e-commerce · Embrace the blur · Retail

Pure-play e-commerce’s scaling woes continue

Just a couple of years ago the conventional wisdom was that e-commerce was going to wreak havoc with every aspect of physical retail. This “e-commerce will eat the world” hypothesis continues to drive the “retail apocalypse” nonsense. It has even caused some normally level-headed analysts (and some maybe not so much) to suggest that brick & mortar stores will cease to exist within 10 – 20 years. I’ll take the over on that bet.

As it turns out lots of folks still like to shop in stores, including–and I hope you are sitting down for this–millennials! It also turns out that many retail categories do not lend themselves to high (or even meaningful) online shopping penetration. But there is another reason that e-commerce is not going to get to 100%, much less 40%, market share any time soon: the economic are often terrible. And while Amazon is leveraging its massive scale and expertise to improve its anemic profit margins, for some high profile disruptive brands the profit challenges are only getting worse.

Earlier this year I wrote about pure-play e-commerce’s scaling problems calling attention to what I saw as the increasingly questionable economics of Wayfair, Stitch Fix and Blue Apron, among others. Quite a few folks challenged my conclusions, much as the excellent work by Peter Fader and Dan McCarthy on similar topics has attracted its share of critics. Aside from being called a Luddite and being told to do some anatomically impossible things, it was suggested that I failed to appreciate how these brands would soon realize the fruits of their massive investments in technology, customer acquisition and “brand” and start to make it rain (okay that’s my wording not theirs).

As luck would have it, we now have some updated facts (author’s note: historians believe data and objective truth were once important to drawing conclusions on any particular object of discourse). Wayfair reported its quarterly earnings just last week and, once again, sales were way up. And once again losses widened. They are now deep into what I refer to as their ruh-roh moment as customer acquisition costs have grown to a staggering $196. They are fast becoming the poster child for profitless prosperity (though I imagine Uber and WeWork might get jealous of that appellation).

Luxury marketplace Farfetch just went public, so we now have visibility into their economics. Their story is much like Wayfair’s. Booming sales, worsening profits and less than stellar marginal customer acquisition economics. Zalando, the Germany based online business, is also public and their latest earnings show great sales growth and deteriorating profits as well. Revolve has filed for an IPO and its financials reveal strong sales growth, little movement on profitability and some truly scary stats on high rates of returns. Coincidence, or an underlying business model issue?

The picture at Stitch Fix and Blue Apron is a bit murkier, but still points to the difficulty in scaling online only businesses. Stitch Fix continues to enjoy solid growth and is marginally profitable, but its growth trajectory is slowing markedly. For Blue Apron, they just reported another terrible quarter. The stock has cratered this year as the meal-kit brand attempts to rein in spiraling costs has resulted in significant customer defections and worsening customer acquisition. And this speaks to an underlying dilemma. These brands could stop investing in customers that have little or no chance of every being profitable, but then their sales growth would go from wow to tepid.

To be fair, there are a few online only brands that are scaling successfully. YNAP, which was acquired by Richemont earlier this year, is a case in point. The luxury e-tailer formed by the merger of Yoox and Net-a-porter is solidly profitable and continues to grow nicely, albeit now barely above the industry’s overall e-commerce growth rate. With much higher than average order size and customer lifetime value they are largely immune from the factors that hamstring or sink other pure-plays (high marginal fulfillment and customer acquisition costs).

As the majority of pure-play brands are private, we don’t much about their profitability. But anecdotally we know that some of the most high profile disruptive brands continue to post big losses. We know that several that were burning tons of cash were bailed out by Walmart. We know that one of the first things HBC’s new CEO did was sell off Gilt. Most importantly, we know that just about every digitally native brand is now opening physical stores. We also know that many of these brands are now seeing the majority of their marginal growth come from their brick & mortar locations. And we can suspect that when many of them leave the ranks of pure-plays their marginal economics get better–often dramatically so.

I will not be so bold as to say there will be no such thing as a profitable online only brand of any real size in a few years time. I am, however, confident that we will see several notable collapses within the next 12-18 months and that the real action in digital commerce will continue to be in the blurring of the lines between channels, not the growth of e-commerce at the expense of brick & mortar.

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.  

I’m honored to have been named one of the top 5 retail voices on LinkedIn.  Thanks to all of you that continue to follow and share my work.

Retail

Are private brands key to beating Amazon?

As Amazon continues to steal significant market share in most product categories, many retailers find themselves on their heels desperately seeking an antidote to the online behemoth’s growing dominance. Investing in the long tail, improving web site performance and reducing shipping time and pricing are tactics being pursued to neutralize the threat. More recently, though, quite a few retailers are upping their private brand game.

Store “owned” brands are hardly new. More than a century ago leading department stores began selling products under their own labels. In the decades that followed retailer exclusive offerings expanded, with most positioned as low price alternatives to more expensive national brands. Things even got pushed to the extreme during the generic product craze of the early 80’s, which readers of a certain age will undoubtedly remember–and some of us have tried to forget.

