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.

Being Remarkable · Reimagining Retail · Retail

Is this the beginning of a department store renaissance? Eh, not so much.

Nearly two weeks ago Macy’s beat quarterly sales and earnings expectations and many on Wall Street promptly lost their mind. Same story with Dillard’s. Then Kohl’s followed up with a similarly surprising upside report that led some to conclude that maybe, just maybe, the long-beleaguered department store sector might be seeing a resurgence or—dare we say it out loud?—the beginning of a renaissance.

Alas, this rising ebullience seems far more driven by a mix of hope, misunderstanding and a heaping side order of denial than any compelling evidence that the tide is turning in any meaningful or sustainable way. Once again we are in real danger of confusing better with good.

To be sure, both Macy’s and Kohl’s sales and profits were much improved over last year. Yet their performance must be viewed from the perspective of both short-term factors and longer-term realities. On the clearly positive side there is solid evidence that both struggling retailers are executing better. In Macy’s case, inventory looks to be well managed (yielding fewer markdowns) and efforts to capture cost efficiencies appear to be paying dividends. A few targeted strategic initiatives, including Kohl’s partnership with Amazon, seem to be driving some incremental business.

With a bit more context, however, these results aren’t really all that stellar. And they most definitely are not yet strong indicators of any substantive turnaround. Notably, both retailers’ sales benefitted significantly from the move of a major promotional event into the quarter. Without this shift, same-store sales would have increased only about 1.7% at Macy’s, and Kohl’s would have been more or less flat (not that this metric is all that useful anymore anyway). That is neither keeping up with inflation nor maintaining pace with the overall growth of the broader categories in which they compete. The optimist might see losing market share at a slightly slower rate as a win. The realist opines that there is a lot more work to do to go from decidedly lackluster to objectively good.

The other thing to bear in mind is that J.C. Penney and Sears (and now Bon-Ton) have been leaking volume through store closings and comparable store sales declines. It’s hard to imagine that Macy’s and Kohl’s have not benefitted materially from this dynamic. While J.C. Penney’s future is increasingly uncertain, any upside from Bon-Ton will be short-lived. Sears looks to be the gift that keeps giving, though likely for only a few quarters more as I expect that Sears will close substantially all of its full-line stores within the next year. While this creates one-time market share gaining opportunities and fixed cost leverage, once the dust settles two factors will come into sharper relief.

The first is the contributions from a strong economy. Recent macro-economic factors have been generally positive for the product categories in which Macy’s and Kohl’s compete. Whether there will continue to be some wind beneath the sails of U.S. retail more broadly—and for the moderate-priced apparel, accessories and home categories in particular—remains to be seen. Clearly my crystal ball is no better than anyone else’s—and maybe worse. But my best guess is that both the economy and the jump ball for market share occasioned by department store consolidation peaks within the next few quarters.

The second factor that looms large seems to be the one Wall Street forgets. The moderate department store sector has been in decline for a long, long time. Some of this has to do with evolving customer trends. Some with stagnant income growth. Some with the rise of superior competing business models: initially category killers, then off-price and dollar stores and now, increasingly, Amazon. And some with more than a fair share of self-inflicted wounds. Regardless, the entire moderate sector, to varying degrees, is stuck in the vast, undifferentiated and boring middle. A somewhat better version of mediocre may the first step on an eventual path to greatness, but it may be just that: a first step.

Lift the veil from a quarter or two of slightly above average performance and the drivers of broader share losses (and related widespread shuttering of stores) continue unabated. Off-price and dollar stores, which in recent years have accounted for the biggest drain on Macy’s, Kohl’s et al., are opening up hundreds of new stores at the same time they are starting to turn up their digital game. Amazon is becoming a bigger factor everyday—and it has yet to make a big push into physical stores. Even if any of the leading department stores miraculously became more innovative and customer relevant they would continue to face significant headwinds. Bottom line: show me someone who believes that a transformation of mid-priced department stores is possible in the foreseeable future and you’ve probably clued me into who has been providing Eddie Lampert with his strategic consulting advice.

As the middle continues to collapse, it is now completely a market-share game. The near-term good news is that Macy’s and Kohl’s competition has made it relatively easy to grab some share. The near-term good news is that a generally healthy economy tends to raise the tide for all. The near-term good news is that Macy’s and Kohl’s operating discipline allows them to convert relatively small sales increases into nice incremental profit opportunities.

