallen so many legacy retailers, the reality is that most of the wounds are self-inflicted. Too many of these retailers, including Macy’s, watched the last 15 or 20 years happen to them. They seemed to be believe that they could cost cut their way to prosperity and that mere tweaks to their product offering and customer experience would move the dial. Now, as many of them inch closer to the precipice, a few are acting—some rather more boldly than others.

The fact is they have no choice. The middle is collapsing under the weight of boring product, boring marketing and boring experiences. And you could not have picked a worse time to be boring. The only way out is to be dramatically more customer-relevant and to deliver a remarkable experience at scale. Being digital-first, offering a seamless customer experience, along with all the other buzzwords the pundit class likes to throw around (myself included) are fast becoming table-stakes. Necessary, but far from sufficient.

Traditional retailers are often pretty good at following others’ leads. I suspect that as Macy’s makes additional moves, many will be emulated by competitors. Yet the idea that legacy retailers will finally wake up to the need to be fundamentally more innovative seems unlikely. They mostly watched when it was clear that e-commerce was going to revolutionize shopping. They mostly stuck to channel-centric thinking and silo-ed behavior when it became clear that the customer was the channel. They mostly remained rooted in one-size-fits-all marketing strategies when it was obvious that we needed to treat different customers differently. And they continue to rely on store closings as a silver bullet, when the real problem is operating a brand that is not big enough for the stores they have.

Adding to my dire and admittedly cynical outlook is that many of the retailers that need to innovate the most still have no clue how to do it and, even if they did, lack the cash flow to make it happen. Sadly, for many, this will end badly.

For them, as the saying goes, the biggest problem is that they think they have time.

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 more on my speaking and workshops go here.

Being Remarkable · Branding · Retail

Is IHOb a big nothing burger?

The teasing announcement that IHOP (the brand formerly known as the International House of Pancakes) would change its name to IHOb sent the interwebs wild. In the days leading up to what some seemed to take as earth-shaking, potentially vortex-shifting, news speculation was rife as to what the “b” stood for. Bacon? Breakfast? Burrito? Bohemianism? Blockchain? So many intriguing possibilities!

One intrepid investigative reporter ultimately engaged in what is sure to be Pulitzer-winning work by simply walking into a local IHOP, where he immediately discovered some signs that seemed to solve the mystery: B is for burgers.

Shockingly, once we got the official word, it turned out to be merely a publicity stunt designed to highlight the chain’s new focus on meals other than breakfast. So the hemming and hawing about how bone-headed the name change was going to be then shifted to challenging the wisdom of the menu refocus or being offended by what some took as a desperate ploy for social media attention. The Wall Street Journal even weighed in with the deeply disturbing news that many customers don’t even know what IHOP stands for. It also turns out that there are quite a few folks disgusted by the lack of global sensibility in the menu despite “International” being right there in the restaurant’s name.

Of course, virtually all of this is noise. The publicity stunt will soon be forgotten. The people that like to get their pancakes at IHOb, er, I mean IHOP, will probably keep getting their pancakes there—or if they want to lean into the International part, their Belgian waffles or, if feeling especially frisky, their French Toast. The burgers will turn out to be a winner, or not. And the Earth will keep orbiting the Sun.

Having said this there are, in fact, at least two important and instructive things to take away from this episode.

First, a name is not the same thing as a brand. A name is what we call something. A brand is something different entirely—and far more meaningful. I like Seth Godin’sdefinition: “a brand is the set of expectations, memories, stories and relationships that, taken together, account for a consumer’s decision to choose one product or service over another.” Often we get lost in the literal naming of something. But a powerful brand transcends mere description.

What comes to mind when we think about Restoration Hardware? Or Pottery Barn? Or Crate & Barrel? Or Banana Republic? When we stop to think about the names of those stores as representations of what they do today, they seem not only pretty silly, but downright misleading. It doesn’t matter. The customer experience over time is what defines the brand. So enjoy your Pepsi while Googling more about this.

Second, the challenges of IHOP speak to broader issues that many legacy brands face. There are great advantages to being known for a clearly defined set of expectations, memories, stories and relationships. Yet that often sets up real limitations and barriers to a brand’s necessary growth and evolution.

Mature brands typically need to retain their long-term historically valuable customer cohorts and attract and grow entirely new segments. It’s part of what I call the “customer trapeze,” and it isn’t easy to execute. The more brands lean into cultivating younger, trendier customers the more they likely risk alienating older, more classic ones. The more you start to push products you aren’t known for, the more you call into question whether you are serious about the core of what made you distinctive in the first place.

The thing to remember is that stagnation in the face of shifting consumer desires and growing, often disruptive, competition is, best case, irrelevance; worst case, it’s death. Many brands convince themselves that embracing radical change is risky, when in fact failing to evolve is the most risky thing a company can possibly do. We don’t have to look very long and hard to come up with dozens of examples of once-leading brands that failed to experiment and innovate and are paying a heavy price today.

