We’re never ready

Oh sure, maybe we’re ready for the easy stuff. Ready to leave for work, make dinner, hop in an Uber, do the laundry, pay the credit card bill.

But the work that matters, that enlivens the spirit, that changes us, our tribes and the world around us? That’s another thing entirely.

Naming our fear is helpful, because it is our fear that keeps us stuck.

Letting go of any notion of perfection–the right time, the right skills, the right conditions–is useful as well.

Being willing to get started–to accept that the only way we can ever really know that we are on the right path is to start walking; slowly at first, but faster and faster as we gain confidence–is essential.

Because here’s the thing…

The conditions will never be perfect.

I have no idea what’s going to happen in the future. And neither do you.

Chances are you already have everything you need to take that first step.

And sure it might not work.

Like it or not it’s later than we think.

The fact is we’re never really ready for what really matters.

But we can still start.

What better time than now?

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An inconvenient truth about e-commerce: It’s largely unprofitable

The disruptive nature of e-commerce is undeniable. Entirely new business models are revolutionizing the way we buy. The transformative transparency created by all things digital has revolutionized product access, redefined convenience and lowered prices across a wide spectrum of merchandise and service categories. The radical shift of spending from brick & mortar stores to online shopping is causing a massive upheaval in retailers’ physical footprint, which looks to continue unabated.

But the inconvenient (and oft overlooked) truth is that much of e-commerce remains unprofitable–in many cases wildly so–and many corporate and venture capital investments have no prospect of earning a risk-adjusted ROI.

While it was once thought that the economics of selling online were vastly superior to operating physical stores, most brands–start-ups and established retailers alike–are learning that the cost of building a new brand, acquiring customers and fulfilling orders (particularly if product returns are high) make a huge percentage of e-commerce transactions fundamentally profit proof. Slowly but surely the bloom is coming off the rose.

Despite the hype–and a whole lot of VC funding–it’s increasingly clear that most of pure-play retail is dying, as L2’s Scott Galloway lays out better than I can. We have already seen the implosion of the flash-sales sector and the collapsing valuations of once high-flying brands like Trunk Club and One King’s Lane. Just the other day Walmart announced it was acquiring ModCloth, reportedly for less than the cumulative VC investment. A broader correction appears to be on the horizon and I suspect we will see a number of high-profile, digitally native brands get bought out at similarly discounted prices. And, ironically, we will continue to witness a doubling down of efforts by many of these same brands to expand their physical footprints, some of which is certain to end badly.

The challenges for traditional retailers and their “omni-channel” efforts are even more vexing. Walmart, Pier 1, H&M and Michaels are among the many retailers that have been criticized for their slowness to embrace digital shopping. Yet I suspect their seemingly lackadaisical approach owes more to their understanding of e-commerce’s pesky little profitability problem than corporate malfeasance. Alas, more and more retailers are increasing their investment in online shopping and cross-channel integration only to experience a migration of sales from the store channel to e-commerce, frequently at lower profit margins. Moreover, this shift away from brick & mortar sales is causing these same retailers to shutter stores, with no prospect of picking up that volume online. The risk of a downward spiral cannot be ignored.

Given the trajectory we are on it’s inevitable that more rational behavior will creep back into the market. But with Amazon’s willingness to lose money to grow share and investor pressure on traditional retailers to “rationalize” their store fleets, I fear it will take several years for the dust to truly settle.

In the meantime, e-commerce continues to be a boon for consumers and a decidedly mixed bag for investors.

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

 

Should Hudson Bay Buy Neiman Marcus? The Case For And Against.

Tuesday morning the Neiman Marcus Group reported another quarter of disappointing financial results and announced that it was going to “explore strategic alternatives.”

To be sure, some of Neiman’s problems are idiosyncratic, largely owing to a botched systems implementation and a now crushing debt load taken on in a 2013 private equity buyout. Yet the brand’s continuing struggles also underscore how luxury retail has hit the wall and how it now seems increasingly likely that the storied company may need to run into the arms of yet another owner.

