Death in the middle · Embrace the blur · Retail

My 13 ‘provocative’ retail predictions for 2018: So how’d I do?

‘Tis the season for annual retail predictions and, fear not dear reader, I will be sharing mine early in the New Year. Yet amidst all the prognostication nary a modern day Nostradamus gets fact checked on how well-honed their gift of prophecy actually turns out to be. I don’t want to be that guy.

So here’s a mostly objective–and decidedly self-indulgent–assessment of my Baker’s Dozen Of Provocative Retail Predictions For 2018.

  1. Physical retail isn’t dead. Boring retail is. This phrase later turned into a Forbes piece, which became my most popular post of the year. And the phrase itself started to catch on, sometimes with attribution, sometimes not (thanks Nike!). Regardless, as 2018 unfolded it seemed increasingly obvious that the retail apocalypse narrative was bogus. Sales in brick & mortar stores are up solidly this year, thousands of stores have opened, digitally-native brands like Warby Parker and Casper are accelerating the pace of their physical presence and Target, Walmart, Best Buy and many other largely brick & mortar-centric retailers have delivered strong results.
  2. Consolidation accelerates. Precise comparisons on mergers & acquisition activity and store closings are not yet available, but by any measure the pace of merger & acquisition activity was brisk. Macy’s, Target, Amazon, Nordstrom, Albertson’s, Kroger and Walmart were among the large players that scooped up one or more earlier stage, largely tech-driven companies. As growth stalls among mature brands, we’re seeing deals like Kors acquisition of Versace take center stage. The vast over-storing of US retail is also moving closer to equilibrium as thousands of surplus real estate shutters or gets repurposed.
  3. Honey, I shrunk the store. As predicted, 2018 brought a lot more activity here. Target, Ikea and Sam’s Club, among others, got more serious about opening scaled down versions of their big stores to squeeze into urban centers. Nordstrom announced that it would expand its totally re-imagined, service-centric “micro-concept” called Local. Less interesting–and potentially more perilous–were efforts on the part of over-spaced (i.e. under-customer relevant) retailers to sub-lease parts of their stores in a vain hope to shrink to prosperity.
  4. The difference between buying and shopping takes center stage. In my view, this trend becomes more obvious by the day, particularly as e-commerce keeps gaining share of “buying” (i.e. a more mission-focused customer journey where price, speed and convenience are especially valued), yet generally struggles with “shopping” (i.e. more discovery-based and tactile journeys where a more immersive experience is desired and face-to-face sales help may be important). Strategically this may have moved to center stage for more retailers (see Amazon’s moves into physical below), but there still is a general lack of understanding and appreciation here.
  5. Amazon doubles down on brick & mortar. Amazon hasn’t gone quite as far as I expected here (yet), but in addition to making some big changes within Whole Foods (their biggest physical store bet thus far) they introduced the Amazon 4 Star concept, expanded Amazon Books and Amazon GO (while hinting at thousands more to come) and continued to experiment with other expressions of Amazon in the physical realm, like their partnership with Kohl’s.
  6. Private brands and monobrands shine. The biggest acceleration came from Amazon, as they are on their way to a stable of more than 100 private brands. Traditional retailers continued to accelerate their own brands and/or largely exclusive offerings as an antidote to Amazon. Digitally-native vertical brands continued to shine, announcing plans to open more than 800 new stores. And Nike, among other manufacturers making a big push into direct-to-consumer, debuted their amazing new NYC flagship and Nike Live.
  7. Digital and analog learn to dance. Legacy brands (think Walmart, Target, Best Buy) that finally learned to embrace the blur and deliver a more harmonized (my, ahem, superior term for what most call “omnichannel”) experience across channels demonstrated great success. Brands that were already pretty good at it (Nordstrom, Sephora) continued to perform well. The upstart digitally native vertical brands continue to kill it, as they don’t care about channels, they care about the customer and use both digital and analog tools to deliver a remarkable retail experience. It appears finally that brand are starting to accept that digital help physical and vice versa.
  8. The great bifurcation widens. And it’s death in the middle. Well positioned retailers at either end of the price/value spectrum continue to grow sales and open stores. Brands stuck in the boring middle are getting killed. This year hundreds of stores that continue to swim in a seas of sameness have shuttered. Sears filed for bankruptcy. JC Penney finds itself in very serious trouble. It’s time to pick a lane.
  9. Omnichannel is dead. Digital-first, harmonized retail rules. This is an expansion of #7 above. The smart retailers are realizing that it’s not about being everywhere, it’s about showing up in remarkable and relevant ways where it really matters in the customer journey and eliminating the discordant notes and amplifying the ‘wow’. I did make a mistake in anchoring this prediction on being “digital-first”–which I have since corrected in my keynotes and in my forthcoming book. While leveraging digital technology to enhance the customer experience can be hugely important in many cases, it’s clear that not all customer journeys start in a digital channel and that digital is not always better.
  10. Pure plays say “buh-bye.” Name a profitable brand of any size that started online and has yet to open brick & mortar stores. Yeah, there are a few, but there numbers are dwindling rapidly. In fact, brands like Warby Parker that once thought they could scale without physical stores are now opening dozens and seeing most of their growth come from their stores. Brands like Everlane that said they’d never open stores are now doing so. Brands like Wayfair are struggling to figure out how to get returns and customer acquisition costs down to remotely profitable levels without a physical presence. And don’t even get me started on Blue Apron. The era of pure-play is, for all intents and purposes, over.
  11. The returns problem is ready for its close up. Arguably, this area got even more attention than predicted. Earlier this year I revisited the issue I first referred to as the industry’s “ticking time bomb” in 2017. Multiple media outlets featured stories on how the growth of e-commerce is leading to very unfortunate outcomes within many online dominant retailers, including Amazon. In response, we are seeing more venture capital funded companies like Good Returns and ReturnRunners getting funded to scale their solutions to retailers.
  12. “Cool” technology underwhelmsDid you buy much on Alexa this year, use a “magic mirror” or experience a store through VR? Yeah, I didn’t think so. Voice commerce will be a big thing some day. Artificial intelligence and machine learning will go from basic applications and ways to eliminate costs to truly delivering a more remarkable and personalized experience. And stores will become far more immersive through the application of advanced technology. Just not this year.
  13. The search for scarcity and the quest for remarkable ramps up. Consumers have access to just about anything they want from anywhere in the world just about anytime they want it. What was scarce a decade ago–price comparisons, product reviews, product access, speedy and affordable home delivery–is now virtually ubiquitous. Yet boring and mediocre retail still abounds. What’s scarce are truly customer relevant and remarkable experiences. You used to be able to get away with being good enough. Today, not so much. The retailers that continue to struggle often find themselves stuck in the middle, trying to cost cut their way to prosperity, hoping to win a race to the bottom. Good luck with that.

