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.

Working on the wrong problem

When we see a brand struggling–or we find ourselves working within a flailing or failing organization–the first order of business should be clear. We need to understand the root causes. Once we’ve become keenly aware of what’s driving our problem–and accepted the reality of the situation–we are then ready to move into developing and launching a course of action.

So if the path is clear and obvious, why do so many retailers–and scores of other types of organizations, for that matter–get it so very wrong, so very often?

We regularly see retail brands hyper-focused on cost reductions when by far the bigger issue is lack of revenue growth (I’m looking at you Sears).

We see brands falling prey to the store closing delusion when often it turns out that closing stores en masse only makes matters worse.

We see brands blindly chasing the holy grail of all things omni-channel when, in most cases, they are merely spending millions of dollars to transfer sales from one pocket to the other–often at a lower margin.

We brands engaging in price wars they can never possibly win or without regard to the possibility that their customers aren’t even interested in the lowest price.

We see brands chasing average, the lowest common denominator, the one-size-fits-all solution because it seems safe. Yet it is precisely the most risky thing they could do.

Far too often we fail to pierce the veil of denial.

Far too often we fall victim to conventional wisdom, what we’ve always done or what we think Wall Street wants.

Far too often we ascribe wisdom to shrewd salespeople or charismatic and clever charlatans.

Far too often we fail to do the work, to ask for help, to dig deep to understand what’s really going on.

We can work really hard. We can focus our energies and those of our teams we great alacrity and intensity. We can pile on the data, build persuasive arguments and rock a really slick PowerPoint presentation. We can tell ourselves a story that convinces us we must be right.

But if we aren’t working on the right problem that’s all a colossal waste of time.

 

 

Does e-commerce suck?

Well it certainly isn’t bad for consumers. In fact, it’s been a bonanza.

The advent and enormous growth of e-commerce has dramatically expanded the availability of products, making nearly anything in the world readily accessible, 24/7. Product and pricing information that was previously scarce and unreliable is now easily obtainable. Prices are down, in many cases, dramatically. Digital tools and technologies have ushered in a new era of innovation making shopping far more convenient, easy and personalized.

For retail brands and investors the picture is much less clear and increasingly bleak. The fact is e-commerce is mostly unprofitable–and that’s not about to change anytime soon.

Amazon, which is both far bigger than any other retailer’s web business and growing faster than the overall channel, has amassed huge cumulative losses. The high cost of direct-to-consumer fulfillment and so-called omni-channel integration has made virtually every established retailer’s e-commerce business a major cash drain. And more and more, it’s becoming clear that most of the “disruptive” venture capital funded pure-plays are ticking time bombs. Quite a few major write-downs have already occurred (e.g. Trunk Club, Nasty Gal and just about every flash-sales business) and more are surely on the way (I’m looking at you Jet.com and Dollar Shave Club).

Investors have been throwing money at business models with no chance of ever making money for years. Analysts and pundits regularly excoriate traditional brands that are slow to “invest” tens of millions of dollars in all things digital and omni-channel while spewing nonsense about physical stores going away. Much of this is incredibly misguided.

It’s time for everyone to be more clearheaded and, dare I say, responsible.

Industry analysts and the retail press need to stop with the breathless pronouncements about the demise of physical stores. They need to back off the notion that retailers can cost cut their way to prosperity. They also need to quit labeling disruptive businesses as “successful” merely based upon revenues and rapid growth and take the time to really understand the economics of e-commerce and omni-channel (hint: it’s mostly about supply chain and customer acquisition costs).

More established retailers need to stop chasing all things omni-channel and prioritize investments based upon consumer relevance, long-term competitive advantage and ROI. They also need to realize that if they feel the urge to close a lot of stores or drastically cut expenses they are probably working on the wrong problem.

Venture capital investors need to start caring more about building a business based upon fundamentals, not just pricing everyone else out of the market and/or hoping that some idiot big corporation will come along and write a huge check. Also, have we forgotten that selling at a loss and making it up on volume has never been a viable strategy?

Of course, by far the single biggest thing that would restore an element of sanity to the overall market would be if Amazon were to decide to not treat most of their e-commerce business as a loss leader. Sadly, that doesn’t seem likely to happen anytime soon.

So if you are a consumer, enjoy the ride and the subsidies.

If you are retailer, yeah, that definitely sucks.

 

The store closing panacea

There has been a strong and growing narrative that the single smartest thing a struggling retailer can do is to close stores and, in some cases, a lot of them. I first touched on this nearly three years ago in my post “Shrinking to prosperity: The store closing delusion.”

