Stop blaming Amazon for department store woes

Given Amazon’s staggering growth and willingness to lose money to grab market share it’s easy to blame them for everything that is ailing “traditional” retail overall–and the  department store sector in particular.

In fact, with announcements last week from Macy’s to Kohl’s and Sears to JC Penney that could only charitably be called “disappointing” many folks that get paid to understand this stuff reflexively jumped on the “it’s all Amazon’s fault” bandwagon. Too bad they are mostly wrong.

The fact is the department store sector has been losing consumer relevance and share for a long, long time–and certainly well before Amazon had even a detectable amount of competing product in core department store categories.

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The fact is it’s just as logical to blame off-price and warehouse club retailer growth–which is almost entirely done in physical locations, by the way–for department stores’ problems.

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The fact is that, despite other challenges along the way, Nordstrom, Saks and Neiman Marcus have maintained share by transitioning a huge amount of their brick & mortar business to their online channels and have closed only a handful of stores in the last few years. Nordstrom and Neiman Marcus now both derive some 25% of their total sales from e-commerce.

Don’t get me wrong, I’m not saying that Amazon isn’t stealing business from the major department store players. Clearly they are. And as Amazon continues to grow its apparel business they will grab more and more share.

But the underlying reason for department stores decades long struggle is the sector’s consistent inability to transform their customer experience, product assortments, marketing strategies and real estate to meet consumers’ evolving needs.

More recently, those brands that have been slow to embrace digital first retail are scrambling to play catch up. Those that still haven’t broken down the silos that create barriers to a frictionless shopping experience will continue to hemorrhage customers and cash.

Most importantly those that think they can out Amazon Amazon are engaged in a race to the bottom. And as Seth reminds us, the problem with a race to the bottom is that you might win.

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My top blog posts of 2016

As has become an annual tradition–and despite my nearly six month hiatus–I present my most popular blog posts from this year.

  1.  I am the captain now
  2.  A few inconvenient truths about e-commerce
  3.  Sears: The one thing that could have saved them
  4.  Quitting is underrated
  5.  Umm, so why aren’t your sales better?
  6.  Pure play e-commerce’s fantastic (and unsustainable) wealth transfer
  7.  The struggles of the flying trapeze artist
  8.  The new retail ecosystem: NRF edition
  9.  Retail’s big reset
  10.  I’m going to build and wall and get Amazon to pay for it

And here are a few more that didn’t put up huge numbers, but are personal favorites.

  1. Just about everything is noise
  2. Retail’s museums of disappointment
  3. Don’t bite the hook
  4. The magical mystery powers of gratitude
  5. Put your ass where your hearts wants to be

As I wrap up my seventh year writing this blog I am incredibly grateful for your attention, support and feedback.

Best wishes for a safe, happy and prosperous New Year!

And if you get a chance check out my other blog “I got here as fast as I could.”

Umm, so then why aren’t your sales better?

You’ve probably heard quite a few retailers proclaim some version of “customers who shop across our multiple channels spend 2, 3, 4, even 6 times, that of our average customer.”

When I worked at Sears that is what we saw and that is what we said. Years later, when I headed up strategy and multichannel marketing for the Neiman Marcus Group, that was what our data showed and that is what we told the world. As “omni-channel” has become the clarion call of retail during the past several years, dozens of brands have employed this observation as a primary rationale for substantial investments in beefing up digital commerce and investing in cross channel integration.

But it raises an interesting question.

If it’s true that multichannel customers spend a whole lot more and all these companies have become much better at omni-channel, why aren’t their sales better?  In fact, why is it that most of the retailers who have made such statements–and invested heavily in seamless commerce–are barely able to eek out a positive sales increase?

Something doesn’t seem to add up. So what exactly is going on here?

The main thing to understand is the fallacy that becoming omni-channel somehow magically creates higher spending customers. A retailer’s best customers are almost always higher frequency shoppers who, obviously, happen to trust the brand more than the average person. When alternate, more convenient ways to shop emerge, they are most likely to try them first and, because they shop more frequently, it’s more likely that they will distribute their spending across multiple channels. Best customers become multichannel, not the other way around.

