Digital · e-commerce · Retail · Store closings

Sears must think we’re stupid or gullible. Here’s why.

Having spent my first 12 years in retail as an executive at Sears, I’ve followed the company’s trials and tribulations with more than a passing interest. And considering my last role at the once-storied brand was leading corporate strategy–where my team was mostly focused on trying to fix the mall-based department store format and making the Lands’ End acquisition work–I am far from an impartial or unknowing observer.

Arguably, I’ve taken Sears to task too many times over the years. When I left Sears in 2003 (a year before Sears and K-mart merged), I had already concluded that the once iconic brand was on a slow slide to oblivion. Combining a deteriorating, mediocre chain with a terrible one did not change my view. Over the years Eddie Lampert’s misguided leadership has been a frequent target of criticism on my blog. In 2013, I labeled Sears “The World’s Slowest Liquidation Sale” as it became abundantly clear that after nine years Lampert still had no viable turnaround plan. In 2014, I lampooned the futility of their efforts in an April Fool’s post and went on CNBC arguing that investors would be better served by a swift liquidation rather than perpetuating an increasingly delusional strategy that only served to lower asset values.

So, years later, Sears is still hanging around and Lampert is still peddling his special brand of snake oil. How is this possible?

Let’s answer the easy question first. Sears has endured longer than they deserve to because they had enough assets to unload (real estate, private brands and fungible business units) to cover the massive operating losses they’ve racked up during the past decade. The fact that Sears has very low operating costs (partially because of favorable rents, partially because Lampert has cut overhead to the bone) has extended their life. But, make no mistake, they are very close to the end of the runway.

To answer the other question we must conclude that investors are either stupid or gullible–or at least Lampert is counting on it. Before we get to the most recent nonsense, it’s worth mentioning some of the whoppers we were supposed to believe over the years:

  • That Sears and Kmart would create some magical synergy
  • That Sears’ problems could be fixed by cutting costs rather than investing in the customer experience
  • That it made sense to have merchandise categories compete internally with each other, rather than focus on the customer and external competition
  • That Sears could disinvest in stores and profitably transition much of its business online
  • That selling once enormously valuable private brands like Kenmore, Craftsman and DieHard in off-the-mall formats and Ace Hardware Stores was a sufficient antidote to the massive share loss to Home Depot, Lowe’s and Best Buy.

Today, the company continues to make a big deal about how it is a “member-driven” company, touting its “Shop Your Way” program and “ecosystem” as some sort of important differentiator and value contributor. The facts are that a) it is, at best, a mediocre loyalty program, b) customer engagement is driven almost exclusively by a high rate of discounting, c) margins have declined since its introduction and d) sales continue to slide. Referring to customers as “members” may sound good, but it connotes a strength of relationship and value that clearly does not exist. The program has always been an expensive gimmick to collect customer data. Suggesting anything else defies credulity.

In an apparent attempt to distract from the collapse of its mall-based stores, Sears Holdings also continues to announce “innovative” new store formats like an appliance & mattress store (which isn’t a new idea at all) and a DieHard Battery Center. These might be interesting formats to franchise when Sears ceases to be a significant retail operator, but the notion they will somehow be material to a turnaround is just silly.

More broadly–and most stupefyingly–Lampert continues to claim turnaround efforts are on track. This from a company that has had precisely one-quarter of positive sales growth in seven years, operating losses that continue to worsen, an acceleration in store closings and rampant departures of key executives. Moreover, the moves detailed in the most recent press release are all about financial restructuring and say nothing about actions to improve customer relevance. If Sears does not quickly and dramatically improve its performance with its customers nothing else matters. Period.

At one level, I get why Lampert apparently chooses to create the illusion that Sears can actually stay in business. He needs vendors to keep shipping product to mitigate a complete unraveling. He needs employees to keep the lights on and greet the few customers who might wander into the ever shrinking store fleet. He needs to avoid looking too desperate to dodge fire sale pricing on the few remaining assets he must unload to make it through the holiday season. And he needs creditors to give him more time to try to pull another rabbit out of his hat.

Yet, let’s be clear, to believe that Sears is somehow going to make it much longer as anything remotely resembling a national, fully operating retailer is beyond folly. I have no idea whether Lampert truly believes Sears can be saved. I hope not because that would be quite sad.