2018 clearly brought more and different levels of disruption. 2019 is likely to bring more of the same, despite what I suspect will be some moderation in store closings. But that’s a different post.

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.  

A really bad time to be boring · Retail · Store closings

The critical question for struggling retailers: Too much store or not enough brand?

I suspect hardly anyone is surprised when an ailing retailer announces plans to shutter locations en masse. Across the last several years we’ve seen dozens of once mighty chains close hundreds of stores in hopes of staving off a trip to the retail graveyard.

Last week, having already closed some 120 stores in a bid to shrink to prosperity, Macy’s announced that it plans to eventually reduce the size of many of its under-performing stores. These “neighborhood stores” (four of which are currently being tested) will also undergo merchandising and service changes. In a Wall Street Journal article discussing the new strategy I was quoted as saying ““If you’ve got too much space, it means your brand isn’t resonating. It’s not a real estate problem, it’s a brand problem.” And while that quotation was a bit out of context and not meant specific to the viability of Macy’s new strategy, I do think it’s critical for retailers to be sure they are working on the right problem. From my experience, more times than not, a massive retrenchment of brick & mortar space is most often an indication of poor customer relevance, not bad real estate.

Of course, this does not mean retailers should not prune store locations and/or look to resize current (or planned future) locations. Clearly real estate decisions, be they specific location or size of footprint, need to reflect today’s consumer and competitive situation. And we know that the United States is, on average, significantly over-stored. We know that some retailers went a bit wild and crazy with store expansion plans in an era of cheap money. We know that the growth of e-commerce can often cause a radical rethink of physical asset deployment. Some store closings and some optimization of space is inevitable for most retailers.

