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.

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.

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.

e-commerce · Retail · The Amazon Effect

Is Amazon finally getting serious about retail profitability?

There seems little doubt that Amazon.com AMZN -0.27% is crushing it and Macy’s is flailing. So who has the best profitability? Well, it’s not even close.

Macy’s operating margin is just over 6%. In recently reporting what was widely seen as a blowout quarter, Amazon is just now approaching a whopping 2% in its non-Amazon Web Services business. By just about any comparison, in most categories, Amazon’s margin performance appears to be anywhere from lousy to lackluster, despite its vast capabilities and more than 20 years of working hard at most of it.

One particularly disturbing trend is rising shipping and fulfillment costs. With Amazon’s massive scale, you might think this would be a growing source of profit leverage. You’d be wrong. Logistics costs continue to rise faster than revenues.

This is not terribly surprising. The structure of Amazon’s Prime program (which recently surpassed 100 million members) essentially encourages customers to overuse “free” shipping for frequent small orders—which generally have low (or non-existent) profits. Amazon also continues to aggressively push same-day delivery, which, at current scale, has terrible marginal economics.

Amazon’s growing success in apparel may be great for the top line, but returns and exchanges tend to be much higher than average, pushing supply chain costs further in the wrong direction.

Before anyone quibbles with my high-level analysis, I will state that I know the company has been making substantial investments for the long term. I realize that there are many instances where Amazon could make more money but it continues to prioritize market share gains over decent (or any) near-term returns. And I understand that Wall Street clearly values growth over profits. Yet against this backdrop, it does seem as if there is a subtle shift in focus.

Given the significant headwinds from growing logistic costs, the fact that profits improved dramatically suggests that both product margins and non-logistics operating costs are starting to be leveraged in more powerful ways. Moreover, in what some see as a risky move—but I see fundamentally as an acknowledgement of customer loyalty, pricing power and a growing need to offset spiraling delivery costs—Amazon is raising the price of Prime membership by $20. Despite customer protestations, I am willing to bet that Amazon comes out way ahead on this move.

Another sign of Amazon’s seriousness toward pursuing profitability is its growing investment in private brands. Amazon already has more than 70 proprietary brands, and more are sure to follow. Done right, increasing the mix of its own brands can further drive market share gains by offering strong additional value to its customers and drive gross margins higher. Expect to hear more about the significant contributions these new brands are making within the next few quarters.

When it comes to buying versus shopping, Amazon holds more and more of the cards. More than 50% of all online product searches start at Amazon. Amazon is fast closing in on owning nearly 50% of the U.S. e-commerce market and is racking up significant share in many global markets. Prime membership tends to lock consumers into a virtuous shopping cycle where, at the margin, Amazon becomes the default choice for a growing basket of stuff. As Amazon gets deeper into physical stores (organically or through another major acquisition), even the “shopping” side starts to come more seriously into view—much of which should actually help expand margins. And personally I think Amazon has yet to take anywhere close to full advantage of its powerful customer data and insight assets.

Given the complexity of its operations—and the overlapping cycle of major investments in the next wave of growth—it’s often hard to discern the underlying dynamics of Amazon’s retail operations in any given quarter. Yet a few things seem clear.

First, Amazon likely never gets to decent operating margins without addressing the supply chain cost issue. Second, private brands will soon become a more important part of the story. Third, in the not too distant future, a more aggressive brick-and-mortar strategy is likely needed to continue to drive outsized growth. Lastly, Amazon still has a lot of levers to pull to leverage its data and take advantage of its growing customer loyalty. For the most part, improved profitability can likely come at a time and date of Amazon’s own choosing.

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 May 17 I will be keynoting Kibo’s 2018 Summit in Nashville, followed the next week by Retail at Google 2018 in Dublin.

e-commerce · Innovation · Retail

E-Commerce May Be ‘Only’ 10% Of Retail, But That Doesn’t Tell The Whole Story

It seems as if those who spend a lot of time worrying about the future of retail have fallen into one of two camps. There are the “retail apocalypse” proselytizers who would have us believe that virtually all shopping will eventually be done online, that most brick-and-mortar stores are doomed and that anyone who says otherwise is a dinosaur. At the other end of the spectrum are the disruption deniers who acknowledge that the retail climate is indeed changing but who take comfort in the fact that physical retail is still growing and, more notably, that e-commerce represents “only” about 10% of all retail.