Recent reports have suggested that the Hudson’s Bay Company was hot on the trail of Macy’s. Yet to many, the notion that HBC would acquire a badly wounded company several times its size, seemed a bit crazy. But the rationale for HBC–the owner of Saks Fifth Avenue and Gilt–to acquire Neiman’s seems, at least at face value, more strategically sound and (perhaps) more easily financed.

When I worked for Neiman Marcus as the head of strategy and corporate marketing we took a hard look at acquiring Saks. Years later, many of the pros and cons of combining the #1 and #2 luxury department stores remain the same.

The Case For

It seems increasingly obvious that the luxury department store sector is quite mature. While e-commerce is growing (now representing 31% of Neiman’s total revenues), most of that is now merely channel shift. Moreover, there are virtually no new full-line store opportunities for either Saks or Neiman’s, and the jury remains out whether or not US brands can find a meaningful number of store openings outside their home markets. Shifting demographics also do not bode well for long-term sector growth.

Faced with this reality, consolidation makes a lot of sense. If Saks were to merge with Neiman’s there would be considerable cost savings from combining many areas of operations. Rationalization of the supply chain would yield material savings as well. Managing the two brands as a cohesive portfolio would allow for optimization of marketing spending and promotional activity. There might even be some benefits from combining buying power to extract greater margins from vendors. Less tangible, but potentially meaningful, is the ability to cascade best practices from each organization.

The more interesting benefits could come from addressing store overlaps. As the market matures and more sales move online, there will be a growing number of trade areas (and specific mall locations) where Saks and Neiman’s going head-to-head only waters down the profitability of each respective location. Selectively closing stores and redeploying that real estate could drive up the remaining locations’ profitability dramatically, while unlocking the underlying real estate value of certain locations. All of which certainly plays into Richard Baker’s (HBC’s Chairman) strengths.

The Case Against

By far the most challenging element of any buyout of Neiman’s by HBC (or by anyone for that matter) would be the price and the related financing. Neiman’s was sold in 2013 for $6 billion dollars and still carries about $5 billion in debt. Since the buyout the company’s EBITDA has gone south, with no prospect for an imminent major turnaround. Given the maturity of the sector and the company’s recent weak operating performance, it’s hard to see why anyone would pay the sort of multiple that would make the current equity and/or debt owners whole.

Unless the real estate value can be unlocked in a transformative way, the only rationale for a merger hinges on the ability to generate operational efficiencies and optimize trade area by trade area market performance. With regard to the former, this isn’t trivial. The Saks and Neiman’s cultures are very different. To say one is very New York and the other is very Texas merely hints at the challenges. It’s easy to sketch out the synergies on paper. Making them actually happen is another thing entirely.

With regard to the latter, the fact is that Saks and Neiman’s are very similar concepts (though Neiman’s historically has been operated far better). When I was at Neiman’s we struggled with how we would operate two virtually identical brands often operating in the same mall–or in places like San Francisco, Beverly Hills, Boston and Chicago–just down the street. Even if we could get out of a lease (or sell the store), would closing a shared location actually be accretive to earnings? If we continued to go head-to-head could we shift the positioning of each brand enough to actually grow market share and profits. Ultimately, other issues trumped this particular concern, but this issue isn’t trivial either and the degree to which it is important mostly comes back to the ultimate price to get a deal done.

Without access to proprietary data it’s impossible to completely assess the likelihood of an HBC/Neiman’s deal. But it seems increasingly likely that something dramatic needs to happen with Neiman’s capital structure and it’s difficult to imagine how another leveraged buyout gets done with private equity sponsors. And it’s hard to see another strategic buyer that makes much sense. More and more, HBC looks like the only game in town.

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

Luxury retail hits the wall

For a long time, the conventional wisdom has been that the luxury market was largely impervious to the ups and down of the economy. Yet recent results suggest otherwise and even with an improving macro-economic picture and booming stock market, most U.S.-based luxury retail brands continue to struggle.

