Four truths and a lie from this year’s ShopTalk

Once again ShopTalk proved itself to be the must-attend retail event of the year. The 4th annual conference was both bursting with people and content, having grown to more than 8,000 attendees, five tracks and a solid number of prominent main-stage speakers across four action-packed days.

Most presentations and panels that I attended were strong. Yet a few speakers unfortunately hit speed bumps when their talks veered into shameless self-promotion, parroted trite expressions (“we put the customer at the center of everything we do”) or set forth declarations as bold new insight when they were merely observations that are obvious to anyone who’s been paying attention the past few years.

Nevertheless, as the dust settles, I came away with a few key points.

TRUTH: Embrace the blurThe delineation between physical and digital is increasingly a distinction without much of a difference . Most consumer’s shopping journeys involve a digital channel and the growing role of mobile makes the lines ever more blurry. While this has been true for years, many brands at ShopTalk seemed to finally be accepting this and taking necessary actions.

TRUTH: It’s about markets, not just physical locations. Just weeks after his brother Blake died, Nordstrom co-president Erik Nordstrom, in a refreshingly modest and honest fireside chat with CNBC’s Courtney Reagan, spoke of the company’s strategy to harness the power of stores and online to be more relevant on a market-by-market basis. He under-scored the reality that for many retail brands the store is the heart of an increasingly complex shopping ecosystem and that the customer is really the channel.

TRUTH: Physical retail isn’t dead. But it is very different. In some ways it seemed like attendees were officially cancelling the retail apocalypse. Sure many stores are closing: sometimes out of irrelevance, sometimes out of gross mismanagement or insanely leveraged capital structures, sometimes out of a needed correction to the ridiculous overbuilding of retail capacity. But Walmart, Target and many other brick & mortar centric retailers are showing new signs of life by treating their stores as assets, rather than liabilities. As just one example, investments in using the store as a key part of the supply chain (ship from store, order online/pick up or return in store, etc) are helping neutralize some of Amazon’s (and other’s) perceived superiority.

TRUTH: The problem is you think you have time. As many presentations centered on artificial intelligence, machine learning, robotics and the like, it seemed clear that the pace of technology adoption is only accelerating. Similarly, talks on shifting consumer behavior served as a stark reminder that customer wants and needs are growing ever more dynamic and more difficult to predict. And news of recent mass store closings and bankruptcies make it clear that those retailers that don’t move quickly and decisively are likely destined to die.

LIE: A slightly better version of mediocre is a compelling strategy. While I won’t name names, at least one retailer that featured prominently in the program may need more than a miracle on 34th Street to make them meaningfully relevant again. As the collapse of the middle continues apace, it seems increasingly obvious that some brands are making only incremental changes–or merely moving to where the puck is. What passes for innovation at some retailers might close competitive gaps, but whether it gets them to being truly remarkable is very much an open and critical question.

In addition to catching up with old and new friends, one of the things I like most about ShopTalk is the ability to get a robust and fairly comprehensive snapshot of where retail stands: the good, the bad, the ugly and, sometimes, the head-scratching. Regardless, I come away better educated, inspired and hoping that more retailers will see the light.

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.  

Macy’s and JC Penney earnings offer evidence of the stall at the mall

On the basis of early results (and specious or unreliable indicators), many industry observers predicted this would be the best holiday season in a long time. It turns out, eh, not so much. In fact, at least one guy was pretty skeptical all along.

But you don’t have to be some sort of retail savant (I’m not) or have the gift of prophecy (I don’t) to have seen this coming. While the idiotic U.S. government shutdown, along with every retailer’s favorite scapegoat (the weather), had a largely unexpected dampening effect, anyone who was paying attention could have predicted that retailers with highly customer-relevant and remarkable offerings would do comparatively well and that those stuck in the boring middle would continue to struggle. Which brings me to Macy’s and JC Penney, the two mall-based department stores that reported earnings this week.

Under the newish leadership of Jeff Gennette, Macy’s has embarked on a number of new initiatives, which my fellow Forbes contributor Walter Loeb recently outlined. While I applaud the company’s willingness to try new things, its results continue to be decidedly uninspiring. As sales continue to go nowhere, Macy’s has resorted to what just about every other retailer that can’t seem to get on a path to being truly customer relevant does—namely, cut costs and close stores. As the saying goes, when all you have is a hammer, everything starts to look like a nail. w

JC Penney recently reported fourth-quarter earnings and managed to top analysts’ estimates. And when we say “top,” we mean they were not quite as horribly sucky as anticipated. Same-store sales were down “only” 4%, and operating losses were only somewhat awful. And, you guessed it, the company also announced it was going to close a bunch of stores.