Over time, however, some companies augmented their strategy by creating brands that were meant to be distinctive in their own right and no longer positioned at the low end of a retailer’s product portfolio. This is really the key distinction between a private label–which has little consumer recognition and loyalty–and a private brand.  Historically Sears was probably the most successful with this approach, launching brands like Kenmore, Craftsman, Weatherbeater and DieHard, all of which garnered significant national market share. Supermarkets also got on this bandwagon as did most other major department stores like Macy’s, Bloomingdales and Nordstrom. In more recent years, Costco and Trader Joe’s have experienced tremendous success with their own private brands.

Given their lower cost structure versus comparable national brands, a robust private brand offers the opportunity to materially improve gross margins. Yet being consistently good at delivering compelling product requires significant investment in design and sourcing talent. When done right, private brands offer more differentiated assortments and better profits. Done poorly, a retailer’s merchandising strategy can quickly lose competitive relevance and markdowns can become excessive, as Kohl’s discovered a few years back.

So the underlying rationale for a sound private brand strategy is clear. What’s newer, however, for some major retailers is using private brands to help “Amazon-proof” their assortments. Here the benefit is clear as well. If a brand can only be found at one retailer, then it’s impossible to price shop for a better deal for that product at Amazon–or any other retailer for that matter. Obviously consumers can still try to comparison shop for a similar product but the trade-offs are harder to understand.

For these reasons brands as diverse as TargetSaks Off 5thJC Penney and Tractor Supply Company continue to strengthen their owned brand game. Nordstrom is increasingly emphasizing “strategic brands”–which include both private brands and semi-exclusive or limited distribution brands–as a core part of its growth and margin expansion strategy. Brandless, a relatively new website that recently raised $240 million in venture capital earlier this year, pretends not to be a brand while building a rich portfolio of proprietary products all under the same, er, name. Whatever you call it, strategically it’s a different variation of the same theme.

Unsurprisingly Amazon is not standing still. A year ago I predicted that Amazon would significantly increase its commitment to private branding and that definitely appears to be the case. Today Amazon offers more than 80 of its own brands and just this week the company launched two new home decor brands. Some estimates suggest Amazon private brands revenues will be reach $7.5 billion this year. In addition to its growing portfolio, Amazon has the traffic and the data to position its own brands ahead of other brands it carries, as CNBC recently examined. That’s a gift that will keep on giving.

It seems that we are in the early days of the private brand wars. Regardless, it’s extremely likely that private brands will continue gaining relative share in many categories for the foreseeable future. Whether all the investment behind them will meaningfully slow down the Amazon juggernaut is a lot less obvious.

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

My speaking page has been updated with several new events, including New York, Las Vegas and a return to Melbourne, Australia.

e-commerce · Retail

We’ve created a monster: Retail’s growing returns problem

At the beginning of the year I published “A Baker’s Dozen Of Provocative Retail Predictions For 2018.” In No. 11, I opined that the industry’s problem with returns would soon start to get the attention it deserves. For awhile now I have seen the growing rate of costly product returns as a ticking time bomb—particularly as e-commerce garners greater share. As we’ve gone through this year, stories of retailers tightening their return policiestracking “serial” returners and going after returns fraud have become more common. Last month, Axios joined in the chorus, calling attention to the problem of e-commerce returns in particular. Unfortunately, despite greater awareness, the issue is likely to get worse before it gets better. But eventually something has to give.

Product returns and exchanges have been the nemesis of the direct-to-consumer industry going back to the mail-order catalog days. For products that are fit and/or fabrication sensitive (think fashion, intimate apparel, shoes) returns often exceed 30%, and rates north of 40% are not unheard of. Back in the good old days, while high return rates were definitely an area of concern, the fact that the customer often paid “shipping & handling” costs helped soften the damage to the bottom line. In fact, for some brands, shipping & handling was actually a profit center.

Today? Well, not so much.

More and more free shipping is becoming the norm. Many “disruptive” brands have made free shipping “both ways” an intrinsic part of their business model. And as the holiday season approaches we are about to enter a period where free shipping offers will practically be tables stakes. In fact, Target has already announced that it will offer free two-day shipping beginning November 1. None of this bodes well for turning the tide on returns.

As is so often the case, Amazon remains the 800-pound gorilla here, particularly as free shipping is core to the Prime value proposition. And while Amazon charges for this privilege, its total fulfillment costs continue to grow as a percent of sales. While the company does not share much detail about the underlying drivers of this escalation, it’s hard to imagine that product returns are not a key contributor.

Some argue that fast, easy and inexpensive returns are all just part of being customer-centric or staying competitive. And certainly that is true. Yet it’s also true that the growing problems are largely self-inflicted and, in many cases, distorted by the increasing popularity of e-commerce. Online shopping can be incredibly convenient. At the same time it’s next to impossible for most consumers to be sure of fit, color accuracy, product quality, etc. sight unseen. So given there is no additional direct cost, it’s not surprising that many customers buy 2, 3 or 4 of the same item in different colors and/or sizes, fully expecting to return all the rest for credit. In the quest to be customer-friendly many companies have radically changed their cost structure. And not in a good way. We have met the enemy and he is us.

