The stores strike back

Amidst all the retail apocalypse nonsense it turns out that physical retail isn’t dead after all.  Last year some 3,000 new stores were opened and physical retail continued to have positive growth in most major global markets. One of my 14 predictions for retail in 2019 is the notion that, despite the presumed death of physical retail, quite a few major brands are seeing a renaissance of sorts. In fact, stores are striking back against being made obsolete by online shopping in many different and important ways.

Amidst all the retail apocalypse nonsense it turns out that physical retail isn’t dead after all.  Last year some 3,000 new stores were opened and physical retail continued to have positive growth in most major global markets. One of my 14 predictions for retail in 2019 is the notion that, despite the presumed death of physical retail, quite a few major brands are seeing a renaissance of sorts. In fact, stores are striking back against being made obsolete by online shopping in many different and important ways.

A couple of years ago legacy retailers like Walmart, Best Buy, Target and Home Depot were often seen as laggards, soon to be made progressively more irrelevant by Amazon and others. Yet it turns out, to paraphrase noted retail strategist Mark Twain, reports of their death were greatly exaggerated.

A couple of years ago, beyond Amazon’s disruptive impact, the future was often thought to be concentrated in the large number of venture capital funded “digitally-native vertical brands” that could scale to massive value creation by avoiding pesky and asset intensive stores.  Yet, in a rather ironic twist, a large cohort of the once firmly “we’ll only grow online because physical retail is going the way of the dinosaurs” upstarts will collectively open more than 800 brick-and-mortar locations this year. Most are now experiencing most of their growth from good old fashioned stores.

A couple of years ago, many analysts and “futurists” saw e-commerce getting to 50% share within a decade and questioned why anyone would invest in physical stores. But facts are stubborn things, and it’s clear we aren’t remotely on a glide-path to online getting to even 30%. Moreover, rather traditional retailers as diverse at TJX, Sephora, Ulta and Dollar General are openings dozens upon dozens of stores. We also have retailers like Tractor Supply and AtHome becoming large, growing and incredibly successful brands with an overwhelming focus on brick-and-mortar locations.

So how do we explain all this?

Not every customer is like you. You personally may love the ultra-convenience of e-commerce and hate going to stores. Good for you. But there is a reason 89% of all retail is still done in brick-and-mortar locations. Every retailer needs to respect the differences among consumers and their key purchasing drivers across different occasions. Repeat after me: treat different customers differently.

Brick and mortar trumps e-commerce in many respects. Shopping in physical stores is more emotional, social and connected. Shopping in physical stores allows customers to try stuff on, understand the real look of a given product and get a clearer sense of value. Shopping in physical stores offers immediate gratification. Shopping in physical stores makes it easier (usually) to put more complex solutions together, like a home project or assembling an outfit. It’s a digital-first world. Until it’s not.

E-commerce is often pretty unprofitable. It’s great that investors are willing to subsidize the poor profitability of many disruptive concepts, from Uber to WeWork to Amazon to Wayfair. It won’t last forever and many sophisticated companies are starting to lean into the lower cost acquisition and/or distribution costs of physical locations vs. direct-to-consumer. Accordingly their investment decisions and pricing are starting to reflect the underlying economic realities.

There is a big difference between buying and shopping. If you are on a largely search-based mission, item-focused and care mostly about price and convenience, e-commerce works really well.  Hence Amazon’s strong relative share in these “buying” occasions. You might even get all wild and crazy and use Alexa. But if you are more engaged in discovery, something more emotional and want a more holistic experience, then you are “shopping” and a physical store-centric (albeit digitally enabled) path is often your best bet.

Assets or liabilities? A brand that fundamentally sees their stores as liabilities typically seeks to optimize them–and a cycle of cost cutting and store closings begins, typically initiating a downward spiral.  If a brand see their stores as assets, they work on improving e-commerce and digital enablement capabilities and lean into making the stores more relevant. Contrast Sears strategy with Target’s. Sears disinvested in stores and will soon be gone. Target shifted many things about its store strategy and simultaneously upped its digital game, while plowing billions into store upgrades and omni-channel capabilities. So have Walmart, Home Depot and Best Buy. Nordstrom has continued its decade long strategy of doing so. It’s paying off.