If it were true that traditional retailers are creating a lot more high spending customers by virtue of being more multichannel, the only way the math works is that they must at the same time be losing lots of other customers and/or doing a horrible job of attracting new customers–which somewhat undermines the whole omni-channel thesis. It’s also rather easy to do this customer analysis. I long for the day when I see this sort of discussion actually occur at an investor presentation or on an earnings call.

There WAS a time when being really good at digital commerce and making shopping across channels more seamless was a way for traditional retailers to acquire new customers, to grow share of wallet and to create a real point of competitive differentiation. Nordstrom is a great example of a company that benefitted from this strategy during the past decade, but is now starting to struggle to get newer investments to pay off as the playing field gets leveled.

So-called “omni-channel” excellence is quickly becoming the price of entry in nearly every category. Most investment in better e-commerce–or omni-channel functionality like “buy online pick-up in store”–is defensive; that is, if a brand doesn’t do it they risk losing share. But it’s harder and harder to make the claim that it’s going to grow top-line sales faster than the competition.

Retailers that find themselves playing catch up are primarily spending money to drive existing business from the physical channel to the web. That’s responsive to customer wants and needs, but it’s rarely accretive to earnings. It’s also a major reason we don’t see overall sales getting any better at Macy’s, Sears, Dick’s Sporting Goods and whole host of other brands that have invested mightily in all things omni-channel.

As we dissect customer behavior, as we understand the new competitive reality, as we wake up to the fact that most retailers are spending a lot of money to shift sales from one side of the ledger to the other, it’s clear that omni-channel is no panacea and that many of the promises of vendors, consultants and assorted gurus were no more than pipe dreams.

Yes, chances are you need a compelling digital presence. Yes, you had better get good at mobile fast. Yes, you need to assure a frictionless experience across channels. Yes, your data will probably show that customers who shop in multiple channels spend more than your average shopper. But so what?

If you’ve invested heavily in omni-channel and your sales, profits and net promoter scores are not moving up, could it be your working on the wrong problem?

 

 

 

 

 

 

A few inconvenient truths about e-commerce

It’s easy to feel like e-commerce is eating the world. It’s not.

While there can be no question of e-commerce’s continued growing importance and its often disruptive nature–particularly in categories like books and music–I’m both amused and amazed at the lack of perspective many in the industry often seem to have. So here are what I believe to be a few important, albeit at times inconvenient, truths.

Physical retail will continue to dominate. Estimates vary, but brick & mortar retail still accounts for over 90% of all sales. While e-commerce will continue to grow, physical stores will be different but not dead.

Pure-play retail is dying. Scott lays this out better than I can, but once you back Amazon out of the equation, it’s becoming ever more obvious that aside from (perhaps) a few niche exceptions, e-commerce only business models are unsustainable owing primarily to uneconomic customer acquisition costs and overly expensive logistics.

A great deal of e-commerce growth is channel shift among traditional brands. Overall growth of e-commerce will be greater than 10% for the foreseeable future, but much of this comes from major retail brands (e.g. Macy’s, Nordstrom, Walmart) transferring business from their physical stores to their improving digital channels.

Much of e-commerce remains unprofitable and economically unsustainable. Let’s remember that Amazon has never consistently demonstrated an ability to make money outside of its web service business. Let’s remember that virtually none of the massively funded pure-plays has ever turned a profit. Let’s remember that traditional brands are spending mightily to improve their omni-channel capabilities while being lucky to achieve flat overall sales. Let’s remember that many retailers experience such high returns and supply chain costs that a large percentage of e-commerce transactions are profit proof. Let’s remember that just about every omni-channel retailer has had to cut prices and offer free-shipping to try to keep pace with upstart competitors who are subsidized by often irrational investment.