In “normal times”—and for any number of reasons it’s clear these are far from normal times—such liberal and wildly unprofitable practices would have long been tamed by market forces. But as many investors have been willing to value growth over profit, the consumer has seen a huge benefit, while many brands continue to see their margins shrink.

Confronted with this reality, smart retailers are not only refining their policies and adjusting their pricing, but also turning to new technology and/or partners like Happy ReturnsOptoro (which raised $75 million earlier this year) and others that seek to help brands deal more effectively with this rising tide. At some level, returns and exchanges are simply an inherent part of the retail business. Seeking to make the best of a necessary, but costly, part of the retail equation is eminently sensible.

Real progress on reducing the overall incidence of returns, however, must focus on the root causes. Many retailers have made significant progress on reducing returns due to product damage, shipping errors and the like. Taming the monster of returns that have nothing to do with delivery quality, and everything to do with intentional customer decisions, is far more vexing.

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.  

November 8th I will be doing the opening keynote eRetailerSummit in Chicago. For more info on my speaking and workshops go here. 

Collapse of the middle · Embrace the blur · Retail

Strange bedfellows? Legacy retailer and disruptive brand partnerships are on the rise.

As the middle continues to collapse—and many well established retailers struggle to move from boring to remarkable—brands must continually seek new ways to become unique, more intensely relevant and truly memorable. One strategy that seems to be picking up steam involves so-called digitally native brands creating alliances with much larger legacy retail companies. Earlier this month, as just one example, Walgreen’s announced a partnership with fast growing online beauty brand Birchbox. An initial pilot will feature a Birchbox offering in 11 Walgreen stores.

The Walgreen’s and Birchbox deal is only the most recent of many business marriages forged in recent years. Target has been especially forward leaning, expanding its assortments via industry disruptors Casper (mattresses), Quip (ultrasonic toothbrushes) and Harry’s (razorblades), among more than a half dozen others. Nordstrom has been active as well, having added (and invested in) Bonobo’s (menswear) way back in 2012. More recently, it has augmented its offering with Reformation (women’s clothing) and Allbirds (shoes). Earlier this year Macy’s invested in and expanded the number of stores featuring b8ta’s store-within-a store concept and Blue Apron began testing distribution through Costco.

I first came to understand the potential power of these alliances when I worked on Sears’ 2002 acquisition of Lands’ End. While the roll-out of Lands’ End products at Sears was horribly botched (and hindered by Sears’ bigger problems), the strategic motivations are easy to grasp. For Sears, struggling to offer powerfully customer relevant brands that weren’t widely distributed at competing retailers, Land’s End held the promise of providing product differentiation, an image upgrade and acquiring new apparel shoppers. For Lands’ End, gaining access to hundreds of Sears stores provided substantially broadened customer reach, lower customer acquisition cost and improved product return rates. Importantly, Lands’ End management knew the biggest barrier to growing its customer base was making it easy for potential customers to experience the product in person—something only physical stores could help deliver. The Sears deal addressed this issue rapidly and at dramatically lower incremental capital investment.

More than 15 years later, the rationale for retailers with a large brick-and-mortar footprint and newer D2C brands to hook up is only stronger. In a world where consumers have nearly infinite product choices and it’s quite easy to shop on the basis of price, it’s never been more important for retailers to differentiate their assortments. Private brands (not “labels”) are one critically important element. Exclusive (or narrowly) distributed products is the other. Not only do these alliances present brands that are largely unique at retail, they can help boost a legacy brand’s overall image, attract new customers and drive incremental traffic.

For many fast-growing digitally native brands the appeal of such partnerships is compelling as well. While many of these brands are opening their own stores, some have used these partnership to test the waters prior to embarking on their own brick-and-mortar strategy. Some use wholesale distribution to drive incremental business in markets where their own stores won’t work. Others (Quip and Harry’s are prime examples) can expand their consumer reach when an owned store strategy simply won’t make sense given their particularly narrow products lines. The opportunity to dramatically expand customer awareness and trial with very little incremental marketing or capital investment is especially attractive.

Of course traditional retail and digitally native brands alike must be quite intentional about how strategic alliances advance their long-term goals. Yet done for the right reason and executed well, these partnerships can address real pain points for each and help accelerate growth. As Amazon continues to gobble up market share—and more and more tools are introduced to help consumers compare product features and prices from any and all retailers—retail brands will face increasing pressure to find meaningful and memorable points of differentiation. And, as the broader market is finally starting to accept, few disruptive direct-to-consumer brands can scale profitability without a material brick-and-mortar presence.

Seen in this light, the rise in these partnership is far from strange. Indeed, they often are quite logical. Which is why we are likely to see quite a few more in the very near future.

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.  

November 8th I’ll kick of the eRetailerSummit in Chicago. For more info on my speaking and workshops go here. 

Embrace the blur · Harmonized · Retail

Retail’s ‘halo effect’: New stores boost a brand’s website traffic by 37%, study finds

One of the recurring themes in my consulting, writing and speaking is that the distinction between online and physical shopping is increasingly a distinction without a difference. The key for most brands is to deploy a well harmonized, one brand, many channels strategy and to embrace the blur. Central to this notion is realizing that a physical store often serves as the hub of a brand’s ecosystem and that brick-and-mortar stores help drive e-commerce sales—and vice versa. While I’ve come to believe this through many years of direct experience, a just released study from the International Council of Shopping Centers sheds a lot more light on the subject.

