What if retail traffic declines last forever?

The results keep pouring in and they don’t bode well for brick & mortar retail. Across just about every sector and virtually every time period, traffic to physical stores continues to decline.

Of course, for the most part, we aren’t buying less, we are shopping differently. The obvious dominant trend is the explosion of e-commerce, and the one player accounting for the most growth is Amazon. Yet the real news for everyone else is how shoppers are diversifying the channels in which they research purchases and ultimately transact. This so-called “omni-channel” world is wreaking havoc with traditional retailers’ underlying economics and, like most things, the future will not be evenly distributed.

The vast majority of retailers have now likely entered a period where comparable store traffic will never increase again for any sustained period of time.

That’s profound. And more than a bit scary.

Drops in store traffic almost always dictate sales declines. Given that physical stores have relatively high fixed costs (rent, inventory, staffing, etc.) a material drop in revenue deleverages operating costs and profits fall disproportionately. This long-term (and increasingly widespread) trend is causing a great deleveraging across many retail segments and is the primary reason so many stores are being closed. It’s also causing brands to rethink the size and operating nature of the stores that remain or they plan to open. These shifts will prove seismic.

While there is a belief that e-commerce’s economics are superior to brick & mortar stores, that frequently is not the case, primarily owing to challenging supply chain costs, high product returns and compressed margins. As traditional retailers invest heavily in building their digital operations–and creating the much vaunted seamlessly integrated shopping experience–many are merely spending a lot of money to move sales from one channel to the other, often at lower profitability. Even brands such as Nordstrom, Neiman Marcus and, to a lesser degree, Macy’s, that are often touted as omni-channel pioneers and have industry leading online penetration, have seen profit growth stall despite massive investments.

Roughly 90% of all retail is still done in physical stores. Yet the growth of e-commerce will continue unabated and the resulting drop in store traffic is an undeniable and unrelenting force. With rare exception, there is little any retailer can do to stem this tide. One key focus must therefore be on right-sizing store counts and the remaining stores’ footprints and operating costs. But the far more important strategy is to create a remarkable customer experience across all channels that reflects how consumers shop today and the intersectionality of digital and physical channels. Ultimately the key is to maximize customer growth, loyalty and profitability irrespective of where the customer decides to transact.

The pain of store traffic declines is inevitable.

The degree of suffering from it remains optional.

 

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

Does e-commerce suck?

Well it certainly isn’t bad for consumers. In fact, it’s been a bonanza.

The advent and enormous growth of e-commerce has dramatically expanded the availability of products, making nearly anything in the world readily accessible, 24/7. Product and pricing information that was previously scarce and unreliable is now easily obtainable. Prices are down, in many cases, dramatically. Digital tools and technologies have ushered in a new era of innovation making shopping far more convenient, easy and personalized.

For retail brands and investors the picture is much less clear and increasingly bleak. The fact is e-commerce is mostly unprofitable–and that’s not about to change anytime soon.

Amazon, which is both far bigger than any other retailer’s web business and growing faster than the overall channel, has amassed huge cumulative losses. The high cost of direct-to-consumer fulfillment and so-called omni-channel integration has made virtually every established retailer’s e-commerce business a major cash drain. And more and more, it’s becoming clear that most of the “disruptive” venture capital funded pure-plays are ticking time bombs. Quite a few major write-downs have already occurred (e.g. Trunk Club, Nasty Gal and just about every flash-sales business) and more are surely on the way (I’m looking at you Jet.com and Dollar Shave Club).

Investors have been throwing money at business models with no chance of ever making money for years. Analysts and pundits regularly excoriate traditional brands that are slow to “invest” tens of millions of dollars in all things digital and omni-channel while spewing nonsense about physical stores going away. Much of this is incredibly misguided.

It’s time for everyone to be more clearheaded and, dare I say, responsible.

Industry analysts and the retail press need to stop with the breathless pronouncements about the demise of physical stores. They need to back off the notion that retailers can cost cut their way to prosperity. They also need to quit labeling disruptive businesses as “successful” merely based upon revenues and rapid growth and take the time to really understand the economics of e-commerce and omni-channel (hint: it’s mostly about supply chain and customer acquisition costs).

More established retailers need to stop chasing all things omni-channel and prioritize investments based upon consumer relevance, long-term competitive advantage and ROI. They also need to realize that if they feel the urge to close a lot of stores or drastically cut expenses they are probably working on the wrong problem.