Of course even while accepting these truths, many brands find themselves in a real bind. As long as investors are willing to irrationally fund certain companies, consumers are the big beneficiaries and traditionally funded brands are either forced to respond to remain competitive or get pummeled in the markets by not playing the game, however self-destructive.

The good news is that reality is slowly creeping into the market. Some bubbles have burst–witness the recent deflation of the once ridiculously hyped flash-sales market. Perhaps even today’s hammering of Amazon’s stock suggests investors’ patience is beginning to wane. But it’s difficult to predict and count on the vicissitudes of either the public or venture capital markets. But there are a few things to do right now.

First, don’t blindly pursue all things omni-channel. With consumer demands and expectations changing no brand can possibly remain idle. But a disciplined approach to investing is essential. Conducting a friction audit is a great way to uncover and to prioritize the areas of leverage and greatest near-term ROI.

Second, understand marginal unit economics. Averages aren’t very helpful, yet many companies rely on them for decision-making all the time.  At any kind of basic scale, e-commerce is mostly a variable cost business. Brick and mortar is mostly a fixed cost one. If you don’t understand the differences–and the interplay–you’re going to do something dumb. Don’t be that guy or gal.

Lastly, go deep on the customer insight and customer profitability analysis. It’s one thing to have a few unprofitable transactions within a mix of purchases for a customer that has overall great lifetime value. It’s another to have your customer portfolio laden with high cost-to-serve, low margin, low average transaction value customers who return stuff all the time. Do the math. Don’t chase your tail. Rinse and repeat.

 

Retail’s new front door

In a “brick & mortar first” world, retailer’s embraced the old adage: location, location, location.

Once the site was determined, a lot of time and money went into the design of the store–with a particular emphasis on making it as strong a magnet for consumer traffic as budget and inspiration would allow. Then the visual and marketing teams went to work, creating attractive window displays and generating eye-catching promotional signage, all with the goal of capturing the customer’s attention as she walked or drove by. If these marketing strategies worked, they would lure her across the threshold and the retailer would have a chance at a sale.

Today, it’s rapidly becoming a “digital first” retail world. More retailers are reporting that the majority of customers start their consumer decision journey online. More and more brands are discovering that a very high (and growing) percentage of new customer acquisition is occurring through a digital channel, not a physical one. And when we say “digital”, it’s increasingly likely we mean some sort of smart mobile device. The power of the traditional store front is waning.

In the vast majority of categories, brick & mortar is not going away. As I like to say, physical retail will be different, not dead. In many cases, stores will remain critical to generating sales, but their role in acquiring a new customer, generating repeat business or building on-going customer engagement and loyalty is diminishing–and, in many cases, quite rapidly.

Right now, for many brands, for many consumers, for many shopping occasions, retail’s new front door is a smart mobile device.

So if your brand’s mobile experience isn’t compelling, the odds of capturing a new customer aren’t that great. If the mobile experience doesn’t help reduce friction for an existing customer (in or out of a store), good luck getting that repeat business. If the mobile experience doesn’t position your brand well in those key decision points that my friends at Google call “micro-moments”,  there’s a pretty good chance you aren’t making that sale.

Embracing the notion that mobile is becoming your brand’s new front door can be profound.

It forces process redesign and budget re-allocation. It requires breaking down the silos that exist in the channel-centric thinking, organization and metrics that persist in so many retailers. It causes us to admit that if we don’t win in a digital channel it barely matters where our stores are located, how good they look, what products we carry or whether we’ve got great salespeople. Heresy, some might say.

It’s apparent that there are quite a few retailers that get this new reality and are acting accordingly–and often boldly. For them, the precise end-game is anything but clear, the path is hardly smooth, but they are in the arena, taking risks, investing where they need to be.

Yet far too many others are merely treading water or paying lip service to this new world order. Sadly they are crippled by legacy thinking and systems, burdened by a store-first culture, unwilling to let go of the past, even when it’s obvious it’s not working. Unless they pivot soon and decisively it’s fairly certain that this will end badly.

