Reimagining Retail · Retail

Nordstrom and retail’s growing urgency to rethink performance metrics

Last week Cowen and Co. retail analyst Oliver Chen downgraded Nordstrom shares, and the stock promptly tumbled. Among the concerns he cited were declining comparable store sales at both Nordstrom’s full-line department stores and the Rack off-price division. There’s a real risk to misunderstanding what is really going on.

One of the things were going to need to get used to, not only with Nordstrom but with many other brick-and-mortar-dominant retailers, is a new way of thinking about performance — and much of this has to do with letting go of comparable stores sales as a key indicator while fundamentally thinking differently about the role of physical stores.

We know that e-commerce is growing much faster than physical retail. That’s not changing anytime soon, if ever. But there is a huge difference between online brands stealing share from industry incumbents and sales that are transferred within channels of “omni-channel” retailers. Nordstrom is a great case in point.

It’s hard to make a case that Nordstrom has been appreciably damaged by the disruptive impact of e-commerce. It’s easy to make the case that the company has done a heck of a job responding to these changes and capturing the digital-first customer, both by developing superior online shopping capabilities and executing a well-harmonized experience across digital and physical channels.

While most of its department store brethren are losing market share, experiencing significantly compressed margins and closing stores in droves, Nordstrom has consistently driven strong overall results despite being a rather mature brand. In recent years, this has mostly played out in strong e-commerce growth and tepid physical store performance.

A world of declining traffic

Last year I posed the question “what if traffic declines last forever?” While I was intentionally being provocative, for many retailers it is far more reasonable to assume that this will be the case going forward than not. There will always be hot retail concepts that will go through a growth cycle of opening plenty of locations and experiencing strong same-store sales growth. The off-price segment is a great example of that right now. But for the most part, the shift away from brick-and-mortar to online shopping will continue unabated. And that means most retail brands, particularly those that are relatively mature, are looking at an almost impossible task of driving consistent positive same-store sales as e-commerce gains share.

So what? 

It’s one thing for physical store sales to go to an online competitor; it’s another to transfer sales to your own captive websites, as Nordstrom has been able to do (for the most part). The problem with the relentless focus on comparable store sales as a key metric is it treats the store as a discrete economic entity, which it clearly is not. This in turn drives the nonsense around closing stores as the silver bullet for fixing what ails traditional retailers. It’s certainly reasonable to assume that physical assets can be better configured to deal with changing shopper behavior and the shift to online selling. And clearly, when a retailer is losing massive share to competitors, a wholesale re-think is in order. But the idea that comparable store sales are the best indicator for a retailer’s brick-and-mortar deployment is simply no longer valid in most cases.

A new role for the store: the heart of a brand’s ecosystem

For most traditional retailers, we must stop thinking about stores as liabilities but rather as assets that, yes, in many cases need to be transformed — often radically. But we must acknowledge that from Target to Kohl’s to Sephora to Neiman Marcus and beyond, the store is typically the heart of a brand’s ecosystem. This means that for many, if not most, if the store goes away many customers’ relationships — and therefore future spending — will be compromised. It’s not brick-and-mortar or e-commerce. It’s both, together, that ultimately drive customer loyalty.

In many categories, physical locations perform key roles in the shopping journey that online simply cannot duplicate or come close to mimicking — at least with current technology. For retailers that put a premium on creating a harmonized experience across channels, e-commerce is a sales channel, but it is also a major complement to the stores, and vice versa. It is therefore not surprising to discover that many brands that have shuttered stores have seen their e-commerce get worse in the trade areas once served by a closed location.

The big move of once-online-only brands into brick-and-mortar locations reinforces the unique and important role of physical stores. Most of these brands are approaching the limits of online growth and see stores as a way to acquire customers more inexpensively, serve them in unique ways and forge more comprehensive relationships through the unique combination that digital and physical can provide. One Warby Parker customer, for example, might be completely comfortable buying a new pair of glasses online, but will turn to a brick-and-mortar location for an optician’s adjustment. Another Warby Parker customer might need to see and physically try on their first pair in a store, but will make future purchases online going forward.

The reinvention of retail demands new metrics

In light of the differing underlying economics and category dynamics faced by any given retailer, there is no one-size-fits-all metric to perfectly define success. But it should be clear that same-store sales is an increasingly irrelevant metric. As it gets harder and harder to truly credit a particular channel for a sale or its role in acquiring, growing and retaining a particular customer, the delineation of channels becomes more of a blur. Retailers (and the analysts who love them) need to evolve their measurement focus.