The bad news is neither one of them goes from incrementally better to demonstrably good until they make much more substantive and fundamental strategic changes that move them from mostly boring to truly remarkable. Neither brand has spelled out what that looks like in any compelling fashion. And once designed, getting there from here is no small task. Until then, it is way too early to declare victory.

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 June 15 I will be doing a keynote at The Shopper Insights & Retail Activation Conference in Chicago. Contact me for a special discount. For more on my speaking and workshops go here.

e-commerce · Retail · The Amazon Effect

Is Amazon finally getting serious about retail profitability?

There seems little doubt that Amazon.com AMZN -0.27% is crushing it and Macy’s is flailing. So who has the best profitability? Well, it’s not even close.

Macy’s operating margin is just over 6%. In recently reporting what was widely seen as a blowout quarter, Amazon is just now approaching a whopping 2% in its non-Amazon Web Services business. By just about any comparison, in most categories, Amazon’s margin performance appears to be anywhere from lousy to lackluster, despite its vast capabilities and more than 20 years of working hard at most of it.

One particularly disturbing trend is rising shipping and fulfillment costs. With Amazon’s massive scale, you might think this would be a growing source of profit leverage. You’d be wrong. Logistics costs continue to rise faster than revenues.

This is not terribly surprising. The structure of Amazon’s Prime program (which recently surpassed 100 million members) essentially encourages customers to overuse “free” shipping for frequent small orders—which generally have low (or non-existent) profits. Amazon also continues to aggressively push same-day delivery, which, at current scale, has terrible marginal economics.

Amazon’s growing success in apparel may be great for the top line, but returns and exchanges tend to be much higher than average, pushing supply chain costs further in the wrong direction.

Before anyone quibbles with my high-level analysis, I will state that I know the company has been making substantial investments for the long term. I realize that there are many instances where Amazon could make more money but it continues to prioritize market share gains over decent (or any) near-term returns. And I understand that Wall Street clearly values growth over profits. Yet against this backdrop, it does seem as if there is a subtle shift in focus.

Given the significant headwinds from growing logistic costs, the fact that profits improved dramatically suggests that both product margins and non-logistics operating costs are starting to be leveraged in more powerful ways. Moreover, in what some see as a risky move—but I see fundamentally as an acknowledgement of customer loyalty, pricing power and a growing need to offset spiraling delivery costs—Amazon is raising the price of Prime membership by $20. Despite customer protestations, I am willing to bet that Amazon comes out way ahead on this move.

Another sign of Amazon’s seriousness toward pursuing profitability is its growing investment in private brands. Amazon already has more than 70 proprietary brands, and more are sure to follow. Done right, increasing the mix of its own brands can further drive market share gains by offering strong additional value to its customers and drive gross margins higher. Expect to hear more about the significant contributions these new brands are making within the next few quarters.

When it comes to buying versus shopping, Amazon holds more and more of the cards. More than 50% of all online product searches start at Amazon. Amazon is fast closing in on owning nearly 50% of the U.S. e-commerce market and is racking up significant share in many global markets. Prime membership tends to lock consumers into a virtuous shopping cycle where, at the margin, Amazon becomes the default choice for a growing basket of stuff. As Amazon gets deeper into physical stores (organically or through another major acquisition), even the “shopping” side starts to come more seriously into view—much of which should actually help expand margins. And personally I think Amazon has yet to take anywhere close to full advantage of its powerful customer data and insight assets.

Given the complexity of its operations—and the overlapping cycle of major investments in the next wave of growth—it’s often hard to discern the underlying dynamics of Amazon’s retail operations in any given quarter. Yet a few things seem clear.

First, Amazon likely never gets to decent operating margins without addressing the supply chain cost issue. Second, private brands will soon become a more important part of the story. Third, in the not too distant future, a more aggressive brick-and-mortar strategy is likely needed to continue to drive outsized growth. Lastly, Amazon still has a lot of levers to pull to leverage its data and take advantage of its growing customer loyalty. For the most part, improved profitability can likely come at a time and date of Amazon’s own choosing.

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 May 17 I will be keynoting Kibo’s 2018 Summit in Nashville, followed the next week by Retail at Google 2018 in Dublin.

