Fashion · Luxury · Retail

Going Private Could Be The Best Thing To Ever Happen To Nordstrom; With One Big Caveat

Recently a roughly $8.4 billion offer from the Nordstrom family to take the namesake retailer private was rejected as inadequate. The deal now seems at risk as the special committee in charge of evaluating a potential transaction indicated that the price needed to be “substantially” and “promptly” improved upon or they would terminate further discussions.

While there is one major concern that looms large in any such deal, my hope is that the Nordstroms can get this done. While as a brand Nordstrom faces most of the same challenges that confront just about all retailers in this era of digital disruption, allowing the company to operate without the harsh and impatient glare of Wall Street could be a major long-term win. Here are a few key benefits to going private:

Avoiding the obsession with growth. The fact is that Nordstrom is fast becoming a relatively mature business. It has few new store openings to execute within its core concepts, it is very well penetrated in e-commerce, and there are not a ton of readily accessible wholly new categories (or geographies) to expand into. The Street’s obsession with growth for growth’s sake often pushes maturing brands to expand their core business too far (think Gap and J. Crew’s fashion missteps, Michael Kors’ distribution overexpansion, or Coach’s — and many others’ — over reliance on the outlet channel).

Minimizing the focus on largely irrelevant metrics. As I’ve been suggesting for many years, same (or comparable) store sales is an increasingly irrelevant metric, and as Brent Franson and I tackled more recently, the shifting nature of retail demands a whole new set of performance measures. Not having to be as concerned about monthly and quarterly reports will free Nordstrom to worry less about pleasing equity investors in the short term and enable greater focus on what they need to do to win over the long term.

Freedom to invest in physical retail. Despite the retail apocalypse narrative, physical retail is not dead; boring retail is. Fortunately Nordstrom has crafted a compelling digital presence, a well executed store model and a harmonious experience across channels. For the most part, Nordstrom full-line and Rack stores are in excellent real estate and it’s unlikely that they will have many store closings on the horizon despite the carnage around them. Nordstrom understands well that physical retail drives e-commerce and vice versa. The challenge is to continue evolving to address changing consumer demands, the emerging importance of younger shoppers and the convergence of digital and physical channels. To thrive Nordstrom must have both a remarkable digital experience and a remarkable brick & mortar experience. Despite what some in the investment community think, for some retailers additional investment in physical retail is not only necessary to keep pace, it is essential to maintain competitive advantage. Nordstrom is firmly in this category.

Ability to think long term and take prudent risks. While some investors are willing to take big bets on silly moon shots (but enough about Wayfair), those that invest in “traditional” retail tend to be more short-term focused and risk averse. Yet we live in a world where the future is getting harder and harder to predict and what will ultimately pay off may take years to become clear. Few retailers will survive, much less thrive, without leaning into more risk and establishing a strong test and learn culture. Historically Nordstrom has shown a willingness to be more innovative than most of its peers, including testing new formats (such as Nordstrom Local), buying emerging concepts (Haute Look and Trunk Club), as well as acquiring two technology companies just last week. While Nordstrom is largely past the capital intensive nature of their major investments in omni-channel infrastructure and expansion into Canada and New York City, there is every reason to believe that the future will require considerable investment and a greater tolerance for risk in order to stay truly remarkable.

Unlike most others in the largely undifferentiated department store space, Nordstrom already has a lot going for it and is not burdened with a crushing debt load like Neiman Marcus. Which brings me to the one big caveat.

Quite a few retailers have gotten into trouble by taking on too much debt through a private equity buyout. Unlike Toys R Us and others, which were struggling with the fundamentals of their core value proposition when they took on considerable leverage, the Nordstrom business model is fundamentally sound, the real estate portfolio is solid, and the management team is excellent and deeply experienced. Nevertheless, financial flexibility, as well as strategic and operating agility, will be key to navigating retail’s future. As mentioned above, Nordstrom is fortunate to have already done much of the heavy lifting where plenty of others are struggling to catch up. Yet, layering on substantial debt and interest payments may limit the company’s ability to make acquisitions and/or the technology investments to stay on the leading edge.