Since customers typically do most of their shopping (whether online or in store) in a relatively narrow geographic region, there is a strong case to be made for seeing a trade area as the more relevant economic entity compared with a store or e-commerce in isolation. Given what was discussed earlier, and knowing that e-commerce sales tend to go up in a trade area when a brand opens a new store, we cannot ignore the inherent interdependence of the channels in retailer metrics any longer.

Spoiler alert: Many brand are already looking at performance this way internally. It’s time for Wall Street to catch up. Here’s my and Euclid’s Brent Franson’s suggestion on some other things to consider.

Of course, none of this is to say that Nordstrom doesn’t have some work to do or that its shares were not overvalued. Yet the inexorable shift to digital and the resulting difficulty in driving what gets counted as comparable store sales does not get addressed in any useful way by defaulting to store closings, leasing out excess space or hyper-focusing on misleading metrics.

Nordstrom is only the latest retailer to be misunderstood. More are sure to follow.

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.  

Just  announced: I will be keynoting the NEXT Conference in Austin, TX on September 24.

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.

A really bad time to be boring · Innovation · Retail

Will Macy’s ignite a new era of legacy retailer innovation?

The moderate department store sector has been struggling for some two decades; first losing share to category killers and discount mass merchants, then to off-price retailers and now, increasingly, to Amazon. Since 2008, department stores’ share of total retail has sunk from 2.8% to about 1.7%. Over 1,000 stores have been shuttered during the past few years with more sure to follow. J.C. Penney and Sears have seen their market values collapse, while Kohl’s, Dillard’s and Macy’s have significantly underperformed the market.

Recently, however, a certain ebullience has returned to the sector as financial performance has improved. Some observers now see a rebirth, while others are a bit more skeptical. It may well turn out that the past few months’ gains are more dead cat bounce than renaissance. Yet Macy’s has garnered considerable attention by stepping up its growth efforts under CEO Jeff Gennette. The first big step was announcing its Growth 50 Strategy earlier this year. Then, in just the past six weeks, two significant deals were announced. In early May, the company acquired Story, the Manhattan-based concept store, and made its founder Rachel Shechtman Macy’s new “chief brand experience officer.” And then just over a week ago Macy’s entered into a strategic alliance with b8ta, the experiential retailer and technology platform.

It remains to be seen whether these initiatives help relieve the epidemic of boring that struck Macy’s and its brethren years ago. Materially and fundamentally altering Macy’s stuck in the middle trajectory will take more than a couple of deals that look to affect a small percentage of its total business. The operational, experiential and product changes that are part of Growth 50 appear solid, but are far more evolutionary than revolutionary. And all of this comes against a backdrop of increasing competition from off-price retailers that are opening substantial number of stores (and aren’t yet close to mastering digital commerce), along with Amazon’s growing push into fashion.

Macy’s improved financial performance has to be put in the context of the broader market (Macy’s is barely keeping pace) and these innovation moves must be put in the context of their potential materiality (they aren’t likely to be). Still, Macy’s is to be applauded for its willingness to act and to embrace what I call a “culture of experimentation.” Given that the sector Macy’s competes in is virtually certain to keep shrinking, the only way for Macy’s to drive consistent, material profitable growth will be for them to steal significant market share. That will take more than incremental improvements or a random set of experiential pilots. These moves seem like a good, albeit limited, start.

While it’s easy to blame Amazon (and others) for the troubles that have befallen so many legacy retailers, the reality is that most of the wounds are self-inflicted. Too many of these retailers, including Macy’s, watched the last 15 or 20 years happen to them. They seemed to be believe that they could cost cut their way to prosperity and that mere tweaks to their product offering and customer experience would move the dial. Now, as many of them inch closer to the precipice, a few are acting—some rather more boldly than others.

The fact is they have no choice. The middle is collapsing under the weight of boring product, boring marketing and boring experiences. And you could not have picked a worse time to be boring. The only way out is to be dramatically more customer-relevant and to deliver a remarkable experience at scale. Being digital-first, offering a seamless customer experience, along with all the other buzzwords the pundit class likes to throw around (myself included) are fast becoming table-stakes. Necessary, but far from sufficient.