But for the rest of us, there is simply no reason to be stupid or gullible. The reality is there for all to see. A story and, most importantly, the one spinning the tale–only has power if we allow them.

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.

Digital · Retail · Store closings

It’s the end of the mall as we know it . . . and I feel fine

For those promulgating the “retail apocalypse” narrative, a key component of their Chicken Little logic is that malls are dying. Moreover, much of the blame is cast squarely upon the growth of e-commerce. While hyperbole IS the greatest thing ever, there is a lot more to the story. So let’s try to put this all in a more fact-based, clear and nuanced perspective.

First, in aggregate, regional malls–and their department store anchors–have been on the decline for more than two decades. The first wave of disruption came from the advent and national expansion of big-box category killers and discount mass merchandisers. The most recent wave of disruption has come mostly from the rise of off-price and dollar stores. So while it’s convenient to blame Amazon, the ascent of online shopping is only a small piece of the puzzle. And due to rampant over-building, a correction was sure to come anyway.

Second, many dying malls are being killed by other malls. As growing retailers situate new stores in growing suburban areas with favorable demographics, we often witness a shift in an area’s “retail center of gravity.” A mall that was built in the 60’s or 70’s may lose relevance as more and more retailers locate closer to where a greater density of high spending shoppers now reside or work. In many instances, a new mall with more desirable tenants has been built during the past decade to capture those sales.

Third, many malls are actually doing very well.  The nation’s so-called “A” malls represent about 20% of locations, but generate about 75% of total mall volume. With few exceptions, these 270 or so malls have stellar (and growing) productivity and very low vacancy rates. Relatively few of these malls are being impacted by the closing of anchor tenants. And specialty store vacancies are typically snapped up quickly.

Fourth, while the closing of department stores is hitting “B” and “C” malls disproportionately hard, it’s not all bad news for mall owners. Sears has been a dead brand walking for more than a decade. Many JC Penney and Macy’s locations have been chronic under-performers for years. As long as these albatross tenants continue operating, the mall operator receives paltry rent from big chunks of their leasable space while generating little incremental traffic. So in reality the loss of poorly performing retailers is often creating new, more profitable opportunities. One scenario is a transformation of tenant mix, often a dramatic shift to more entertainment venues and/or professional office use.  Sometimes, non-traditional retail tenants (think Dick’s Sporting Goods or Target) become anchors. Yet another is a complete re-purposing of the entire center to more lucrative multi-use development.

This is not to say that some malls won’t die a painful death, never to return from the ashes. But the apocalyptic vision painted by some is far from accurate. Most higher-end malls will continue to thrive with an approach that looks rather familiar. Many others will evolve to be quite different, but will remain far from hurting, much less dead. Others will be radically transformed to something with a vastly higher and better use.

Either way, with few exceptions, investors, customers and employees are going to be just fine.

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.

Growth · Retail · Winning on Experience

Assessing The Damage Of ‘The Amazon Effect’

Since I anticipate being labeled a Luddite, a Socialist and a hypocrite by some, let me acknowledge that I firmly believe that Amazon has done a lot of good for consumers by expanding choice, making shopping far more convenient and by delivering extraordinary product value. I recognize that many retailers were long overdue for a swift kick in their strategy. I also remain a very good and loyal Amazon customer. And I anticipate that the Whole Foods acquisition will ultimately result in lower prices, an enhanced shopping experience and maybe even improve the availability of more healthful food options. These are all good things.

Yet, we can’t–and shouldn’t–ignore the profound effect that Amazon is having on just about every corner of the retail world they set their sights on. Amazon is the proverbial 800-pound gorilla. Their entry into a market segment reshapes shopping dynamics, upsets the supply chain and exerts tremendous pricing and margin pressure. Books came first and we know how that played out. But, one by one, other categories followed and the dominoes continue to fall. Store closings. Bankruptcies. Once proud and dominant retailers teetering on the brink. Now you can add small “natural” grocery chains to the list of established retailers that may well get Amazon-ed (which is the most polite way to say it.)