One of the key findings in the report—which is based on a sample of more than 800 retailers and 4,000 consumers—is the so-called “halo effect.” It turns out that when a retailer opens a new store, on average, that brand’s website traffic increases by 37%, relative share of web traffic goes up by 27% and the retailer’s overall brand image is enhanced. This impact is even more pronounced for newer, digitally native vertical brands. Conversely, when a retailer closes a store, web traffic typically takes a big hit.

None of this is all that surprising. Established brands that started as mail order only but eventually expanded into their own stores—think Williams-Sonoma, REI, J. Crew—have recognized and benefitted from this insight for decades. For any retailer, but especially for direct-t0-consumer brands, a physical presence serves as marketing for the brand whether the customer ultimately chooses to transact physically or online. Brick-and-mortar stores also offer the opportunity for consumers to demo or try on products, talk to a salesperson and/or get a better sense for the price/value relationship, all of which improve conversion. Importantly, particularly for newer brands trying to profitably scale, customer acquisition costs can be lower in a physical store and product returns are typically lower—often dramatically.

While it’s taken the industry a while to understand the powerful symbiotic role that exists between a compelling physical and digital presence, the evidence keeps building. One clear sign is that digitally native brands, many of which have already opened dozens of stores, have plans to open more than 850 physical locations in the coming years. Warby Parker was one of the first disruptive retailers to understand the complementarity of digital and physical shopping. The pioneering eyewear brand will soon have more than 100 brick-and-mortar locations and already derives more than half its revenues from its physical stores.

We’re also seeing what some refer to as the “billboarding” of retail or, as retail futurist Doug Stephens refers to it, viewing stores as media. In these instances physical locations serve primarily to promote a brand rather than sell products in store. B8ta and Story are good examples of this. As this phenomenon expands, retail will require new metrics as traditional measures of sales productivity and same store sales become less relevant.

Understanding the critical relationship between a brand’s physical and digital presence is also essential to store closings and/or store downsizing decisions. Viewed from a channel-centric lens, many retailers will convince themselves that they need many fewer stores and that the stores they keep (or they intend to open) can be meaningfully smaller as more business moves online. Yet viewed from a holistic customer perspective it’s easy to see how this siloed thinking can backfire. Recognizing this, a number of retail CEOs have wisely resisted Wall Street’s pressure to close more stores because they understand how damaging such a move could be.

I’m hardly the first person to challenge the retail apocalypse narrative or to suggest that physical retail is definitely different, but far from dead. And the collapse of the middle continues to push retailers to become more intensely customer relevant. The move away from mediocre and boring requires making physical stores more unique and memorable. Yet without understanding the interplay between the customers’ digital and physical experience, how this gets executed can be quite different. The more a brand understands the overall customer journey and the role that all elements of the experience play—digital and analog—the better prepared they are to become remarkable.

Regardless, one thing is quite clear. The death of the physical store is greatly exaggerated.

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.  

November 8th I’ll kick of the eRetailerSummit in Chicago. For more info on my speaking and workshops go here. 

Bricks & Clicks · Embrace the blur · Innovation · Retail

Will Amazon 4-Star live up to its reviews?

After learning that Amazon might open up to 3,000 Go stores by 2021, the industry was still catching its collective breath when the retail behemoth opened an entirely new format in Manhattan’s Soho neighborhood last week. Amazon 4-Star is the latest move into physical retail on the part of the once online-only retailer, joining Amazon Books and Whole Foods. If this keeps up, some might start to wonder whether the retail apocalypse narrative may not be entirely accurate (indeed, sarcasm is my superpower).

Just about anything Amazon does tends to be of keen interest and can often send shockwaves throughout the sector. Not only is the company often several steps ahead of the competition, but it possesses the culture and the spending capacity to try a lot of stuff and keep everyone on their toes, desperately trying to figure out what’s next. So at this point it’s anyone’s guess where this particular experiment could lead over time. Yet the idea behind this new concept, along with what I have observed in visiting Amazon’s growing fleet of bookstores, so far leaves me unimpressed.

The organizing principle of 4-Star seems similar to Amazon’s foray into physical book stores: edit down a vastly larger online assortment to a core of mostly “greatest hits” (best sellers, customer favorites and new & trending), add some cool technology, and layer on some of that omni-channel stuff we’ve all heard so much about. At one level, this seems eminently sensible. If we already know what the customer buys online, surely translating that to a physical store is not only the “right” product strategy, but will lead to excellent productivity. Unfortunately this left-brain driven translation from the digital world to brick and mortar can often be underwhelming. There are a few reasons for this.

Shopping online just isn’t the same as shopping in a store.

While e-commerce works well when we are on a mission, it’s not as good when we are engaged in discovery. Most websites are optimized for speed and conversion. Conversely, a really good brick-and-mortar experience can deliver an entirely different customer journey by leveraging displays, product adjacencies, sight lines to neighboring departments, in-person sales assistance, etc. Category management strategies that ultimately determine a brand’s success play out in fundamentally different ways in a physical store. The ability to see, touch and/or try on products requires that assortment strategies be tailored to the unique dynamics of a store shopping experience.