Traditional retailers are often pretty good at following others’ leads. I suspect that as Macy’s makes additional moves, many will be emulated by competitors. Yet the idea that legacy retailers will finally wake up to the need to be fundamentally more innovative seems unlikely. They mostly watched when it was clear that e-commerce was going to revolutionize shopping. They mostly stuck to channel-centric thinking and silo-ed behavior when it became clear that the customer was the channel. They mostly remained rooted in one-size-fits-all marketing strategies when it was obvious that we needed to treat different customers differently. And they continue to rely on store closings as a silver bullet, when the real problem is operating a brand that is not big enough for the stores they have.

Adding to my dire and admittedly cynical outlook is that many of the retailers that need to innovate the most still have no clue how to do it and, even if they did, lack the cash flow to make it happen. Sadly, for many, this will end badly.

For them, as the saying goes, the biggest problem is that they think they have time.

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.

Being Remarkable · Branding · Retail

Is IHOb a big nothing burger?

The teasing announcement that IHOP (the brand formerly known as the International House of Pancakes) would change its name to IHOb sent the interwebs wild. In the days leading up to what some seemed to take as earth-shaking, potentially vortex-shifting, news speculation was rife as to what the “b” stood for. Bacon? Breakfast? Burrito? Bohemianism? Blockchain? So many intriguing possibilities!

One intrepid investigative reporter ultimately engaged in what is sure to be Pulitzer-winning work by simply walking into a local IHOP, where he immediately discovered some signs that seemed to solve the mystery: B is for burgers.

Shockingly, once we got the official word, it turned out to be merely a publicity stunt designed to highlight the chain’s new focus on meals other than breakfast. So the hemming and hawing about how bone-headed the name change was going to be then shifted to challenging the wisdom of the menu refocus or being offended by what some took as a desperate ploy for social media attention. The Wall Street Journal even weighed in with the deeply disturbing news that many customers don’t even know what IHOP stands for. It also turns out that there are quite a few folks disgusted by the lack of global sensibility in the menu despite “International” being right there in the restaurant’s name.

Of course, virtually all of this is noise. The publicity stunt will soon be forgotten. The people that like to get their pancakes at IHOb, er, I mean IHOP, will probably keep getting their pancakes there—or if they want to lean into the International part, their Belgian waffles or, if feeling especially frisky, their French Toast. The burgers will turn out to be a winner, or not. And the Earth will keep orbiting the Sun.

Having said this there are, in fact, at least two important and instructive things to take away from this episode.

First, a name is not the same thing as a brand. A name is what we call something. A brand is something different entirely—and far more meaningful. I like Seth Godin’sdefinition: “a brand is the set of expectations, memories, stories and relationships that, taken together, account for a consumer’s decision to choose one product or service over another.” Often we get lost in the literal naming of something. But a powerful brand transcends mere description.

What comes to mind when we think about Restoration Hardware? Or Pottery Barn? Or Crate & Barrel? Or Banana Republic? When we stop to think about the names of those stores as representations of what they do today, they seem not only pretty silly, but downright misleading. It doesn’t matter. The customer experience over time is what defines the brand. So enjoy your Pepsi while Googling more about this.

Second, the challenges of IHOP speak to broader issues that many legacy brands face. There are great advantages to being known for a clearly defined set of expectations, memories, stories and relationships. Yet that often sets up real limitations and barriers to a brand’s necessary growth and evolution.

Mature brands typically need to retain their long-term historically valuable customer cohorts and attract and grow entirely new segments. It’s part of what I call the “customer trapeze,” and it isn’t easy to execute. The more brands lean into cultivating younger, trendier customers the more they likely risk alienating older, more classic ones. The more you start to push products you aren’t known for, the more you call into question whether you are serious about the core of what made you distinctive in the first place.

The thing to remember is that stagnation in the face of shifting consumer desires and growing, often disruptive, competition is, best case, irrelevance; worst case, it’s death. Many brands convince themselves that embracing radical change is risky, when in fact failing to evolve is the most risky thing a company can possibly do. We don’t have to look very long and hard to come up with dozens of examples of once-leading brands that failed to experiment and innovate and are paying a heavy price today.

So maybe the IHOb thing is just a goofy publicity stunt. Maybe the folks at IHOP are kidding themselves that they can become a meaningful player in a world that’s crowded with all manner of burger joints and casual-dining options. Maybe this is all just much ado about nothing.