If a consolidation of a retailer’s real estate portfolio, along with a robust digital strategy, results in a more remarkable customer experience that, in turn, leads to growing customer value then the strategy may well be sound. But this is rarely the case. Usually the shrinking to prosperity strategy is driven by a lack of physical store sales productivity which has been caused by losing market share to competitors with a better value proposition. So–at least in theory–you can improve productivity metrics by reducing the denominator. But that presumes that sales (the numerator) are at least stable. And the track record on that is poor. Show me a list of retailers that have cut their square footage massively in recent years and you’ve pretty much got a list of bankrupt or nearly bankrupt brands.

A lot of times Amazon–or e-commerce in general–is cited as the reason that retailers need a lot less square footage. Unfortunately this argument doesn’t hold up all that well. In turns out there are plenty of “traditional” retailers that have winning value propositions that are doing little if anything to the size of their stores. In fact many are opening stores. This is because their value proposition is unique, highly relevant, remarkable and well-harmonized across channels. I very much doubt Apple, Sephora, Costco, Nike, TJX, Neiman Marcus, Nordstrom, among many others, will be announcing major contractions of their physical space anytime soon because their brands are more than big enough for their real estate.

Of course, the impact of e-commerce and shifting consumer preferences affect different categories quite differently, so there is no one size fits all prescription when it comes to any given retailers situation. Having said that, it always gives me pause when a brand that (allegedly) serves a large audience and derives most of its sales from brick & mortar locations discovers it must shut down a store in an otherwise well performing mall or in a trade area that has oodles of other “national” retailers that are not struggling in the least. Again, this suggests the problem is with the brand, not the location.

For Macy’s in particular, their neighborhood store strategy may well turn out to be value enhancing. Time will tell. But in some ways it is akin to admitting defeat in those trade areas unless other aspects of their overall digital strategy lead to meaningful market share growth.

When retailers get into trouble the easy thing to do is cut costs. Most struggling retailers have the expense optimization hammer and are always looking for the next nail. What’s harder, but ultimately far more important, is to become truly customer-obsessed and to invest behind being more remarkable than the competition. Until that happens, whether we are talking about Sears, JC Penney, Dillard’s, Kohl’s, Macy’s or any other brand that remains largely stuck in the boring middle, shrinking is not going to be the answer.

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.

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. 

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. 

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. 

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.

Customer Growth Strategy · Digital Disruption · Retail

Here’s what investors are missing about the Sears-Amazon partnership

Shares of Sears Holdings spiked last week on news that the beleaguered retailer had expanded its tire partnership with Amazon. Once again, the optimism — or is it outright gullibility? — of some investors astonishes me.

Over four years ago, I wrote (admittedly more than a little bit provocatively) that Sears investors would do far better with a liquidation of the company than with a perpetuation of the charade that there was any hope for a real turnaround. More recently, I opined on the 2017 Amazon-Kenmore deal, as well as the initial Amazon-Sears tire partnership announced in May. My view was that these deals do little, if anything, to stave off the inevitable for Sears. Moreover, I believe they are ultimately of greater value to Amazon.

For what it’s worth, when I wrote (and appeared on CNBC) with my “liquidate ASAP” thesis, Sears’ stock was in the low $40s. When I posted the Kenmore piece, Sears’ shares were down to about $9. My first tire article was written about three months ago when the shares had a bit of an inexplicable run-up, hitting nearly $4. On the day of the announcement SHLD was up 12%, closing at $1.24. Draw your own conclusions, but certainly don’t say that I didn’t warn you.

While on one level I appreciate the audacity of hope displayed by certain eager investors, I believe those who display ebullience in the face of these sort of deals are missing three essential things.

Dead brand walking. The overwhelming issue is that there is no plausible scenario in which Sears remains a viable national retailer. In fact, with Sears having closed hundreds of stores, with many more to follow after the holidays (if not sooner), one could argue it is no longer a real force on the national stage today. The only thing that keeps Sears afloat is Eddie Lampert and ESL’s willingness to fund a seemingly never-ending stream of massive operating losses. The idea that Sears can shrink to prosperity is ridiculous. For all intents and purposes, they are winding down the business. The particular relevance to the Amazon-Sears tire deal is that the points of distribution will continue to contract, perhaps dramatically.