 

Optimizing our way to boring.

Best sellers, by definition, are what some comparatively mass audience has already voted on; the peak of the bell curve, not the extremes. Any student of retail knows what great merchants have done for centuries to create competitive differentiation and maximize long-term productivity—namely they curate an interesting combination of what already works along with offering up interesting items that add to the overall experience, supported by loss leaders that help spur traffic and complementary items that drive up basket size. Heavy reliance on carrying only the most popular items inevitably causes a regression to the mean, which can easily make for rather boring and/or disjointed stores.

Be careful what you wish for.

Among the many dumb things Sears has done over the years, there were two whoppers that speak to my thesis that I was also “blessed” to witness firsthand. The first happened some 15 years ago when the financial types started to have more influence than the merchants and store operators. This led to an initiative to improve our sagging financial performance where the driving logic was essentially to keep the best sellers and eliminate (or shrink) the products with below average financial performance. While mathematically that sounds appealing, back in the real world it had the effect of lowering traffic and reducing conversion as it made our stores even less customer relevant, while also ignoring the key ingredients to building profitable market-baskets and creating customer lifetime value.

The other little oopsy daisy came a year or so later when we acquired Lands’ End and were rolling out its product to hundreds of Sears stores. The Lands’ End merchants insisted that virtually all of their direct-to-consumer best sellers had to be included in the new Sears’ retail assortment. When translated to carrying a basic depth and breadth of sizes and colors the resulting offering not only didn’t make much sense in the context of other products we carried, it led to inventory levels that had no chance of being productive. But hey, what’s a few hundred million dollars of markdowns among friends?

The lesson, of course, is that a remarkable retail experience should be built from the customer’s perspective, be competitively unique and be mindful of leveraging the unique characteristics that only a physical store can deliver. Digital can be hugely important in informing the brick and mortar execution, but should not overwhelm the overall experience design..

In Amazon’s case, more times than not, it plays by a different set of rules, some of which other retailers would be wise to emulate, others that the competition can only dream about. Amazon’s 4-Star may turn out to be this generation’s Service Merchandise. More likely, however, it is the first of many iterations and merely the tip of the iceberg in a broader and more aggressive move into physical retail.

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 October 16th I’ll be in San Antonio delivering the opening keynote at X/SPECS . November 8th I’ll kick of the eRetailerSummit in Chicago.

For more info on my speaking and workshops go here. 

Digital Disruption · Radical · Retail

Gee, I thought you were in the mattress business?

In my current keynote, I make the observation that many retailers have gotten themselves into trouble watching the last decade or so happen to them. Primarily for this reason, No. 8 in my “Essentials of Remarkable Retail” is the need to be “Radical” and to embrace a culture of experimentation.

Clay ChristiensenGary Hamel and many others have highlighted how legacy brands often struggle to keep pace with innovation. While there are some examples of industry incumbents responding well to disruption, it is far more typical (at least in retail) for companies to get this wrong. Having been a Sears executive when, arguably, there was still a chance for a meaningful turnaround, I often point out that we did not lack the knowledge that Home Depot and Lowe’s were on a trajectory to destroy our primary competitive advantage. What we lacked was the willingness to act. Some of this was clearly linked to culture, process, risk aversion and the like. But a lot of it was tied to how we defined what business we were in. This faulty line of thinking is a mistake oft repeated.

The latest example of this phenomenon is what’s transpiring in the $29 billion mattress category. Drive around any major city and you’re likely to encounter quite a few mattress specialty stores, the most prominent being Mattress Firm with over 3,000 locations in the U.S. Department stores like Macy’s and JC Penney also have significant mattress businesses. Mattresses are sold through traditional furniture stores like Ashley or Haverty’s as well. Given the size and profitability of the industry, the pace of digital disruption and competitive intensity, you might think that a few of these players would be aggressively pursuing innovative new formats. You’d be wrong.

In a rather ironic twist, Casper, which launched as an online only brand in 2014 and has raised $240 million in venture capital funding, is set to open 200 stores while industry leader Mattress Firm appears about to file bankruptcy to facilitate mass store closings. Casper is far from the only industry insurgent. Purple, Saatva and others are all trying to carve out sizable and sustainable positions. Most will not be around in 5 years time, but they will wreak havoc in the meantime and one or two might get acquired for what is likely to be stupid money. In fact, Tuft & Needle, Casper’s primary direct competitor, just merged with mattress manufacturing behemoth Serta Simmons.

casper_stores_1.0

Given the accelerating pace of change and the investment community’s tendency to value growth over profit, it’s not easy to be certain which disruptive model will take hold and which will be exercises in setting a big pile of cash on fire. Nevertheless, if you are Folger’s and you limit the way you see your business, you miss the value created by Starbucks. If you are Blockbuster and decide you are in the business of distributing videos through physical locations, you miss Netflix. If you are Sears and you decide you are a multi-category retailer selling a whole bunch of stuff mostly through mall-based department stores, you miss the home improvement warehouse opportunity. Oh yeah, and you also miss Amazon.

