Going private: Here comes Amazon’s next big wave of disruption and dismantling

While Amazon is often falsely blamed for all of retail’s woes, the “Amazon Effect” is both profound and well-documented. While the company’s overall market share is relatively low (under 5%), Amazon now accounts for nearly half of all e-commerce sales and its pricing and supply chain supremacy continues to put margin pressure across many categories of retail.

Yet, lost among the stories about the showdown between Amazon and Walmart or the impact of the Whole Foods acquisition or the company’s many stymied attempts to become a major fashion player is potentially an even bigger and more interesting narrative. What should be added to the list of things that keep both manufacturers and retailers up at night is Amazon’s rapidly evolving private brand strategy. The massive potential for a “go private” thrust to be another key component in what L2’s Scott Galloway has called Amazon’s systemic dismantling of retail and brands is huge.

Here’s why:

Private brands can have powerful consumer appeal. A well-executed private brand strategy allows for equal (or even better) quality products to be delivered at much lower prices. Store brands have moved well beyond the generic product days into being desired brands in their own right and have become significant lines of business for many retailers.

Private brands typically have greater margins. By controlling both the product design and supply chain–and avoiding the need for large marketing and trade allowance budgets–proprietary store brands can deliver a better price to the consumer and better gross margins for the retailer. Therefore the brand owner has a greater incentive to push its captive brands over national brands.

Amazon has already created a solid base of private brands. It turns out that Amazon already has a solid stable of proprietary brands. Some are more basic commodity items sold under the Amazon name. Some have their own identity, like Mama Bear and Happy Belly. Others tilt toward the more fashionable. With the Whole Foods acquisition, the company also controls the 365 Everyday Value brand which, rather unsurprisingly, is now available at Amazon. Recent reports suggest they are jumping into the athletic wear business.

Amazon’s private brands are on fire. While specific financial data is relatively sparse, most indications are that the company is thus far yielding strong performance with its own products. According to one report, many of these brands are experiencing hyper-growth.

The Amazon chokehold. Ponder for a moment the amount and quality of customer data Amazon can leverage to both design and target its own stable of higher margin products. Consider that more than 55% of all online product searches start at Amazon. Reflect on the reality that Alexa’s algorithms already give preference to Amazon’s private brands. Contemplate how easy it will be for Amazon to systematically design its website to feature the brands it wants to promote. Meditate on the freedom Amazon has to pursue the long game given its strong cash flow and Wall Street’s current willingness to value growth over profits.

Because of its sheer size, as well as the need to feed the growth beast, Amazon must both grab more market share in categories where it already has a material position, while also entering and penetrating significant new opportunity areas. At some point, Amazon will also have to demonstrate that it can make some decent money outside of its Amazon Web Services business. The opportunity in private brands serves both Amazon’s long-term revenue and margin objectives.

For the most part, Amazon’s private brand aspirations have operated under the radar. But from where I sit, it won’t be long before they reach critical mass in many key categories. And when they are ready to truly step on the gas–both from their organic efforts, as well as from what I believe will be at least one more major brick & mortar acquisition–another wave of brands (both wholesale and retail) will get caught in the wake.

For the competition, it’s time to be afraid. Very afraid.

dezhas8u0aac0fw

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

For information on speaking gigs please go here.

Sears: Is The End Finally In Sight For The World’s Slowest Liquidation Sale?

When I left Sears in 2003, I was quite pessimistic about the company’s long-term prospects. Some initiatives we had put in place during a two-year strategic re-positioning effort were gaining traction, but most key metrics were alarming. The apparel business was well below a sustainable productivity level. The appliance and home improvement segments–which accounted for roughly 50% of our enterprise value–were losing market share to better positioned competitors, mostly notably Home Depot and Lowes. And the one strategy that might have saved us was no longer a feasible option. My fear was that Sears’ slow death was inevitable.

The following year Eddie Lampert put two failing retailers together and promptly made a bad situation even worse. While Sears and Kmart both suffered from challenges driving revenue, Lampert focused on cutting costs. As leading brands realized that retail was moving to an era of greater customer experience and shopping integration, Lampert set up merchandise categories as warring factions. Next came the idea of starving the stores further to focus on making Sears more digitally savvy. Then he became enamored with an emphasis on making Sears “member-driven” by launching “Shop Your Way,” a frequency shopping scheme that only served to lower margins without restoring necessary sales growth.

After witnessing nearly a decade of flailing, in 2013 I publicly declared Sears “the world’s slowest liquidation sale” and suggested that they were a dead brand walking.

I have to admit that Sears has hung in there longer than I would have thought. The degree to which Lampert has been able to extract value from Sears assets has been surprising and remarkable. But he is rapidly running out of rabbits to pull out of his hat.

First, and most importantly, Sears has never laid out any realistic strategy to reverse a nearly perfect string of comp store declines for both the Sears and Kmart brands extending back to 2004. Sears cannot possibly cut enough costs to restore positive operating cash flow without growing top-line sales significantly.

Second, most store closings only make things worse. Contrary to popular belief, stores are needed to drive online sales, and vice versa. Sears’ fundamental problem is not too many stores, it is that is has become a brand that is no longer relevant enough for the assets and operating scale it has in place.

Third, with massive operating losses assured for the foreseeable future, Sears must raise a lot of cash to stay afloat. And it has already sold almost all the good stuff.