To be fair, we should not blame department store woes on Amazon. Clearly many malls and quite a few retailers were well on their way to oblivion before Amazon cracked the $25 billion mark. And the grocery market share that Amazon will pick up with the Whole Foods acquisition is a drop in the bucket, even when combined with Amazon’s existing volume. We also know that not everything Amazon touches turns to gold (I’m guessing you are unlikely to be reading this on your Amazon Fire).

Still it’s hard to underestimate the magnitude of the Amazon effect. E-commerce represents about 10% of all U.S. retail and Amazon is by far the largest player, with an estimated share of 43%. Last year, Amazon accounted for 53% of all the incremental growth of online shopping, which means they are only growing their dominance. To underscore how much Amazon has infiltrated the shopping zeitgeist, one study indicates that more than half of all product searches start on Amazon.

It’s also hard to underestimate the fundamentally different rules Amazon plays by. First and foremost, Amazon isn’t required by its investors to make any real money. In fact, despite being in business more than 20 years, Amazon only recently surpassed Kroger and Priceline (not the sexiest of retailers) in total annual profits.

As a core strategy to gobble up market share, Amazon (or more accurately its shareholders) provides huge subsidies to its delivery operation. According to one analysis, Amazon lost $7.2 billion on shipping costs last year alone. While this is clearly great for consumers, it puts many retailers in the untenable position of choosing between ceding market share to Amazon or lowering their prices to uneconomic and unsustainable levels. Most have chosen the latter strategy and are paying the price. The fallout is far from over.

It’s hard to argue against innovation. It’s hard to argue against greater choice, more convenience and lower prices. And clearly, long-term investors in Amazon have few arguments, while those that have hung in with Macy’s, JC Penney and the like are licking their wounds.

Maybe Amazon can sell all this stuff at a loss and make it up on volume. Maybe once they help put many, many retailers out of business and play a big role in the “rationalization” of commercial real estate, Amazon will continue to reduce prices, rather than exploit their emerging monopoly-like power. Maybe we’ll all be happy with fewer choices in retail brands. Maybe Amazon’s dominance will encourage a new wave of different and more interesting retail models to counter-act the homogenization of retail we are in the midst of.

Maybe.

On the other hand, perhaps we should all be careful what we wish for. Perhaps we should consider that the problem with a race to the bottom is that we might win.

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.

Digital · Mobile · Omni-channel · Retail

Retail’s Single Biggest Disruptor. Spoiler Alert: It’s Not E-commerce

There is no question that the retail industry is under-going a tremendous amount of change. Record numbers of store closings. Legacy brands going out of business–or teetering on the brink of bankruptcy. Venture capital funded start-ups wreaking havoc upon traditional distribution models and pricing structures. Discount-oriented retailers stealing share away from once mighty department stores. And, oh yeah, then there’s Amazon.

In assessing what is driving retailers’ shifting fortunes most observers point to a single factor: the rapid growth of e-commerce. But they’d be wrong.

To be sure, online shopping has, and will continue to have, a dramatic impact on virtually every aspect of retail. One simply cannot ignore the dramatic share shift from physical stores to digital commerce, nor can we under-estimate the transformative effect of e-commerce on pricing, product availability and shopping convenience.

Yet a far more profound dynamic is at play, namely what some have termed “digital-first retail.” Digital-first retail is the growing tendency of consumers’ shopping journeys to be influenced by digital channels, regardless of where the ultimate transaction takes place. It’s obvious that this shift helps explain the success of Amazon and other e-commerce players. But when it comes to how traditional retailers need to reinvent themselves, several factors related to this phenomenon need to be better understood and, most importantly, acted upon.

The majority of physical store sales start online. Deloitte has done a great job tracking digitally influenced sales and its most recent report indicates 56% of in-store sales involved a digital device–and this will only continue to grow. Moreover, quite a few major retailers, across a spectrum of categories, have publicly commented that they are experiencing 60-70% digital influence of physical stores sales.

Digitally-influenced brick & mortar sales dwarf e-commerce. While e-commerce now accounts for (depending on the source) some 10% of all retail sales, both Forrester and Deloitte have estimated that web-influenced physical store sales are about 5X online sales.