It’s all one thing. Brands that are physical store dominant see their brick-and-mortar locations as the hub of a shopping ecosystem. They don’t get hung up on a phony battle between e-commerce and stores. The customer is the channel. Online drives stores and vice versa. Their mission is to leverage the best of each customer touchpoint, eliminate the friction, harmonize the experience and amplify the “wows.” Rinse and repeat.

Sure, there is plenty of doom and gloom in the retail industry. And the collapse of the boring middle is real–and not about to go away.

Yet there is plenty of hope as well for those that do the work, reimagine the opportunities and are willing to act decisively.

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 February 25th I will be doing the opening keynote at Retail ’19 in Melbourne, Australia, followed the next week by ShopTalk in Las Vegas where I will be moderating an expert panel and participating in other events.

Holiday 2017: The fault in our stores

By all accounts this holiday shopping season looks to be pretty solid overall–perhaps the best since 2010. Aggregate sales will likely be up between 3.5% and 4.0%. E-commerce year-over-year growth will come in around 17%. Retailers’ inventories seem to be generally in good shape, which should allow most to deliver strong gross margin performance. And despite the silly retail apocalypse narrative, I’ll even venture to say that sales in physical stores will show a slight increase.

Of course a given retailer’s mileage will vary; often considerably. The future of retail will not be evenly distributed. As we’ve seen in recent years, the fortunes of the have’s and have not’s continue to diverge. For more and more retail brands it’s death in the middle.

While we can be certain that the coming weeks will be filled with stories dissecting this season’s winners and losers, the truth is we already know the outcome. The retailers that consistently offer a relevant and remarkable value proposition–and execute well against it–are growing, making good money and (hold on to your hat) opening stores–sometimes a lot of them. We see this across a spectrum of price points. Off-price retail, warehouse clubs and dollar stores doing well; great, typically higher-end, specialty stores gaining share and delivering solid profits.

The simplistic notion that physical retail is going away is clearly flat out wrong. The continuing rise of Amazon does not spell doom for all of retail. The rapid growth of e-commerce hardly represents the death knell for traditional brick & mortar stores. For every Sears, Radio Shack and Borders, there is a Best Buy, Walmart or Nordstrom. The failed (and failing) retailers are the ones that did not innovate, that thought the physical store and e-commerce were the channels, when the customer was the channel all along. Somehow they believed they could cost cut their way to prosperity instead of evolving to where the customer was moving. Lower costs and drastic pruning of store locations mean precisely nothing if when the dust settles you are still drowning in a sea of sameness.

Physical retail is not dying. Boring retail is.

The fault is not with stores, it’s with stores that are irrelevant and unremarkable.

The fault in our stores lies in seeking to be everywhere and ending up being nowhere. The fault in our stores lies in aiming to be everything to everybody and being mostly “meh” to just about everyone. The fault in our stores emanates from retailers failing to understand the customer journey and committing to ruthlessly rooting out friction points and amplifying the experiences that really matter along that journey. The fault in our stores rests in retailers unwillingness to experiment and take prudent risks.

The shift of power to the consumer is not going away. What was once scarce rarely is anymore. Most customer journeys will start in a digital channel. Seamless integration across channels is now table-stakes. Good enough no longer is. Today’s basis for competition is being redefined, often radically.

As it turns out it’s an especially bad time to be boring.

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.

With Kenmore Deal Amazon Is A Winner. For Sears, Not So Much.

Investors reacted quite favorably to the news that Kenmore appliances will soon be sold through Amazon. For Amazon, it’s clearly an interesting opportunity. While online sales of major appliances are currently comparatively small, being able to offer a leading brand on a semi-exclusive basis gives Amazon a jump start in a large category where they have virtually no presence. On the other hand, for Sears, it smacks of desperation.

First, some context. Way back in 2003 I was Sears’ VP of Strategy and my team was exploring options for our major private brands. Despite years of dominance in appliances and tools, our position was eroding. Our analysis clearly showed that not only would we continue to lose share (and profitability) to Home Depot, Lowe’s and Best Buy, but those declines would accelerate without dramatic action. Unfortunately, it was also clear that very little could be done within our mostly mall-based stores to respond to shifting consumer preferences and the growing store footprints of our competitors. Kenmore, Craftsman and Diehard’s deteriorating positions were fundamentally distribution problems.  And to make a long story a bit shorter, a number of recommendations were made, none of which were implemented in any significant way.

