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

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Retail · Store closings · The Amazon Effect

Department store quarterly performance: Better isn’t the same as good

Last week we had five major department stores report their quarterly earnings: Macy’sKohl’sNordstromDillard’s and JCPenney. It was a decidedly mixed bag relative to both expectations and absolute performance. Yet many observers seemed encouraged by the overall improvement in sales trend. Yet the overall sector is still losing market share, just not at quite as fast a rate. Which begs the question, is less bad somehow good?

It’s clear that one must pull out of a dive before an ascent can begin. It’s also obvious that reducing the rate of descent is no guarantee of a resurrection. Better is simply not the same as good. So to understand whether recent results provide a dose of optimism or are merely noise, it’s worth looking more closely at a few key considerations.

More rationalization must occur. The sector has been in decline for two decades–and not because of Amazon or e-commerce. The main reason is that department stores failed to innovate. They focused on expense reduction and excessive promotions, instead of being more remarkable and relevant. That won’t be fixed easily or quickly. So, in the meantime, there is simply too much supply chasing contracting consumer demand. Sector profitability isn’t going to improve much until Sears goes away and additional location pruning on the part of remaining players occurs.

Yet physical retail is not going away. Brick & mortar retail is becoming very different, but it’s far from dead. There is no fundamental reason why any given department store cannot not have a viable operation with hundreds of physical locations, particularly when we realize that some 80% of all products in core department store categories are purchased offline.

You can’t shrink to prosperity. Wall Street seems to think that store closings are a panacea. They’re wrong. It’s one thing to right-size both store counts and individual store sizes in response to overbuilding and shifting consumer preferences. It’s another thing to make a brand’s value proposition fundamentally more relevant and remarkable. Department stores must spend more time working on giving consumers reasons to shop in the channels they have (note: excessive discounting doesn’t count) and abandon the idea that shuttering scores of locations is a silver bullet.

Same-store sales are an increasingly irrelevant metric. Wall Street needs to let go of its obsession with same-store performance as the be-all-end-all performance indicator. Any decent “omni-channel” retailer should be on its way to–or as is already true with Nordstrom and Neiman Marcus well past–more than 20% of its overall sales coming from e-commerce. So unless a retailer is gobbling up market share most of that business is coming from existing stores. The reality is that shifting consumer preferences are going to make it nearly impossible for many retailers (of any kind) to run positive store comps. That does not mean a brand cannot grow trade area market share and profits. And it doesn’t mean that a given store is not productive even if sales keep trending down. Stores drive online, and vice versa. Smart retailers understand this and focus on customer segment and trade area dynamics, not merely individual store performance in isolation.

It is going to take more than a couple of quarters to fully understand whether the department store sector has stabilized, much less turned the corner. As we look ahead, of the five that reported, Nordstrom is clearly the best positioned, both from the standpoint of having relevant and differentiated formats and possessing physical and digital assets that are the closest to being “right-sized” for the future. And call me crazy, but I sense that JC Penney is actually starting to gain some meaningful traction. Dillard’s is a mess and Macy’s and Kohl’s remain very much works in progress.

Regardless, with tepid consumer demand and over-capacity, no department store brand (and I’d include Neiman Marcus and Saks in the mix as well) does especially well until we see further consolidation. And even when that occurs, if department stores keep swimming in a sea of sameness and engaging in a promotional race to the bottom, they have zero chance of getting back to a sustainable, much less interesting, level of performance. Better is nice. Encouraging even. But it is simply not the same as good.

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.

Being Remarkable · Innovation · Retail

Retailers picked a really bad time to be so boring

Perhaps you’ve noticed that things are pretty tough across the retail industry these days?

Competition has never been more fierce. Average unit retail prices are getting compressed, putting ever greater downward pressure on margins. Retailers and developers that overbuilt for years are at long last facing a reckoning. Radical transparency and ease of anytime, anywhere, anyway shopping are hammering those that have failed to innovate and differentiate.

Of course, not so long ago retail brands could get away peddling average products for average people. There was a time when retailers and the brands they sold held most of the cards. There was a time when rapid industry growth could smooth over patches of mediocrity. There was a time when being just a little bit interesting could win the customer’s attention and give retailers a good shot at making the sale.