Hardly moves the dial. It’s hard to see material profit contribution from this deal. First, tire installation is tiny in the scheme of Sears’ overall business. This particular offering is solely focused on customers who are willing to buy their tires online and have them shipped to a nearby Sears store so that, a couple of days later, they can have them installed. So to be meaningfully relevant to customers, first the customer has to be willing to wait. Given that a lot of the tire-replacement market is driven by an emergency (i.e., a flat tire) a big chunk of the available market is not addressable. Second, even if waiting isn’t a big deal, there are still likely to be many local competing outlets, many of which are going to be more conveniently located (particularly as Sears continues to shutter locations) and have the tire in stock, ready to install right away. Third, Sears actually stocks a lot of tires, so if you are willing to have your tires installed at Sears, it makes more sense for most people to take a step out of the process and just see if Sears has the tire in stock. In many cases it will. This is a long way of saying that the market opportunity seems quite small. When you further factor in the lower margin given Amazon’s cut, it’s hard to come up with a scenario where this moves the dial in any profound way.

Amazon’s Trojan Horse. Sears is desperate. Amazon is patient, smart and willing to try lots of stuff. Sears has few arrows left in its quiver. Amazon can use this partnership to explore the convergence between digital and physical in a large category, acquire some new customers and continue to probe potential private brand opportunities with DieHard and other Sears brands. Sears need to show Wall Street it still has some life in it. Amazon needs to learn how to get deeper into under-penetrated categories (auto and installed services) to help sustain a robust growth story. For Sears, every little bit seems to count. For Amazon, this is a rounding error even if it turns out to be a disaster. So who’s likely to be getting the better deal?

To be sure, as is true with the potential sale of Kenmore, Sears has very few decent options left. So there is nothing inherently wrong at this point in the company’s decidedly ragged history to executing this particular transaction. But the idea that this materially improves the value of the Sears brand seems just plain silly to me.

See you on the other side of $1.

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.  

Retail · The Amazon Effect · Voice commerce

Sorry, Alexa: Voice shopping is still mostly hype

Voice-activated shopping—and Amazon’s anticipated dominance of the platform via Alexa-enabled devices—has been touted as one of the next big things in retail. In fact, a simple Google search with any combination of the relevant keywords reveals a large number of bold predictions about the revolutionary nature of the technology. Go ahead and give it a try. I’ll wait.

So, given the large number of pundits, publications and consultancies reveling in the future thrill of a world dominated by voice-driven shopping, should we believe the hype? Well, as it turns out, maybe not so much. At least not yet.

In a report released last week by The Information, it appears that only about 2% of Alexa owners have ever used the device for shopping. Even more startling is the finding that of those that had bought via voice, a mere 10% did so again. As you probably know, repeat purchase rates are often a good indication of customer delight and can provide valuable insight into future sales momentum. So, if true, this doesn’t bode well for rapid adoption.

To be fair, a study by Narvar suggests higher adoption rates and considerable customer interest. Amazon has also disputed the numbers in the report, responding that “millions of customers use Alexa to shop.” Of course, when you do the math, given the installed base of Alexa devices, that’s not definitive proof that purchase incidence is a whole lot greater than 2%. Whether the actual data reveals a considerably different picture or Amazon is simply obfuscating a disappointing outlook is anyone’s guess. And just because momentum might be relatively slow right now doesn’t mean the rate won’t pick up considerably as the technology improves and consumers become more familiar. But I’d be cautious. Here’s why.

First, there is an aspect of the technology that is solving a problem I’m guessing relatively few customers have. Shopping on Amazon (and most other sites) via a mobile device, laptop or desktop is pretty easy, fast and well optimized. At the margin, in some instances, Alexa can save a little time and solve an immediate need. But it’s not like it’s a step function in improved convenience.

Second, voice-activated commerce, at least as it’s currently delivered, can involve significant experiential comprises. While I have not seen specific data, my own personal and industry experience suggests that visual cues are central to many purchases, and the ability to see options—and navigate through them—is highly useful for many purchase occasions. In these situations “regular” online shopping is clearly superior.