Yes, the presumably imminent sale of the Kenmore and DieHard brands may fetch in excess of a billion dollars. Yes, there is some real estate left to unload. Yes, the Home Services and Auto Centers retain some meaningful value. But don’t let the financial engineering strategies gloss over the fundamental point. There is no viable operating strategy to restore Sears to a profitable core of any material size. And unless the company can generate cash from operations before running out of assets to fund its staggering losses, it is not, in any practical sense, a going concern.

The company has been liquidating for many years now. It’s just that some of us are finally starting to notice.

 

This post originally appeared on Forbes where I recently became a contributor. You can check out more of my writing by going here.

Shut up and play the hits

Maybe you’ve been to the famous comedian’s show where by far the biggest laughs come from the bits you’ve already seen him do on Fallon. And Kimmel. And YouTube. And his five year old Netflix special.

Maybe you’ve excitedly gone to hear that marketing guru at a big industry conference and grown weary and uninterested when she begins by talking about her just released book, you know, the one you haven’t read. But you instantly light up again when she starts to riff on the ideas from a decade old tome that formed the basis of her TED talk that you’ve watched a half dozen times.

Maybe you’ve attended a concert by an iconic rock band and became impatient with the lead singer’s extended stage patter. And then as soon as they start to play the new stuff–or maybe some deep track from a classic album you’ve always skipped past–you know that’s your signal to head to the rest room or go grab a beer.

For any kind of artist–and we’re all artists now–it’s a whole lot easier to go for the well-tested laugh line, crank up the guaranteed crowd pleaser or simply default to the thing that made you popular (or at least accepted) in the first place. As it turns out, most of us like safety and there is safety in the familiar.

Organizations and brands aren’t a whole lot different. Most non-profits turn again and again to golf tournaments and galas to raise money. In the CPG  world, the core strategy is to churn out seemingly endless iterations of best sellers. And just about every retailer goes back to the well over and over again with minor tweaks to long-standing merchandising and marketing practices.

Yet the evidence is clear. Eventually we grow tired of the greatest hits. What worked well for so long, no longer does. And with more and more art and content and ideas and disruption being produced literally by the second–accessible to nearly everybody at any time, anywhere–what once seemed remarkable is anything but.

Is there an audience who only wants regurgitated versions of what you or your organization has always done, who can’t possibly accept new material, who has no interest in being challenged? Perhaps.

Is that the audience that is going to get you to where you need to be?

 

Pema Nest

 

Retail’s big reset

It’s been happening for a few years now, but the pace is accelerating.

Retailers waking up to the reality of a slow or no growth world.

Retailers beginning to understand that if you don’t garner share of attention, you have little or no shot at share of wallet.

Retailers starting to comprehend that it’s not about the silos of e-commerce, catalogs, social, mobile and physical stores. It’s about one brand, many channels.

Retailers seeing that it’s not only a digital first world, increasingly it’s a mobile first world.

Retailers coming to terms with having too many stores, and being confronted with the cold hard facts that the ones that should remain are often too large and, more importantly, too boring.

Retailers recognizing that continuing to offer up average products for average people is a recipe for either long-term mediocrity or inevitable bankruptcy.

Retailers realizing that most of their e-commerce growth is now coming from channel shift and that much of their “omni-channel” investments are proving unprofitable.

When historically strong brands like Nordstrom and Neiman Marcus start taking a big whack at their corporate staffs and pulling back on capital investments, it’s hard to argue that this is just about low oil prices and weak foreign tourist traffic.

The big reset is upon us.

Some get it. But too many clearly don’t.

Change is happening faster and faster. Disruption is now just part of the ecosystem.

If you believe, as I do, that we are in for an extended period of muted consumer spending, that we are way over-stored in most major markets and that the power has shifted irretrievably to the consumer, then business as usual–and relentless, but vague promises to become “omni-channel”–will not cut it.

The discipline of the market will be harsh. Good enough no longer is.

If you aren’t worried, chances are you should be.

And if you aren’t in a hurry, you might want to pick up the pace.

 

 

Sears: The World’s Slowest Liquidation Sale (Redux)

Today Sears Holdings reported comparable store sales decreases of 10.9% and its twelfth straight quarterly operating loss. And when we are reminded that despite a decade of Eddie Lampert’s leadership there is still no articulated–much less viable–strategy to turn the retailer around, another cash raising tactic is highlighted to distract from the brutal reality of the approaching cliff.

Long time readers of my blog know that I’ve taken Sears leadership to task multiple times over the past several years. And I will readily admit that I am guilty of piling on. But should you be desperate for entertainment, here are a few of my diatribes:

The original: Sears: The World’s Slowest Liquidation Sale

The deliberately provocative: 5 reasons why Sears should liquidate ASAP

And my increasingly prescient: Sears: It’s even worse than you think.

By now, it’s hard to imagine that anyone buys the notion that the growing percentage of Sears Shop Your Way customers has anything to do with the retailer becoming more customer relevant–much less profitable. By now, I would hope it’s obvious that Sears cannot possibly cost cut its way to prosperity. By now, everyone should see that without unprofitable discounts, Sears is unable to even maintain market share.

Most critically, Sears is quickly falling–or has fallen–below a critical mass on a number of dimensions:

  • Number of stores to remain a viable national omnichannel retailer
  • Production volume and outlet distribution for its key proprietary brands (Kenmore, Craftsman, DieHard)
  • Selling space and differentiated product offering needed in most categories to remain competitive.

To maximize the prices he can fetch through an orderly liquidation, I suppose Mr. Lampert has to maintain the illusion that Sears can remain a going-concern national retailer. Let’s just not forget, that it is only an illusion. And he had better hurry.

Dead brand walking.