Many things in life are defined (and obscured) by our lens and filters. We need not look beyond the partisan hackery of America’s current political climate to see the truth of this. Yet in the context of how we manage our brands, respond to disruption and stay one step ahead of the consumer, we should take a lesson from the world of psychology. There are three fundamental steps to unlocking the opportunity that lays beyond our fears. First, is awareness. We must deeply understand our customers, their journey and how it is evolving, as well as the competitive dynamics that are at play. Second, is acceptance. We can see something but not truly own the truth of it and all the potential implications. The third is, of course, the most important: action.

Until we find ourselves in the arena, trying stuffseeing failure as an option, we are likely to have the next decade happen to us as well.

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 October 16th I’ll be in San Antonio delivering the opening keynote at X/SPECS . November 8th I’ll kick of the eRetailerSummit in Chicago.

For more info on my speaking and workshops go here. 

Bricks and Mobile · Embrace the blur · Retail

Plot twist: Amazon’s future may soon be tied to physical stores

It’s hard to underestimate the success and increasing power of Amazon. Their market cap hovers just under $1 trillion. Their growth rates have been astounding. By most estimates Amazon now accounts for nearly 50% of all US e-commerce revenues, roughly 5% of all retail and is significantly bigger than their next 10 competitors combined. One study has some 55% of all online product searches starting at Amazon.

Last week a report that Amazon is considering opening up to 3,000 of their Amazon Go cashierless convenience stores by 2021 grabbed a lot of attention, despite their only having opened up a fourth location a few days ago. Advocates enthusiastically tout the concept’s potential ability to revolutionize shopping. Skeptics challenge the high capital cost, the reliability of the underlying technology and whether the stores really offer enough added value to take on well established players like 7-Eleven. I think both miss the larger point.

From a strictly pragmatic view, Amazon is not bound by the limitations of most retailers. They have patient investors who are much more focused on growth than short-term profits. Amazon has a strong commitment to innovation and has enormous capacity to invest for the long-term. While the economics of these stores do look rather challenging, the costs are certain to come down. And besides, at least for now, Amazon is not held to the conventional ROI hurdles that their traditional competitors face.

Whether or not the world sees 10 or 10,000 Amazon Go stores 5 years from now, what’s important to understand is that for Amazon to sustain anything remotely close to current growth rates over the long-term–much less defend against Walmart, Alibaba and others–they MUST significantly expand their physical store presence. You don’t have to possess a highly functioning crystal ball to see that one key to unlocking major growth in certain large product categories will require a substantial brick & mortar footprint. There are a few reasons for this.

The physical limitations of direct-to-consumer. Until someone invents a teleportation device (Elon, you on it?), considerable retail volume is impulsive driven, demands immediate gratification, is dependent on proximity to point of sale or is just stupid expensive to absorb the “last mile” delivery cost. Maybe Amazon is willing to have a robot or drone deliver a Slurpee to you, but that doesn’t make it a scalable business model.

The difference between buying and shopping. Amazon is really good at the “buying” process, i.e., those occasions where the customer values a highly efficient transaction, great pricing, vast (or very specifically curated) assortment and the particular convenience of direct-to-consumer delivery. “Shopping” on the other hand is less search and more discovery. It leans heavily on experience, be that the ability to interact in-person with a sales associate, see first hand the quality and/or fit of the product, figure out a broader, more complicated solution (like assembling an outfit or visualizing a re-decorating project) or simply to enjoy the social or entertainment dimensions that a brick & mortar location uniquely provides. While a customer “shopping” journey may be digitally informed, a physical dimension is often essential to conversion and customer delight.

When we understand this, it’s no surprise that most “shopping” dominant segments not only have much lower e-commerce share (groceries, prepared foods, furniture, home improvement, luxury fashion, etc.) but many digitally-native vertical brands (Warby Parker, Bonobos, Indochino, Casper) are investing in physical locations to reach consumers for whom pure online shopping is an obstacle to becoming frequent and profitable customers. Given the barriers to meaningful growth without a physical presence, Amazon will either have to place big brick & mortar bets (through their own formats and/or through acquisitions like Whole Foods) or accept a material deceleration of their growth rates over time.

Brick & mortar can be more profitable. Online shopping has two big profit drivers: the cost of acquiring (and retaining) customers with solid lifetime value and the per order dynamics of fulfilling orders. If the marginal cost of acquiring customers is greater than the marginal value of the lifetime value of those newly acquired customers the business model is unsustainable. This may well be the achilles heel of brands like Blue Apron and Wayfair. As many once online only brands are learning, it’s often cheaper to acquire a customer in a physical location than to pay the marketing tollbooth operators (Google, Facebook and, increasingly, Amazon) to target and convert the best prospects.