Third, as Scott Galloway from New York University and L2 humorously illuminated, Alexa does not always present most of the available product options and, shockingly, might have a bit of a bias towards Amazon’s own private brands. While it would take a large study to really understand how prevalent this pattern is, it strikes me that voice-activated shopping can work quite well when you know exactly what you want and aren’t especially open to considering alternatives. In all the other situations (which might well be the vast majority), it’s far from clear it’s meeting consumers’ needs in a highly relevant, compelling and unbiased manner.

Fourth is the trust factor, which extends beyond voice-activated commerce in particular to the general adoption and use of Alexa and similar devices. Some of the things I’ve mentioned already speak to the trust of shoppers getting the experiential outcome they desire. The other aspect is whether some of the suspicions about how these devices invade privacy get adequately addressed over time. Stories like the one about a woman’s conversation being recorded by Alexa and then being sent to a random contact don’t exactly inspire confidence. Whether these concerns are all that profound and whether a significant number of customers remain cautious about using such devices remains to be seen. Certainly the technology will continue to evolve, if only because of Amazon and Google’s massive commitment to their adoption.

As I don’t possess a working crystal ball, I’m reluctant to predict that voice-activated commerce won’t someday be retail’s next big thing. Right now, however, it seems much more of a cool technology still in search of addressing a real customer need at scale.

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.  

e-commerce · Retail

Amazon Prime Day: Don’t fall for the hype

It would be hard to calculate the crazy amount of media and analyst time spent anticipating, covering and then trying to dissect the implications of this year’s Amazon Prime Day event. In fact, each year it seems like the breathless coverage moves closer and closer to the media frenzy that surrounds Black Friday. It’s mostly a complete waste of time.

Here’s the thing: Going into this year’s Prime Day, there were a few outcomes we could easily predict. First, it was going to be a record day. Second, knowing virtually nothing, you could reasonably guess that the year-over-year growth was going to be materially higher than the general trajectory Amazon has been on this year. Why? Well that’s what happened each of the last several years, and that’s what almost always happens when any brand intensifies promotions around a particular event. Third, Amazon was going to distort efforts toward the strategic areas it’s focused on building (i.e., voice-activated commerce, its private brands and generally anything that reinforces why everyone on the planet should be a Prime member). Why? C’mon, you can answer that question for yourself. Fourth, major competitors were going to dial up their efforts to protect marketshare. Why? Because that’s what retailers always do, whether it’s rational or not.

The last major thing we knew going into Prime Day is that, post-event, Amazon was not going to share anything especially useful or specific about its actual category or financial performance.

And, yes, that’s precisely what happened. Apparently my crystal ball remains in good working order.

So here we are looking back at the event, reading, watching or listening to folks like me — and hopefully some real journalists from time to time — trying to make sense of it all, which leaves me inclined to ask three questions. First, did we learn anything substantive that we didn’t already know beforehand? Second, more specifically, does any of the information gleaned from Prime Day help us make a more accurate prediction about what’s next? Third, if you work at a retailer (or supplier), now that are you armed with any incremental and actionable knowledge gained, are you going to do anything different in the future?

Now here’s where I need to briefly make the comparison to Black Friday. Since I’ve worked in retail, which is now more than 25 years, Black Friday has become a bigger and bigger deal, both in terms of the media attention it garners and the time and energy most retailers put against it. And the two things that have become clear over time is that most of what happens on Black Friday is completely predictable in advance and that actual performance on Black Friday is a poor indicator of how the industry will do that overall holiday season and how any given retailer’s results will turn out. In other words, it’s mostly much ado about nothing.

So with regard to my first two questions, I’m struck by how Prime Day is becoming more and more like Black Friday — and, for that matter, the unfortunately named Cyber Monday. Sure, they will be huge volume days. Sure, they will rack up bigger numbers than last year. But did we really learn anything that we didn’t already know, other than it turns out Amazon’s website also crashes from time to time?

Which brings me to a follow-on to the third question I posed: As a retail leader (or someone who provides services to the industry), regardless of whether you actually gained any new knowledge and insight this week, what is it you are actually doing to fight and win in the age of Amazon?

From where I sit, many of us (myself included) spend way too much time watching things happen, rehashing things we already know and staying stuck in judgement and critique.

Don’t fall for the hype. Don’t get sucked into the media vortex. It may feel like it’s useful to watch the talking heads on CNBC. You might feel like you are learning something poring over various articles and newsletters. But it’s a distraction and a trap. Most of us already know what we need to do.