Fortunately the debt levels that are currently being contemplated don’t put the Nordstrom deal into the territory that ToysRUs and Neiman’s now find themselves. But obviously if the buyout price increases substantially it is likely the debt burden will as well. Investors also need to mindful of how well any company with considerable leverage would fare in a major economic downturn.

With any luck, a reasonable compromise can be achieved.

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 at the World Retail Congress.  Check out the speaking tab on this site for more on my keynote speaking and workshops.

Fashion · Luxury · Retail

A tough agenda faces Neiman Marcus’ new CEO

Late last week the Neiman Marcus Group named former Ralph Lauren executive Geoffroy van Raemdonck as their new CEO, replacing company veteran Karen Katz (full disclosure: once my boss). While not terribly surprising given the company’s struggles under a mountain of debt, extremely rocky “NMG One” systems implementation and largely stagnant growth, the move does come at a critical time for North America’s leading luxury retailer.

As van Raemdonck takes the helm next month (and Katz moves to a Board position), he will be faced with addressing several important and vexing challenges. As I was SVP of strategy, business development & multi-channel marketing for the Neiman Marcus Group from 2004-08 (most of that time reporting to then CEO Burt Tansky) I have a somewhat unique perspective on what requires intense and urgent focus. Here’s my take:

Growing share in a mature and shifting market

As I wrote nearly a year ago, much of luxury retail has hit a wall. Many brands, including Neiman Marcus and its most direct competitor Saks Fifth Avenue, have struggled to grow both top and bottom line as core customers “age out” of peak spending years and very few new store locations exist. Neiman’s also has one of the highest e-commerce’s penetration in the industry and much of that growth is now merely channel shift.

Competition is also intensifying. In addition to the myriad online competitors, many of Neiman’s key vendors wisely continue to invest in direct-to-consumer growth strategies as they recognize the advantages of forging a direct relationship with consumers, the strategic brand control that operating their own stores and website affords and the opportunity for greater margins. Some are even pulling back from wholesale selling to create more exclusivity and more tightly managed distribution.

Affluent consumer behavior is also evolving markedly. After the financial crisis fewer customers seem willing to spend as conspicuously as before– despite a booming stock market and growing wealth inequality. Moreover, younger customers are starting to represent a growing percentage of the potential target market and clearly they are more digitally savvy, less logo conscious and don’t (yet?) seem to value the core elements of the luxury department store experience. All these factors create strong headwinds for Neiman Marcus’ hopes to restore significant revenue growth.

An overplayed hand

The work my customer insight team did on customer segment performance in 2007-08 revealed several alarming trends. While we were doing well with the uber-wealthy who tended to pay full price and were largely impervious to our raising average unit prices 7-9% per year, the rest of our business was weakening considerably and steadily. For customers who represented more than 2/3 of our profits, we were experiencing decreasing customer counts and lower transaction levels every year. In fact, literally all of our comparable store growth in the prior 5 years could be explained by the growth in average unit retail. While this was tolerated (and maybe even appreciated) by our very best customers, we were leaking business to Nordstrom (and others) as many very good customers found our ever increasing prices to be too high and our customer experience frequently lacking.

The strategy that had gotten Neiman’s to a leadership position was starting to run out of gas. Until the financial crisis hit (and Burt Tansky retired) little of substance was done to address this growing issue. While Karen Katz has made some inroads during her tenure, the brand still suffers from too narrow a customer base and little demonstrated ability to grow customer and transaction counts. This is the single biggest strategic challenge facing the company over the long term.

Unsustainable debt load

Neiman’s private equity owners paid way too much and saddled the company with a debt level that, unaddressed, will bring the company to its knees. There is simply no way for the brand to earn its way out of the problem. It is merely a matter of time before a significant restructuring of some sort must take place. The sooner this gets resolved the better, but thus far, despite the obviousness of the issue, neither the equity or debt holders have been willing to take the necessary haircut. Hope is not a strategy.

Limited degrees of freedom and flexibility

While Neiman’s has seen their operating performance improve somewhat, macro-economic factors explain much of it and there can be no certainly of that continuing. The fact is that the only way Neiman’s performance improves markedly is for them to start gaining significant share in a mostly flat market. That will almost certainly require substantial investment in new technology, re-inventing the customer experience at retail and extending their digital capabilities. Saddled with large debt and interest payments, the company will be severely constrained in having the cash to do what it will take.

