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.

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

Physical retail is not dead. Boring retail is.

It may make for intriguing headlines, but physical retail is clearly not dead. Far from it, in fact. But, to be sure, boring, undifferentiated, irrelevant and unremarkable stores are most definitely dead, dying or moving perilously close to the edge of the precipice.

While retail is going through vast disruption causing many stores to close — and quite a few malls to undergo radical transformation or bulldozing — the reality is that, at least in the U.S., shopping in physical stores continues to grow, albeit at a far slower pace than online. An inconvenient truth to those pushing the “retail apocalypse” narrative, is that physical store openings actually grew by more than 50% year over year. Much of this is driven by the hyper-growth of dollar stores and the off-price channel, but there is also significant growth on the part of decidedly more upscale specialty stores and the move of digitally-native brands like Warby Parker and Bonobos into brick and mortar.

People also seem to forget that, according to most estimates, about 91% of all retail sales last year were still transacted in a brick-and-mortar location. And despite the anticipated continued rapid growth of online shopping, more than 80% of all retail sales will likely still be done in actual physical stores in the year 2025. Different? Absolutely. Dead? Hardly.

I have written and spoken about the bifurcation of retailand the collapse of the middle for years. While I was confident in my analysis, I had concluded much of this through intuition and connecting the dots from admittedly limited data points. Now, a brilliant new study by Deloitte entitled “The Great Retail Bifurcation” brings far greater data and rigor to help explain this growing phenomenon. Their analysis clearly shows that demographic factors — particularly the hammering that low-income people take while the rich get richer — help explain the rather divergent outcomes we see playing out in the retail industry today.

In particular, wage stagnation and the rising cost of “essentials” is driving lower income Americans to seek out lower cost, value-driven options. Rising fortunes for top earners, most notably ever greater disposable income, creates spending power for more expensive retail at the other end of the continuum. Deloitte’s data clearly shows the resulting strong bifurcation effect: Revenue, earnings and store growth at both ends of the spectrum and stagnation (or absolute decline) in the vast undifferentiated and boring middle.

Notably, if we isolate what’s going on with retailers focused on delivering convenience, operational efficiency and remarkably value-priced merchandise, along with those retailers that differentiate themselves on unique product and more remarkable experiential shopping (including great customer service, vibrant stores and digital channels that are well harmonized with their stores), you would conclude not only that physical retail isn’t dead, you could well argue it is quite healthy.

Conversely, the stores that are swimming in a sea of sameness — mediocre service, over-distributed and uninspiring merchandise, one-size-fits-all marketing, look-alike sales promotions and relentlessly dull store environments — are getting crushed. A close look at their performance as a group reveals lackluster or dismal financial performance and shrinking store fleets. For these retailers, by and large, physical retail is indeed dead or dying. But so are their overall brands.

It’s been clear for some time that the future of retail will not be evenly distributed. Those that have looked closely know that the retail apocalypse narrative is nonsense. Yet, depending on where brands sit on the spectrum, the impact of digital disruption and the age of Amazon is affecting them quite differently. For some, at least for now, it’s much ado about nothing. For others, it should be sheer, full-on panic.

These forces, along with the underlying macroeconomic factors that Deloitte illuminates in their report, bring far greater clarity to what many have been missing, leaving the savvy retail executive to conclude a few key things:

  1. Physical retail is not dead, but it’s very different
  2. The future of retail will not be evenly distributed
  3. The market is likely to continue bifurcating and, increasingly, it’s death in the middle
  4. It’s a really bad time to be boring
  5. Struggling retailers need to pick a lane
  6. If you think you are going to out-Amazon Amazon you are probably wrong
  7. Most likely you are going to have to have to choose remarkable
  8. You have to get started and you had better hurry
  9. What better time than now?

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.  

My next speaking gig is in Madrid at the World Retail Congress.  Check out the speaking tab on this site for more on my keynote speaking and workshops.

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.

Customer Growth Strategy · e-commerce · Marketing · Retail

Unsustainable Customer Acquisition Costs Make Much Of Ecommerce Profit Proof

As much attention as both the growth and disruptive nature of e-commerce receives, few observers seem realize that often the economics of selling online are terrible (what I often refer to as “the inconvenient truth about e-commerce”). The fact is only a handful of venture capital funded “pure-plays” have (or will ever) make money and most are now embarked on a capital intensive foray into physical retail that even Alanis Morissette would find deeply ironic. Amazon, which accounts for about 45% of all US e-commerce,  has amassed cumulative losses in the billions, and even after more than 20 years still operates at below average industry margins. And while I have yet to see a comprehensive breakout, it’s clear that the e-commerce divisions of many major omni-channel retailers run at a loss–or at margins far below their brick & mortar operations.