The hard part isn’t the analysis. The hard part is the doing.

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 3 I’ll be doing a keynote at the ICSC Canadian Convention in Toronto. Hope to see you there.

A really bad time to be boring · Innovation · Retail

Will Macy’s ignite a new era of legacy retailer innovation?

The moderate department store sector has been struggling for some two decades; first losing share to category killers and discount mass merchants, then to off-price retailers and now, increasingly, to Amazon. Since 2008, department stores’ share of total retail has sunk from 2.8% to about 1.7%. Over 1,000 stores have been shuttered during the past few years with more sure to follow. J.C. Penney and Sears have seen their market values collapse, while Kohl’s, Dillard’s and Macy’s have significantly underperformed the market.

Recently, however, a certain ebullience has returned to the sector as financial performance has improved. Some observers now see a rebirth, while others are a bit more skeptical. It may well turn out that the past few months’ gains are more dead cat bounce than renaissance. Yet Macy’s has garnered considerable attention by stepping up its growth efforts under CEO Jeff Gennette. The first big step was announcing its Growth 50 Strategy earlier this year. Then, in just the past six weeks, two significant deals were announced. In early May, the company acquired Story, the Manhattan-based concept store, and made its founder Rachel Shechtman Macy’s new “chief brand experience officer.” And then just over a week ago Macy’s entered into a strategic alliance with b8ta, the experiential retailer and technology platform.

It remains to be seen whether these initiatives help relieve the epidemic of boring that struck Macy’s and its brethren years ago. Materially and fundamentally altering Macy’s stuck in the middle trajectory will take more than a couple of deals that look to affect a small percentage of its total business. The operational, experiential and product changes that are part of Growth 50 appear solid, but are far more evolutionary than revolutionary. And all of this comes against a backdrop of increasing competition from off-price retailers that are opening substantial number of stores (and aren’t yet close to mastering digital commerce), along with Amazon’s growing push into fashion.

Macy’s improved financial performance has to be put in the context of the broader market (Macy’s is barely keeping pace) and these innovation moves must be put in the context of their potential materiality (they aren’t likely to be). Still, Macy’s is to be applauded for its willingness to act and to embrace what I call a “culture of experimentation.” Given that the sector Macy’s competes in is virtually certain to keep shrinking, the only way for Macy’s to drive consistent, material profitable growth will be for them to steal significant market share. That will take more than incremental improvements or a random set of experiential pilots. These moves seem like a good, albeit limited, start.

While it’s easy to blame Amazon (and others) for the troubles that have befallen so many legacy retailers, the reality is that most of the wounds are self-inflicted. Too many of these retailers, including Macy’s, watched the last 15 or 20 years happen to them. They seemed to be believe that they could cost cut their way to prosperity and that mere tweaks to their product offering and customer experience would move the dial. Now, as many of them inch closer to the precipice, a few are acting—some rather more boldly than others.

The fact is they have no choice. The middle is collapsing under the weight of boring product, boring marketing and boring experiences. And you could not have picked a worse time to be boring. The only way out is to be dramatically more customer-relevant and to deliver a remarkable experience at scale. Being digital-first, offering a seamless customer experience, along with all the other buzzwords the pundit class likes to throw around (myself included) are fast becoming table-stakes. Necessary, but far from sufficient.

Traditional retailers are often pretty good at following others’ leads. I suspect that as Macy’s makes additional moves, many will be emulated by competitors. Yet the idea that legacy retailers will finally wake up to the need to be fundamentally more innovative seems unlikely. They mostly watched when it was clear that e-commerce was going to revolutionize shopping. They mostly stuck to channel-centric thinking and silo-ed behavior when it became clear that the customer was the channel. They mostly remained rooted in one-size-fits-all marketing strategies when it was obvious that we needed to treat different customers differently. And they continue to rely on store closings as a silver bullet, when the real problem is operating a brand that is not big enough for the stores they have.

Adding to my dire and admittedly cynical outlook is that many of the retailers that need to innovate the most still have no clue how to do it and, even if they did, lack the cash flow to make it happen. Sadly, for many, this will end badly.

For them, as the saying goes, the biggest problem is that they think they have time.

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 more on my speaking and workshops go here.