They are both more wrong than they are right, and neither provides a point of view that is useful or actionable to brands or investors seeking to make critical decisions.

Let’s be clear. Physical retail is far from dead. There is no “retail apocalypse.” E-commerce is not eating the world. Every mall is not closing. And many of the brands we all know and love are likely to be around for a long time.

The facts are clear. In most major markets, physical retail continues to grow, albeit at a far slower rate than online shopping. Lots of stores continue to be opened, including by quite a few brands that are hardly new or “digital-first” (think Dollar General or Aldi). And it is true that physical stores account for roughly 90% of all retail sales (at least in North America). Five years from now, by most estimates, that number is still likely to be well over 80%.

But in most cases, taking any solace from the “e-commerce is only 10% of all retail” narrative is — and, well, there is simply no nice way to say this — just plain dumb.

First of all, that percentage is an industry-wide average, an amalgamation of many different categories. The percentage of e-commerce sales varies markedly by product segment, from around 2% for grocery to more than 20% for apparel to the overwhelming majority of sales in categories where products can be digitally delivered, like music, books and games. So perhaps folks in the supermarket business might justly not be completely freaked out by the growth and relative market share of e-commerce today, but I doubt you’d get the same reception from the executives at Borders and Blockbuster who failed to see the wave of digital disruption a decade ago and were given the gift of “spending more time with their families.”

Think of it this way: If you live in the U.S. or China or any nation with greatly varying climates, you wouldn’t decide what clothing to wear based upon the average temperature in the country. So why would one even think about driving the urgency and direction of their company’s corporate strategy based upon broad industry averages?

The other big problem with the “only 10%” argument is that it ignores the marginal economic impact of how a loss (or transfer) of physical-store sales to digital channels affects financial returns under specific retailer circumstances. A brand that has done a good job of “harmonizing” the customer experience across physical and digital channels might have kept most of the potential shift away from physical to digital within their corporate umbrella. Neiman Marcus and Nordstrom (as just two examples) may have struggled to grow comparable stores sales across the last several years, but their e-commerce business has been strong and now accounts for over 25% of total revenues. So clearly it can make a big difference, regardless of the category average for e-commerce, whether a brand captures much of the shift versus very little of it — as many other legacy retailers have failed to do.

Unfortunately, if one works in a business where margins are already below average and there are large fixed costs of operating stores and the marginal economics of online shopping aren’t good (likely owing to lower average order values and/or high rates of products returns) and the brand is not capturing its fair share of the shift away from physical stores to e-commerce, then relatively small revenue loss to online shopping can severely worsen overall economics. The moderate store department sector is a good example of this phenomenon and what is increasingly looking like a downward spiral.

Regardless of where a given brand falls within the digital category share numbers, the potential de-leveraging of its physical-store fixed costs and whether it faces what I call the “omni-channel migration dilemma” mandate a hard look at particular situations and dynamics. Relying on averages seldom works under any circumstances. An individual retailer’s mileage will, without question, vary.

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 next speaking gig is in Madrid on Tuesday at the World Retail Congress.  On May 2 I will be keynoting the Retail Innovation Conference in NYC.

e-commerce · Retail

Wayfair, StitchFix And Pure-Play E-commerce’s Scaling Problem

Late last month, Wayfair, the leading online-only furniture brand, reported dramatic sales growth and yet year-over-year profits fell significantly. Unsurprisingly the stock took a steep hit. In its most recent earnings announcement, Stitch Fix, the online styling subscription service, reported sales up over 25%, yet profits were essentially flat. When they signaled that profits were expected to get worse as they grew, their stock also took a beating. Several non-public online-only retailers are said to be facing similar issues of growing sales and non-existent profits. We shouldn’t be surprised.

Not too long ago it seemed like e-commerce was going to eat the world. Pundits, equity analysts and venture capital seeking entrepreneurs alike declared the death of physical retail. Many even predicted online shopping would surpass 50% of all retail sales by 2025 (spoiler alert: it will be lucky to break the 20% mark by then).