Amid the generally bad news—which comes, I might add, as Sears (its neighbor in hundreds of locations) hemorrhages market share—was one bright spot: The company did manage to reduce bloated inventory levels by some 13%.

New CEO Jill Soltau also said that the company “has the capacity to produce improved results.” You know, kind of like I have the capacity to complete a triathlon. So good luck and Godspeed to us both.

As Macy’s and JC Penney close the financial chapter on 2018 and try, yet again, to reset their overall cost base, there are five things that need to be kept front and center as we move forward.

1. The stall at the mall is real, and there is no going back. As I’ve written about many times, the moderate-department-store sector has been losing share for decades, first to discount mass merchants and category killers and then (mostly) to off-price retailers. The format is structurally disadvantaged. Accept the things you cannot change.

2. Stop blaming Amazon. To be sure, the growth of online, and Amazon in particular, has added extra challenges, but most of the share losses in the past decade have not been to online-only players, and as mentioned above, both these brands were struggling way before Jeff Bezos had impressive biceps. And by the way, I’m pretty sure there is no law against Macy’s and JC Penney having really good digital capabilities (see Neiman Marcus, Nordstrom et al.).

3. Get out of the boring middle. If you continue to swim in a sea of sameness, you are going to drown. If you continue to chase promiscuous shoppers, your margins will stay low. If you continue to try to be a slightly better version of offering average products for average people, your best-case outcome is average results. Better is not the same as good. You have to choose to be truly remarkable.

4. It’s a customer-relevance problem, not a cost problem. Given the structural issues facing mall-based retailers, as well as the broader shift to online shopping, we often jump to the conclusion that brands like Macy’s and JC Penney can shrink their way to prosperity. This is fundamentally wrong and, in most cases, ultimately destructive. It also belies the fact that plenty of “traditional” retailers have managed to thrive by opening stores and foregoing massive cost-cutting. Time and time again we see that brands that get into big trouble have a problem being customer relevant and memorable yet decide instead that they have a too-many-stores and too-much-staff problem. This is not to say that Macy’s and JC Penney can’t thrive with less square footage; they can and should optimize their store fleets. But there is plenty of business to be done directly in and, more importantly, by leveraging brick-and-mortar locations. As we move ahead, the overwhelming majority of Macy’s and JC Penney’s efforts must be about growing share with their target consumers through improved relevance.

5. Aggressive trade-area based goals. We need to get away from the hyper-focus on comparable-store sales and realize that online drives offline and vice versa—and that the store is the heart of most brands’ customer ecosystems. Accordingly, the metric we should pay most attention to is how retailers are gaining share (customer relevance) and profits on a trade-area by trade-area basis, regardless of channel. If Macy’s and JC Penney are going to be around for the long term, they likely need to be growing at least 3-5% in every trade area where they have stores and be growing faster than inflation overall. Closing many more locations risks impacting both customer relevance and necessary scale economies.

In the next year or two, things are likely to remain especially noisy as the long overdue correction in commercial real estate settles out and the weakest competitors make their way to the retail graveyard. And even if that were not true, both Macy’s and JC Penney face significant structural headwinds as well as daunting operating challenges making their way out of the boring middle—although, to be fair, Macy’s is definitely further along.

Despite the noise, from where I sit, one thing is clear: Neither brand will cost-cut or store-close their way to prosperity. If revenues don’t start to consistently grow faster than industry averages (and that’s likely to come with relatively flat physical-store sales and online growth of at least 15-20 %), then both chains will continue to lose relative customer relevance, and a downward spiral is likely inevitable.

A slightly better version of mediocre is rarely a winning strategy.

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.  

Despite a booming stock price, Wayfair is no Amazon

Wayfair.com, the leading purveyor of home furnishings online, recently delivered what many on Wall Street saw as a blockbuster quarter, reporting sales growth of more than 40%. Of course they also lost $144 million for the quarter, which about doubled the loss from the year earlier. For the entire year they lost a cool half a billion dollars, despite being at this whole e-commerce thing for over 15 years.  Seems like selling at a loss and making it up on volume is now back in vogue. Despite the seemingly deteriorating economics, Wayfair’s stock is up 70% in the past year and the company is now valued at nearly $15 billion.

At one level, Wayfair can certainly be applauded for having gone from a fledgling start-up to a major retail brand with revenues trending at more than $7 billion per year. And having thrown many millions at broadcast media of late, their jingle (“Wayfair you’re just what I need”) is rapidly turning into an annoying earworm. There is only one eensy-weensy little problem with all of this : their business model, at least as presently executed, is deeply flawed and, well ladies and gentlemen there is no nice way to say this, those bidding up the stock might do better to short it.