Increasingly, mobile is the gateway. We no longer go online, we live online and smartphones are the main reason. As the penetration of mobile devices–and time spent on them–grows, mobile is becoming the front door to the retail store. Digital-first now often means mobile-first. It may not be the predominant behavior today, but it won’t be long before it is.

It’s a search driven world. Sometimes consumers turn to the web for rather mundane tasks: confirming store hours or looking up the address of a retailer’s location. Other times they are engaged in a more robust discovery process, seeking to find the best item, the best price, the best overall experience and so forth. Retailers need to position themselves to win these moments that matter (what Google calls “micro-moments.” Full disclosure: Google’s been a client of mine).

Digital-first can be (really) expensive: Part 1. Having a good transactional e-commerce site is table stakes. Becoming great at enabling a digital-first brick & mortar shopping experience is the next frontier. As customers turn to digital channels to help facilitate brick & mortar activity, be that a sale or a return, retailers need to be really good at creating a harmonious shopping experience across all relevant engagement points. This isn’t about being everything to everybody in all channels. It isn’t about integrating everything. It is about understanding the customer journey for key customer segments, rooting out the friction points and discovering points of amplification, i.e. where the experience can be made unique, intensely relevant and remarkable at scale. It’s not easy, and it’s rarely cheap to implement. It turns out, however, it’s a really bad time to be so boring.

Digital-first can be (really) expensive: Part 2. Estimates vary, but it’s clear that search (or engaging on social media) is an intrinsic part of most consumers’ shopping process. And that means that an awful lot of customer journeys intersect with Google, Amazon, Facebook or some other toll-booth operator. I say toll-booth operator because so often a brand’s ultimate success in capturing the consumer’s attention, driving traffic to a website or store and converting that traffic into sales requires paying one of these companies a fee. And that can add up. Fast. Of course the best brands generate consumer awareness and interest through word-of-mouth, not paying to interrupt the consumer’s attention. The best brands get repeat business through the inherent attractiveness of their offering, not chasing promiscuous consumers through incessant bribes. The best brands don’t engage in a race to the bottom because they are afraid they might win. This shift in who “owns” (or at least can dictate) access to the customer is profound. A strategy of attraction rather than (expensive) promotion is the far better course, but not so easily done.

While e-commerce–and Amazon in particular–is re-shaping the retail industry, having a compelling online business is necessary, not sufficient. In fact, in my humble opinion, many of the retailers that are reeling today got into trouble because they spent too much time and money focused on building their e-commerce capabilities as a stand-alone silo, to the detriment of their physical stores and without understanding the digital-first dynamic that determines overall brand success and the ultimate viability of their brick & mortar footprint.

Blaming struggling retailers’ woes on Amazon, or e-commerce more broadly, is only part of the story. Figuring out how to thrive, much less survive, in the age of digital-first disruption requires a lot more than shutting down a bunch of stores and getting better at e-commerce. A whole lot more.

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.

 

Growth · Retail · Store closings

Shrinking To Prosperity: Can Store Closings Save Struggling Retailers?

It seems as if major store closing announcements are becoming a nearly daily occurrence. Earlier this week Michael Kors, the once high flying accessible luxury brand, announced it would close at least 100 stores over the next two years. They now join the ranks of Payless Shoes, Macy’s, JC Penney and a host of other major players that have recently decided to shutter a significant percentage of their store fleet.

In fact, some retailers are closing all of their stores hoping to thrive as an online only retailer. Bebe, Guess, Wet Seal and The Limited have all chosen to go this route–and it seems like both Sears and Radio Shack are headed there as well; they just haven’t made it official. In any event, if you want follow the action along at home my friends at Fung Global Retail maintain a store closing tracker.

While its clear that more and more struggling retailers are embracing a strategy to get much smaller, this ultimately begs the question whether it’s really possible to shrink your way to greatness.

Take a moment to make a list of brands (don’t worry, I’ll wait) that have intentionally walked away from a significant percentage of their revenue and been successful over the long-term. I’m not talking about conglomerates that have jettisoned under-performers in their portfolio or companies that have exited specific lines of business with challenging profitability. I’m talking about brands that have willingly stopped doing business in major geographies and/or with large numbers of core customers. It’s not easy it?