What got lost in the hype were two fundamental things. First, in many instances, brick-and-mortar locations actually add value to the shopping experience. It turns out lots of consumers prefer going to a physical store for all sorts of reasons and for all sorts of products and services. So it’s hardly shocking that once digital-only brands are now opening stores and that many “traditional” retailers continue to add to their store fleets as well. Second, and more importantly, a great deal of e-commerce remains unprofitable and often struggles from significant diseconomies of scale. This latter factor likely helps explain what’s going on underneath the surface of recent earnings concerns, including from brands as disparate as Blue Apron and Walmart.

Without access to internal data it’s impossible to say for sure, but having analyzed several pure-play brands’ customer metrics over the years I can hazard a guess at the challenges these brands are facing. Here’s a typical growth pattern for a pure-play online brand and why most eventually hit a wall, some never to recover.

Phase 1: The Liftoff

Having identified an interesting market niche and put together a solid business model, the brand launches. The first tranche of customers are acquired relatively easily as they quickly “get” the new concept and are already comfortable shopping online. They tend to be acquired inexpensively as they are the quintessential “heavy users” who are apt to learn about the brand through social media and word-of-mouth. Accordingly, many are likely the perfect fit customers, likely to be loyal and less reliant on discounting. Lifetime value is very high, cost of acquisition low. Bingo!

Phase 2: Momentum Builds

With success in Phase 1, the buzz starts to build, and flush with a big round of VC money the website gets optimized, investments in branding are made and marketing is expanded. Growing awareness leads to the relative ease of aquiring “look-alike” customers at a generally attractive cost of acquisition. It may take a bit more promotion to incentivize trial, but hey you got to fuel the rocket ship right?

Phase 3: Time To Go Find Customers

In this phase it becomes readily apparent why building an online-only brand isn’t so easy. Here, in order to sustain hyper-growth, the brand must start moving beyond its obsessive bullseye core customer to the outer rings where, on average, the customer spends less per year, is less loyal and is more promotionally driven. There also tends to be more direct competition as a brand expands. It also turns out that to break through all the marketing noise and gain the attention (and first sale) from these more promiscuous shoppers, the brand has to start spending more on expensive highly targeted marketing channels (i.e., Google and Facebook). Cost of customer acquisition starts to escalate, gross margins start to be depressed and the average lifetime value of the marginal customer acquired declines.

Phase 4: ‘Ruh ‘Roh

Here despair starts to set in for many as it becomes apparent that the cost of acquiring a marginal customer is often greater than the lifetime value of the customers being acquired. In the initial stages of Phase 4, the best brands are playing around with their marketing mix, finetuning their assortments and generally optimizing all manner of things to try to see if they can change this trajectory and convince investors that they aren’t throwing good money after bad. Some conclude that the only way to sustain growth and have a chance at profitability is to open physical stores (oh, irony, you are a cruel mistress). This is also often the time someone calls Bentonville or other deep-pocketed “strategic partner” in hopes of securing a lifeline.

Phase 5: Crossroads

Quick, name the pure-play e-commerce brands that made it through Phase 4 and came out alive (it doesn’t count if they got acquired by Walmart). To be fair, it is still too early to say whether many of the brands that find themselves at this difficult crossroad will make it out alive or join the many others in the retail graveyard. And to be sure it’s certainly not unusual for customers that get added later in a company’s growth cycle to be less profitable. What is different for pure-play e-commerce brands is that it is almost impossible to avoid rapidly escalating marginal customer acquisition costs (which is only like to get worse as Instagram and Pinterest figure out how to raise their prices for targeted ads). Rising cost of acquisition with declining lifetime value is a difficult equation to work through.

When it starts to look like every incremental customer that gets added to a brand makes profits worse, investors might want to start think about heading for the door.

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

For information on keynote speaking and workshops please go here.

e-commerce · Personalization · Retail

Retail’s ‘Big Show’: A few key takeaways

Every year 35,000 or so of my closest friends assemble in New York City for the National Retail Federation’s “Big Show”–a three day extravaganza featuring dozens of presentations, a huge technology EXPO and networking, networking, networking. During my 25+ year career as an executive (at Neiman Marcus and Sears) and now as an independent consultant, author and speaker, I have attended at least a dozen times.