 

 

Retail’s great bifurcation

It’s not that malls are dying. In fact, many malls are not only surviving, quite a few are thriving.

Despite all the doomsayers, physical retail is not facing extinction. Not only are many retailers opening significant numbers of profitable locations, many of the most highly valued and rapidly growing pure-play online brands are opening brick & mortar locations. These new units are among the most productive of any specialty retail sites anywhere.

Department stores aren’t going away any time soon either, despite the constant buzz of consternation from Wall Street. Several major players are successfully reinventing themselves.

What IS happening is a great bifurcation. The proverbial fork in the road. The increasingly clear emergence of “have’s” and “have not’s. And the looming death in the middle.

“Class A” malls and the also-rans.

Retailers that have a well articulated target consumer and seamlessly meet those customers needs anytime, anywhere, anyway, versus stores drowning in a sea of sameness, offering disjointed service and peddling average products to average people.

Brands that either go big, efficient and cheap or intimate and remarkable, versus those that get stuck in the middle or are trapped in an inevitable race to the bottom.

There are obvious choices to be made. The chasm is widening. The poles are becoming more extreme.

Yet many of us remain stuck. Many brands keep straddling the line.We fail to choose because a bold commitment seems risky, when in fact it is our inaction that is the riskiest decision of all.

Pick a lane. Start driving.

And you might want to step on the gas.

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Omni-channel’s migration dilemma: Holiday edition

Last year I wrote a post about what I called retail’s “omni-channel migration dilemma” wherein I observed that while the deployment of so-called omni-channel strategies–i.e. making it easier for consumers to shop anytime, anywhere, anyway–improves the customer experience immensely, the outcomes for most retailers were, thus far, not quite so wonderful.

At the heart of this argument were three core points:

  • With few exceptions, omni-channel retailers’ total revenues remain essentially flat, meaning that robust growth online is mostly cannabilizing brick & mortar sales;
  • In many cases, the profitability of e-commerce is actually worse than a physical store sale. This is particularly true for lower transaction value players like Walmart and Target.
  • In their quest to become “all things omni-channel”, retailers are investing enormous sums–and in some cases–getting distracted from arguably higher value-added activities.

You don’t have to be a math whiz to understand that spending a lot of money to end up–if you’re lucky–with basically the same total revenue at a lower margin is not exactly a genius strategy. But this is where we find Macy’s and many other retailers right now.

The omni-channel frenzy around the holiday shopping season only shines a harsher light on the issue. By launching sales earlier and earlier, by pushing deep discount events like Cyber Monday and by offering free shipping pretty much throughout the season, the tilt toward online sales is exacerbated and margins continue to shrink. Consumers win through great deals. And retailers lose, as overall sales are likely to go absolutely nowhere.

Now some have argued that omni-channel is ruining retail. They are wrong. They’re wrong not only because it is pointless to fight reality, but also because efforts that are fundamentally rooted in the desire to improve the customer experience are rarely misguided. The key is not to confuse necessary with sufficient, nor “the what” with “the how.”

So we should not get distracted by analysts who try to extrapolate one or two days of sales as part of some trend.

And we should bear in mind that online sales for most omni-channel retailers remain far less than 10% of their total business. So even healthy e-commerce growth is not likely to offset seemingly small declines in physical stores sales. You don’t have to trust me on this. Do the math.

But mostly we should remember that the story is not about all things omni-channel, nor what happens on Black Friday, Cyber Monday or the few weeks that comprise the holiday shopping season.

It IS about which retailers are breaking through the sea of sameness with remarkable product AND a remarkable experience. It is about which retailers are eliminating friction for the consumers that matter the most in the places that matter most. It is about which retailers are eschewing one-size-fits-all strategies in favor of a “treat different customers differently” philosophy. It is about retailers that know where to focus and how to properly sequence their omni-channel initiatives, not blindly chase everything some consultant has pitched them.

Clearly, the future of omni-channel will not be evenly distributed.

Don’t be blinded by the hype.