So why is this?

Last month I wrote a post pointing out how high rates of returns, coupled with the growing prevalence of free shipping “both ways”, makes certain online product categories virtually profit proof. While the impact of this factor tends to be isolated to categories with relatively low order values and a high incidence of returns or exchanges (e.g. much of apparel), a different dynamic has wider ranging implications and profit killing power. I’m referring to the increasingly high cost of acquiring (and retaining) customers online.

Investors have been lured (some might say “suckered”) into supporting “digitally-native” brands because of what they believed to be the lower cost, easily scaled, nature of e-commerce. Seeing how quickly Gilt, Warby Parker, Bonobos and others went from nothing to multi-million dollars brands, encouraged venture capital money to pour in. What many failed to understand were the diseconomies of scale in customer acquisition. As it turns out, many online brands attract their first tranche of customers relatively inexpensively, through word of mouth or other low cost strategies. Where things start to get ugly is when these brands have to get more aggressive about finding new and somewhat different customers. Here three important factors come into play:

  • Marketing costs start to escalate. As brands seeking growth need to reach a broader audiencethey typically start to pay more and more to Facebook, Google and others to grab the customer’s attention and force their way into the customer’s consideration set. Early on customers were acquired for next to nothing; now acquisition costs can easily exceed more than $100 per customer.
  • More promotion, less attraction. As the business grows, the next tranches of customers often need more incentive to give the brand a try, so gross margin on these incremental sales comes at a lower rate. It’s also the case that typically these customers get “trained” to expect a discount for future purchases, making them inherently less profitable then the initial core customers for the brand.
  • Questionable (or lousy) lifetime value. It’s almost always the case that customers that are acquired as the brand scales have lower incremental lifetime value, both because on average they spend less and because they are inherently more difficult to retain. It’s becoming increasingly common for fast growing online dominant brands to have large numbers of customers that are projected to have negative lifetime value.

So it’s easy to see how an online only brand can look good at the outset, only to have the profit picture deteriorate despite growing revenues. The marginal cost of customer acquisition starts to creep up and the average lifetime value of the newly acquired customer starts to go down, often precipitously. Accordingly it’s not uncommon for some of the sexiest, fastest growing brands to have many customers that are not only unprofitable, but have little or no chance of being positive contributors ever.

While it’s not the only reason, this challenging dynamic explains in large part the collapse of valuations in the flash-sales market in total, as well as several major flameouts like One Kings Lane. It also helps explain why so many pure-plays are investing heavily in physical locations. To be sure, opening stores attracts new customers that are reticent to buy online. But another key factor is that customers can often be acquired in a store more cheaply than they can be by paying Facebook or Google.

Slowly but surely the world is starting to wake up to this phenomenon. The nonsense that is the meal-kit business model is finally getting the scrutiny it deserves as people start to question whether Blue Apron is a viable business if it spends $400 to acquire new customers. Spoiler alert: the answer is “no.” Increasingly, many “sophisticated” investors are backing off the high valuations that digitally-native brands are seeking to fuel the next stage of their growth, leaving these companies to thank their lucky stars that Walmart seems to relish its role as a VC bailout fund. More folks are starting to realize that physical retail is definitely different, but far from dead. And, in another bit of irony, some even are starting to see that many traditional brands (think Best Buy, Nordstrom, Home Depot and others) are actually well positioned to benefit from their stores and improving omni-channel capabilities.

It may take some time, but eventually the underlying economics tell the tale.

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.

Innovation

The future of retail will not be evenly distributed

If you follow retail at all you’ve no doubt read multiple recent stories claiming that we are in the midst of a “retail apocalypse.” Like Chicken Little, these journalists and pundits see the sky falling on physical stores and a veritable tsunami of store closings, mall foreclosures and bankruptcies. I imagine they also expect a plague of locusts to descend upon us at any minute, as darkness covers the land.