Attracting younger customers and executing the ‘customer trapeze’

While demographically oriented strategies are typically overly simplistic, demographics ARE destiny over the long-term. For Neiman Marcus to thrive in the future they must navigate what I like to call the ‘customer trapeze.’  They must deftly do their best to optimize value from their historical high spending core customers–who tend to be older, love the traditional in-store shopping experience and prefer the highest end brands– while simultaneously doing a much better job of attracting new customers who are largely “digital first” shoppers, prefer more relaxed and democratic personal service and tend to spend considerably less on average. Getting this portfolio right isn’t easy and will require Neiman’s to literally take significant share away from some very formidable competitors whose brands’ are currently better aligned with younger, more aspirational shoppers’ needs and values.

An inevitable merger with Saks?

Many people believe that both Neiman’s and Sak’s fundamentally have too many stores. They are wrong. Because of incredibly favorable rent deals and developer capital contributions, the break-even volumes for most stores are very reasonable. Even if their physical stores were to lose 10% of their volume you could count the number of stores that would be cash negative on one hand. More importantly, stores are critical to helping support the online business, which is nearly a third of Neiman Marcus’ total volume. We understood this relationship well when I worked there–and this dynamic has only gotten far stronger. Closing stores, for the most part, would weaken the brand, not help it.

Having said that, a long rumored merger with Saks holds the potential for value creation. There are some geographies where having Saks and Neiman Marcus duke it out directly only leads to mediocre profits for both, particularly as more business moves online. Rationalizing locations would increase the overall profit pool. Opportunities for eliminating redundant overhead are hardly trivial. Alas, the challenges of both companies’ current capital structures make this conceptually valid merger more complex than it might otherwise be.

Cultural pushback

When I joined the Neiman Marcus executive team one of the first things I noticed was how strong the culture was. This was good and bad. The good part was that most folks had worked together for a long time and the company was a well oiled execution machine. The bad parts were exactly the same thing. Strategy played second fiddle to execution, many senior managers lacked the requisite external perspective and, consequently, there were many blindspots.

Innovation as a discipline was also incredibly under-valued. Karen Katz deserves praise for moving the company forward on many of these fronts, but some of what is needed to take the company to the next level is not inherent to its DNA. van Raemdonck is the first outsider to run the company in some time. I expect a rocky road generally, as well as some departures of high level, long-tenured executives.

Unlike many decades old brands that are struggling mightily, Neiman has many strong core elements. And that’s clearly an advantage as van Raemdonck sets his agenda. Unfortunately, Neiman’s historical strengths are also at the center of many of its go-forward challenges. Until the debt issue is resolved, even under a best case scenario, their new leader will likely be hamstrung to move as quickly as he would like, not to mention at the pace that the company desperately needs.

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.

Consolidation · Luxury · Store closings

The Kors/Jimmy Choo Deal May Usher In A New Era Of Retail Consolidation

Last week’s announcement that Michael Kors would buy luxury shoe and accessories brand Jimmy Choo comes on the heels (heh, heh) of Coach’s $2.4 billion deal to acquire Kate Spade. While this particular move is not in and of itself a catalyst for more merger & acquisition activity, there is a growing sense that various forces are converging to drive an acceleration in retail industry consolidation.

The biggest driver is the harsh reality that organic growth is getting harder and harder to come by. Most sectors of the luxury market have stalled and retailers across a spectrum of formats and price points are being confronted with the need to downsize their physical store footprints amidst retail overcapacity and a fundamental shift in consumer spending behavior. Many companies–and Coach and Kors are good examples of this–have hit a wall in how far their core brands can be stretched and expanded. Strategic acquisitions offer the potential to address different price points and/or reach new demographics that are not easily accessible by their primary banners. In Kors case, it looks like the Jimmy Choo deal will not be their last.

Another driver is the underlying dynamics of operating in today’s ever shifting, fast changing retail world. The power is shifting way from brands toward the consumer, away from retailers toward product brand owners, away from physical toward e-commerce and away from traditional mass market ways of reaching consumers toward all things digital. For many brands, a fundamental reinvention of their model is required and that necessitates new skills, increased scale, more speed and greater agility.