The truth is that it is far easier to name brands that closed stores merely as an intermediate step on their way to oblivion. Think Blockbuster and Borders (or Bradlee’s for you old timers). And that’s just the B’s. The retail graveyard is chock-a-block with once mighty merchants that spent years closing stores only to eventually succumb to the inevitable.

I have maintained for some time that when retailers start to close a lot of stores the issue is rarely that they have fundamentally too many outlets. Rather it’s that their value proposition is not sufficiently relevant and remarkable for the locations they have. We know that the notion that physical retail is dead is just silly. We know that plenty of “traditional” retailers are opening stores. Ulta, Sephora, Dollar General, Costco come readily to mind. We know that the hottest brands in retail–from giants like Amazon to specialty players like Warby Parker and Bonobo’s– are opening stores. We know that in most cases the economics of physical stores are superior to e-commerce. We know that the combination of digital AND physical is most often what customers want and what yields the best results. We know that it is virtually always the case that when retailers close stores their e-commerce revenues in the vacated trade area go down.

Clearly, on balance, there are too many stores. And for most retailers the size, configuration, operations and many fundamental aspects of the in-store experience must be changed, in some cases radically. Often the “need” to close stores is borne of desperation, propelled by multiple years of management neglect and failure to innovate. Often, as a practical matter, there is no choice, because there is no way to make up for the sins of the past in the here and now. While I cannot definitively say that mass store closings indicate the beginning of a downward spiral, I would definitely reject that notion that they are a panacea. And we absolutely shouldn’t conclude that such moves suggest a sustainable long-term strategy.

Over three years ago I posited that retailers were delusional if they thought that store closings would be their salvation. Today, as the pace of these closings accelerate, I still fundamentally reject the notion that more than a handful of brands can shrink their way to greatness. I hope I’m wrong.

michael-kors-closing-stores

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.

Customer Growth Strategy · Omni-channel · Retail

Is off-price the next retail sector to go off the rails?

Amidst all the pain that most of the retail industry has endured during the past few years, the “off-price” sector has been one of the few shining stars.

While most retailers struggle to eke out any top-line growth, the segment’s big four–TJX, Ross, Burlington and Nordstrom Rack–have delivered solid growth. While many retailers are closing stores in droves, the off-price leaders have been opening new outlets at a brisk pace while announcing plans to open hundreds of stores over the next several years. TJX, the parent company of T.J. Maxx, Marshalls, HomeGoods and Sierra Trading Post, added nearly 200 stores this past year alone.

So while it’s easy to blame Amazon for department stores’ troubles, there is ample evidence that it’s been the major share grab on the part of the off-price and outlet sector that’s inflicted a great deal of the pain.

Of course, the bifurcation of retail has been going on for some time. Consumers have been steadily shifting their spending toward more price-oriented brands since the recession. In some cases it has been driven by an economic need to spend less. In other cases by a realization that strong value can be obtained at a lower price, whether that is from a traditional retailer (e.g. Walmart), a leading fast fashion brand (e.g. H&M and Zara), a newer business model (e.g. Gilt and Farfetch) or, of course, Amazon.

Yet there is growing evidence that the segment is beginning to mature and that future results may be quite different from the boom of recent years. In the most recent quarter, TJX saw same-store sales growth slow to 1%. Archrival Ross posted better results but struck a decidedly cautious note. Nordstrom Rack, which has been the star within Nordstrom, has seen its growth slow to below the industry average.

So while one or two quarters do not indicate cause for alarm, there are several reasons why investors might want to beware.

Sluggish apparel growth

Average unit prices for apparel continue to contract, the discounting environment shows no sign of abating and consumers continue to shift their spending away from products to experiences. This means most sales growth must come from stealing share. That’s not likely to come easily.

Growing competition.

Competition is always intense in retail, but with the number of new stores that are opening, the rapid growth of online competition and Amazon’s growing and intense focus on apparel and home products (including an almost certain big push into private fashion brands in the next couple of years), sales and margin pressures are certain to become more pronounced.

Here comes e-commerce–and its challenges.  