A really bad time to be boring · Reinventing Retail · Retail

Retail 2018: Now Comes The Real Reckoning

There is some dispute over whether more stores opened during 2017 than were closed. IHL says yes. Fung Retail Tech says no. Mostly I say “who cares”?

Either way, it’s clear that the retail landscape is changing rapidly, causing some retailers to prune their store counts, shutter locations en masse or liquidate entirely. What’s unfortunate–and not the least bit useful–is the tendency to declare that physical retail is dying and that we are going through some sort of “retail apocalypse.” The facts clearly do not support this notion. Similarly devoid of substance and nuance is the proclamation that e-commerce is eating the world and that virtually all “traditional” retailers are falling victim to the “Amazon Effect.”

What IS occurring at the macro-level is three-fold. First, the irrational expansion of retail space during the past two decades is finally correcting itself. Second, as retailers better understand the physical requirements to support a world where online is a significant and growing sales channel, many are optimizing their footprints to better align space with demand. Third, and far more important, is that retail brands that failed to innovate and create a meaningfully relevant and remarkable value proposition are rapidly going the way of the horse-drawn carriage.

A look at either the IHL or the FRT data reveals precisely the same picture. Lots of physical stores are being opened on the part of brands that have a winning formula, both in the value sector (think TJX, Aldi, Costco, Dollar General) and at the other end of the spectrum (think Nordstrom, Sephora, Ulta). Overwhelmingly, the retailers that are closing large number of stores are those that have operated in the vast undifferentiated middle. And it’s becoming increasingly clear that it’s death in the middle.

Physical retail is not dead. Boring retail is.

I believe the majority of over-capacity from excessive building has now been dealt with (or will be as retailers do typical post-holiday store closings). I believe most sophisticated retailers have a clear understanding of the go-forward physical requirements to best support a harmonized (what some prefer to call “omni-channel”) strategy.  They get the critical role that physical stores play in supporting the online business and vice versa. This implies that retailers that have fundamentally sound value propositions won’t be closing very many stores this year. And the best positioned brands will defy the bogus retail apocalypse narrative and continue opening stores–in some cases large numbers of them.

The flip side is that retailers with unremarkable concepts will continue their march toward oblivion. Some will hang around longer than they should–I’m looking at you Sears–because they have assets to sell off to raise cash, all the while delaying the inevitable. Store closings are a panacea, not a fix.

Similarly, many pure-play online brands with unsustainable economics will either figure out a viable bricks & clicks strategy (e.g. Warby Parker), get acquired by the digitally-native brand bail out fund known as Walmart or go ‘buh ‘bye having burned through both their cash and all the greater fools.

For me, last year was a large scale, inevitable pruning away of the brush. Now in 2018, with the obvious losers having been closed in 2017, we get to see far more clearly the brands that truly have longevity, be they omni-channel” or pure-plays.

Now we get to witness the real reckoning.

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 keynote speaking and workshops please go here.

 

A really bad time to be boring · Retail

Department Store Shares Are Up. Your Hopes Shouldn’t Be.

Amidst reports that holiday spending was up nearly 4.9%, some optimism about the American moderate department store sector has started to creep back in. In fact, right after these reports shares of Macys, Dillards, Kohls and JC Penney spiked. It’s all a bit baffling.

On the one hand, if I were a betting person, I expect that these brands will report decent, maybe even objectively good, numbers this quarter. Consumer confidence is strong, the stock market is up and many regular folks (mistakenly) believe that their income will be up materially on the heels of the new tax bill. From a retailer perspective, the burst of cold weather bodes well for sales of seasonal items. Tighter inventories, store closings and other expense reductions should lead to year-over-year profit improvements.

On the other hand, none of this fundamentally changes the relative competitive positions of these retailers. And that means until several other things change, the overall outlook for the sector remains pretty gloomy.

As I pointed out several months ago, at least two major things must happen before any optimism about the prospects of any of the middle market department store brands is warranted.

First, there is still too much capacity chasing a shrinking pie of spending. While it may turn out that these chains picked up a bit of market share over the holidays, the sector remains in overall decline and any blip in consumer spending ebullience isn’t very likely to continue into 2018. More store closings need to occur to get supply better in line with sustained demand. As Sears sinks into oblivion, and the remaining big four close additional locations early next year, there is some hope for the future. For now though, capacity remains out of whack.