This year three major things struck me. First, there was a giddy optimism as the industry convened on the heels of the most robust holiday season in more than a decade. Second, attendance was up considerably. No matter that the Javits Convention Center is ill equipped to handle the growing throngs. Third, much of the main stage content was steeped in overly self-promotional messaging; heavy on the “what” and largely devoid of any useful “how’s”. Organizers need to take note of how the audience regularly voted with its feet, leaving en masse during several sessions where the speaker failed to provide any truly useful or relevant content.

Yet moving past some of the limitations seemingly inherent to most large industry conferences, there were a few major themes and takeaways from the event.

The end of e-commerce.

Anyone who has been paying attention (or who has been following research from folks like Deloitte Digital) knows that the distinction between e-commerce and physical stores is increasingly a distinction without a difference. Digital drives brick & mortar shopping and vice versa. It’s all just commerce now and the customer is the channel. As outgoing NRF Chairperson and recently retired Macy’s CEO Terry Lundgren put it “retail is retail” wherever it occurs. It’s not clear to me why the industry has been so slow to embrace this reality, but various speakers seemed to finally acknowledge what I’ve been writing about since 2010–and what many winning brands having been putting into practice for years. Retailers need a one brand, many channels strategy and silos belong on farms.

The death of physical retail has been greatly exaggerated.

NRF CEO Matthew Shay was among several speakers who challenged the “retail apocalypse” narrative, pointing to the large number of retailers that continue to open stores (including many once online-only brands) and the fact that overall shopping in brick & mortar store has not declined. He won’t get any argument from me. Lost, however, in debunking the high-level narrative is any level of nuance. The fact is retail’s future is not being evenly distributed. On average physical retail is doing okay, but it’s fair to say that individual retailer’s mileage will vary–often considerably. The middle continues to collapse and many retailers’ existence is being challenged by the seismic shifts in retail. Physical is not dead, but boring retail is.

This time it’s personal.

A strong theme, both from speakers and from various exhibitors in the technology EXPO, was personalization. More and more retailers are finally accepting that one of the best paths to being more intensely relevant and remarkable is to treat different customers differently by using data and advanced technology to tailor marketing messages and the overall experience. Finding ways to be compelling, rather than creepy, annoying or just bad, isn’t easy, but retailers from emerging (Stitch Fix) to legacy (Neiman Marcus) are finding ways to make it work.

Artificial intelligence is ready for its close-up.

While still relatively early in its deployment, AI was at the center of major technology announcements, including IBM’s new V9 Watson-enabled commerce platform (full disclosure: I’m a member of their Influencer program). A wide range of companies, from Alibaba to eBay to Williams-Sonoma, also discussed how artificial intelligence, machine learning and related advanced analytics tools are enhancing their ability to execute marketing and merchandising strategies. Clearly, use cases are being proven out and momentum is building.

The false ebullience of the holiday season.

Coming off of a robust holiday season, optimism was definitely in the air. I hate to be cynical (though it IS one of my super powers), but there are at least two things to bear in mind as the industry moves forward. First, a month or two of above average sales is no guarantee of sustained momentum. Any euphoria from tax cuts and a buoyant stock market is likely to be short-lived as the realities of a largely dysfunctional US government and ballooning deficits become more apparent. Second, the gulf between the have’s and have not’s continues to widen. A great quarter for the industry in total does somewhere between little or nothing for failing retailers. Arguably, for a few, it may give them a tiny bit of breathing room. But the long-term prospects of brands like Sears, Macy’s and JC Penney are not meaningfully better because of the overall strong holiday season. We went into the season with a mixed-bag of performance and we’ll come out of it with the same exact mix.

The best time to plant a tree.

Nobody needed to attend the NRF show to be reminded that the retailers that have gone out of business–or are struggling mightily–suffer(ed) from two main root problems. First, they did not focus enough time and energy on deeply understanding their customers and evolving with those changing needs and wants. Second, they fundamentally failed to embrace a culture of innovation and experimentation.

In addition to hearing from numerous fast-growing disruptive retailers, XRCLabs sponsored the Innovation Lab which showcased 25 emerging technology companies. There was plenty of variety to choose from in the booths and among the various talks. Both were typically packed. Of course the real question is how many were there as spectators versus how many will actually have the courage to act on what they saw and learned.