The off-price industry was slow to get into digital commerce. Some of this was for good reason: it’s almost impossible to make money online in apparel with low transaction values and high rates of returns. But given consumer demand, the convergence of channels and pressure from growing competition, none of these brands have a choice but to invest heavily. But as e-commerce becomes an important growth driver, much of that growth will come through diversion of sales from a brand’s own physical stores–and often at a lower profit margin (what I call “the omnichannel migration dilemma”). As e-commerce becomes a more important piece of the overall business, the economics of physical stores will become more challenging, calling into question the reasonableness of the current store opening pace.

Brand dilution and saturation. 

The key driver of the off-price business has been offering major brand names at deeply discounted prices. While this is a bit of a con, the consumer is either blissfully ignorant or doesn’t care–at least so far. But as more brands grow through heavily discounted channels the risk of brand dilution goes up. And we’ve already seen several major brands pull back from factory outlet channels and tighten their distribution to wholesale channels where discounting was rampant. As Nordstrom, Neiman Marcus, Saks, Macy’s and Bloomingdales emphasize off-price growth (both physical store openings and online) the brand dilution concern to their “parent brands” looms large.

Overshooting the runway on store growth.

The over-expansion of most major retail chains is plaguing much of the retail industry right now. So far the off-price sector has escaped this fate, largely because the sector has been gaining share. But if growth continues to moderate and a greater share of the business moves to e-commerce, today’s store opening plans seem awfully aspirational. This is not a 2017 issue, and probably not one for 2018 either. But if I were a betting person, I’d wager that in 2019 we will view today’s plans as incredibly optimistic.

While the off-price sector is unlikely to experience the shockwaves of disruption pummeling its retail brethren anytime soon, we should remember that no business is immune from fundamental forces. And no business maintains above average growth forever. Investors would be wise to take a more cautious approach.

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.  

Being Remarkable · Innovation · Retail

Macy’s: After Big Earnings Whiff, Here’s What It Needs To Do

Last week Macy’s missed its revenue and earnings forecast for the first quarter, sending its shares tumbling.

While the talk of a retail apocalypse is just so much hype, the intense waves of digital disruption and shifting consumer preferences assure that the future of retail–and the impact on many large and lumbering players like Macy’s–will not be evenly distributed.

We now live in a digital-first world where the line between brick & mortar sales and e-commerce is mostly a distinction without a difference. Fellow retail analyst Doug Stephens describes this new landscape as “phygital.” But whatever you label it, the consumer’s path to purchase has changed substantially–and with it the role of the store. And, increasingly, same-store sales are a largely irrelevant metric.

Nevertheless, the continuing overall poor performance of Macy’s is concerning and underscores the problems faced by many legacy brands. To get back on track, Macy’s needs to aggressively address several fundamental problems.

  • Eschew the sea of sameness. Macy’s, like so many other retailers, picked a really bad time to be so boring. Redundant, repetitive and fundamentally uninteresting product has become the norm. If customers don’t have a compelling reason (other than price) to traffic either their website or store, Macy’s will continue to hemorrhage market share.
  • It’s the experience stupid! Having remarkable and relevant products is critically important and a necessary foundation, but it’s hardly sufficient. If Macy’s continues to provide me-too visual presentation, marketing that is indistinguishable from every other department store and lackluster customer service they will continue to make price the deciding factor for most consumers.
  • Omni-channel is dead, at least in the way many have been pursuing it. Macy’s spent a lot of time and money trying to be all things to all people. Channel ubiquity with continued mediocrity is pointless. All retailers need to think about how to best harmonize and simplify the shopping across the moments of truth that matter the most for customers. Otherwise we’re just spending a lot of money to move customers between channels, not gaining relevance, share of wallet and profits.
  • Strategically re-imagine the store and the store footprint. Analysts are going to keep pushing Macy’s to close stores. And to be sure, shrinking of both store counts and store size is probably required. But the reason this is even a talking point has much more to do with the weakness of Macy’s value proposition, not their sheer number of stores. Online helps stores and stores help online. Period. Mediocre retailers that close a lot of stores are likely starting a downward spiral from which they will never return. The key is to understand the store as the hub of an ecosystem for the brand, not an asset to be merely fine-tuned for productivity. Focus on being remarkable instead of mediocre and focus on how stores strategically drive online (and vice versa) and the store closing discussion recedes into the background.
  • Don’t start a price war. With pricing pressures from Amazon, outlet stores and all the off-price players there might be a tendency to get overly focused on pricing. But don’t forget, the problem with a price war is you might win.
  • Become a testing machine. It’s easy to blame Amazon for the troubles facing the industry. But by far the biggest reason retailers are in trouble is their abject failure to innovate. Every retailer needs an R&D budget and every retailer needs to test, fail and test again. Retailers were too scared to fail and now their failing because of it. As Seth reminds us “if failure is not an option, than neither is success.”