Venture capital investors need to start caring more about building a business based upon fundamentals, not just pricing everyone else out of the market and/or hoping that some idiot big corporation will come along and write a huge check. Also, have we forgotten that selling at a loss and making it up on volume has never been a viable strategy?

Of course, by far the single biggest thing that would restore an element of sanity to the overall market would be if Amazon were to decide to not treat most of their e-commerce business as a loss leader. Sadly, that doesn’t seem likely to happen anytime soon.

So if you are a consumer, enjoy the ride and the subsidies.

If you are retailer, yeah, that definitely sucks.

 

Stop blaming Amazon for department store woes

Given Amazon’s staggering growth and willingness to lose money to grab market share it’s easy to blame them for everything that is ailing “traditional” retail overall–and the  department store sector in particular.

In fact, with announcements last week from Macy’s to Kohl’s and Sears to JC Penney that could only charitably be called “disappointing” many folks that get paid to understand this stuff reflexively jumped on the “it’s all Amazon’s fault” bandwagon. Too bad they are mostly wrong.

The fact is the department store sector has been losing consumer relevance and share for a long, long time–and certainly well before Amazon had even a detectable amount of competing product in core department store categories.

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The fact is it’s just as logical to blame off-price and warehouse club retailer growth–which is almost entirely done in physical locations, by the way–for department stores’ problems.

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The fact is that, despite other challenges along the way, Nordstrom, Saks and Neiman Marcus have maintained share by transitioning a huge amount of their brick & mortar business to their online channels and have closed only a handful of stores in the last few years. Nordstrom and Neiman Marcus now both derive some 25% of their total sales from e-commerce.

Don’t get me wrong, I’m not saying that Amazon isn’t stealing business from the major department store players. Clearly they are. And as Amazon continues to grow its apparel business they will grab more and more share.

But the underlying reason for department stores decades long struggle is the sector’s consistent inability to transform their customer experience, product assortments, marketing strategies and real estate to meet consumers’ evolving needs.

More recently, those brands that have been slow to embrace digital first retail are scrambling to play catch up. Those that still haven’t broken down the silos that create barriers to a frictionless shopping experience will continue to hemorrhage customers and cash.

Most importantly those that think they can out Amazon Amazon are engaged in a race to the bottom. And as Seth reminds us, the problem with a race to the bottom is that you might win.

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The store closing panacea

There has been a strong and growing narrative that the single smartest thing a struggling retailer can do is to close stores and, in some cases, a lot of them. I first touched on this nearly three years ago in my post “Shrinking to prosperity: The store closing delusion.”

There is no question that, in aggregate, the United States has too much retail space. There is no question that, in concept, the growth of e-commerce can allow an omni-channel retailer to serve some trade areas more profitably without a store and some trade areas with a smaller box. The key is to understand “some” and that starts with understanding why a given brand is under-performing in the first place. The other key is to understand the role that brick & mortar locations play in driving e-commerce–and vice versa.

In most cases, as recent events are bearing out more and more, store closings make an already irrelevant retailer less relevant. And frequently much less profitable as well.

Nearly 90% of traditional retail is still done in physical stores. In five years it will still be about 85%. The math is not that complicated.

Make it harder to get to a store OR make returns in a store OR order online and pick up in a store OR go to a store to research potential purchases OR learn about the brand, etc. and a retailer is almost certain to lose way more business (and margin dollars) to a competitor’s physical store in the vacated trade area than the brand “rationalizing” its store count will ever be able to make up through its website. This is why JC Penney, Home Depot and Lowes should write Eddie Lampert thank you notes pretty much every day.

Moreover, the symbiotic nature of digital and physical channels should not be ignored, yet often is. Several retailers–Sears is perhaps the best example–made the assumption that by investing in digital at the expense of physical stores they could more profitability serve their customer base over the long-term. As it turns out (and as more retailers are learning), e-commerce is often less profitable at the margin than brick & mortar operations and that when you close stores you actually make it more difficult for your e-commerce business to thrive. Oops.

Any retailer in trouble should absolutely analyze whether closing and/or “right-sizing” stores will be accretive to cash-flow. But that analysis MUST include the impact on long-term competitiveness and digital channel sales in the affected store’s trade area. Thinking you are helping when in fact you are merely initiating a downward spiral is a pretty big mistake to make.