Accordingly, some recent transactions have been motivated by a desire for the acquiring brand to inject new talent and ideas into a moribund culture. Others are driven by a classic “make vs. buy” decisions or spurred by more opportunistic situations where a struggling player runs into the arms of a cash rich suitor. Walmart’s recent activity seems to be a little bit of all the above.

The aborted discussions between HBC and Neiman Marcus might be more illustrative of what the future holds. More and more, I expect to see traditional players come to the realization that their sector must be consolidated and rationalized as top line growth opportunities evaporate and it becomes clear that meaningful earnings growth can only come from taking out capacity, mitigating competitive intensity and better leveraging scale and scope. In some cases these transactions will come together through proactive, forward thinking leadership. Others will be triggered by the opportunity to acquire assets at fire sale prices when a competitor is struggling or files for bankruptcy.

Either way, with the ripple effects of disruption only growing stronger, the pace of activity is likely to quicken considerably. And it just may turn out that store closings are not the only big retail story this year.

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

 

Brand Marketing · Customer Growth Strategy · Luxury

Tiffany seeks to execute the ‘customer trapeze’

Last week the Wall St. Journal featured a story on Tiffany & Co’s “midlife crisis.” The piece highlighted the jewelry brand’s struggle to regain its “cool” and improve recently tepid sales and profits. A few days later they announced the hiring of a new CEO.

Yet Tiffany is hardly alone in dealing with what I have coined the “customer trapeze“, particularly as Millennials become an increasingly important demographic.

The customer trapeze is the idea of hoping to reach a new, highly desirable set of customers while letting go of those with less favorable characteristics. Most often we see it at play when brands face an aging customer base. Knowing full well that their customers will literally die off, companies will seek to update their image and strategy to seem more hip and trendy. This might include becoming more fashion forward, less expensive or attaching themselves to celebrities that appeal to different cohorts. The key to executing the trapeze move is to not let go of one group before being fully ready to take on the new one.

In Tiffany’s case, over the years they have introduced less expensive items and expanded their assortments in an attempt to widen their appeal. Most recently, they’ve taken on Lady Gaga and Elle Fanning as spokespeople and launched a new, more youthful ad campaign. They’ve even taken steps to lessen the predominance of their iconic blue in their brand imagery. The challenge, of course, is that many of these steps to attract new customers run the risk of alienating long-term, often highly valuable, ones.

Tiffany follows in the footsteps of many brands that see the demographic writing on the wall and take bold steps to attract new customers. Readers of a certain age may remember the “This Is Not Your Father’s Oldsmobile”campaign. This is a text book example of a brand that let go of one customer group before it could safely latch onto another one. The once legendary company went too far, too fast and, at the risk of pushing the trapeze analogy too far, suffered mightily from its aggressiveness and decision to work without a net.

There are many examples of brands essentially abandoning one customer group too quickly to chase a new, sexier one. Often this comes through an attempt to “trade up” the customer base by pushing more expensive and fashion forward products to attract more affluent consumers. The most recent disaster of this sort came under Ron Johnson’s failed reboot of JC Penney. While not (yet?) fatal, the company has been struggling to recover for over 4 years.

History reveals that very few established brands are able to successfully execute a dramatic re-configuration of their customer base–at least quickly. Once you get beyond Cadillac and IBM, the list grows short indeed. It’s not hard to understand why. The more a brand is known for one set of things, the harder it is to persuade consumers to believe something fundamentally new and different. To the extent a company starts to dramatically move away from what made it successful with its traditional segment in the hopes of cultivating a new group, it risks alienating its historical core. More often than not, the customers that are being de-emphasized are significant contributors to current cash flow. We saw this with JC Penney and I witnessed it first hand when we tried similar moves at Sears more than a decade ago.

With rare exception, brands simply cannot survive, much less thrive over the long-term without being really good at acquiring profitable new customers to replenish those that leave or naturally decrease their spending. But executing this transition is not so easy. Like any trapeze act, the customer trapeze is all about speed, coordination and timing. Let go at the wrong time, be it too late or too early, and the fall can be disastrous.