A little over a week ago, reports surfaced that Neiman Marcus was looking to restructure its debt after a series of disappointing quarters. While Neiman Marcus faces unique challenges owing to high leverage from its 2013 buyout and a botched systems implementation, they are also being hit by a general malaise affecting the sector. HBC’s Saks Fifth Avenue division revenues have stalled during the past year. Nordstrom, which was once a shining star in the retail pantheon, has seen five straight quarters of declines in its full-line stores. Tiffany and Kors are among other brands facing similar declines. So what’s going on here?

The most common explanations for faltering performance have been the strong dollar’s impact on foreign tourism and a weak oil market. To be sure, these factors have not been helpful. But the problems in the luxury market go deeper, particularly among the department store players. Even an improvement in foreign tourism or the oil market are unlikely to return the sector to its former glory. Here’s why:

  • Little new customer growth. Other than through e-commerce, luxury retailers have had a tough time with customer acquisition for many years. With e-commerce maturing–and most recent reported gains merely channel shift–unfavorable demographics (see below) and very few new store openings, luxury brands are struggling to replace the customers they are losing.
  • Little or no transaction growth. While not widely appreciated, most of the comparable store growth in luxury retail has come through prices increases, not growth in transactions. To change this dynamic companies need to appeal to a wider range of customers and that’s proven difficult to execute in an intensely competitive environment. Brands must be also be careful not to dilute their brand relevance and differentiation in an attempt to cast a wider net.
  • Unfavorable demographics. Affluent baby boomers have propped up the sector for more than a decade. But as customers get older they tend to spend less overall, and quite a bit less on luxury in particular. Baby boomers are slowly but surely aging out of the segment. Gen X is a smaller cohort and there is little evidence they will spend as much as the boomers. Over the longer term, millennials will need to make up for the boomers who, to put it bluntly, will be dying off. Most studies suggest millennials will be more price-sensitive and less status conscious then then the cohorts ahead of them. This is a major long-term headwind.
  • Growing competition. Strict control over distribution largely insulates the luxury market from intense price competition and having to go head-to-head with Amazon. Nevertheless, full-price luxury is increasingly being cannibalized by retailers’ own growing off-price divisions. Luxury brand manufacturers are also aggressively investing in their own direct-to-consumer efforts by improving their e-commerce operations and continuing to open their own stores. Luxury websites like Net-a-Porter are gaining share of a no longer expanding pie.
  • Shifts in spending. Affluent consumers continue to value experiences and services over things–and are allocating their spending accordingly. Perhaps this multi-year trend will start to reverse itself. Perhaps.
  • The omni-channel migration dilemma. Luxury retailers are spending mightily on all things omni-channel, as they must to remain competitive. But it’s incredibly expensive to create a more integrated customer experience. The better a retailer becomes at this, the more business shifts from physical stores to digital. Most often this is not accretive to earnings as brick & mortar economics get deleveraged and online shopping is plagued by high returns and expensive logistics.
  • Looming over-capacity. While the luxury sector does not face the pressure to close stores that the broader market does, stagnant sales and a continued shift to digital channels will start to put more and more pressure on full-line store economics. Moreover, there is growing evidence that the high-end off-price sector is approaching saturation. The rationale for a Saks and Neiman merger may start to make more sense and some pruning of locations seems inevitable.

Notwithstanding the capital structure issues Neiman Marcus must deal with, the luxury market does not face nearly the same immediate challenges that many parts of retail must address. Nevertheless, there is mounting evidence that the sector’s struggles go beyond foreign currency woes and the vagaries of the oil market.

Profound change is coming to luxury as well and most of the headwinds simply aren’t going away.

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

The fault in our stores

Last week Target became the latest retailer to report weak earnings and shrinking physical store sales. They certainly won’t be the last.

As more retail brands disappoint on both the top and bottom lines–and announce scores of store closings–many may conclude that brick-and-mortar retail is going they way of the horse-drawn carriage. Unfortunately this ignores the fact that roughly 90% of all retail is still done in actual stores. It doesn’t recognize that many retailers–from upstarts like Warby Parker and Bonobos, to established brands such as TJMaxx and Dollar General–are opening hundreds of new locations. It also fails to acknowledge the many important benefits of in-store shopping and that study after study shows that most consumers still prefer shopping in a store (including millennials!)