For retailers that have a hard time keeping pace with change, it’s worth remembering the Chinese proverb: “The best time to plant a tree was 20 years ago. The second best time is now.”

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

For information on keynote speaking and workshops please go here.

e-commerce · Omni-channel · The Amazon Effect

Here’s who Amazon could buy next, and why it probably won’t be Nordstrom

Since the Whole Foods deal, more than a few industry analysts and pundits have weighed in on which retailers might be on Amazon’s shopping list.

Various theories underpin the speculation. Some say Jeff Bezos wants to go deeper in certain categories, so Lululemon or Warby Parker get mentioned. Foursquare (is that still a thing?) crafted its own list from analyzing location data. The Forbes Tech Council came up with 15 possibilities. The always provocative, and generally spot-on, Scott Galloway of L2 and NYU’s Stern School of Business believes Nordstrom is the most logical choice.

Obviously no one has a crystal ball, and Amazon’s immediate next move could be more opportunistic than strategic. Given Amazon’s varied interests, there are several directions in which they could go. And clearly they have the resources to do multiple transactions, be they technology enabling, building their supply-chain capabilities out further, entering new product or service categories, or something else entirely. For my purposes, however, I’d like to focus on what makes the most sense to expand and strengthen the core of their retail operations.

Before sorting through who’s likely to be right and who’s got it wrong (spoiler alert: Scott), let’s briefly think about the motivating factors for such an acquisition. From where I sit, several things are critical:

  • Materiality. Amazon is a huge, rapidly growing company. To make a difference, they have to buy a company that either is already substantial or greatly accelerates their ability to penetrate large categories. This is precisely where Whole Foods fit in.
  • Fundamentally Experiential. There is an important distinction between buying and shopping. As my friend Seth reminds us, shopping is an experience, distinct from buying, which is task-oriented and largely centered on price, speed and convenience. Amazon already dominates buying. Shopping? Not so much.
  • Bricks And Clicks. It’s hard to imagine Amazon not ultimately dominating any category where a large percentage of actual purchasing occurs online. Where they need help is when the physical experience is essential to share of wallet among the most valuable customer segments. They’ve already made their bet in one such category (groceries). Fashion, home furnishings and home improvement are three obvious major segments where they are under-developed and where a major stake in physical locations would be enormously beneficial to gaining significant market share.
  • Strong Marginal Economics. We know that Amazon barely makes money in retail. What’s not as well appreciated is the inconvenient truth that much of the rest of e-commerce is unprofitable. Some of this has to do with venture-capital-funded pure-plays that have demonstrated a great ability to set cash on fire. But unsustainable customer acquisition costs and high rates of product returns make many aspects of online selling profit-proof. An acquisition that allows Amazon access to high-value customers it would otherwise be challenged to steal away from the competition and one that would mitigate what is rumored to be an already vexing issue with product returns could be powerfully accretive to earnings over the long term. Most notably this points to apparel, but home furnishings also scores well here.

So pulling this all together, here’s my list of probable 2018 acquisition targets, the basic rationale and a brief word on why some seemingly logical candidates probably won’t happen.

Not Nordstrom, Saks or Neiman Marcus

Scott Galloway is right that Nordstrom (and to a lesser degree Saks and Neiman Marcus) has precisely the characteristics that fit with Amazon’s aspirations and in many ways mirror the rationale behind the Whole Foods acquisition. Yet unlike Whole Foods, a huge barrier to overcome is vendor support. Having been an executive at Neiman Marcus, I understand the critical contribution to a luxury retailer’s enterprise value derived from the distribution of iconic fashion brands, as well as the obsessive (but entirely logical) control these same brands exert over distribution. Many of the brands that are key differentiators for luxury department stores have been laggards in digital presence, as well as actually selling online. Most tightly manage their distribution among specific Nordstrom, Saks and Neiman Marcus locations. If Nordstrom or the others were to be acquired by Amazon, I firmly believe many top vendors would bolt, choosing to further leverage their own expanding direct-to-consumer capabilities and doubling down with a competing retail partner, fundamentally sinking the value of the acquisition. While Amazon might try to assure these brands that they would not be distributed on Amazon, I think the fear, rational or otherwise, would be too great.