Yet in a world where lots of legacy brands sat around and watched the last 15 or 20 years happen to them and now find themselves inching toward the precipice, IHOP should at least be applauded for trying something new.

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.

Customer Experience · Omni-channel · Reimagining Retail · Retail

These brands apparently did not get the ‘retail apocalypse’ memo

For a couple of years now pundits, analysts, journalists and various other retail observers have been advancing the “retail apocalypse” narrative. A typical story or opinion piece warns of the “death of the mall,”  points out how “e-commerce is eating the world,” and generally suggests that “traditional” retailers are toast.

Alas, facts are stubborn things, as I point out in my keynote talks and highlighted in a recent Forbes article, “Physical Retail Is Not Dead. Boring Retail Is.”

Recent reports from several high-profile–and clearly brick & mortar-dominant–retailers underscore the uselessness of broad statements about the future of physical shopping. Despite the supposed plague descending upon those poor sods who continue to open actual stores, Lululemon and Costco managed to drive double-digit comparable store increases and robust e-commerce growth. Same with Ulta, the beauty brand that is opening 100 new stores this year. If physical retail is dead, please also get the word out to TJX, Ross, Dollar General and Aldi, all of which continue to open significant numbers of new locations. Oh, and don’t forget Warby Parker, Indochino, Untuckit, Everlane, Fabletics and many other brands that started online, only to discover that physical stores are essential to their next stage of growth—and may actually be the key to their making any real money.

Alternatively, if we look at China where, frankly, much of the really cool stuff in retail is happening, it turns out shopping behemoth Alibaba is stepping up its “new retail” strategy by opening more Hema stores and making investments in various brick & mortar-centric retail concepts. I wonder if those who continue to promulgate the “death of physical retail” storyline are short the publicly-traded brands in the two biggest retail markets on the planet that continue to defy their thesis?

Of course, the real issue is the foolishness of adopting a one-size-fits-all view of a huge and complicated industry. The future will not be evenly distributed and individual retail brand’s mileage will vary—often considerably. What we know to be true is that in sectors where e-commerce penetration is higher than 40% or so—typically where the product can literally be delivered digitally, as is the case with music, books and games—most of physical retail has been wiped out. We know that in sectors where the supply of retail space greatly exceeded the sustainable demand (I’m looking at you department stores), in some cases owing to the growth of e-commerce, in other cases owing to the rise of better value propositions (off-the-mall and off-price competition), a massive consolidation is occurring. Most notably, we know that retailers that got stuck in the middle, failing either to choose to be great at price/value and convenience (what I like to call “optimized buying”) or to deliver a remarkable shopping experience, are extinct or being pushed to the brink of irrelevance.

Just as misleading and potentially dangerous as making pronouncements about a retail apocalypse are those that adopt the Alfred E. Neumann position (note to Millennials: Google it) and find solace in e-commerce being “only 10%” of all retail. The impact of digital disruption varies considerably by sector, a particular retailer’s cost structure and whether or not a given retailer has executed a well-harmonized omnichannel strategy. For every Nordstrom and Neiman Marcus that have captured a fair share of the shift to digital shopping for themselves and continue to grow overall in relatively mature markets, we have J.C. Penney and Toys ‘R’ Us that pretty much missed the boat entirely.

It’s easy to blame Amazon for all of the industry’s woes. But it isn’t true. It’s easy to say that malls are dead. Yet many are incredibly vibrant and healthy. It’s easy to pronounce the death of physical retail. But then you have to explain the thousands of new stores that are opening and the dozens of overwhelmingly brick & mortar-centric brands that are thriving.

So if you are one of those people going on and on about the retail apocalypse please just cut it out. Your lack of perspective and nuance is not helping.

It is crystal clear, however, that many more malls and stores will close without aggressive actions to reimagine and reinvent themselves. Struggling brands desperately need to go from boring to remarkable. Struggling brands need to adopt a culture of experimentation and be willing to be retail radicals. Struggling brands need to stop the nonsense about channels and realize it’s all just commerce, and that the customer is the ultimate channel. Struggling brands need to learn to treat different customers differently. And struggling brands need to hurry. Time is not on their side.

When this all comes together, we see the positive results that are possible. When it doesn’t, there is no longer any place to hide.

Lululemon--39312-detailp

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 Friday June 15 I will be keynoting The Shopper Insights & Retail Activation Conference in Chicago.  For more on my speaking and workshops go here.