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

Fashion · Luxury · Omni-channel · Retail

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

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

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

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

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

The Case For

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

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

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

The Case Against

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

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

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

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

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

Being Remarkable · Luxury · Retail

Luxury retail hits the wall

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

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

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

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

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

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

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

Luxury · Retail

Kors is the latest retail highflier to get its wings clipped

Add once soaring–and seemingly invincible–Michael Kors to the list of retail brands to disappoint the market.

Last week Kors, the “accessible luxury” fashion brand that has grown from a niche player to a multi-billion dollar global juggernaut in under a decade, reported earnings that actually slightly beat expectations. Yet a miss on sales and lowered guidance sent the stock cratering.

At first blush, the overall sales weakness should not have surprised anyone. Kors has pulled back significantly on its wholesale distribution while simultaneously reducing promotional activity. An increase in that sector would have taken a miracle. But what was shocking was a rather precipitous 6.4% drop in comparable stores sales and a nearly 23% decline in licensing revenue.

It’s tempting to see the problems at Kors as brand specific, self inflicted and temporary as the brand realigns its pricing and distribution strategy. But I believe they underscore several broader and more vexing industry issues.

For several quarters now we’ve witnessed a panoply of once mighty high-end brands falter. The luxury department store industry’s big stall is now well into its second year. Saks has reported several quarters of disappointing comps. Neiman Marcus, saddled with high debt and weakening sales, had its debt rating downgraded last week. Nordstrom’s industry leading full-line store performance has become tepid at best. And all of this comes amidst a surging stock market and improving consumer confidence.

To be sure, the strong dollar and weak oil market has a material dampening effect. But even if that were to reverse–which seems rather unlikely anytime soon–the industry is still plagued by increasingly unfavorable demographics, lack of innovation, over capacity and growing consumer willingness to “trade down” to less expensive substitutes. Until these companies find ways to drive traffic increases, attract meaningful numbers of new customers and drive revenues through transaction growth instead of merely raising prices, we can expect a continued string of disappointments from most, if not all, of these brands.

And it just might take a major shakeout to restore the industry to its glory days.

A version of this post originally appeared @Forbes where I recently become a contributor. You can check out my latest work here.

Growth · Luxury · Omni-channel · Retail

The bullet’s already been fired 

I’m fascinated by our capacity to get stuck, the many ways we craft a narrative in a vain attempt to avoid change, the stories we buy into as we hope to keep above the fray. Far too often, the power of denial seems endemic to individuals and organizations alike.

Go back to the 80’s and 90’s and ponder how a slew of successful retailers mostly did nothing while Walmart, Home Depot, Best Buy–and a host of innovative discount mass merchandisers and category killers–moved across the country opening new stores and evolving their concepts to completely redefine industry segments. Somehow it took many years for the old regime to realize what was going on and how much market share was being shed. For many, any acceptance and action came far too late (RIP, Caldor, Montgomery Ward, et al).

Witness how digital delivery of books, music and other forms of entertainment came into prominence while Blockbuster, Borders and Barnes & Noble spent years mostly doing nothing of any consequence. Two of them are now gone and one is holding on for dear life.

Starbucks revolution of the coffee business hardly occurred overnight. But if you were the brand manager of Folger’s or Maxwell House you apparently were caught unawares.

Consider how consumer behavior has been shifting strongly toward online shopping and the utilization of shopping data through digital channels for well over a decade. Yet many companies are seemingly just now waking up to this reality. And by the way, Amazon didn’t just spring out of nowhere. They will celebrate their 22nd anniversary this summer.

And lastly, examine how the elite players of the luxury industry have largely resisted embracing e-commerce–and most things digital–believing that somehow they were immune to the inexorable forces of consumer desires and preferences. Apparently they failed to notice, as just one example, Neiman Marcus’ rise to having 30% of their sales come from online and more than 60% of physical store sales now being influenced by digital channels.

More often than we care to admit, the bullet’s been fired, it just hasn’t hit us yet.

The good news is that while the pace of change is increasing in retail, we have a lot more time to react than we do in a gunfight.

The bad news is that the impact can be just as deadly if we are not prepared.

 

 

Amplify · Being Remarkable · Customer Growth Strategy · Holiday Sales · Luxury · Omni-channel · Retail

My top ten posts of 2015

As has become a tradition, I present my most popular blog posts from this year.

