Macy’s and JC Penney earnings offer evidence of the stall at the mall

On the basis of early results (and specious or unreliable indicators), many industry observers predicted this would be the best holiday season in a long time. It turns out, eh, not so much. In fact, at least one guy was pretty skeptical all along.

But you don’t have to be some sort of retail savant (I’m not) or have the gift of prophecy (I don’t) to have seen this coming. While the idiotic U.S. government shutdown, along with every retailer’s favorite scapegoat (the weather), had a largely unexpected dampening effect, anyone who was paying attention could have predicted that retailers with highly customer-relevant and remarkable offerings would do comparatively well and that those stuck in the boring middle would continue to struggle. Which brings me to Macy’s and JC Penney, the two mall-based department stores that reported earnings this week.

Under the newish leadership of Jeff Gennette, Macy’s has embarked on a number of new initiatives, which my fellow Forbes contributor Walter Loeb recently outlined. While I applaud the company’s willingness to try new things, its results continue to be decidedly uninspiring. As sales continue to go nowhere, Macy’s has resorted to what just about every other retailer that can’t seem to get on a path to being truly customer relevant does—namely, cut costs and close stores. As the saying goes, when all you have is a hammer, everything starts to look like a nail. w

JC Penney recently reported fourth-quarter earnings and managed to top analysts’ estimates. And when we say “top,” we mean they were not quite as horribly sucky as anticipated. Same-store sales were down “only” 4%, and operating losses were only somewhat awful. And, you guessed it, the company also announced it was going to close a bunch of stores.

Amid the generally bad news—which comes, I might add, as Sears (its neighbor in hundreds of locations) hemorrhages market share—was one bright spot: The company did manage to reduce bloated inventory levels by some 13%.

New CEO Jill Soltau also said that the company “has the capacity to produce improved results.” You know, kind of like I have the capacity to complete a triathlon. So good luck and Godspeed to us both.

As Macy’s and JC Penney close the financial chapter on 2018 and try, yet again, to reset their overall cost base, there are five things that need to be kept front and center as we move forward.

1. The stall at the mall is real, and there is no going back. As I’ve written about many times, the moderate-department-store sector has been losing share for decades, first to discount mass merchants and category killers and then (mostly) to off-price retailers. The format is structurally disadvantaged. Accept the things you cannot change.

2. Stop blaming Amazon. To be sure, the growth of online, and Amazon in particular, has added extra challenges, but most of the share losses in the past decade have not been to online-only players, and as mentioned above, both these brands were struggling way before Jeff Bezos had impressive biceps. And by the way, I’m pretty sure there is no law against Macy’s and JC Penney having really good digital capabilities (see Neiman Marcus, Nordstrom et al.).

3. Get out of the boring middle. If you continue to swim in a sea of sameness, you are going to drown. If you continue to chase promiscuous shoppers, your margins will stay low. If you continue to try to be a slightly better version of offering average products for average people, your best-case outcome is average results. Better is not the same as good. You have to choose to be truly remarkable.

4. It’s a customer-relevance problem, not a cost problem. Given the structural issues facing mall-based retailers, as well as the broader shift to online shopping, we often jump to the conclusion that brands like Macy’s and JC Penney can shrink their way to prosperity. This is fundamentally wrong and, in most cases, ultimately destructive. It also belies the fact that plenty of “traditional” retailers have managed to thrive by opening stores and foregoing massive cost-cutting. Time and time again we see that brands that get into big trouble have a problem being customer relevant and memorable yet decide instead that they have a too-many-stores and too-much-staff problem. This is not to say that Macy’s and JC Penney can’t thrive with less square footage; they can and should optimize their store fleets. But there is plenty of business to be done directly in and, more importantly, by leveraging brick-and-mortar locations. As we move ahead, the overwhelming majority of Macy’s and JC Penney’s efforts must be about growing share with their target consumers through improved relevance.

5. Aggressive trade-area based goals. We need to get away from the hyper-focus on comparable-store sales and realize that online drives offline and vice versa—and that the store is the heart of most brands’ customer ecosystems. Accordingly, the metric we should pay most attention to is how retailers are gaining share (customer relevance) and profits on a trade-area by trade-area basis, regardless of channel. If Macy’s and JC Penney are going to be around for the long term, they likely need to be growing at least 3-5% in every trade area where they have stores and be growing faster than inflation overall. Closing many more locations risks impacting both customer relevance and necessary scale economies.