Any analyst pushing for store closings and footprint down-sizing should be mindful that it is almost never the case that a struggling retailer’s ills are because they have too many stores or that the stores they have are fundamentally too large. Rather, it is because their brand relevance is not big enough for the channels, both physical and digital, that they have. Be careful what you wish for.

Show me a retail brand that is remarkable and relevant enough to command the share of attention that drives share of market and I’m virtually certain their executives are not spending a second on down-sizing. In fact, most are opening physical stores (e.g Nordstrom, Warby Parker, Amazon, TJX) and, in many cases, a bunch of them.

Show me a retail brand that is consumed with store closings and expense reduction and there is a pretty good chance they are a dead brand walking.

 

Thanks to those who have encouraged me along my path as I took a six month break from writing this blog. During my sabbatical I started a new blog on waking up to a life of love, purpose and passion at any age, which can be found at http://www.IGotHereAsFastAsICould.blog.

Pure play e-commerce’s fantastic (and unsustainable) consumer wealth transfer

“Retail disruption” has been a popular buzz phrase for several years now. In fact, most of the retail brands that have received out-sized mentions in the business press–and commanded the adoring attention of industry conference attendees–for the past 5 years or so are somehow or other leveraging digital innovation to fundamentally re-work the consumer experience, gobble up market share and attract truckloads of venture capital.

Amidst this transformative reshaping of the retail landscape three things are clear:

  • Consumers have benefitted substantially from the introduction of new business models through more convenience, greater product access and lower prices.
  • This profound shift in the consumer value equation has put enormous pressure on industry incumbents that lack either the cost structure or agility to respond effectively.
  • A dramatic rationalization is gaining momentum as traditional players are being forced out of business or pressured to close and or shrink the foot-print of their stores, make huge investments in “omni-channel” capabilities and lower costs across the board.

Unfortunately what is lost in tales of this evolution is that most of the “disruptive” pure-play e-commerce brands have completely unsustainable business models and mostly what is happening is that venture capitalists (and other investors) are funding a transfer of wealth to the consuming public. So, on behalf of my fellow consumers, thanks venture capitalists.

Alas, this is unlikely to last much longer.

While many people think digital retail is some sort of license to print money, it’s becoming clear that e-commerce is virtually profit proof in categories with low transaction values, owing primarily to the substantial supply chains costs (particularly when brands offer free shipping and returns). Moreover, while it can be relatively easy and cheap to build an initial following online through public relations,  social media and other forms of peer-to-peer marketing, scaling an e-commerce only brand turns out to be extremely costly. Many of the buzziest pure-plays are now investing heavily in expensive branding efforts (as well as opening their own stores) in the hopes that size engenders profitability. Accordingly, initial expectations of break-evens are now being pushed out several years.

As the ROI of these efforts starts to come into sharper relief, my bet is many funding sources will lose their patience.

I’ve been an on-the-record skeptic for several years now, going back to when I called into question the sustainability of the flash-sales market well before the meltdown. More recently, I’ve been pointing out E-commerce’s pesky little profitability problem. So I’m not suprised that recent valuations of several once high flying players have collapsed. And more folks are starting to take notice. Professional smart guy (and noted wise ass) Scott Galloway agrees and has been on the “pure play doesn’t work” train for some time. Expect more to join us.

To be clear, a few digital-first brands will likely emerge as sustainable value creators. Brands with high enough average order values to overcome high delivery costs are better positioned (though Net-a-porter’s inability to make money after all these years underscores how difficult this is). Those that deftly merge online and offline experiences–think Warby Parker and Bonobos–also improve the odds (though, side-note, don’t be misled by the high productivity of their initial locations and comparisons to other brands’ productivity stats. We need to understand the four-wall profitability of these new stores and make comparisons to traditional retailers averages in like locations, not overall chain averages).

Mostly, however, we need to be careful to declare a brand successful without defining what we mean by success. If we define success as having grown revenues quickly and having been able to raise gobs of capital from investors to enable subsidizing consumers on a massive scale, than clearly Amazon and dozens of others are wildly successful. If we define success as creating enormous pricing pressure and raising the cost of doing business so as to push traditional players into a double-bind than, yes, mission accomplished.

But if we determine success as having demonstrated the ability to deliver a new and better customer experience AND earn a risk appropriate return on capital than I’m not sure any pure-play E-commerce player of any size is yet successful.