Of course, this is all nonsense. The reports of traditional retail’s death are, to paraphrase Mark Twain, “greatly exaggerated”–as several of my esteemed colleagues have rightly pointed out. Barring an asteroid hitting Earth, the vast majority of retail will still be done in brick & mortar stores for a long, long time. Most of the major retail brands we know and love will remain household names. Hundred of regional malls will not only survive but continue to do quite well, thank you.

While the disaster scenarios are fake news, one can’t be too sanguine either. Yet, at the other end of the spectrum, we now have an emerging cadre of apocalypse deniers, who counter the claims of the alarmists with their own equally false narrative. Let’s take a look at their most common arguments.

Retail is still growing. This is true, but very misleading. First, the tepid growth in physical retail is not keeping pace with inflation, contributing to a profit squeeze for most players. Second, the main thing that nudges the number into the positive is the concentrated out-sized growth in a few categories, most notably off-price and dollar stores. So the growth in retail is good for a few–and pretty much sucks for everyone else.

Overbuilding of stores is causing a one-time correction. I’d rate this one “true-ish.” The US has been over-stored and over-malled for more than a decade and eventually, the bubble had to burst. But the rationalization and consolidation of commercial real estate go beyond a mere correction, however deep. We are witnessing a fundamental re-structuring of both the number of retail locations and the size and configuration of those boxes. Certainly, a big whack to the stores counts of flagging retailers was (and remains) overdue. And I do expect that the pace of store closings will subside substantially after the first quarter of next year. But anyone who doesn’t see the profound shift is missing the big picture.

Besides lots of new stores are opening. Yes, and this is one of the reasons that physical retail is far from extinct. But–and it’s a big but–while thousands of new stores are opening, they are, almost across the board, much smaller footprints than the stores being shuttered AND they are typically located in very different types of real estate. Hundreds of TJ Maxx and Dollar General stores don’t come close to offsetting the impact of hundreds of Sears, J.C. Penney and Macy’s closings. And while the store openings of  “disruptors” like Bonobos and Warby Parker get a lot of press, not only are their stores tiny, they are very likely to slow their pace substantially unless they can begin to demonstrate profitability.

Malls and retailers are re-inventing themselves with an emphasis on experience. Without question, the most successful malls are reformatting, adding restaurants, theaters, hot specialty formats and other experiential elements to differentiate themselves and drive foot traffic. The problem is bulldozing a mall anchor and/or replacing failed retail tenants with a steak house, juice bar or art show may be smart business for the developer, but it doesn’t necessarily help the retailers that are struggling. As far as retailers themselves, yes, a few are investing in experiential improvements, but for every cool Nike or Apple store there are dozens of retailers that haven’t invested a bit in innovation (or have limited themselves to some gimmicky shiny object that has an immaterial impact on customer relevancy).

The issue is that the future of retail will not be evenly distributed. Far from it.

Even a small shift of spending online (or failure to maintain real growth) can cause a great deleveraging of physical store economics. The closing (or massive re-purposing) of lower quality malls will be highly disruptive to particular major tenants. Online is growing disproportionately, affecting certain categories far more than others. Customers’ continued willingness to trade down and shop for discounts puts greater pressure on retailers with weaker value propositions and poor cost positions. And on and on.

Apocalypse? No.

But the suggestion that most retailers are not seeing their world’s rocked mightily is both misguided and dangerous. Similarly, the blanket notion that the sky is falling on everyone is equally wrong-headed.

Yet the harsh reality is that few retailers will escape unscathed from the seismic changes affecting the industry. Indeed we stand at a precipice. Without radical change and heretofore unseen levels of innovation, many major players are in for a world of hurt.

The clock is ticking. I’d hurry if I were you.

william_ford_gibson

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.  

Digital · e-commerce

Walmart’s E-commerce Strategy: Pure Genius Or Venture Capitalist Bailout Fund?

Some believe Walmart should be pilloried for its laggard status in e-commerce. Many of these same folks are now cheering the company’s decision to put all e-commerce under internet wunderkind Mark Lore, as well as its new aggressive strategy to acquire online brands (Jet, ModCloth, ShoeBuy, MooseJaw and–apparently any minute–Bonobos). At last, they say, the company is serious about taking on Amazon.