A really bad time to be boring · Retail · Store closings

Sears: The world’s slowest liquidation sale picks up the pace

The Lampert Delusion might be a good name for a Robert Ludlum novel. Unfortunately it is more apropos of the apparent strategy Sears Holdings’ principal shareholder and CEO is employing to try to save the flailing retail chain.

Regular readers may remember that I have been calling Sears “the world’s slowest liquidation sale” since 2013 as it became clear that Lampert had no credible strategy to stop Sears and Kmart from sinking further into irrelevance–much less restoring them to meaningful profitability. Since then, nothing material has been done to get the brands back on track, and asset after asset has been unloaded to fund widening operating losses.

The good news — in one way of looking at it — is that Sears had significant fungible assets of decent value to raise cash and a more than cozy relationship with a few willing buyers. Unfortunately, in many cases, by the time Sears sells off something, it is doing so at fire-sale prices and in a manner that only further weakens its core business. Which is why my provocative post from 2014 is looking more prescient every day.

So while Lampert has been slinging strategic nonsense for over a decade, he has been able to keep Sears Holdings alive well past its expiration date. However, today’s action to close yet another bunch of stores is almost certain to accelerate Sears’ trip to the retail graveyard. Here’s why:

First, and most importantly, closing stores does precisely nothing to improve customer relevance. Neither Sears nor Kmart suffers from a “too many stores” problem. They suffer from being boring, irrelevant and poorly executed retail concepts. Tellingly, both have exited multiple markets and trade areas that lots of other similar retailers make work. There is a reason the Kohl’s or Macy’s or Home Depot down the street from the stores Sears is closing remain profitable, and it mostly comes down to customer relevance and remarkability.

Second, closing these stores does little to improve profitability. Sears lost $324 million in the first quarter on a 11.9% comparable store sales decline. You cannot possibly show me any math that suggests shuttering these stores will make a dent in those deeply disturbing statistics. Moreover, almost none of the volume lost from these closings will be made up online or in neighboring stores.

Third, as a practical matter, neither Sears nor Kmart is a national retailer anymore, and as they shed volume they deleverage or make inefficient their operating systems. As marketing moves further to digitization and personalization, national scale economics are less important, but they still matter.

The supply chain is highly dependent on scale. Continue to drop volume, and logistics costs as a percentage of revenue go up — or service must be cut, further weakening Sears’ competitive position. Sears has a lot of product that is home delivered. Take volume out of a delivery area, and costs go up or service must go down. As revenues continue to contract, vendors not only become worried about getting paid but also aren’t likely to focus product development and marketing resources on an ever-shrinking chain. It gets harder and harder for Sears to offer anything proprietary or unique in its merchandise assortments.

Fourth, a key point of differentiation for decades has been Sears’ proprietary brands, particularly Kenmore, Craftsman and Diehard. As these products get distribution elsewhere, Sears may generate some incremental cash, but it continues to give customers fewer reasons to shop in its stores or on its captive e-commerce sites.

The simple reality is this: Nothing of any consequence has been done or is being done that will materially reverse the downward trajectory of the company. Closing stores and selling off key elements of the business may slightly improve cash flow, but they further weaken Sears’ and Kmart’s value propositions. Operating losses remain huge with no end in sight. And Sears Holdings is quickly running out of things to raise significant cash.

In an ode to Hemingway, the way Sears will go bankrupt is gradually and then suddenly. Dead brand walking.

838634748_sears-store-750x500

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 June 15 I will be doing a keynote at The Shopper Insights & Retail Activation Conference in Chicago.  For more on my speaking and workshops go here.

Being Remarkable · Reimagining Retail · Retail

Is this the beginning of a department store renaissance? Eh, not so much.

Nearly two weeks ago Macy’s beat quarterly sales and earnings expectations and many on Wall Street promptly lost their mind. Same story with Dillard’s. Then Kohl’s followed up with a similarly surprising upside report that led some to conclude that maybe, just maybe, the long-beleaguered department store sector might be seeing a resurgence or—dare we say it out loud?—the beginning of a renaissance.

Alas, this rising ebullience seems far more driven by a mix of hope, misunderstanding and a heaping side order of denial than any compelling evidence that the tide is turning in any meaningful or sustainable way. Once again we are in real danger of confusing better with good.

