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.



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 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.