The contrarian view is that Walmart was right to go slow in online shopping because of how hard it is to make money, and that encouraging too much volume to shift from physical to digital channels would de-leverage brick & mortar store economics unnecessarily. Moreover, spending billions to acquire brands that seem to have little prospect of ever being cash positive may appease Wall Street, but it is throwing good money after bad. More than a few folks have also intimated that Walmart is mostly bidding against itself in these deals as the “smart money” now sees how crazy many so-called digitally-native brand valuations have become.

I tend to side with the latter camp. And, full disclosure, I’ve never understood how Jet.com could ever make any real money. I’ve also been on record for some time in my view that much of e-commerce is profit proof and that most digitally-native brands will never turn profitable. Of course, the jury is still out on most of this, but the collapse of the flash-sales market and recent big write-downs of some high-fliers should give investors pause and encourage them to see past the hype and to dig deeper.

Either way, there are a few important things to consider as Walmart’s strategy unfolds:

  • Shopping behavior is morphing dramatically. While e-commerce remains small to the total, it is growing much faster than physical store shopping. More importantly, most shopping trips start online. Any retailer that fails to have a strong digital presence and does not offer a well integrated shopping experience will be at a distinct competitive disadvantage. Walmart, like every other retailer, needs to respond to this trend aggressively even if the marginal economics aren’t always so favorable.
  • A digital-first mindset is critical. Here is where most “traditional’ brands get stuck. When a culture is rooted in the old way of doing business and holds on to product-centric thinking and siloed organizational structures, much needed innovation is thwarted and vast numbers of opportunities are missed. Arguably, the greatest value from Walmart’s new acquisition strategy is that they are injecting a new mindset into the organization and jump-starting a cultural transformation that can pay vast dividends.
  • Demographics are destiny. The core Walmart model is rapidly maturing. Walmart has never done well with more affluent consumers and they are likely not doing particularly well with acquiring increasingly important Millennial customers. One way or another, to sustain growth Walmart needs to figure this out and scale it quickly.
  • Organic growth is hard and time is not our friend. Most large companies struggle to move the needle on growth in any material way through their own internal efforts. If anything, the pace of change is accelerating. Clearly, a smart acquisition strategy is one way to address both of these challenges.
  • E-commerce valuations are mostly irrational. I have consulted to multiple investment firms and conducted due diligence on quite a few e-commerce deals–including one of the brands that Walmart acquired. In every case the prices that were being discussed at the time either proved to be ridiculously high (as evidenced by subsequent write-downs) or the company could not present a compelling roadmap to profitability. Clearly there are, and will continue to be, exceptions. But irrationality does not last forever. Bubbles eventually burst.

As skeptical as I am, Walmart needs to do something big and bold. Minimally, their culture will get shaken up, likely in a very good way. Managing a portfolio of innovative brands should give them plenty of useful learning. And, in the scheme of things, a poor ROI on a few billions dollars will hardly bring them to their knees.

Yet mostly I am struck by the words of a venture capitalist who has been struggling mightily with how he was going to salvage a multi-million dollar investment in a “disruptive” online brand that has garnered gobs of good PR but is burning through cash with no end in sight.

As he reflected on Walmart’s most recently announced acquisition he told me this: “Now I wake up every day and thank God for companies like Walmart.”

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.  

Digital · e-commerce · Omni-channel

An inconvenient truth about e-commerce: It’s largely unprofitable

The disruptive nature of e-commerce is undeniable. Entirely new business models are revolutionizing the way we buy. The transformative transparency created by all things digital has revolutionized product access, redefined convenience and lowered prices across a wide spectrum of merchandise and service categories. The radical shift of spending from brick & mortar stores to online shopping is causing a massive upheaval in retailers’ physical footprint, which looks to continue unabated.

But the inconvenient (and oft overlooked) truth is that much of e-commerce remains unprofitable–in many cases wildly so–and many corporate and venture capital investments have no prospect of earning a risk-adjusted ROI.

While it was once thought that the economics of selling online were vastly superior to operating physical stores, most brands–start-ups and established retailers alike–are learning that the cost of building a new brand, acquiring customers and fulfilling orders (particularly if product returns are high) make a huge percentage of e-commerce transactions fundamentally profit proof. Slowly but surely the bloom is coming off the rose.