While some may see Wayfair as the “Amazon of home furnishings” there are many reasons why those comparisons are largely specious (though their ability to lose lots of money for more than a decade is certainly an apt parallel). Yet unfortunately Wayfair doesn’t have an AWS to subsidize its losses, so eventually they will have to make money the old fashioned way–or hope to be acquired.

Here are four significant underlying issues with Wayfair’s business model, supporting why I predicted earlier this year that Wayfair’s stock is due to crash back to earth.

  1. Customers are expensive to acquire at scale. I’ve written many times about the challenges of scaling e-commerce businesses given the high cost of marginal customer acquisition. Wayfair is pretty much the poster child for this “reverse economies of scale” phenomenon. The last few earnings reports suggest that Wayfair’s acquisition costs remain extremely high and they are getting little leverage despite their growing scale. To keep sales growth booming they will almost certainly need to keep paying Facebook, Google and the rest of the toll-booth marketing industrial complex dearly to stand out in a highly competitive sector. And as Peter Fader and Dan McCarthy’s work illuminates, despite these pricey bounties many new customers will have insufficient lifetime value to be worth adding.
  2. Supply chain costs are big barriers to profitability. E-commerce may work really well in the search and discovery piece of the furniture shopping process but it does very little when it comes to a big piece of the value chain, namely the cost of (and complications associated with) home delivery of big and bulky items. So far nobody has figured out how to have delivery trucks get from point A to point B much faster. Nobody has figured out how to get a sofa into a house and up a flight of stairs without two guys going along for the ride. Amazon has its own challenges in dealing with spiraling fulfillment costs. While Wayfair is investing a lot to build better supply chain capabilities there are many daunting fundamental challenges inherent to home furnishings that will not be easy to overcome.
  3. Product returns are a killer. As I’ve written about previously, returns & exchanges are a ticking time-bomb for retail as online shopping grows. It’s particularly bad in the furniture business. Not only does buyers’ remorse tend to be higher in the home furnishings category, but the nature of the product often means items are more prone to damage. So when a product needs to come back it can be hugely expensive to handle the reverse logistics and refurbishing and/or liquidation cost. Want some evidence that this is a growing concern? Wayfair’s first physical store is an outlet.
  4. And what’s the deal with gross margin? There was a lot of excitement about Wayfair getting to 24% gross margin. Need I remind everyone that better is not the same as good? This might be an acceptable margin for a retailer with a low cost structure like Walmart or Best Buy. For a brand like Wayfair that isn’t close to sufficient. A better comparison is Williams-Sonoma–and their margin is around 34%. As Wayfair grows they can develop further efficiencies. They can also shift their product mix and obtain lower product costs–yet they already have a very high penetration in private label. What this low margin suggests to me more than anything is that their pricing is consistently too low. That may help explain the rapid customer growth, but it is hardly a recipe for long-term profitability.

While Wayfair has done many admirable things–and there certainly is room for a sizable digitally-driven home furnishing brand of some scale, should we continue to be impressed with a business that only seems to drive outsized growth with unsustainable pricing and crazy high levels of marketing, while offering free shipping in a business with notoriously high supply chain costs? If you don’t find this more than a bit crazy please contact me about investing in my new highly disruptive business model selling $20 bills for $15.

This likely doesn’t end well. Unless of course Amazon, Walmart, Target or some other huge player decides to acquire them in a “strategic move.” If things don’t start to improve much more dramatically in the near future that may be the best and only hope.

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.  

Barneys and MedMen hope ‘high’ fashion will be a big hit

Two retailers are seeking to really put the high into high fashion.

Last week Barney’s New York, which operates 15 luxury department stores and outlets in the US, announced it would open “The High End” in its Beverly Hills flagship. Deemed a “luxury cannabis lifestyle shop” the new concept will be tucked away on the fifth floor and feature a range of cannabis-based home, beauty and wellness products as well as a (presumably elevated) offering of accessories. The shop is scheduled to open next month and the products will also be available at barneys.com.

In making the announcement Barneys’ CEO Daniella Vitale said  “Barneys New York has always been at the forefront of shifts in culture and lifestyle, and cannabis is no exception. Many of our customers have made cannabis a part of their lifestyle, and The High End caters to their needs with extraordinary products and service they experience in every facet of Barneys New York.” 

Just a few days later, MedMen, the rapidly growing vertically-integrated retailer of CBD products, announced their new line of cannabis-inspired apparel. While we haven’t seen Barney’s offering quite yet, MedMen’s looks to be decidedly more casual and less expensive and is already available for sale online. The new line of men and women’s clothing is also available at MedMen’s 19 retail stores (expected to grow to at least 30 by year’s end).