Macy’s, Kohl’s or J.C. Penney 

Amazon has its sights set on expanding apparel, accessories and home but is facing some headwinds owing to a relative paucity of national fashion brands, likely lower-than-average profitability (mostly due to high returns) and a lack of a physical store presence. Acquiring one of these chains would bring billions of dollars in immediate incremental revenues, improved marginal economics and a national footprint of physical stores to leverage for all sorts of purposes. All are (arguably) available at fire-sale prices. Strategically, Macy’s makes the most sense to me, both because of their more upscale and fashion-forward product assortment (which includes Bloomingdale’s) and because of their comparatively strong home business. But J.C. Penney would be a steal given their market cap of just over $1 billion, compared with Macy’s and Kohl’s, which are both north of $8 billion at present.

Lowe’s

The vast majority of the home improvement category is impossible to penetrate from a pure online presence. Lowe’s offers a strong value proposition, dramatic incremental revenues, already strong omni-channel capabilities, and a vast national network of stores. The only potential issue is its valuation, which at some $70 billion is hardly cheap, but is dramatically less than Home Depot’s.

A Furniture Play

Home furnishings is a huge category where physical store presence is essential to gaining market share and mitigating the high cost of returns. But it is also highly fragmented, so the play here is less clear as no existing player provides a broad growth platform. Wayfair, the online leader, brings solid incremental revenue and would likely benefit from Amazon’s supply chain strengths. But without a strong physical presence their growth is limited. Crate & Barrel, Ethan & Allen, Restoration Hardware, Williams-Sonoma and a host of others are all sizable businesses, but each has a relatively narrow point of view. My guess is Amazon will do something here — potentially even multiple deals — but a big move in furniture will likely not be their first priority in 2018.

As I reflect on this list (as well as a host of other possibilities), I am struck by three things.

First, despite all the hype about e-commerce eating the world, the fact remains that some 90% of all retail is done in physical stores, and that is because of the intrinsic value of certain aspects of the shopping experience. For Amazon to sustain its high rate of growth, a far greater physical presence is not a nice “to do” but a “have to do.”

Second, the battle between Amazon and Walmart is heating up. While they approach the blurring of the lines between physical and digital from different places, some of their needs are similar, which could well lead to some overlapping acquisition targets. That should prove interesting.

Lastly, the business of making predictions is inherently risky, particularly in such a public forum. So at the risk of stating the obvious, I might well be wrong. It wouldn’t be the first time, and it surely won’t be the last.

But why not go out on a limb? I hear that’s where the fruit is.

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

For information on keynote speaking and workshops please go here.

e-commerce · Holiday Sales · Retail

Hype-y holidays: ‘Black Friday’ and other nonsense

Brace yourself. The media hype around Black Friday and Cyber Monday is now at a fevered pitch. Don’t fall prey to the nonsense.

But you can rest assured that as we emerge from a tryptophan-induced haze Friday morning and turn on just about any news outlet you will witness some hapless reporter standing in a mall–or outside a (insert well-known national retailer name here)–opining about whether various “indicators” (number of people in line at store opening, whether shoppers are carrying full shopping bags and so on) bode well for retailers’ fortunes. Alas, Black Friday has always been far more media trap than sign o’ the times. There are several reasons for this.

Black Friday is not the biggest shopping day of the year.

The Saturday before Christmas and the day after are often the highest volume. In fact, if recent history is any indication, several days right before Christmas will likely rival Black Friday’s sales numbers. So while it’s an important day, it’s hardly a huge contributor to overall holiday season sales.

Black Friday revenues are on the decline.

As online shopping continues to grow, the relative share of total holiday sales done in stores on Black Friday is decreasing markedly. A recent survey suggests another down year. With some stores opening on Thanksgiving Day–and more and more Black Friday deals breaking early–revenues are being spread out over more days, rather than concentrated on the traditional “holiday” of massive consumption. Our friends at Amazon even launched their deals 50 days early this year.

For consumers, it’s mostly a con.

Study after study shows that, with few exceptions (mostly the heavily promoted, limited quantity “doorbusters”), the deals just aren’t that good. In fact, prices tend to be better in December or during traditional clearance periods.

The customer experience is terrible.