High fulfillment costs can make many e-commerce orders profit proof. There often is not enough gross profit per order for lower-priced items to offset the cost of picking, packing and shipping. This only gets worse when items are prone to high rates of returns or exchanges. This also helps explain why many online only brands are now opening stores and seeing their marginal fulfillment costs as a percentage of sales drop markedly. Amazon, on the other hand, is continuing to see fulfillment costs go in the wrong direction, thereby setting up a major headwind to improving lackluster margins. To reach more customers, improve marginal profitability and offset certain advantages of current (Walmart, Best Buy) and important future competitors (Nordstrom, Home Depot, Walgreens, Nebraska Furniture Mart)  a significantly expanded brick & mortar presence is not nice to have, but essential.

While important, it is by no means urgent for Amazon to make an immediate big move. There is still plenty of solid growth within their core business model, including tapping into international markets. They have their hands full figuring out Amazon Go and Whole Foods. But in my mind, the long-term math leads to one inevitable conclusion. If Amazon wants to be the world’s largest retailer and significantly improve their margins a lot more physical locations are virtually certain to be a big part of that future.

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.  

Over the next few weeks I’ll be in Chicago (twice!), Dallas, Toronto and San Antonio delivering an updated version of my keynote “A Really Bad Time To Be Boring.” For more info on my speaking and workshops go here. 

Harmonized · Loyalty Marketing · Personal · Retail

Nordstrom ups the ante with new loyalty program

Last week Nordstrom, the U.S.-based fashion retailer, announced the launch of a new loyalty program. Despite its rather uninspired name, The Nordy Club is intended to broaden customer engagement while increasing earn rates by 50% for members paying with a Nordstrom credit card. The new program also offers more access to services and personalized offerings.

At first blush, Nordstrom seems to be emulating what brands as diverse as Neiman Marcus (Note: I worked on the InCircle redesign some 10 years ago), StarbucksUlta and others have long recognized. First, an engaging rewards program is a foundational element for gathering data and leveraging customer insight. Second, programs that have what amounts to a cash-back feature—as many do when they rely on gift cards as primary redemption vehicles—can often provide discounts more cost effectively than one-size-fits-all promotions. Third, reward points create a currency for highly targeted offers to drive specific desired outcomes for the retailer. Fourth, through the use of well designed tiers, the best loyalty programs provide “stretch” incentives that encourage customers to spend more to earn higher rewards and obtain access to unique services and experiences.

At their core, the best in breed reward programs focus on two components. First is transactional loyalty. Here the brand is simply providing a tangible value exchange for increased shopping behavior (and better access to customer data). Calling this “loyalty” is a bit misleading, as this is more akin to bribery. While this program feature incentivizes customers to increase their spending, many customers will respond because they are essentially leaving money on the table if they don’t. The more strategic program designs recognize that true loyalty is an emotion.  In this case leading programs typically use accelerated point accumulation and more experiential offerings to further engender a deeper connection to the brand. This typically includes preferential access to merchandise and events and special or enhanced services (free alterations, valet parking, etc). In this regard, Nordstrom isn’t breaking any new ground.

What does appear to be more on the leading edge, however, is how Nordstrom is leaning into at least 4 of what I call the “8 Essentials of Remarkable Retail.” And this provides the potential for meaningful competitive advantage if done right.

Harmonized. This is the idea that, regardless of how and where the customer chooses to shop, retailers must eliminate points of friction in the customer journey and deliver experiential elements that amplify relevance. In the press release, Nordstrom VP Dave Sims said “when thinking about this evolution, a guiding principle was to offer something for everyone, no matter…where they interact with us.”

Mobile. Many retailers have come to realize that customers no longer go online—they live online and their smart device is often a constant companion in the shopping journey. The new Nordy Club app looks set up to be a core component of how members will engage with the brand.

Personal. As I talk about in my current keynote, no customer wants to be average. More importantly, no customer has to be, given how the power has shifted to them. Making personalization a key aspect of the new rewards program is very responsive to what consumers want and what smart retailers need to do to be more relevant and unique.

Memorable. Today’s consumer is deluged with a tsunami of information and choices. To be the signal amidst all the noise, to truly command meaningful attention, all brands are challenged to become more unique, more relevant and more remarkable. A key way to do that is to create memorable experiences. It’s a bit difficult to ascertain at this point how truly unique some of the benefits will be for elite members (particularly since many of these will never be advertised), but I’m willing to bet that this program dimension will be dialed up substantially.

Of course it remains to be seen how well this new effort will work when fully deployed. Clearly Nordstrom is adding considerable cost to the program. Whether this turns out to generate a good ROI will take years to assess. Moreover, some aspects of what was just announced just bring the company to competitive parity and therefore can be viewed as largely defensive. Others may risk setting off a rewards point war. If that happens, that is a battle that customers win and investors lose.

More interesting for the long-term is how Nordstrom will evolve the harmonized, mobile, personal and memorable pieces of the program and how those will authentically resonate with the others aspects of the branded customer experience for which Nordstrom is justly well regarded. Here, much as they have done over the years staying on the leading edge of digital commerce and executing a well integrated “omnichannel” experience, Nordstrom does seem to be upping the ante and leading the way. How (or if) the competition responds will be the next thing to keep an eye on.

Note: For a far more comprehensive and insightful look at loyalty, I heartily recommend my fellow Forbes Contributor Bryan Pearson’s book The Loyalty Leap.

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.  

