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.

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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