With overflowing parking lots, teeming throngs, long checkout lines and, in some cases, a need to camp out hours before the doors open to have a chance of scoring an actual great deal, shopping on Black Friday is the ultimate soul-crushing hassle. Apparently, some people thrive on this sort of thing. I hope they get the help they need. Oh, and many of the deals are recycled anyway.

Black Friday success (or failure) is meaningless.

With all the attention Black Friday gets you might think that a given retailer’s performance would be highly correlated with how its overall season will turn out. You’d be wrong. Over the years, many folks have tried to determine this correlation and haven’t found it. One study even found a somewhat negative relationship. So move along. Nothing to see here.

What about profits? 

While we’ll have to wait to see how Black Friday and Cyber Monday turn out, we can be fairly certain that it won’t be particularly profitable. This year’s retail industry exercise in group-think will have the predictable effect of compressing product margins and driving up operating costs all in the name of defending market share.

Of course with many retailers running scared or even fearful of their continued existence, few have the discipline to approach the season with any kind of restraint, promotional or otherwise.

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

For information on speaking gigs please go here.

Being Remarkable · e-commerce · Strategy

Going private: Here comes Amazon’s next big wave of disruption and dismantling

While Amazon is often falsely blamed for all of retail’s woes, the “Amazon Effect” is both profound and well-documented. While the company’s overall market share is relatively low (under 5%), Amazon now accounts for nearly half of all e-commerce sales and its pricing and supply chain supremacy continues to put margin pressure across many categories of retail.

Yet, lost among the stories about the showdown between Amazon and Walmart or the impact of the Whole Foods acquisition or the company’s many stymied attempts to become a major fashion player is potentially an even bigger and more interesting narrative. What should be added to the list of things that keep both manufacturers and retailers up at night is Amazon’s rapidly evolving private brand strategy. The massive potential for a “go private” thrust to be another key component in what L2’s Scott Galloway has called Amazon’s systemic dismantling of retail and brands is huge.

Here’s why:

Private brands can have powerful consumer appeal. A well-executed private brand strategy allows for equal (or even better) quality products to be delivered at much lower prices. Store brands have moved well beyond the generic product days into being desired brands in their own right and have become significant lines of business for many retailers.

Private brands typically have greater margins. By controlling both the product design and supply chain–and avoiding the need for large marketing and trade allowance budgets–proprietary store brands can deliver a better price to the consumer and better gross margins for the retailer. Therefore the brand owner has a greater incentive to push its captive brands over national brands.

Amazon has already created a solid base of private brands. It turns out that Amazon already has a solid stable of proprietary brands. Some are more basic commodity items sold under the Amazon name. Some have their own identity, like Mama Bear and Happy Belly. Others tilt toward the more fashionable. With the Whole Foods acquisition, the company also controls the 365 Everyday Value brand which, rather unsurprisingly, is now available at Amazon. Recent reports suggest they are jumping into the athletic wear business.

Amazon’s private brands are on fire. While specific financial data is relatively sparse, most indications are that the company is thus far yielding strong performance with its own products. According to one report, many of these brands are experiencing hyper-growth.

The Amazon chokehold. Ponder for a moment the amount and quality of customer data Amazon can leverage to both design and target its own stable of higher margin products. Consider that more than 55% of all online product searches start at Amazon. Reflect on the reality that Alexa’s algorithms already give preference to Amazon’s private brands. Contemplate how easy it will be for Amazon to systematically design its website to feature the brands it wants to promote. Meditate on the freedom Amazon has to pursue the long game given its strong cash flow and Wall Street’s current willingness to value growth over profits.

Because of its sheer size, as well as the need to feed the growth beast, Amazon must both grab more market share in categories where it already has a material position, while also entering and penetrating significant new opportunity areas. At some point, Amazon will also have to demonstrate that it can make some decent money outside of its Amazon Web Services business. The opportunity in private brands serves both Amazon’s long-term revenue and margin objectives.

For the most part, Amazon’s private brand aspirations have operated under the radar. But from where I sit, it won’t be long before they reach critical mass in many key categories. And when they are ready to truly step on the gas–both from their organic efforts, as well as from what I believe will be at least one more major brick & mortar acquisition–another wave of brands (both wholesale and retail) will get caught in the wake.

For the competition, it’s time to be afraid. Very afraid.

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

For information on speaking gigs please go here.