In the next year or two, things are likely to remain especially noisy as the long overdue correction in commercial real estate settles out and the weakest competitors make their way to the retail graveyard. And even if that were not true, both Macy’s and JC Penney face significant structural headwinds as well as daunting operating challenges making their way out of the boring middle—although, to be fair, Macy’s is definitely further along.

Despite the noise, from where I sit, one thing is clear: Neither brand will cost-cut or store-close their way to prosperity. If revenues don’t start to consistently grow faster than industry averages (and that’s likely to come with relatively flat physical-store sales and online growth of at least 15-20 %), then both chains will continue to lose relative customer relevance, and a downward spiral is likely inevitable.

A slightly better version of mediocre is rarely a winning strategy.

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.  

Retailers’ pointless pursuit of the promiscuous shopper

I’m not sure who said it first, but it’s certainly true that great brands don’t chase customers, they attract customers to them. But I think it goes deeper than that.

This week, as many retailers close their books for the fiscal year, those that remain stuck in the boring middle are very likely to experience weakening margins–or margins that remain materially below industry averages. And when some of the faster growing public “digitally-native” brands share their quarterly numbers, there is a good chance that their margins will be poor as well. The relentless, expensive and mostly futile pursuit of the promiscuous shopper deserves much of the blame.

By promiscuous shopper I don’t simply mean those folks that are value conscious or use technology to be sure they aren’t getting ripped off. Many people do that. What I’m referring to are those shoppers that have virtually zero propensity to remain loyal within a particular category and are constantly searching for the best deal. Clearly having too many of these customers in a retailer’s portfolio can make it impossible to grow enterprise value if they don’t spend at all without receiving a big fat discount. In some cases (as Peter Fader and Dan McCarthy’s work has illuminated) many of these customers may actually have negative marginal value. So the more a brand grows, the worse it gets. But enough about Wayfair.

Of course plenty of this is self-inflicted and hardly new. Over multiple decades the retail industry has done a great (and by “great” I mean “lousy”) job teaching customers to wait for a deal and that regular price is not only mostly meaningless but is often “the sucker price.” The long-suffering department store sector is perhaps the poster-child for this behavior, with constant promotions and the layering on of “friends & family” and private label credit card discounts. That doesn’t seem to be working out all that well. But we also have Bed, Bath & Beyond with their ubiquitous coupons, as well as plenty of other retailers offering a litany of buy 1, get 2 (or 3!) free promotions that obliterate any concept of regular price.

Despite a long-history of “promotional retail”, in recent years this chasing of the promiscuous shopper has gotten worse and now makes it imperative for retailers to get their acts together. Pricing information used to be relatively scarce (or hard to come by). Today, not so much. As the power has shifted to the customer it’s next to impossible for any retailer to get away with having uncompetitive pricing. More pernicious, though, is the heavy discounting on the part of venture capital funded “disruptive” brands. As these companies seek to maintain their growth trajectory and/or seek to be the last brand standing in a rapidly maturing segment (think flash-sales 5 years ago and subscription meal kits today), massive discounts are being thrown at new customers, many of whom will simply go back and forth from one largely interchangeable brand to the next. This will end badly.

So what’s the solution? First of all, if the underlying business model is unremarkable, a more sensible promotional strategy is necessary, but not sufficient. To be sure, JC Penney spends way too much time and energy chasing promiscuous shoppers. So does Macy’s. But their issues go beyond a lack of more sophisticated target marketing. There are always better ways to chase customers, but it’s the chasing that is the core issue.

Nevertheless, all brands need to understand both their marginal customer economics and lifetime value at a detailed level. They need to find more ways to treat different customers differently. In some cases that means stop pursuing customers that can never be profitable. But in most cases it will mean a much more finely honed and personalized set of customer-focused strategies informed by deep customer insight.

The fact is very few brands can ever “own” discount–and those retailers that try to compete with them are merely engaging in a race to the bottom. If your brand only gets love when you pay for it, aside from the not so nice metaphor, you might want to get to work on the underlying reasons.

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.  

I was honored and humbled to move up to #5 on Vend’s 2019 Top Retail Influencer List and to be recently named a Top Retail Tech Influencer to follow on Twitter.

Nordstrom: No good deeds go unpunished

Nordstrom–not only one of my favorite places to shop but also a brand I regularly feature in my keynotes on remarkable retail–recently reported strong quarterly operating performance and raised its outlook. So, naturally the stock promptly got whacked–and continues to be caught up in the market downdraft. To be sure, a non-recurring $72MM charge related to credit card billing errors does not inspire confidence. But unless this unexpected earnings hit suggests some underlying management issue it indicates nothing about the go-forward health of the business which, from where I sit, looks rather healthy.