Of course all of this is more easily said than done, particularly as Wall Street pushes for short-term fixes and Amazon continues to lower its thin margin hammer on most sectors of retail. Yet it’s hard to escape the fact that more of the same at Macy’s will only yield more of the same.

What Macy’s needs is a lot more innovation.

What investors need is just a bit more patience.

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.  

Being Remarkable · Innovation · Retail

Retailers picked a really bad time to be so boring

Perhaps you’ve noticed that things are pretty tough across the retail industry these days?

Competition has never been more fierce. Average unit retail prices are getting compressed, putting ever greater downward pressure on margins. Retailers and developers that overbuilt for years are at long last facing a reckoning. Radical transparency and ease of anytime, anywhere, anyway shopping are hammering those that have failed to innovate and differentiate.

Of course, not so long ago retail brands could get away peddling average products for average people. There was a time when retailers and the brands they sold held most of the cards. There was a time when rapid industry growth could smooth over patches of mediocrity. There was a time when being just a little bit interesting could win the customer’s attention and give retailers a good shot at making the sale.

That time is over. Forever.

Now the customer is very much in charge. Now largely stagnant markets require brands to steal share to have any chance of material top line growth. Now much of retail is drowning in a sea of sameness. Now the consumer is overwhelmed by choices and the battle for share of attention is only won by the weird, the intensely relevant, the remarkable.

And yet….

And yet when entrepreneurs chased force multiplication effectiveness, many legacy brands chose to focus on incremental efficiency gains. While innovative start-ups took risks, the big retailers mostly hunkered down. As a wave of profound change was rippling through the industry, many just decided to watch and study and analyze. But mostly watch. When venture capital was piling into the bold and interesting, much of mainstream retail remained decidedly dull.

There is no shortage of unique, impactful and useful innovations that have emerged from the new age of digital disruption. It’s just that so little of it has come from traditional retailers. At precisely the time that so many retailers desperately need innovation, their cupboards are woefully bare. Confronted by me-too marketing, look-a-like stores, repetitive products and shoddy customer experiences, so many once-proud brands still have next to nothing new, differentiated and exciting to offer.

Today you can take the name off the door and Staples, Office Depot and Office Max are virtually indistinguishable. Same for Macy’s and Dillard’s, Lowe’s and Home Depot. And on and on.

The danger of death by years of inaction, thousands of tiny compromises and clinging to the false notion that a company can shrink to prosperity is now very real. Half measures have availed them nothing. Taking so few risks has turned out to be the riskiest thing retailers could have possibly chosen.

In fact, it’s hard to imagine a worse time to be so boring.

And, ironically, many of these retailers are about to experience a lot of excitement. Just not the fun kind.

Now isn’t that special?

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.  

Retail

Sears’ March Toward Bankruptcy: Gradually, Then Suddenly

I get the nostalgic love for Sears.

Sears was a pioneer in catalog shopping, the creation of the department store, the boom in suburban regional malls and the advent of powerful private brands. They even sold houses through the mail. Years ago, when I was an executive at Sears, I remember sitting in focus groups and hearing some customers talk glowingly about how Sears was the only company to give them a credit card when they got out of school and how nearly everything they bought for their first home came from Sears. Kenmore. Craftsman. Diehard. All iconic.

I get the disdain for Sears too.

Consumers have suffered through years of mismanagement and, at times, what seemed like episode after episode of willful neglect. Long-term employees have seen their pride turn to embarrassment and sorrow. Investors have endured a roller coaster, with each plunge from the top growing deeper and deeper.

What I don’t get is the wishful thinking.

Despite more than a decade of steady declines in performance, despite the absence of a coherent turnaround strategy, despite the massive operating losses, some investors return to the stock like they might return to a bad love affair. In fact, since the company stated last month it had substantial doubt about its ability to survive, the stock has rallied. And some pundits continue to opine on the various ways Sears could survive as a leaner, meaner version of its storied past. Don’t be fooled.