As more states legalize marijuana, and societal attitudes shift, the notion of cannabis as a mainstream consumer product seems more real every day. And there certainly seems to be a great deal of investor interest. A dramatic expansion of CBD-based retail concepts and related products seems inevitable, particularly as the regulatory environment becomes more favorable.

Strategically, clearly Barney’s and MedMen approach the opportunity a bit differently, with the former taking a much more upscale approach befitting its more exclusive and affluent customer base. MenMen’s brand image is much more mass market, and its initial offering is in keeping with that positioning. Yet I am left wondering about the broader validity of their respective strategies.

MedMen’s product-line extension strategy makes total sense and follows in the line of many other “lifestyle” brands that look to extend their brand equity and sell more to customers they already have. And since MedMen is not yet licensed to sell their core offering in most states, there is a certain genius to marketing products that are “on brand” but do not have any regulatory issues. Moreover they are getting their brand out to markets where they may eventually have stores. I would say something about seeding future customers, but that seems way too obvious.

In my view, for Barney’s it’s a little more hazy (heh, heh). On the one hand, a brand should meet their customers where they are. If a significant number of Barney’s customers are experiencing the so-called cannabis lifestyle than finding a unique, on-brand way of meeting their needs seems eminently sensible. It’s also likely that the space where the new shop is going is not terribly productive, so this is a relatively inexpensive way to experiment. On the other hand, Barney’s has always been about leading edge, luxury fashion, so it’s less clear to me how this new venture reinforces their core brand equity (or moves them in a strongly desired evolution). In some ways, the Barney’s move feels more like a PR stunt. But time will tell.

In any event, it will be interesting to see how MedMen and Barney’s new forays play out and evolve, as well as how other retailers choose to pursue the CBD opportunity–or not. Whether it ultimately proves to be a bonanza or merely a fad remains to be seen. But for punsters it’s definitely a bull market.

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.  

Sears lives to die another day

Against the odds—and over the objections of most creditors—Eddie Lampert has “saved” Sears, with a federal bankruptcy court judge approving the sale of the once-storied retailer to the billionaire hedge fund king.

At one level, we should admire the resilience of the former Sears CEO (and its principal shareholder, though ESL Holdings). Part Energizer bunny, part Michael Myers from the Halloween movies, part gag birthday cake candles, he just won’t die. At another level, it’s hard to imagine a bigger waste of time. Moreover, the idea that he is motivated to keep the company going to save some 45,000 jobs is laughable and undeniably cruel.

For more than a decade, we have witnessed the brand shrink and shrink. Under Lampert’s leadership, the majority of Sears and Kmart locations have been shuttered. Key brand assets have been sold off to keep the lights on. Comparable store sales have been down virtually every quarter since 2004, and e-commerce sales have consistently lagged the industry. Nothing in the latest Hail Mary move reverses a strong downward trajectory. In fact, the situation keeps going from bad to worse, and the current fragility presents growing challenges, as fellow Forbes.com contributor Warren Shoulberg highlights.

As I have touched on before, Sears has been in trouble for decades, and it’s highly unlikely that anyone could have restored the brand to its former glory, much less maintain it as a meaningfully profitable national retailer. While that may be an interesting thought piece or business school case study, the reality today is that Sears simply has no reason to exist in its current manifestation. Sears no longer offers anything that is remarkable to customers—and no strategic plan has been proffered to alter that. While there may be a few diehard fans (heh, heh) left, absent any nostalgic feelings, as a practical matter, no one will miss Sears when it is gone. There simply are plenty of better options to buy everything that Sears sells.

A Sears store in Hackensack, N.J. (AP Photo/Seth Wenig, File)

Despite being a former Sears executive, I now only wish the insanity would stop. There is no plausible scenario in which Sears does not keep shrinking into oblivion. There are few assets left to fund operating losses. The company will struggle to get creditors to ship it product. Its management team is in tatters. It has no clear target customer groups or compelling value proposition. It has little cash to invest in the areas that desperately need improvement—most notably its remaining stores. And the competition only continues to grow stronger and have greater scale to apply against any resurgence.

So the world’s slowest liquidation sale has entered yet another chapter. I will leave it to others to debate whether this particular move is merely a “scheme to rob Sears and its creditors of assets” or whether it is a good-faith effort to keep Sears as a going concern. Regardless, it is good news for the many thousands of Sears associates who get to keep their jobs for a bit longer. Sadly, though, for most of them, it only delays the inevitable.

As the former Sears CEO (and my former boss) Alan Lacy recently said, “We know how this movie ends; I’m just not sure how many more minutes are left.” Dead brand walking.

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 February 25th I will be doing the opening keynote at New Retail ’19 in Melbourne, Australia, followed the next week by ShopTalk in Las Vegas where I will be moderating an expert panel and participating in other events.