More importantly, the major moderate department stores have picked a really bad time to be boring. They remain stuck in the vast, largely undifferentiated middle, drowning in a sea of sameness. And, unfortunately, it’s death in the middle. These major chains all have considerable work to do to create a more harmonious shopping experience, to up there game on personalization and to find places in both their assortment strategies and customer experience to be more relevant and remarkable. They remain overly attached to competing on price, when fundamentally that is deciding to compete in a race to the bottom which–spoiler alert–they will never win.

The notion that department stores are fundamentally doomed is just as silly as the retail apocalypse narrative. So too is the idea that Amazon is solely to blame for department store woes. Yet the structural reasons for the declining state of the sector remain intact. The only way any of these brands deserve stock appreciation is for more rationalization to occur (which is inevitable) and for them to truly embrace more innovation and to have the courage to become more intensely relevant and remarkable.

Then again, there is always the hope they get bought out by Amazon.

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 keynote speaking and workshops please go here.

Being Remarkable · Omni-channel · Reinventing Retail · Retail

My top ten Forbes posts of the year

Earlier this year I had the honor of joining Forbes as a retail contributor.

As is my tradition, I’ll publish my top ten list from my blog right after the New Year. For now, here are my most popular articles on Forbes during 2017. One thing is for sure: folks were interested in hearing me opine about Sears. I have a feeling that window is closing.

  1. Sears Must Think We’re Stupid Or Gullible: Here’s Why
  2. Sears: Is The End Finally In Sight For The World’s Slowest Liquidation Sale?
  3. Here’s Who Amazon Could Buy Next And Why It Probably Won’t Be Nordstrom
  4. The Inconvenient Truth About e-Commerce: It’s Largely Unprofitable
  5. Omnichannel Is Dead. Long live Omnichannel.
  6. Sears March Toward Bankruptcy: Gradually, Then Suddenly
  7. Sears: Dead Brand Walking
  8. Reports Of JC Penney’s Death Are Greatly Exaggerated 
  9. Luxury Retail Hits The Wall
  10. With Kenmore Deal Amazon Is A Winner. For Sears, Not So Much

And this one goes to 11: Hype-y Holidays: Black Friday And Other Nonsense

Thanks for reading and engaging this past year.

A most happy and peaceful New Year to all!

Top.Ten_

 

e-commerce · Omni-channel · The Amazon Effect

Here’s who Amazon could buy next, and why it probably won’t be Nordstrom

Since the Whole Foods deal, more than a few industry analysts and pundits have weighed in on which retailers might be on Amazon’s shopping list.

Various theories underpin the speculation. Some say Jeff Bezos wants to go deeper in certain categories, so Lululemon or Warby Parker get mentioned. Foursquare (is that still a thing?) crafted its own list from analyzing location data. The Forbes Tech Council came up with 15 possibilities. The always provocative, and generally spot-on, Scott Galloway of L2 and NYU’s Stern School of Business believes Nordstrom is the most logical choice.

Obviously no one has a crystal ball, and Amazon’s immediate next move could be more opportunistic than strategic. Given Amazon’s varied interests, there are several directions in which they could go. And clearly they have the resources to do multiple transactions, be they technology enabling, building their supply-chain capabilities out further, entering new product or service categories, or something else entirely. For my purposes, however, I’d like to focus on what makes the most sense to expand and strengthen the core of their retail operations.

Before sorting through who’s likely to be right and who’s got it wrong (spoiler alert: Scott), let’s briefly think about the motivating factors for such an acquisition. From where I sit, several things are critical:

  • Materiality. Amazon is a huge, rapidly growing company. To make a difference, they have to buy a company that either is already substantial or greatly accelerates their ability to penetrate large categories. This is precisely where Whole Foods fit in.
  • Fundamentally Experiential. There is an important distinction between buying and shopping. As my friend Seth reminds us, shopping is an experience, distinct from buying, which is task-oriented and largely centered on price, speed and convenience. Amazon already dominates buying. Shopping? Not so much.
  • Bricks And Clicks. It’s hard to imagine Amazon not ultimately dominating any category where a large percentage of actual purchasing occurs online. Where they need help is when the physical experience is essential to share of wallet among the most valuable customer segments. They’ve already made their bet in one such category (groceries). Fashion, home furnishings and home improvement are three obvious major segments where they are under-developed and where a major stake in physical locations would be enormously beneficial to gaining significant market share.
  • Strong Marginal Economics. We know that Amazon barely makes money in retail. What’s not as well appreciated is the inconvenient truth that much of the rest of e-commerce is unprofitable. Some of this has to do with venture-capital-funded pure-plays that have demonstrated a great ability to set cash on fire. But unsustainable customer acquisition costs and high rates of product returns make many aspects of online selling profit-proof. An acquisition that allows Amazon access to high-value customers it would otherwise be challenged to steal away from the competition and one that would mitigate what is rumored to be an already vexing issue with product returns could be powerfully accretive to earnings over the long term. Most notably this points to apparel, but home furnishings also scores well here.

So pulling this all together, here’s my list of probable 2018 acquisition targets, the basic rationale and a brief word on why some seemingly logical candidates probably won’t happen.

Not Nordstrom, Saks or Neiman Marcus

Scott Galloway is right that Nordstrom (and to a lesser degree Saks and Neiman Marcus) has precisely the characteristics that fit with Amazon’s aspirations and in many ways mirror the rationale behind the Whole Foods acquisition. Yet unlike Whole Foods, a huge barrier to overcome is vendor support. Having been an executive at Neiman Marcus, I understand the critical contribution to a luxury retailer’s enterprise value derived from the distribution of iconic fashion brands, as well as the obsessive (but entirely logical) control these same brands exert over distribution. Many of the brands that are key differentiators for luxury department stores have been laggards in digital presence, as well as actually selling online. Most tightly manage their distribution among specific Nordstrom, Saks and Neiman Marcus locations. If Nordstrom or the others were to be acquired by Amazon, I firmly believe many top vendors would bolt, choosing to further leverage their own expanding direct-to-consumer capabilities and doubling down with a competing retail partner, fundamentally sinking the value of the acquisition. While Amazon might try to assure these brands that they would not be distributed on Amazon, I think the fear, rational or otherwise, would be too great.

Macy’s, Kohl’s or J.C. Penney 

Amazon has its sights set on expanding apparel, accessories and home but is facing some headwinds owing to a relative paucity of national fashion brands, likely lower-than-average profitability (mostly due to high returns) and a lack of a physical store presence. Acquiring one of these chains would bring billions of dollars in immediate incremental revenues, improved marginal economics and a national footprint of physical stores to leverage for all sorts of purposes. All are (arguably) available at fire-sale prices. Strategically, Macy’s makes the most sense to me, both because of their more upscale and fashion-forward product assortment (which includes Bloomingdale’s) and because of their comparatively strong home business. But J.C. Penney would be a steal given their market cap of just over $1 billion, compared with Macy’s and Kohl’s, which are both north of $8 billion at present.

Lowe’s

The vast majority of the home improvement category is impossible to penetrate from a pure online presence. Lowe’s offers a strong value proposition, dramatic incremental revenues, already strong omni-channel capabilities, and a vast national network of stores. The only potential issue is its valuation, which at some $70 billion is hardly cheap, but is dramatically less than Home Depot’s.

A Furniture Play

Home furnishings is a huge category where physical store presence is essential to gaining market share and mitigating the high cost of returns. But it is also highly fragmented, so the play here is less clear as no existing player provides a broad growth platform. Wayfair, the online leader, brings solid incremental revenue and would likely benefit from Amazon’s supply chain strengths. But without a strong physical presence their growth is limited. Crate & Barrel, Ethan & Allen, Restoration Hardware, Williams-Sonoma and a host of others are all sizable businesses, but each has a relatively narrow point of view. My guess is Amazon will do something here — potentially even multiple deals — but a big move in furniture will likely not be their first priority in 2018.

As I reflect on this list (as well as a host of other possibilities), I am struck by three things.

First, despite all the hype about e-commerce eating the world, the fact remains that some 90% of all retail is done in physical stores, and that is because of the intrinsic value of certain aspects of the shopping experience. For Amazon to sustain its high rate of growth, a far greater physical presence is not a nice “to do” but a “have to do.”