To be sure, both Macy’s and Kohl’s sales and profits were much improved over last year. Yet their performance must be viewed from the perspective of both short-term factors and longer-term realities. On the clearly positive side there is solid evidence that both struggling retailers are executing better. In Macy’s case, inventory looks to be well managed (yielding fewer markdowns) and efforts to capture cost efficiencies appear to be paying dividends. A few targeted strategic initiatives, including Kohl’s partnership with Amazon, seem to be driving some incremental business.

With a bit more context, however, these results aren’t really all that stellar. And they most definitely are not yet strong indicators of any substantive turnaround. Notably, both retailers’ sales benefitted significantly from the move of a major promotional event into the quarter. Without this shift, same-store sales would have increased only about 1.7% at Macy’s, and Kohl’s would have been more or less flat (not that this metric is all that useful anymore anyway). That is neither keeping up with inflation nor maintaining pace with the overall growth of the broader categories in which they compete. The optimist might see losing market share at a slightly slower rate as a win. The realist opines that there is a lot more work to do to go from decidedly lackluster to objectively good.

The other thing to bear in mind is that J.C. Penney and Sears (and now Bon-Ton) have been leaking volume through store closings and comparable store sales declines. It’s hard to imagine that Macy’s and Kohl’s have not benefitted materially from this dynamic. While J.C. Penney’s future is increasingly uncertain, any upside from Bon-Ton will be short-lived. Sears looks to be the gift that keeps giving, though likely for only a few quarters more as I expect that Sears will close substantially all of its full-line stores within the next year. While this creates one-time market share gaining opportunities and fixed cost leverage, once the dust settles two factors will come into sharper relief.

The first is the contributions from a strong economy. Recent macro-economic factors have been generally positive for the product categories in which Macy’s and Kohl’s compete. Whether there will continue to be some wind beneath the sails of U.S. retail more broadly—and for the moderate-priced apparel, accessories and home categories in particular—remains to be seen. Clearly my crystal ball is no better than anyone else’s—and maybe worse. But my best guess is that both the economy and the jump ball for market share occasioned by department store consolidation peaks within the next few quarters.

The second factor that looms large seems to be the one Wall Street forgets. The moderate department store sector has been in decline for a long, long time. Some of this has to do with evolving customer trends. Some with stagnant income growth. Some with the rise of superior competing business models: initially category killers, then off-price and dollar stores and now, increasingly, Amazon. And some with more than a fair share of self-inflicted wounds. Regardless, the entire moderate sector, to varying degrees, is stuck in the vast, undifferentiated and boring middle. A somewhat better version of mediocre may the first step on an eventual path to greatness, but it may be just that: a first step.

Lift the veil from a quarter or two of slightly above average performance and the drivers of broader share losses (and related widespread shuttering of stores) continue unabated. Off-price and dollar stores, which in recent years have accounted for the biggest drain on Macy’s, Kohl’s et al., are opening up hundreds of new stores at the same time they are starting to turn up their digital game. Amazon is becoming a bigger factor everyday—and it has yet to make a big push into physical stores. Even if any of the leading department stores miraculously became more innovative and customer relevant they would continue to face significant headwinds. Bottom line: show me someone who believes that a transformation of mid-priced department stores is possible in the foreseeable future and you’ve probably clued me into who has been providing Eddie Lampert with his strategic consulting advice.

As the middle continues to collapse, it is now completely a market-share game. The near-term good news is that Macy’s and Kohl’s competition has made it relatively easy to grab some share. The near-term good news is that a generally healthy economy tends to raise the tide for all. The near-term good news is that Macy’s and Kohl’s operating discipline allows them to convert relatively small sales increases into nice incremental profit opportunities.

The bad news is neither one of them goes from incrementally better to demonstrably good until they make much more substantive and fundamental strategic changes that move them from mostly boring to truly remarkable. Neither brand has spelled out what that looks like in any compelling fashion. And once designed, getting there from here is no small task. Until then, it is way too early to declare victory.

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 June 15 I will be doing a keynote at The Shopper Insights & Retail Activation Conference in Chicago. Contact me for a special discount. For more on my speaking and workshops go here.

Retail

Memories: Two kinds

At a basic level there are really only two kinds of memories.

For many of us, the first type are all too familiar–and the most problematic. We remember the pain of the past: a failed relationship, the promotion we didn’t get, the hurtful comment of a relative or friend, an apology we “deserved” and are still waiting for, any number of actions that somehow or other hurt our feelings. And on and on.

