Being Remarkable · e-commerce · Strategy

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.

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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.

Leadership · Omni-channel · Retail · Strategy

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.

Being Remarkable · Strategy

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

 

Being Remarkable · Customer Growth Strategy · Customer-centric · Omni-channel · Retail · Share of attention · Strategy · Uncategorized

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.

 

 

Retail · Strategy

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.

Being Remarkable · Omni-channel · Retail · Strategy · Winning on Experience

Everywhere. And nowhere.

You’ve probably read the admonishments. You must be everywhere your customer is: online, bricks & mortar, mobile, Facebook, Twitter, Pinterest and on and on.

You’re told the future is now and that future is all about allowing the consumer to shop anytime, anywhere, anyway.

You’re urged to create a seamless experience across all channels and touch-points.

And much of this is valid. If you don’t meet your customer where she is (and is headed), you’re very likely to be yesterday’s news (RIP Radio Shack). More and more, the consumer IS everywhere and channel hop is becoming the norm.

But for those who think that all they need is a little omni-channel pixie dust and a side order of frictionless commerce, think again.

In the rush to embrace all things digital, integrated and omni-channel, far too many brands have lost sight of the need to be relevant and remarkable. Most of the capabilities that industry white papers wax eloquent about–and consultants relentlessly peddle–are merely the new table-stakes. And, quite frankly, your mileage will vary. Perhaps a lot.

Sears has made huge investments to create powerful digital and integrated commerce capabilities. In fact, they are regularly recognized for their leadership position in many aspects of what industry pundits describe as the holy grail of everywhere commerce. So how’s that working out? Oh yeah, they forgot to sell stuff people want in the way people want it. This is certain to end badly.

On the other hand, Amazon has managed to become a retail industry behemoth, crushing competitors in its wake and continuing to gobble up market share, all without physical stores and, in many cases, putting forth a pretty lackluster mobile and social presence. Their lack of “omni” doesn’t seem to be slowing them down too much.

As I’ve pointed out before, the future of omni-channel will not be even distributed. For those brands that rush eagerly into the “everywhere retail” world without a clear view of the customers they wish to serve and how they wish to serve them in a relevant and remarkable way, don’t be surprised when you don’t get the ROI you hoped for.

It’s quite possible to be everywhere and nowhere at the same time.

Being Remarkable · Strategy

Where were you when the middle collapsed?

In case you haven’t noticed, most markets aren’t growing much–if they are growing at all. In many cases your top-line only expands through stealing market share.

In case you haven’t noticed, it’s getting harder to garner even a modicum of attention. In a world where the amount of noise grows louder by the day and the consumer is deluged with information–and often overwhelmed by choice–if you haven’t amplified something remarkable you’re probably on a fast trip to the brand graveyard.

In case you haven’t noticed, average doesn’t work anymore. Good enough just isn’t.

More and more, success is found at either end of a continuum. At one end of the spectrum, you can go big, winning on scale, assortment, price, convenience and efficiency. At the other end, you can get small, intensely focusing on a comparatively narrow group of consumers and delivering a set of powerfully relevant and highly valued benefits.

More and more, a fundamental choice is emerging. Hazy value propositions, sort of good prices and one-size fits all strategies are losing steam. Trying to carve out a sustainable strategy somewhere along the continuum is becoming untenable. You need to pick a lane, to push toward one of the edges.

Eventually you’re going to get asked: where were you when the middle collapsed?

bridges_down_01

Customer Growth Strategy · Digital · Omni-channel · Retail · Strategy

Wall Street’s simple, surefire–and mostly wrong–strategy to fix retail

Show me a struggling retailer and I’ll tell you what many Wall Street analysts will say is that company’s quickest path to new-found prosperity. Close stores. Or better yet, close a whole bunch of stores.

This was supremely evident with the frenzy that erupted on Twitter prior to JC Penney’s Analyst Day last week. Here’s a paraphrased exchange I had with one “famous”–mostly for posting photos of crappy Sears stores–Wall St. type.  Note: this is highly edited and paraphrased for brevity (and perhaps levity).

HIM: Penney’s is about to announce a bunch of store closings.

ME: I doubt it.

HIM: But they must close stores, lots and lots of stores!

ME: No they don’t. (I proceed to tell him why).

HIM: You don’t understand. They must close stores, lots and lots of stores! They need to have the same number of stores as Macy’s!

ME: That’s dumb.

HIM: You’re dumb.

The Analyst Day presentation concludes. Penney’s announces no store closings.

ME: I don’t want to say ‘I told you so’ but…

HIM: Hey, want to see my photos of really crappy Sears stores?

Now don’t get me wrong. Overall, the retail industry is over-stored. And the growth of e-commerce is causing a fundamental re-think of the number of stores a retailer requires, the size (and configuration) of these stores and how these stores need to operate. A contraction and re-working of gross retail space is inevitable.

But the knee-jerk reaction in favor of wholesale store closings is focused on the wrong problem. Struggling chains like Radio Shack and Sears aren’t in dire trouble because they have too much retail space. They are struggling because their overall value proposition isn’t working. If Radio Shack and Sears had a business model that was fundamentally sound, their needed store count overtime wouldn’t necessarily be dramatically different from what they have today. Show me a nationally branded, omni-channel retailer that is closing a lot of stores and I’ll show you one that is likely on the way to extinction.