Brick-and-mortar retail is very different, but not dead. Still, most retailers will, regardless of any actions they take, continue to cede share to digital channels, whether it’s their own or those of disruptive competitors. To make the best of a challenging situation, retailers need a laser-like focus on increasing their piece of a shrinking pie, while optimizing their remaining investment in physical locations. And here we must deal with the reality that aside from the inevitable forces shaping retail’s future, there are many addressable faults in retailers’ stores. Here are a few of the most pervasive issues.

The Sea Of Sameness

Traditionalists often opine that it all about product, but that’s just silly. Experiences and overall solutions often trump simply offering the best sweater or coffee maker. Nevertheless, too many stores are drowning in a sea of sameness–in product, presentation and experience. The redundancy in assortments is readily apparent from any stroll through most malls. The racks, tables and signage employed by most retailers are largely indistinguishable from each other. And when was the last time there was anything memorable about the service you received from a sales associate at any of these struggling retailers?

One Brand, Many Channels

Too many stores still operate as independent entities, rather than an integral piece of a one brand, many channels customer strategy. Most customer journeys that result in a physical store visit start online. Many customers research in store only to consummate the transaction in a digital channel. The lines between digital and physical channels are increasingly blurred, often distinctions without a difference. Silos belong on farms.

Speed Bumps On The Way To Purchase

How often is the product we wish to buy out of stock? How difficult is it to find a store associate when we are ready to checkout? Can I order online and pick up in a store? If a store doesn’t have my size or the color I want can I easily get it shipped to my home quick and for free? Most of the struggling retailers have obvious and long-standing friction points in their customer experience. When in doubt about where to prioritize operational efforts, smoothing out the speed bumps is usually a decent place to start.

Where’s The Wow?

As Amazon makes it easier and easier to buy just about anything from them, retailers must give their customers a tangible reason to traffic their stores and whip out their wallets once there. Good enough no longer is. Brands must dig deep to provide something truly scarce, relevant and remarkable. Much of the hype around in-store innovations is just that. For example, Neiman Marcus’ Memory Mirrors are cool, but any notion that they will transform traffic patterns, conversion rates or average ticket size on a grander scale is fantasy. Much of what is being tested is necessary, but hardly sufficient. The brands that are gaining share (and, by the way, opening stores) have transformed the entire customer experience, not merely taken a piecemeal approach to innovation.

Treat Different Customers Differently

In an era where there was relative scarcity of product, shopping channels and information, one-size-fits all strategies worked. But now the customer is clearly in charge, and he or she can often tailor their experience to their particular wants and needs. Retailers need to employ advanced analytical techniques and other technologies to make marketing and the overall customer experience much more personalized, and to allow for greater and greater customization. More and more art and intuition are giving way to science and precision.

Physical retail is losing share to e-commerce at the rate of about 110 basis points per year. While that is not terribly significant in the aggregate, this erosion will not be evenly distributed and the deleveraging of physical store economics will prove devastating to many slow to react retailers. This seemingly inexorable shift is causing many retailers to reflexively throw up their hands and choose to disinvest in physical retail. The result, as we’ve seen in spades, is that many stores are becoming boring warehouses of only the bestselling, most average product, presented in stale environments with nary a sales associate in sight.

The fault in our stores are legion. But adopting an attitude that stores are fundamentally problems to be tolerated–or eliminated–rather than assets to be leveraged and improved, makes the outcome inevitable and will, I fear, eventually seal the fate of many once great retailers.

PurpleCow

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

JC Penney: The good, the bad and the ugly.

J.C. Penney recently announced its fourth quarter earnings as well as plans to shutter as many as 140 stores. To say the least, the announcement was a decidedly mixed bag.

On the good–or at least improving–side, earnings were a bit better than anticipated. Moreover, Penney’s comparable stores sales fell “only” 0.7%, materially better than their direct competitors, indicating some growth in relative market share. The company also continues to experience double-digit e-commerce growth with some 75% of online orders “touching” a physical store. While the picture is incomplete, this at least suggests that they are gaining much needed traction on their omnichannel initiatives. The retailer will continue to roll-out appliances, positioning them well for growth as Sears implodes and HHGregg appears headed for bankruptcy. And Penney’s should gain share in other key categories as Sears, Macy’s and others close stores and continue to struggle.