Flash forward to today, and Sears leadership in appliances and tools is gone. While in the interim some minor distribution expansion occurred, it was not material enough to offset traffic declines in Sears stores and the shuttering of hundreds of locations. More important is the fact that Kenmore and Craftsman still aren’t sold in the channels where consumers prefer to shop–and that train has left the station.

So last week’s announcement does expand distribution, but it does little, if anything, to fundamentally alter the course that Sears is on. Simply stated, making Kenmore available on Amazon will not generate enough volume to offset continuing sales declines in core Sears outlets, particularly as more store closings are surely on the horizon. Selling Kenmore on Amazon does not in any way make Sears a more relevant brand for US consumers. In fact, it will give many folks one more reason not to traffic a Sears store or sears.com.

Since 2013 I have referred to Sears as “the world’s slowest liquidation sale”, owing to Eddie Lampert’s failure to execute anything that looks remotely like a going-concern turnaround strategy, while he does yeoman’s work jettisoning valuable assets to offset massive operating losses. Earlier this year, Sears fetched $900 million by selling the Craftsman brand to Stanley Black & Decker, one of the leading manufacturers and marketers of hand and power tools. So it’s hard to imagine that Sears did not try to do a similar deal with either a manufacturer of appliances (e.g. Whirlpool or GE) or one of the now leading appliance retailers. The Kenmore partnership with Amazon appears to have far less value than the Craftsman deal, despite being done just six months later–which speaks volumes to how far Sears has fallen and for how weak Sears’ bargaining position has become.

The cash flow from the Amazon transaction will do little to mitigate Sears operating losses and downward trajectory. In fact, it seems to be mostly the best way, under desperate circumstances, to extract the remaining value of the Kenmore brand given that no high dollar suitors emerged and Sears continues its march toward oblivion. Amazon, however, is able to take advantage of fire-sale pricing and create the valuable option to have Kenmore as a potentially powerful future private brand to build its presence in the home category.

Advantage Bezos.

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

Sears: The one thing that could have saved them

As much fun as it is to call out Eddie Lampert on his misguided, selfish and seemingly delusional decade-plus leadership of Sears Holdings, when the world’s slowest liquidation sale is ultimately complete–I’m guessing, for all intents and purposes, by this time next year–we should acknowledge that Sears fate was probably sealed well over 20 years ago, when Crazy Eddie was not even involved.

First a bit of context. I worked at Sears from 1991-2003 and my last job was head of strategy reporting to then CEO Alan Lacy. I also led the Lands’ End acquisition integration team. During my tenure, in addition to various operating and marketing assignments, I was either the #1 or # 2 strategy guy when we implemented the “Softer Side of Sears”, created and piloted The Great Indoors and Sears Grand concepts and launched or accelerated the growth of free-standing Sears Appliance and Sears Hardware stores. I worked on or led teams that evaluated the acquisition of Kmart, Lowes, Best Buy, Circuit City–and Builder’s Square and Eagle Hardware when they were still around. We also seriously assessed turning all Sears mall locations into home only stores (among other concepts) and, in 2003, analyzed selling Kenmore and Craftsman to Home Depot or Lowes. So it’s safe to say I have more than a passing knowledge of how Sears evolved (or more accurately devolved) over an extended period of time.

With the benefit of that experience (and a good amount of hindsight) my conclusion is this: the only thing that would have given Sears a chance to thrive–not merely survive–was to have either launched their own home improvement warehouse concept or to have acquired Home Depot or Lowes’s at a time when they were realistically affordable–and that’s probably prior to 1995.

The reasons are simple. First, well before Amazon was even a thing it was becoming abundantly clear that the moderate department store space was structurally challenged and that Sears weird mix of hardlines and apparel was not a winning formula. Even if the soft home and apparel business got significantly better that was neither a particularly good nor a sustainable outcome. Second, far and away what Sears had that WAS relevant, remarkable and highly profitable were its appliances and home improvement categories. Importantly, Sears also had several leading market share brands- Kenmore, Craftsman and Diehard–that were only available at Sears.