That time is over. Forever.

Now the customer is very much in charge. Now largely stagnant markets require brands to steal share to have any chance of material top line growth. Now much of retail is drowning in a sea of sameness. Now the consumer is overwhelmed by choices and the battle for share of attention is only won by the weird, the intensely relevant, the remarkable.

And yet….

And yet when entrepreneurs chased force multiplication effectiveness, many legacy brands chose to focus on incremental efficiency gains. While innovative start-ups took risks, the big retailers mostly hunkered down. As a wave of profound change was rippling through the industry, many just decided to watch and study and analyze. But mostly watch. When venture capital was piling into the bold and interesting, much of mainstream retail remained decidedly dull.

There is no shortage of unique, impactful and useful innovations that have emerged from the new age of digital disruption. It’s just that so little of it has come from traditional retailers. At precisely the time that so many retailers desperately need innovation, their cupboards are woefully bare. Confronted by me-too marketing, look-a-like stores, repetitive products and shoddy customer experiences, so many once-proud brands still have next to nothing new, differentiated and exciting to offer.

Today you can take the name off the door and Staples, Office Depot and Office Max are virtually indistinguishable. Same for Macy’s and Dillard’s, Lowe’s and Home Depot. And on and on.

The danger of death by years of inaction, thousands of tiny compromises and clinging to the false notion that a company can shrink to prosperity is now very real. Half measures have availed them nothing. Taking so few risks has turned out to be the riskiest thing retailers could have possibly chosen.

In fact, it’s hard to imagine a worse time to be so boring.

And, ironically, many of these retailers are about to experience a lot of excitement. Just not the fun kind.

Now isn’t that special?

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.  

Being Remarkable · Customer Growth Strategy

Relevance-light models are now retail’s big problem

So-called “asset-light” business models, where a company has relatively few capital assets compared to the overall size of its operations, have drawn increasing attention (and investor dollars) in recent years. Think Airbnb, Uber, Snap and many other essentially digital-only brands. The concept isn’t new. Brand licensing and many hotel management and franchise-based businesses have employed this formula for years.

In fact, the initial appeal of e-commerce was centered on the notion that a profitable business could be built without expensive physical stores loaded up with gobs of inventory. Then people started to learn that even with relatively little capital tied up in brick & mortar, both online-only brands and the e-commerce divisions of omni-channel retailers still have a hard time making money.

Recently, more and more traditional retailers have been drinking the asset-light Kool-Aid. Sears Holdings CEO Eddie Lampert has been jettisoning real estate and investing heavily in e-commerce while largely ignoring physical stores. Macy’s, HBC and other department and specialty stores have been closing and/or spinning off real estate assets galore. JCPenney is among a number of retailers that are bringing in outside entities to run parts of their business, effectively reducing the risk of a heavy commitment to physical space and inventory.

Clearly some of these moves may make sense as either savvy financial engineering strategies or targeted product/service offerings. Well, not for Sears, but perhaps for others.

Yet as we seek to understand what’s behind the headline grabbing announcements–with many more certain to come–we should grasp one key concept. The fundamental problem at Sears, Penney’s, Macy’s, Kohl’s, Dillard’s and a host of other long suffering retail brands is not that they have too many assets. The driving issue is that they have too little relevance for the assets they possess. In fact, we need look no further than last week’s strong earnings announcements from Home Depot and Walmart to see that retail companies can have enormous physical assets and still remain relevant.

Unfortunately, more times than not, focusing attention on driving down assets (the denominator of a success equation) instead of improving customer relevance (the numerator) only helps the investor math for a short time. This is not to say that store closings are not needed. But the evidence is clear that plenty of asset-heavy retailers have figured out how to make money without embracing the store closing panacea.

Leaders and Boards of struggling retailers may think they are pursuing a smart asset-light strategy. My fear is that most of them are only deepening their commitment to a relevance-light model. And that’s likely to end badly.

 

A version of this post appeared @Forbes where I have recently become a retail contributor. To see more click here.

Being Remarkable · Customer-centric · Digital · Frictionless commerce · Omni-channel · Winning on Experience

Stop blaming Amazon for department store woes

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

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

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

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

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

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

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

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

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

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