Digital Disruption · Radical · Retail

Gee, I thought you were in the mattress business?

In my current keynote, I make the observation that many retailers have gotten themselves into trouble watching the last decade or so happen to them. Primarily for this reason, No. 8 in my “Essentials of Remarkable Retail” is the need to be “Radical” and to embrace a culture of experimentation.

Clay ChristiensenGary Hamel and many others have highlighted how legacy brands often struggle to keep pace with innovation. While there are some examples of industry incumbents responding well to disruption, it is far more typical (at least in retail) for companies to get this wrong. Having been a Sears executive when, arguably, there was still a chance for a meaningful turnaround, I often point out that we did not lack the knowledge that Home Depot and Lowe’s were on a trajectory to destroy our primary competitive advantage. What we lacked was the willingness to act. Some of this was clearly linked to culture, process, risk aversion and the like. But a lot of it was tied to how we defined what business we were in. This faulty line of thinking is a mistake oft repeated.

The latest example of this phenomenon is what’s transpiring in the $29 billion mattress category. Drive around any major city and you’re likely to encounter quite a few mattress specialty stores, the most prominent being Mattress Firm with over 3,000 locations in the U.S. Department stores like Macy’s and JC Penney also have significant mattress businesses. Mattresses are sold through traditional furniture stores like Ashley or Haverty’s as well. Given the size and profitability of the industry, the pace of digital disruption and competitive intensity, you might think that a few of these players would be aggressively pursuing innovative new formats. You’d be wrong.

In a rather ironic twist, Casper, which launched as an online only brand in 2014 and has raised $240 million in venture capital funding, is set to open 200 stores while industry leader Mattress Firm appears about to file bankruptcy to facilitate mass store closings. Casper is far from the only industry insurgent. Purple, Saatva and others are all trying to carve out sizable and sustainable positions. Most will not be around in 5 years time, but they will wreak havoc in the meantime and one or two might get acquired for what is likely to be stupid money. In fact, Tuft & Needle, Casper’s primary direct competitor, just merged with mattress manufacturing behemoth Serta Simmons.

casper_stores_1.0

Given the accelerating pace of change and the investment community’s tendency to value growth over profit, it’s not easy to be certain which disruptive model will take hold and which will be exercises in setting a big pile of cash on fire. Nevertheless, if you are Folger’s and you limit the way you see your business, you miss the value created by Starbucks. If you are Blockbuster and decide you are in the business of distributing videos through physical locations, you miss Netflix. If you are Sears and you decide you are a multi-category retailer selling a whole bunch of stuff mostly through mall-based department stores, you miss the home improvement warehouse opportunity. Oh yeah, and you also miss Amazon.

Many things in life are defined (and obscured) by our lens and filters. We need not look beyond the partisan hackery of America’s current political climate to see the truth of this. Yet in the context of how we manage our brands, respond to disruption and stay one step ahead of the consumer, we should take a lesson from the world of psychology. There are three fundamental steps to unlocking the opportunity that lays beyond our fears. First, is awareness. We must deeply understand our customers, their journey and how it is evolving, as well as the competitive dynamics that are at play. Second, is acceptance. We can see something but not truly own the truth of it and all the potential implications. The third is, of course, the most important: action.

Until we find ourselves in the arena, trying stuffseeing failure as an option, we are likely to have the next decade happen to us as well.

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 16th I’ll be in San Antonio delivering the opening keynote at X/SPECS . November 8th I’ll kick of the eRetailerSummit in Chicago.

For more info on my speaking and workshops go here. 

Customer Growth Strategy · Digital Disruption · Retail

Here’s what investors are missing about the Sears-Amazon partnership

Shares of Sears Holdings spiked last week on news that the beleaguered retailer had expanded its tire partnership with Amazon. Once again, the optimism — or is it outright gullibility? — of some investors astonishes me.

Over four years ago, I wrote (admittedly more than a little bit provocatively) that Sears investors would do far better with a liquidation of the company than with a perpetuation of the charade that there was any hope for a real turnaround. More recently, I opined on the 2017 Amazon-Kenmore deal, as well as the initial Amazon-Sears tire partnership announced in May. My view was that these deals do little, if anything, to stave off the inevitable for Sears. Moreover, I believe they are ultimately of greater value to Amazon.

For what it’s worth, when I wrote (and appeared on CNBC) with my “liquidate ASAP” thesis, Sears’ stock was in the low $40s. When I posted the Kenmore piece, Sears’ shares were down to about $9. My first tire article was written about three months ago when the shares had a bit of an inexplicable run-up, hitting nearly $4. On the day of the announcement SHLD was up 12%, closing at $1.24. Draw your own conclusions, but certainly don’t say that I didn’t warn you.

While on one level I appreciate the audacity of hope displayed by certain eager investors, I believe those who display ebullience in the face of these sort of deals are missing three essential things.

Dead brand walking. The overwhelming issue is that there is no plausible scenario in which Sears remains a viable national retailer. In fact, with Sears having closed hundreds of stores, with many more to follow after the holidays (if not sooner), one could argue it is no longer a real force on the national stage today. The only thing that keeps Sears afloat is Eddie Lampert and ESL’s willingness to fund a seemingly never-ending stream of massive operating losses. The idea that Sears can shrink to prosperity is ridiculous. For all intents and purposes, they are winding down the business. The particular relevance to the Amazon-Sears tire deal is that the points of distribution will continue to contract, perhaps dramatically.

Hardly moves the dial. It’s hard to see material profit contribution from this deal. First, tire installation is tiny in the scheme of Sears’ overall business. This particular offering is solely focused on customers who are willing to buy their tires online and have them shipped to a nearby Sears store so that, a couple of days later, they can have them installed. So to be meaningfully relevant to customers, first the customer has to be willing to wait. Given that a lot of the tire-replacement market is driven by an emergency (i.e., a flat tire) a big chunk of the available market is not addressable. Second, even if waiting isn’t a big deal, there are still likely to be many local competing outlets, many of which are going to be more conveniently located (particularly as Sears continues to shutter locations) and have the tire in stock, ready to install right away. Third, Sears actually stocks a lot of tires, so if you are willing to have your tires installed at Sears, it makes more sense for most people to take a step out of the process and just see if Sears has the tire in stock. In many cases it will. This is a long way of saying that the market opportunity seems quite small. When you further factor in the lower margin given Amazon’s cut, it’s hard to come up with a scenario where this moves the dial in any profound way.

Amazon’s Trojan Horse. Sears is desperate. Amazon is patient, smart and willing to try lots of stuff. Sears has few arrows left in its quiver. Amazon can use this partnership to explore the convergence between digital and physical in a large category, acquire some new customers and continue to probe potential private brand opportunities with DieHard and other Sears brands. Sears need to show Wall Street it still has some life in it. Amazon needs to learn how to get deeper into under-penetrated categories (auto and installed services) to help sustain a robust growth story. For Sears, every little bit seems to count. For Amazon, this is a rounding error even if it turns out to be a disaster. So who’s likely to be getting the better deal?

To be sure, as is true with the potential sale of Kenmore, Sears has very few decent options left. So there is nothing inherently wrong at this point in the company’s decidedly ragged history to executing this particular transaction. But the idea that this materially improves the value of the Sears brand seems just plain silly to me.

See you on the other side of $1.

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.