Since Eddie Lampert still has a few things to sell to raise the mountain of cash necessary to fund ongoing operations, it’s possible he can stave off bankruptcy a bit longer. But make no mistake, the end is in sight.

It turns out that Sears is having a hard time unloading some of its few remaining significant assets, most likely because potential buyers realize their value declines along with Sears fortunes and that they might, in fact, do better in bankruptcy court.

It turns out that Sears has been quietly closing even more stores than they previously announced.

It turns out that the idea that retailers can shrink to prosperity is typically the first sign of a death spiral.

It turns out Sears has been slowly liquidating itself for years. Dead brand walking.

I’d like nothing more than to see Sears survive as a vibrant and sustainable retailer. But, sadly, all the wishful thinking in the world will not change the inevitable.

Now, whenever I think of Sears, I’m reminded of what Hemingway wrote in The Sun Also Rises. When one of the characters is asked how he went bankrupt, he replies mournfully: “Two ways. Gradually, then suddenly.”

 

 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.  
Omni-channel · Retail · Store closings

Wall Street’s Misguided (And Dangerous) Fascination With Retail Store Productivity

An unprecedented number of retail store locations are closing this year and more announcements are surely coming–though perhaps not quite as many as I suggested in my April Fool’s post.

Given the lack of innovation on the part of traditional retailers, rampant overbuilding and the disruptive nature of e-commerce, this ongoing and massive consolidation of retail space was both inevitable and overdue. Yet much of the way the investor community sees the need for even more aggressive store closings is wrong and, one could argue, pretty dangerous.

One of the more ridiculous ways Wall Street firms have tried to determine the “right” number of store closings is to calculate how many locations would need to be shuttered to return various chains to their 2006 store productivity levels. A somewhat more responsible, though still alarming, analysis comes from Cowen, which focused more on the need to more closely align retail selling space supply and demand.

The most obvious problem with this type of analysis is its focus on ratios. The fact is that many stores with below average productivity are still quite profitable, particularly department stores, given their low rent factors. So while closing a lot of locations may yield a temporary productivity boost it often has a direct and immediate negative impact on earnings, which is a far better indicator of a retailer’s health.

The bigger issue is an underlying misunderstanding of the role of brick & mortar stores in retail’s new world order. Just as “same-store” sales is an increasingly irrelevant metric, so are store productivity numbers. Yes, more stores need to close. Yes, many of the stores that remain need a major rethink with regard to their size and fundamental operations. But what many still fail to grasp is how a retailer’s store footprint drives a brand’s overall health and the success of its e-commerce operations.

A given store’s productivity can be below average and decline yet still contribute to a retailer’s overall success, particularly online. Stores serve as an important–and often low cost–channel to acquire new customers. Stores serve as showrooms that drive customers online. Stores serve as fulfillment points for e-commerce operations. Stores are billboards for a retail brand. Without a compelling store footprint, a brand’s relevance will likely decline and its e-commerce business almost certainly will falter. Stated simply, store productivity numbers, taken in isolation, no longer get at the heart of a brand’s overall performance in an omnichannel world.

While there surely is merit in closing stores that drain cash and management attention, store closings can often make a bad situation worse. Ironically–as Kevin Hillstrom from MineThatData does a great job of illustrating–closings stores to respond to e-commerce growth can actually have the opposite effect. In fact, from my experience, massive store closings often initiate (or at least signal) a coming downward spiral.

Store closings are hardly the panacea that Wall Street seems to believe. And the notion that a brand can shrink its way to prosperity is typically horribly misguided. Macy’s, J.C. Penney and a host of others need to close more stores. And Sears and Kmart just need to go away. But, as I’ve said many times before, show me a retailer that is closing a lot of stores and you’ve likely shown me a retailer that doesn’t have too many stores, but a retail brand that is no longer relevant enough for the stores it has.

The danger of closing too many stores is increasingly real. The danger that struggling retailers will continue to appease Wall Street’s thirst for taking an ax to store counts instead of working on the underlying fault in their stores seems, sadly, clear and present.

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.