Despite the hype–and a whole lot of VC funding–it’s increasingly clear that most of pure-play retail is dying, as L2’s Scott Galloway lays out better than I can. We have already seen the implosion of the flash-sales sector and the collapsing valuations of once high-flying brands like Trunk Club and One King’s Lane. Just the other day Walmart announced it was acquiring ModCloth, reportedly for less than the cumulative VC investment. A broader correction appears to be on the horizon and I suspect we will see a number of high-profile, digitally native brands get bought out at similarly discounted prices. And, ironically, we will continue to witness a doubling down of efforts by many of these same brands to expand their physical footprints, some of which is certain to end badly.

The challenges for traditional retailers and their “omni-channel” efforts are even more vexing. Walmart, Pier 1, H&M and Michaels are among the many retailers that have been criticized for their slowness to embrace digital shopping. Yet I suspect their seemingly lackadaisical approach owes more to their understanding of e-commerce’s pesky little profitability problem than corporate malfeasance. Alas, more and more retailers are increasing their investment in online shopping and cross-channel integration only to experience a migration of sales from the store channel to e-commerce, frequently at lower profit margins. Moreover, this shift away from brick & mortar sales is causing these same retailers to shutter stores, with no prospect of picking up that volume online. The risk of a downward spiral cannot be ignored.

Given the trajectory we are on it’s inevitable that more rational behavior will creep back into the market. But with Amazon’s willingness to lose money to grow share and investor pressure on traditional retailers to “rationalize” their store fleets, I fear it will take several years for the dust to truly settle.

In the meantime, e-commerce continues to be a boon for consumers and a decidedly mixed bag for investors.

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

 

Being Remarkable · Digital · Omni-channel · Personalization · Retail

The fault in our stores

Last week Target became the latest retailer to report weak earnings and shrinking physical store sales. They certainly won’t be the last.

As more retail brands disappoint on both the top and bottom lines–and announce scores of store closings–many may conclude that brick-and-mortar retail is going they way of the horse-drawn carriage. Unfortunately this ignores the fact that roughly 90% of all retail is still done in actual stores. It doesn’t recognize that many retailers–from upstarts like Warby Parker and Bonobos, to established brands such as TJMaxx and Dollar General–are opening hundreds of new locations. It also fails to acknowledge the many important benefits of in-store shopping and that study after study shows that most consumers still prefer shopping in a store (including millennials!)

Brick-and-mortar retail is very different, but not dead. Still, most retailers will, regardless of any actions they take, continue to cede share to digital channels, whether it’s their own or those of disruptive competitors. To make the best of a challenging situation, retailers need a laser-like focus on increasing their piece of a shrinking pie, while optimizing their remaining investment in physical locations. And here we must deal with the reality that aside from the inevitable forces shaping retail’s future, there are many addressable faults in retailers’ stores. Here are a few of the most pervasive issues.

The Sea Of Sameness

Traditionalists often opine that it all about product, but that’s just silly. Experiences and overall solutions often trump simply offering the best sweater or coffee maker. Nevertheless, too many stores are drowning in a sea of sameness–in product, presentation and experience. The redundancy in assortments is readily apparent from any stroll through most malls. The racks, tables and signage employed by most retailers are largely indistinguishable from each other. And when was the last time there was anything memorable about the service you received from a sales associate at any of these struggling retailers?

One Brand, Many Channels

Too many stores still operate as independent entities, rather than an integral piece of a one brand, many channels customer strategy. Most customer journeys that result in a physical store visit start online. Many customers research in store only to consummate the transaction in a digital channel. The lines between digital and physical channels are increasingly blurred, often distinctions without a difference. Silos belong on farms.

Speed Bumps On The Way To Purchase

How often is the product we wish to buy out of stock? How difficult is it to find a store associate when we are ready to checkout? Can I order online and pick up in a store? If a store doesn’t have my size or the color I want can I easily get it shipped to my home quick and for free? Most of the struggling retailers have obvious and long-standing friction points in their customer experience. When in doubt about where to prioritize operational efforts, smoothing out the speed bumps is usually a decent place to start.

Where’s The Wow?

As Amazon makes it easier and easier to buy just about anything from them, retailers must give their customers a tangible reason to traffic their stores and whip out their wallets once there. Good enough no longer is. Brands must dig deep to provide something truly scarce, relevant and remarkable. Much of the hype around in-store innovations is just that. For example, Neiman Marcus’ Memory Mirrors are cool, but any notion that they will transform traffic patterns, conversion rates or average ticket size on a grander scale is fantasy. Much of what is being tested is necessary, but hardly sufficient. The brands that are gaining share (and, by the way, opening stores) have transformed the entire customer experience, not merely taken a piecemeal approach to innovation.