Yet by the early 90’s it was becoming increasingly clear that Home Depot and Lowes were transforming those categories by winning on more convenient locations, better pricing and the ability to serve a broader set of purchase occasions. As they rolled out their stores Sears share (and profits) in those markets dropped precipitously. And it was also clear–or should have been–that Sears could not mitigate those competitive advantages through its mall-based locations.

So what Sears missed (or more accurately, was unwilling to act on) was that the only way to meaningfully counteract the inevitability of the dominance of the home improvement warehouse (and preserve or grow the value inherent in their proprietary brands and strong customer relationships) was to become a leader in that format. Instead, Sears spent the past 25 years wringing out costs (when it mostly had a revenue problem), vainly trying to grow its off-the-mall presence with too few (and way too mediocre) formats, investing in cool digital stuff while starving their physical stores to the point of irrelevance and embarrassment and, apparently, hoping that the Kardashians could somehow turn around an apparel business that has struggled for more than a decade to consistently get to a 30% gross margin and $100/sf in many stores (or what I like to call the “lame brand instead of name brand” strategy).

To be sure, one can argue that there were any number of things Sears could have done over the past 25 years to have meaningfully altered its course. Certainly had Sears not run its catalog into the ground they would not only have had more money to invest in the core business but would have been beautifully positioned to benefit from the dramatic rise in direct-to-consumer commerce. Without a doubt, virtually all of the new formats that were rolled out could have been much better executed. And some of the fantastic consumer interest created by the Softer Side of Sears campaign was not fulfilled by store and merchandising execution. The Lands’ End deal, while strategically sound and potentially transformative, was botched by a too aggressive store-rollout and mishandled marketing. And on and on.

Of course, we will never know for sure. But ultimately, from where I sit, it would all probably just have been lipstick on the pig.

In my view the real fault lies at the leadership all those many years ago that was too busy diversifying Sears into insurance, real estate and mutual funds, while taking their eye off of the customer and the core business and, thereby, letting Home Depot and Lowes (and to a lesser degree Best Buy) gain an insurmountable lead. And that’s a real shame, not to mention a heartbreaking disservice to all those men and women who worked so hard to make Sears a retail icon.

Dead brand walking.

 

 

Slow motion crises

In the world of retail it’s pretty rare that brands get into trouble over night–much less over a matter of months or even years.

What will turn out to be the deathblow for Sears started with Walmart in the 1980’s, and was followed by Home Depot, Lowes and Best Buy chipping away at Sears core tools and appliance business as these insurgents opened new stores and improved their offerings over many, many years.

The ability to deliver books, music and other forms of entertainment digitally (or shipped directly to the consumer) just didn’t pop up one day. Blockbuster, Borders and Barnes & Noble had years to respond. They just didn’t in any especially powerful way.

Starbucks initiated its rapid store growth more than 20 years ago. And the broader reinvention of the retail coffee business by local independents, along with forays by Keurig, Nespresso and others, is hardly a recent phenomenon. Yet it’s hard to point to anything particularly innovative that industry leaders Folger’s and Maxwell House have done during this extended period, despite their brands continuing to lose sales and relevance.

As Macy’s, JC Penney, Dillards and other traditional department store players garner lots of negative press about their current struggles, we should remember that the department store sector has lost relative market share for more than two decades. Their problems are not simply a function of the growth of e-commerce. And even if they were, the best in class players were investing heavily in e-commerce–think Neiman Marcus and Nordstrom–more than 15 years ago.

Crises created by unforeseen events are one thing. Slow motion crises only reveal that we took our eyes off the ball, were too afraid to act or both.

The way to avoid a retail slow motion crisis is as follows:

  • Understand where customer value is being created on a go forward basis
  • Dissect your most valuable customer segments to understand where your brand is vulnerable and where you have potential leverage
  • Figure out where you can compete by modifying your core business and where you need to innovate outside of your core
  • Don’t be afraid to compete with yourself
  • Consider acquistions as way to build new capabilities quickly
  • Embrace a culture of experimentation
  • Spend more time doing, than studying.