The other kind are those that lift our spirit: remembering the birth of our child, the feeling of first falling in love, hoisting that trophy, crossing that finish line (literally or figuratively) or, as we do in the United States today, honoring the memory of those who died in service to our country.

Until someone invents a time machine that allows us to go back and attempt to fix that which didn’t go as we would have wanted or planned, ruminating on negative memories keeps us stuck and limits our potential. At some point, as Lily Tomlin allegedly said, “we must give up all hope for a better past.” The only thing that allows us to move on is to forgive unconditionally and let it all go. Easier said than done, I know.

While it’s possible to get just as stuck on positive memories–and at this point you might want to sing an impromptu version of “Glory Days”–they still typically fill us with love, warmth and compassion. They remind us of what’s possible. They serve to put life in better perspective and sharper relief. They steep us in gratitude.

Most importantly, when we acknowledge the two kinds and are aware of the keen differences, we can more clearly see how getting attached to one set is not in our best long-term interest.

And then we get to make a different choice.

memorial-day-flags-1

This post was also published on my more spiritually oriented blog I Got Here As Fast As I Could.

Retail

Despite Amazon tire deal, talk of a Sears turnaround is just hot air

Having spent 12 years of my career at Sears, I find it particularly sad to see the once-storied retailer sink slowly into oblivion in what I frequently refer to as the world’s slowest liquidation sale. Equally troubling is the continued efforts by Eddie Lampert, chairman and CEO of Sears Holdings SHLD +8.72%, to suggest a transformation is still possible. As I have written before — and there is no nice way to say this — you’d have to be either gullible or stupid to believe that anything resembling a turnaround is in the cards.

So from a “Can Sears be saved?” point of view, despite the short-term pop in the stock price, there is nothing remotely hopeful in last week’s announcement that will start selling Sears’ tires. As with last year’s similar Kenmore deal, Sears may slightly delay the inevitable, but Amazon is likely the real winner.

Having held the title of vice president for corporate strategy at Sears at one point, I know that its private brands (and the services that surround them) once represented the core of Sears’ consumer and shareholder value. Set the wayback machine to 15 years or so ago, and brands like Kenmore, Craftsman and DieHard collectively were worth many multiples of what Sears Holdings in its entirety is worth today. Starting in the mid-1990s, as Sears lost market share to category killers such as Home Depot, Lowe’s and Best Buy, the value of these proprietary brands began a pronounced and prolonged descent.

Since Lampert has owned and run Sears, it has only gotten worse, as nothing of any consequence has been done to reverse the retailer’s overall fortunes. Simply put, the value of these brands continues to decline as Sears shrinks.

At this point, almost anything that expands distribution and generates cash is probably worth doing. Opportunities to have struck a grander bargain with those omnichannel brands with the best distribution power, market share and growth potential — which my team aggressively explored in 2003 — have long since passed. These retailers frankly don’t need anything material from Sears anymore.

For Amazon, however, this makes good sense. First, Amazon does not have a significant position in the tire category. Second, as with the Kenmore deal, Amazon gets access to a well-known brand and related services at what is likely to be at or near fire-sale prices. Third, we already know that Amazon is starting to push an aggressive private-brand strategy, and this gives it a decent jump-start in a sizable segment. And while selling Sears’ house brands is not exclusive right now, for all intents and purposes, it may be in the not too distant future as Sears continues to close stores and struggles with its own e-commerce offerings. Lastly, given its scale and scope, Amazon can well afford to do some experimentation.

Importantly, this particular deal is different from the Kenmore partnership in that it drives sorely needed traffic to more than 400 Sears’ Auto Centers. However, the likelihood that this traffic is material, particularly as Sears continues to shrink its fleet, is relatively small. Still, clearly every little bit helps, particularly when Sears is faced with so few viable alternatives.

From an Amazon perspective, even if Sears Auto Centers shrink considerably — or go away entirely — it has started to build category knowledge and insight to inform future bricks-and-clicks partnerships and/or the opening of its own physical stores.

As Sears’ market position continues to deteriorate, moves such as these smack more of desperation than the renaissance that Lampert et al. would like us to believe. Don’t be fooled. While it turns out there are still a few worthwhile assets within the Sears portfolio, the cupboard is growing increasingly bare.

Tick tock.

sears auto center closing Best of Store Closings by Date and Final Going Out of Business Sales Last Days

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 22nd I will be doing the opening keynote at Retail at Google 2018 in Dublin. 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.