Over the next few weeks I’ll be in Austin, Chicago (twice!), Dallas, Toronto and San Antonio delivering an updated version of my keynote “A Really Bad Time To Be Boring.” For more info on my speaking and workshops go here. And stayed tuned for announcements on early 2019 speaking gigs and my new book.

Embrace the blur · Frictionless commerce · Retail

Physical stores: Assets or liabilities?

Of course the obvious answer is “well, that depends.”

As the intersection of economic feasibility and consumers’ willingness to adopt new technology hit a tipping point, for retailers that had invested big bucks in the brick-and-mortar distribution of music, books and games, the answer changed rather dramatically. Today’s retail apocalypse narrative is nonsense. But it wasn’t so long ago that the tsunami of digital disruption very quickly turned the physical store network of Barnes & Nobles, Blockbuster, Borders and others into massive liabilities. While we can argue about whether any of those brands laid to waste by Amazon, Netflix et al. could have responded better (spoiler alert:the answer is “yes”), it’s hard to imagine a scenario for any of them that would have included a fleet of stores remotely resembling what was in place a decade ago.

Most of the so-called digitally native vertical brands that are disrupting retail today—think Warby Parker, Bonobos, Indochino—started with the premise that not only were physical stores unnecessary, they would soon become totally irrelevant. In fact, about six years ago, I remember asking the founder of one of these brands when they were going to open stores. He looked at me with the earnest confidence of someone who had just received a huge check with a Sand Hill Road address on it and said, “we’re never opening stores.” Clearly, at the time, he saw stores as liabilities. He wasn’t alone. Everlane’s CEO made a similar, but more public statement.

So for several years scores of startups attracted massive amounts of venture capital on the belief that profitable businesses could scale rapidly without having to invest in physical retail outlets. A key part of the investment thesis was that stores were undesirable given the high cost of real estate, inventory investment and operational support. Clearly the underlying premise was that stores were inherent liabilities. So it’s more than a little bit ironic, dontcha’ think, that my friend’s company has since opened dozens of stores, that Everlane just opened its second location (with more to follow I’m sure) and that many other once staunchly online only players are now seeing most of their future growth coming from brick-and-mortar locations.

For legacy retailers, particularly as e-commerce took off, many acted as if much of their investment in physical real estate was turning into a liability—or at least an asset to be “rationalized” or optimized. This underscores a fundamental misunderstanding of what was happening. Too many stayed steeped in channel-centric, silo-ed thinking and action. They saw e-commerce as a separate channel, with its own P&L. Because of this, they underinvested (or went way too slowly) because they couldn’t see their way clear to making the channel profitable. Before long they got the worst of both worlds: They found themselves not participating in the upside growth of online shopping while losing physical store sales to Amazon or traditional retailers that were pursuing a robust “omni-channel” strategy.

To be sure, the overbuilding of commercial real estate was going to lead to a shakeout at some point. Digital shopping growth enables many retailers to do the same (or more) business with fewer locations or smaller footprints. Yet I would argue that most of the retailers that find themselves with too many stores (or stores that are way over-spaced) rarely have a fundamental real estate problem—they have a brand problem. The retailers that consistently deliver a remarkable retail experience, regardless of channel, are closing few if any stores. In fact, brands as diverse as Apple, Lululemon, Ulta—and dozens of others—have strong brick-and-mortar growth plans.

What sets most of these winning retailers apart is that they deeply understand the unique role of a physical shopping experience in a customer’s journey and act accordingly. They know that digital drives physical and vice versa. They started breaking down the silos in their organizations years ago—or never set them up in the first place. They accept that talking about e-commerce and brick and mortar is mostly a distinction without a difference and know that it’s all just commerce. And they embrace the blur that shopping has become. They see their stores as assets. Different and evolving assets certainly, but assets all the same.

On the heels of recent strong retail earning reports (and an increase in store openings) some are starting to pivot from the narrative that physical retail is dying to one that is closer to all is now well. Both lack nuance. We can chalk up some positive momentum to the fact that a rising economic tide tends to lift all ships. We can peg some of the ebullience to Wall Street waking up to facts that were plain to see for quite some time.

What is most important over the longer-term, however, is to understand the root causes of why and where physical retail works and why and where it doesn’t. Whether it’s Casper, Glossier, Warby Parker, Nordstrom, Neiman Marcus, Williams-Sonoma, Sephora or many others, the formula is pretty much the same. Deeply understand the customer journey, and whether it’s a digital channel or physical channel, root out the friction and amplify the most relevant and memorable aspects of the customer experience.

When we do this we see the unique role a physical presence can (and often should) play in delivering something remarkable. The answer will be different depending on a brand’s customer focus and value proposition. But armed with this understanding we can design the business model (and ultimately the physical retail strategy) knowing that the channels complement each other and the desire is to harmonize them. At this point the question is not whether stores are an asset or a liability, it’s which aspects of brick and mortar’s unique advantages to lean into and leverage.

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.  

Over the next few weeks I’ll be in Dallas, Austin, Chicago, Toronto and San Antonio delivering an updated version of my keynote “A Really Bad Time To Be Boring.” For more info on my speaking and workshops go here.