There is no question that, in aggregate, the United States has too much retail space. There is no question that, in concept, the growth of e-commerce can allow an omni-channel retailer to serve some trade areas more profitably without a store and some trade areas with a smaller box. The key is to understand “some” and that starts with understanding why a given brand is under-performing in the first place. The other key is to understand the role that brick & mortar locations play in driving e-commerce–and vice versa.

In most cases, as recent events are bearing out more and more, store closings make an already irrelevant retailer less relevant. And frequently much less profitable as well.

Nearly 90% of traditional retail is still done in physical stores. In five years it will still be about 85%. The math is not that complicated.

Make it harder to get to a store OR make returns in a store OR order online and pick up in a store OR go to a store to research potential purchases OR learn about the brand, etc. and a retailer is almost certain to lose way more business (and margin dollars) to a competitor’s physical store in the vacated trade area than the brand “rationalizing” its store count will ever be able to make up through its website. This is why JC Penney, Home Depot and Lowes should write Eddie Lampert thank you notes pretty much every day.

Moreover, the symbiotic nature of digital and physical channels should not be ignored, yet often is. Several retailers–Sears is perhaps the best example–made the assumption that by investing in digital at the expense of physical stores they could more profitability serve their customer base over the long-term. As it turns out (and as more retailers are learning), e-commerce is often less profitable at the margin than brick & mortar operations and that when you close stores you actually make it more difficult for your e-commerce business to thrive. Oops.

Any retailer in trouble should absolutely analyze whether closing and/or “right-sizing” stores will be accretive to cash-flow. But that analysis MUST include the impact on long-term competitiveness and digital channel sales in the affected store’s trade area. Thinking you are helping when in fact you are merely initiating a downward spiral is a pretty big mistake to make.

Any analyst pushing for store closings and footprint down-sizing should be mindful that it is almost never the case that a struggling retailer’s ills are because they have too many stores or that the stores they have are fundamentally too large. Rather, it is because their brand relevance is not big enough for the channels, both physical and digital, that they have. Be careful what you wish for.

Show me a retail brand that is remarkable and relevant enough to command the share of attention that drives share of market and I’m virtually certain their executives are not spending a second on down-sizing. In fact, most are opening physical stores (e.g Nordstrom, Warby Parker, Amazon, TJX) and, in many cases, a bunch of them.

Show me a retail brand that is consumed with store closings and expense reduction and there is a pretty good chance they are a dead brand walking.

 

Thanks to those who have encouraged me along my path as I took a six month break from writing this blog. During my sabbatical I started a new blog on waking up to a life of love, purpose and passion at any age, which can be found at http://www.IGotHereAsFastAsICould.blog.

Coffee is for closers

Coffee may be for closers, but that’s about all the rewarding we should do. The relentless focus on transactions, conversion rates and closing statistics is well past its expiration date.

Sure you could get married on a first date, but I’ll wager that’s not the best idea.

Today the shift must be toward building relationships–and that starts with earning attention and establishing trust, not making a quick deal.

In a new model of retail KPIs we start first with awareness, which is mostly about breaking through the noise and achieving share of attention. We then focus on engagement that is intensely relevant and remarkable in the truest sense of that word. And we accept that one transaction doesn’t count for much, particularly if it’s achieved through uneconomic and unsustainable discounting. What does matter is continued engagement and interaction that, overtime, leads to loyalty (not mere frequency) and brand advocacy.

Brands that adopt this mindset and plan of action will be far better positioned for a digital-first, customer-in-charge world.

For everyone else, well, enjoy the steak knives.

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Broadway shouldn’t work

In an age where a virtually infinite amount of entertainment is available whenever, wherever and however we want it–with much of it free or very inexpensive–Broadway just posted its best season ever.

Somehow, despite the inconvenience, despite the high cost, despite the fact that the show will start when it wants, not when you want, millions of people each year still choose to trek to Manhattan, plop their butts in a seat for 2 hours or so and, in the case of Hamilton, often shell out way north of $500.

It shouldn’t work. But it does.

It works because what a great Broadway show offers is unique and scarce.

It works because certain aspects of the experience of seeing a live performance cannot be replicated online.

It works because there is something magical about an immersive happening we get to share with our tribe.

It works because after we’ve been through it we have a remarkable story to tell.

Broadway didn’t have its best year ever because they collectively decided to make what they already offer cheaper and more digitally accessible. They had their best year ever by leaning into what they do that is relevant and remarkable.

The death of physical retail IS greatly exaggerated. But maybe if retailers want to do more than just survive or tread water, Broadway can teach us a thing or two.

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