Given the huge revenue drop during the Ron Johnson era, the bad news continues to be that despite all the merchandising and operating improvements during the past three years, regaining material market share is proving nearly impossible. Moreover, the small amount of share that has been clawed back has come at high rates of couponing and promotional activity. Penney’s can never become a profitable retailer merely by closing a bunch of stores and maintaining an unprofitable level of discounting. Until Penney’s proves it can drive positive same store sales and a sustainable margin rate the turnaround remains teetering on the brink of life support.

The ugly centers on the increasingly dire picture these announcements paint for “traditional” department stores. Everything we have seen of late from the moderate department store players indicates that the sector’s decades long decline is not only accelerating but is reaching the tipping point where consolidation, store rationalization and fundamental business model restructuring must occur at a much faster and more dramatic pace. There is no scenario in which the available market these retailers compete for does not continue to shrink, thereby eviscerating the underlying economics of hundreds of physical locations. Pruning costs, rolling-out new merchandising strategies, offering “buy-on-line, pick-up-in-store”–and all the other turn-out plans outlined in the press releases–are all likely worthwhile. But they are not remotely close to sufficient.

With all the store closings already in the works–and more certain to follow–it will take some time for the dust to settle. The potential for a major acquisition or two may further cloud the picture this year. The only thing we know for sure is that the “profit pool” for the sector continues to contract and it’s very likely that one or more players won’t be around by this time next year. Until one or more of the remaining brands can demonstrate both improving margins and sustained comparable stores sales the sector starts to look one where no one can earn a decent return.

And maybe no one gets out of here alive.

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

Relevance-light models are now retail’s big problem

So-called “asset-light” business models, where a company has relatively few capital assets compared to the overall size of its operations, have drawn increasing attention (and investor dollars) in recent years. Think Airbnb, Uber, Snap and many other essentially digital-only brands. The concept isn’t new. Brand licensing and many hotel management and franchise-based businesses have employed this formula for years.

In fact, the initial appeal of e-commerce was centered on the notion that a profitable business could be built without expensive physical stores loaded up with gobs of inventory. Then people started to learn that even with relatively little capital tied up in brick & mortar, both online-only brands and the e-commerce divisions of omni-channel retailers still have a hard time making money.

Recently, more and more traditional retailers have been drinking the asset-light Kool-Aid. Sears Holdings CEO Eddie Lampert has been jettisoning real estate and investing heavily in e-commerce while largely ignoring physical stores. Macy’s, HBC and other department and specialty stores have been closing and/or spinning off real estate assets galore. JCPenney is among a number of retailers that are bringing in outside entities to run parts of their business, effectively reducing the risk of a heavy commitment to physical space and inventory.

Clearly some of these moves may make sense as either savvy financial engineering strategies or targeted product/service offerings. Well, not for Sears, but perhaps for others.

Yet as we seek to understand what’s behind the headline grabbing announcements–with many more certain to come–we should grasp one key concept. The fundamental problem at Sears, Penney’s, Macy’s, Kohl’s, Dillard’s and a host of other long suffering retail brands is not that they have too many assets. The driving issue is that they have too little relevance for the assets they possess. In fact, we need look no further than last week’s strong earnings announcements from Home Depot and Walmart to see that retail companies can have enormous physical assets and still remain relevant.

Unfortunately, more times than not, focusing attention on driving down assets (the denominator of a success equation) instead of improving customer relevance (the numerator) only helps the investor math for a short time. This is not to say that store closings are not needed. But the evidence is clear that plenty of asset-heavy retailers have figured out how to make money without embracing the store closing panacea.

Leaders and Boards of struggling retailers may think they are pursuing a smart asset-light strategy. My fear is that most of them are only deepening their commitment to a relevance-light model. And that’s likely to end badly.

 

A version of this post appeared @Forbes where I have recently become a retail contributor. To see more click here.