  1.  Bleak Friday
  2.  Learning to surf
  3.  I see dead marketers
  4.  Omni-channel myths, distortions and, yeah, that’s just silly
  5.  What if omni-channel is too expensive?
  6.  An end to omni-channel?
  7.  It’s later than you think
  8.  Luxury retail’s big stall
  9.  Sears: The world’s slowest liquidation sale (redux)
  10.  The fault in our stores

And here are a few more that didn’t quite make the cut, but that I’m rather proud of….

  1. Retail’s new front door
  2. No new stores ever!
  3. A dim signal amidst the noise
  4. Everywhere and nowhere
  5. I fought the math and the math won

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

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

Luxury · Uncategorized

Luxury retail’s big stall

Neiman Marcus and Saks both just reported disappointing sales and earnings. And both cast most of the blame on the strong dollar’s effect on their tourist business. There was also some whining about the unseasonably warm weather, low oil prices and volatile capital markets.

To be sure, these factors have not been helpful. But the problems in the luxury market go deeper, particularly among the department store players. First some quick context.

The widely held notion among analysts that luxury brands are immune from the vicissitudes of the economy reveals a fundamental misunderstanding of their actual customer base. Yes, a significant percentage of the business comes from the very wealthy, who are not very price sensitive and not affected much by the sturm und drang of the economy. But for all but the most rarified brands, most luxury retail spending comes from what I call the “solidly affluent” (others call them HENRY’s–High Earners Not Yet Rich). These customers have much more volatile spending and much greater price sensitivity (I know this well from 4 years at Neiman Marcus diving into the data and conducting scores of studies). When the economy wanes they pull back. When prices get too high they shop less frequently or trade down to lower priced brands.

So with that as a backdrop–and going beyond the near-term headwinds– here are the key reasons I see a tough longer-term outlook for luxury retail–at least in North America:

  • Little new customer growth. Other than through e-commerce, luxury retail has had a tough time with customer acquisition for more than a decade. With e-commerce maturing, unfavorable demographics (see below) and few, if any, new store openings, luxury department stores, in particular, will struggle to replace the customers they lose.
  • Little or no transaction growth. While not widely appreciated, most of the comparable store growth in luxury retail for quite some time has come through prices increases, not growth in transactions. There is nothing to suggest this trend will change.
  • Unfavorable demographics. Affluent Baby Boomers have propped up the sector for the past decade or so. But as customers get older they spend less in general and quite a bit less on luxury products. The Baby Boomers are slowly but surely “aging out” of the sector. Gen X is a smaller cohort and there is little evidence they will spend as much on average as the Boomers. Over the longer term, Millennials will need to make up for the Boomers who, to put it bluntly, will be dying off. So far, most studies suggest Millennials will be more price sensitive and less status conscious then then the cohorts ahead of them.
  • Limits to price increases. For about 15 years, average luxury retail prices have grown at more than twice the general rate of inflation. In accessories it’s more like three times. Prices just don’t rise forever without affecting demand.
  • Shifts in spending. The affluent continue to value experiences and services over things–and are allocating their spending accordingly. Maybe this multi-year trend will start to reverse itself. Color me skeptical.
  • The omni-channel migration dilemma. Saks, Neiman’s and others are spending mightily on all things omni-channel and frankly the ROI is often terrible. Now they must do so to remain competitive. But it’s incredibly expensive to create a more integrated customer experience and, for the most part, the better you get at it the more you accelerate a shift to digital away from physical stores. Most often this is not accretive to earnings. For either Neiman Marcus or Saks to get a pay-off they need to grab market share. And the reality is they have more competition on the higher end part of their business from the wholesale brands that continue to open up stores and dramatically improve their e-commerce game. And on the lower end of their business they are playing catch up with Nordstrom.

For me, what I see is a sector that clearly has immediate term headwinds. But, more importantly, I see a sector that has much more profound long-term demographic and psycho-graphic headwinds. A sector that will have increasing difficulty wielding it’s tried and true big hammer of price increases. A sector that can no longer count on e-commerce for much new customer growth A sector that has 2-3 years of significant investment in digital and omni-channel capability building just to remain competitive.

Even if the dollar weakens or oil prices rise or we have colder winters, it’s still not a very pretty picture.