Treat Different Customers Differently

In an era where there was relative scarcity of product, shopping channels and information, one-size-fits all strategies worked. But now the customer is clearly in charge, and he or she can often tailor their experience to their particular wants and needs. Retailers need to employ advanced analytical techniques and other technologies to make marketing and the overall customer experience much more personalized, and to allow for greater and greater customization. More and more art and intuition are giving way to science and precision.

Physical retail is losing share to e-commerce at the rate of about 110 basis points per year. While that is not terribly significant in the aggregate, this erosion will not be evenly distributed and the deleveraging of physical store economics will prove devastating to many slow to react retailers. This seemingly inexorable shift is causing many retailers to reflexively throw up their hands and choose to disinvest in physical retail. The result, as we’ve seen in spades, is that many stores are becoming boring warehouses of only the bestselling, most average product, presented in stale environments with nary a sales associate in sight.

The fault in our stores are legion. But adopting an attitude that stores are fundamentally problems to be tolerated–or eliminated–rather than assets to be leveraged and improved, makes the outcome inevitable and will, I fear, eventually seal the fate of many once great retailers.

PurpleCow

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

Digital · Omni-channel · Retail

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

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

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

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

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

Alas, this is unlikely to last much longer.

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

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

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

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

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

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

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

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

 

 

 

 

 

Being Remarkable · Branding · Digital

Creating meaning at scale

In case you haven’t noticed, there is a whole lot of bifurcation going on. And in many markets, the middle is all but collapsing.

bridges_down_01

At one end are the Walmart’s, the Home Depot’s, the Amazon’s–the low price, vast assortment guys. Their pitch is easy to understand. We have just about everything you could possibly want, virtually anytime you want it, at the low, low price. Operationally this is incredibly difficult to scale. But from the customer’s perspective, it couldn’t be more simple to grasp. Dominance and value (defined by price) creates meaning.

At the other end of the spectrum are the brands built around market niches, product differentiation and the somewhat intangible “brand personality.” What defines meaningfulness here is built on deep customer insight, emotional connection and, more and more, the ability to treat different customers differently.

Historically, luxury brands thrived by merchandising exclusive products in spectacular settings delivered face-to-face by well-trained sales associates. To the extent companies could replicate this model as they added stores, they could continue to create meaning and deliver it at scale. Yet, as all things digital become increasingly important, the notion of what constitutes a meaningful one-to-one “luxury” relationship is being challenged.

The best specialty stores have succeeded by curating merchandise for a particular “lifestyle” and presenting it in a distinctive environment that reinforced a unique brand image. These companies created a business model that was simple to replicate and led to the ubiquity of many of these brands in affluent malls and upscale shopping areas of most major cities. Now, with product choice and availability exploding and new micro-niche brands emerging online, the concept of “specialty” is being redefined.

The hyper-growth, venture-backed “pure-play” brands that have launched over the past few years–think Gilt, Bonobos, Warby Parker–found it comparatively easy to scale at first. They exploited many of the advantages of a direct-to-consumer model and employed low-cost acquisition techniques to build an initial base of customers–what I like to call the obsessive core.

But it turns out that creating meaning at the scale that will lead to profitability isn’t so easy (or economically viable). Too many newer customers of these high-flying brands have started to equate meaning with discounts. Others, it turns out rather predictably, need the meaning that comes from a physical presence to derive theirs. Many see this hybrid-model as an exciting new area of growth. Others see it as clear evidence that most e-commerce only brands are finding it very difficult to deliver meaning at scale.

In an anything, anytime, anywhere, anyway world, it’s getting harder and harder to break through the clutter, to win the battle for share of attention, to create the all essential meaning that matters for customers.

If you seem to be stuck in a sea of sameness, selling average products to average people, relentlessly promoting just to stay even, it’s time to get off the bridge. The collapse is near.

If your customer is choosing you mostly on price, you had better be the low-cost provider. Otherwise you will lose the inevitable race to the bottom.

If you believe you have the ability to be meaningful to a well-defined set of customers who choose you over the competition for specific, sustainable reasons, good on you.

Just remember, as Bernadette reminds us, it’s not so easy to create meaning at scale, particularly if you need that scale to stay in business.