I will go on the record as saying far more pure plays will go bust in the next three years (or get sold at valuations well below their most recent funding) than will emerge as truly successful.

Until then, enjoy the low prices and the free shipping, and if you get some time, send the nice folks funding Jet.com and others a sincere and heartfelt “thank you” note.

 

 

 

 

 

I’m going to build a wall and I’m going to get Amazon to pay for it

As I sift through recent retailer earnings reports and reflect on the various (largely excellent) sessions I’ve attended at the inaugural ShopTalk conference in Las Vegas, it’s impossible to ignore the elephant in the room. That elephant is, of course, named Amazon.

Story after story–presenters and panelists alike–are quick to remind us of Amazon’s tremendous growth, the staggeringly large percentage of online revenue they account for and the dampening effect their strategy has on pricing, store traffic and other measures of competitiveness.

Apparently it sucks to be us.

So unless we want to totally ignore this harsh reality, we have a couple of decisions to make.

The first is to decide whether we will accept it and focus instead on the things we can change. From where I sit, I see way too many brands knee-deep in denial and choosing a path that involves a lot of whining. Ugh, so much whining.

The second decision is whether we will try to out-Amazon Amazon. There is plenty of advice on how to counter the Amazon effect. Most of it is terrible.

It’s terrible because it suggests that retailers with higher costs than Amazon can possibly win a price war. It’s terrible because it pre-supposes that merely offering free shipping or “buy online pick-up in store” is enough to counter Amazon’s dominance in product assortment and delivery convenience. It’s terrible because it’s based on a hope that Amazon will follow the same profit and investment calculations that long-established retailers do. It’s terrible because even if some of these efforts manage to gain some traction it presumes Amazon won’t respond aggressively or find some other way to grab market share in their areas of focus.

So, in virtually all cases, the decision to take on Amazon directly is a decision to lose. It’s a decision to invest a lot of time, resources and energy in the vain hope that it will work for you and hurt them. It’s a decision to set a pile of money on fire.

The only decision then is to double down on (or lean into) those things that make your brand more relevant, more remarkable, more sustainable and more profitable.

For retailers that still garner most of their sales from their physical stores that means appreciating and nurturing the unique advantages of brick & mortar locations: personal service, product presentation, merchandise curation, social experiences, instant gratification and the like. It’s about complementing the in-store experience with a well integrated online offering. It’s about understanding how digital (and, increasingly, mobile in particular) is the new front-door for your brand and working to make that experience as compelling and customer-centric as possible.

It is possible that your business may shrink in the process? It is. Is it possible that you will get a lot of heat on why you aren’t taking on Amazon more directly? Of course. It’s also possible you will be a hell of a lot more profitable than the path you are currently on. You also stand a far better chance of being in a business a few years from now.

You aren’t going to build a wall and get Amazon to pay for it.

 

 

 

 

Growing share is retail’s new black

Nearly two years ago I wrote about what I saw as Retail’s zero-sum game.

My hypothesis was that, for the foreseeable future, top-line growth across most retail sectors was likely to be tepid at best. I also hinted at an upcoming slowdown in the once resilient luxury segment. Looks like I was being optimistic.

Today’s dismal earnings announcement from Macy’s featured a quarterly sales decline of more than 7%. It’s yet another in a series of lackluster–and often frightening–reports from established retailers across just about every segment of the market. It certainly won’t be the last. Fasten your seat belts, it’s going to be a bumpy ride.

The reality is that there are profound shifts in consumer behavior and the underlying economics of omni-channel retail that go way beyond Amazon’s impact or what’s rapidly becoming a digital-first retail world.

In case you haven’t noticed your customers now have the upper hand. More and more, consumers are valuing experiences over products, renting over buying, trading down instead of trading up, holding out for the best price and on and on. None of this bodes well for an expanding pie or a rising tide that raises all ships.

Your job then–plain and simple–is to gain share; to get more out of the same sized (or even shrinking) pie. And thus there are two things you need to be really, really good at: acquiring (and then retaining) customers at a disproportionate rate from your competitors and growing share of wallet among those existing customers that have the best potential for long-term profitability.

You can go on and on about bold omni-channel plans, your seamless shopping experience and your really cool Instagram strategy. But if you can’t articulate how you are going to be remarkable and relevant for your best customers and prospects at the point of acquisition and customer growth chances are you are focused on the wrong things.

And if you aren’t busting your hump to get those ideas into action, you had better step on the gas.

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