Second, the battle between Amazon and Walmart is heating up. While they approach the blurring of the lines between physical and digital from different places, some of their needs are similar, which could well lead to some overlapping acquisition targets. That should prove interesting.

Lastly, the business of making predictions is inherently risky, particularly in such a public forum. So at the risk of stating the obvious, I might well be wrong. It wouldn’t be the first time, and it surely won’t be the last.

But why not go out on a limb? I hear that’s where the fruit is.

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 keynote speaking and workshops please go here.

Being Remarkable · Reinventing Retail · Store closings

Department stores aren’t going away, but 3 big things still need to happen

It’s been a long, slow slide for department stores. Starting some two decades ago, the major chains began leaking share to the big-box, off-the-mall players. Just as that started to stabilize somewhat, Amazon and other e-commerce pure-plays began chipping away at the sector’s once dominant position in apparel, accessories and home products. Most recently, in addition to the ongoing threat from online shopping, off-price chains have benefitted from a growing legacy of major chain mediocrity.

Unsurprisingly, investors have treated the sector like the plague. The market values of Macy’s, J.C. Penney, Sears, Dillard’s and Kohl’s have all plummeted. Even Nordstrom, which has performed relatively well, has seen its market value halved in the past couple of years. Just this past week J.C. Penney saw its shares, which were already off some 80% since 2013, plunge further after a surprise earnings warning. In addition, Sycamore looks to be picking at the carcass of Bon-Ton Stores and Lord & Taylor is selling its iconic Manhattan flagship to WeWork. And on and on.

For many, this unrelenting parade of bad news leads them to believe that department stores are toast. But just as the retail apocalypse narrative is nonsense, so is the notion that department stores are going away. I am willing to go out on a limb to say that a decade from now there will still be hundreds of large, multi-category brick-and-mortar stores operating in the United States and throughout the world. But despite this conviction, things are virtually certain to get worse before they get better and three major things must happen before any sort of equilibrium can be reached and decent profits can return.

Major space rationalization/consolidation. The overall retail industry is still reeling from decades of overbuilding, as well as the abject failure of most department store anchors to innovate to stay remotely relevant and remarkable. While the idea that major chains can shrink to prosperity is fundamentally misguided, it’s clear that a) most chains still have too many stores, b) the stores they have are, on average, larger than they need and c) there is no compelling reason for Sears, Kmart, Bon-Ton (and perhaps a few others) to exist at all. Many dozens, if not hundreds, of locations are certain to be whacked after the holiday season. And despite the liquidation sales that will put pressure on earnings in the first half of the calendar year, there is actually a real chance for year-over-year margin improvement by the time the holiday season rolls around this time next year.

A true commitment to be more focused, more innovative and more remarkable. It turns out department stores, like every other struggling retail brand, picked a really bad time to be so boring. It turns out that deferred innovation is even more crippling than deferred maintenance. It turns out that trying to be everything to just about everybody means being mostly irrelevant to a lot of folks. Given the certain continuing contraction of the sector, the only hope for remaining brands is to gain significant amounts of market share. And that only happens to any material degree by embracing intense customer-centricity to become more relevant to a tighter customer set and by consistently executing a far more remarkable experience than the competition. Continued flogging of me-too products, one-size fits all advertising, boring presentation and chasing the promiscuous shopper through promotion on top of promotion won’t cut it. Period. Full stop. The hard part is that most of the flailing brands are woefully far behind, lack a culture of innovation and simply don’t have the cash to do what it will take to right the ship.

Amazon needs to place its bet. It’s clear that Amazon has its sights set on being a much bigger player in apparel, accessories and home products. And it’s hard to see how Amazon gets speed, adds the necessary volume and addresses the vexing returns/supply chain issues without a major physical presence in the moderate and higher-end softlines arena. For that reason, I’m also willing to go out on a limb and predict that Amazon will buy a major department store player in 2018. And just as its acquisition of Whole Foods is transformative for the grocery industry, so too will be a much deeper brick-and-mortar (and omnichannel) presence in the department store sector. In fact, it’s hard to underestimate how a big move by Amazon here will reshape just about every imaginable facet.

While 2017 has brought more than its fair share of department store news–and we’re hardly finished–I see 2018 as being chock-a-block with not only profound news but likely representing the year when the future of the sector will become far more clear. Stay tuned.

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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.