What many on Wall Street often don’t get is that the cost of real estate for many of these established retailers is really quite low, making it easy for even chronically low productivity stores to be cash positive. And while Wall Street likes to cite the growth in e-commerce as the reason why store counts need to shrink dramatically, the reality is that for any decently integrated retailer, stores help drive the online business–and vice versa. Total customer and cross-channel economics need to be taken into account when doing a store closing analysis. When you do this analysis, along with the cash flow calculations, it turns out that closing a lot of store often makes things worse.

As for JC Penney, they are certainly far from out of the woods. They have a ton of work to do to refine and execute a merchandising and customer experience strategy that can regain share in an intensely competitive sector of the market. They are rightly focused on honing a new brand positioning and strengthening their omni-channel capabilities. My educated guess–having done this sort of analysis for other department store retailers–is that with conservative sales growth assumptions, only around 5% of Penney’s stores would be sensible candidates for near-term closure. Penney’s management is likely watching this list closely as they see how new strategies take root and they better understand the omni-channel effect.

For me, if Penney’s were to announce a large number of stores closings in the next year–say 75 or more–it wouldn’t be evidence that they are smart managers, it would be a sign that their overall strategy isn’t working.

 

 

Being Remarkable · Brand Marketing · Strategy

Escape velocity

In physics, an object’s escape velocity is the speed needed to break free of a planet or moon’s gravity and leave it without the need for further propulsion.

In business, understanding escape velocity is critical as well. There is a point when a brand’s positioning starts to gel, when enough of the early mistakes are in the past and when the underlying economics become clear. There is that critical moment when the obsessive core starts to coalesce and remarkability begins to work powerfully in a brand’s favor. Formerly insurmountable challenges start to fade. Customers (and capital) become abundant.

While randomness and serendipity pervade virtually all situations, it’s not terribly difficult to glean what has to be true for any brand to achieve escape velocity. Still many companies fail to do it.

For some, they are too busy putting out the daily fires to take the time to think it through. For others, perhaps there’s a subconscious fear that the analysis will reveal the futility of their current efforts.

Yet finding the time and the courage are crucial. The gravitational forces of the marketplace are powerful. And only the competition wins when a brand crashes back down to earth.

 

Branding · Retail · Strategy

Sears: It’s even worse than you think

The only thing worse than witnessing someone fail, is hearing the denial that pervades their explanations of why things are going to be so much better in the future.

With Sears Holding’s most recent earnings announcement we get yet another quarter of abysmal results and yet another  round of “trust me honey, I can change” assertions from management. Don’t buy it.

Sears was struggling mightily with relevance and profitability when I was still in senior management there more than a decade ago. In the intervening years–despite a merger with Kmart and numerous revitalization experiments–the company has moved from mediocre to bad to just plain sad. Unfortunately, we must now conclude that Sears has zero chance of surviving in anything resembling its current state and size. Given this tragic reality, I recently called for the company to stop the insanity and liquidate ASAP.

While my post was deliberately provocative–and more than a bit hyperbolic–it illustrated two fundamental and important points. The first, that Sears cannot and will not be turned around and therefore the highest value for shareholders is through an orderly liquidation. The second, more urgently, is that the underlying assets continue to decline in value and the sooner their break-up value can be realized, the better.

Last week’s earnings announcement only amplifies my argument–and suggests that things are even worse than most people think. Here are a few points to ponder.

  • Traffic continues to wane at malls and department stores as shoppers increasingly favor online shopping. This trend is sure to continue in the aggregate and bodes poorly for the underlying value of Sears real estate.
  • While they are still far from turned around, JC Penney is on a strong trajectory and beginning to win back customers lost during the Ron Johnson era. A resurgent Penney’s is a growing problem for Sears efforts to improve its soft-lines business.
  • Sears’ much vaunted “Shop Your Way” is clearly making things worse. Sears has flogged this very mediocre rewards program as a transformative strategy. While it’s theoretically helpful in building a customer data asset and enhanced personalization capabilities, all it’s done in practice is give a growing majority of customers an extra layer of discount, without moving the dial on retention or share of wallet. The more people who join, the worse margins get. With its cash balances dwindling, Sears simply cannot afford to keep buying sales.
  • The value of Sears major private brand assets (Kenmore, Craftsman, DieHard) is intrinsically linked to their channel performance, which continues to deteriorate. These brands are also much stronger with an older customer. Here too, Sears does not have time on its side.
  • Lack of investment and a shrinking store base is making things worse. Sears abject failure to invest in their stores to retain any measure of competitiveness has accelerated Sears decline. While some store closings and realignment of space is necessary for virtually any retailer, Sears aggressive down-sizing points to a value proposition problem, not a fundamental real estate issue. Dramatic further shrinking risks de-leveraging the expense structure, losing the support of key vendors and ultimately makes it harder to be top-of-mind with consumers.
  • They’ve yet to find a buyer for Sears Canada. Why? Potential investors see it as a real estate play, not as a going-concern. Bottom line, Sears is very unlikely to get close to their asking price.

Dead brand walking.

 

 

Full disclosure: I have a long, albeit modest, position in JC Penney.