So maybe the IHOb thing is just a goofy publicity stunt. Maybe the folks at IHOP are kidding themselves that they can become a meaningful player in a world that’s crowded with all manner of burger joints and casual-dining options. Maybe this is all just much ado about nothing.

Yet in a world where lots of legacy brands sat around and watched the last 15 or 20 years happen to them and now find themselves inching toward the precipice, IHOP should at least be applauded for trying something new.

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 more on my speaking and workshops go here.

Customer Experience · Omni-channel · Reimagining Retail · Retail

These brands apparently did not get the ‘retail apocalypse’ memo

For a couple of years now pundits, analysts, journalists and various other retail observers have been advancing the “retail apocalypse” narrative. A typical story or opinion piece warns of the “death of the mall,”  points out how “e-commerce is eating the world,” and generally suggests that “traditional” retailers are toast.

Alas, facts are stubborn things, as I point out in my keynote talks and highlighted in a recent Forbes article, “Physical Retail Is Not Dead. Boring Retail Is.”

Recent reports from several high-profile–and clearly brick & mortar-dominant–retailers underscore the uselessness of broad statements about the future of physical shopping. Despite the supposed plague descending upon those poor sods who continue to open actual stores, Lululemon and Costco managed to drive double-digit comparable store increases and robust e-commerce growth. Same with Ulta, the beauty brand that is opening 100 new stores this year. If physical retail is dead, please also get the word out to TJX, Ross, Dollar General and Aldi, all of which continue to open significant numbers of new locations. Oh, and don’t forget Warby Parker, Indochino, Untuckit, Everlane, Fabletics and many other brands that started online, only to discover that physical stores are essential to their next stage of growth—and may actually be the key to their making any real money.

Alternatively, if we look at China where, frankly, much of the really cool stuff in retail is happening, it turns out shopping behemoth Alibaba is stepping up its “new retail” strategy by opening more Hema stores and making investments in various brick & mortar-centric retail concepts. I wonder if those who continue to promulgate the “death of physical retail” storyline are short the publicly-traded brands in the two biggest retail markets on the planet that continue to defy their thesis?

Of course, the real issue is the foolishness of adopting a one-size-fits-all view of a huge and complicated industry. The future will not be evenly distributed and individual retail brand’s mileage will vary—often considerably. What we know to be true is that in sectors where e-commerce penetration is higher than 40% or so—typically where the product can literally be delivered digitally, as is the case with music, books and games—most of physical retail has been wiped out. We know that in sectors where the supply of retail space greatly exceeded the sustainable demand (I’m looking at you department stores), in some cases owing to the growth of e-commerce, in other cases owing to the rise of better value propositions (off-the-mall and off-price competition), a massive consolidation is occurring. Most notably, we know that retailers that got stuck in the middle, failing either to choose to be great at price/value and convenience (what I like to call “optimized buying”) or to deliver a remarkable shopping experience, are extinct or being pushed to the brink of irrelevance.

Just as misleading and potentially dangerous as making pronouncements about a retail apocalypse are those that adopt the Alfred E. Neumann position (note to Millennials: Google it) and find solace in e-commerce being “only 10%” of all retail. The impact of digital disruption varies considerably by sector, a particular retailer’s cost structure and whether or not a given retailer has executed a well-harmonized omnichannel strategy. For every Nordstrom and Neiman Marcus that have captured a fair share of the shift to digital shopping for themselves and continue to grow overall in relatively mature markets, we have J.C. Penney and Toys ‘R’ Us that pretty much missed the boat entirely.

It’s easy to blame Amazon for all of the industry’s woes. But it isn’t true. It’s easy to say that malls are dead. Yet many are incredibly vibrant and healthy. It’s easy to pronounce the death of physical retail. But then you have to explain the thousands of new stores that are opening and the dozens of overwhelmingly brick & mortar-centric brands that are thriving.

So if you are one of those people going on and on about the retail apocalypse please just cut it out. Your lack of perspective and nuance is not helping.

It is crystal clear, however, that many more malls and stores will close without aggressive actions to reimagine and reinvent themselves. Struggling brands desperately need to go from boring to remarkable. Struggling brands need to adopt a culture of experimentation and be willing to be retail radicals. Struggling brands need to stop the nonsense about channels and realize it’s all just commerce, and that the customer is the ultimate channel. Struggling brands need to learn to treat different customers differently. And struggling brands need to hurry. Time is not on their side.

When this all comes together, we see the positive results that are possible. When it doesn’t, there is no longer any place to hide.

Lululemon--39312-detailp

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.  

On Friday June 15 I will be keynoting The Shopper Insights & Retail Activation Conference in Chicago.  For more on my speaking and workshops go here.