It IS a confusing time for shares of most retailers. I’m not talking about JC Penney, Sears or legions of others hopelessly stuck in the boring middle. I’m referring to companies that are not only competitively well positioned but have also recently reported solid sales and earnings. Despite a strong consumer outlook, everyone from Amazon to Walmart to Macy’s to Home Depot to Target seems to be falling out of favor. Some of this is surely part of the broader market correction and lingering tariff concerns. But much of it is more than a bit mystifying.

In Nordstrom’s case, I remain bullish. The company is showing signs of maturity and is hardly immune from the competitive pressures brought on by industry over-building and digital disruption. Barring a wholly new and unexpected major growth initiative, the accessible luxury retailer has few new locations to open and already has a very well developed e-commerce and off-price business. Yet they seem to be executing well on most of my 8 Essentials of Remarkable Retail and that bodes well for the future. Let’s take a closer look.

  1. Digitally-enabled. For more than a decade Nordstrom has not only been building out best-in-class e-commerce capabilities (online sales now account for 30% of total company revenues!), but architecting its customer experience to reflect that the majority of physical stores sales start in a digital channel. Nordstrom complements its already excellent in-store customer service by arming many sales associated with tablets or other mobile devices.
  2. Human-centered. Being “customer-centric” sounds good, but most efforts fall short largely because brands do not actually incorporate empathetic design-thinking into just about everything they do. Nordstrom, like their neighbors up the street, are much closer to customer-obsessed than virtually all of their competition.
  3. Harmonized. This is my reframe of the over-used term “omni-channel.” But unlike the way many retailers have approached all things omni, it’s not about being everywhere, it’s showing up remarkably where it matters. And it’s realizing that customers don’t care about channels and it’s all just commerce. The key is to execute a one brand, many channels strategy where discordant notes in the customer experience are rooted out and the major areas of experiential delight are amplified. Nordstrom scores well on all key dimensions here–and has for some time. Nordstrom was a first mover in deploying buy online pick-up in store (BOPIS) and continues to elevate its capabilities by dedicating (and expanding) in-store service desks, among other points of seamless integration.
  4. Personal. With a newly improved loyalty program, private label credit card business and high e-commerce penetration, Nordstrom has a massive amount of customer data to make everything it does more intensely customer relevant. Its targeted marketing efforts are good and getting better and it has identified implementing “personalization at scale” as a strategic priority. Fine-tuning its one-to-one marketing efforts, introducing more customized products and experiences and further leveraging its personal shopping program represent additional upside opportunities.
  5. Mobile. Recognizing that a smart device is an increasingly common (and important) companion in most customers’s shopping journeys, Nordstrom has been building out its capabilities, including acquiring two leading edge tech companies earlier this year. Its increasingly sophisticated and useful app has helped earn the brand a top ratingin 2018 Gartner L2’s Digital IQ rankings.
  6. Connected. While there are opportunities to participate more actively in the sharing economy, Nordstrom’s overall social game is strong, earning it the leading US department store rating from BrandWatch.
  7. Memorable. While its department store brethren are swimming in a sea of sameness, Nordstrom excels on delivering unique and relevant customer service and product. It continues to strengthen its merchandise game by offering a well-curated range of price points across multiple formats. This offering is increasingly differentiated–either because the brands are exclusive to Nordstrom or are in limited distribution. Nordstrom’s plan to up the penetration of “preferred”, “emerging” and “owned” brands strengthens the brand’s uniqueness and should provide improved margin opportunities.
  8. Radical. Nordstrom is not quite Amazon-like in its commitment to a culture of experimentation and willingness to fail forward, but they have placed some pretty big equity bets in fast-growing brands like HauteLook, Bonobos and Trunk Club (whoops), in addition to being one of the first traditional retailers to launch an innovation lab (since absorbed back into the company). They are constantly trying new things online and in-store. Most interesting are their new Local concepts  Unlike some competitors who are trying smaller format stores mostly by editing out products and/or whole categories, Local is a completely re-conceptualized format emphasizing services and convenience. These stores have the potential to be materially additive to market share on a trade-area by trade-area basis.

As mentioned at the outset, Nordstrom is a comparatively mature brand with limited major growth pathways. But to view the company from the lens that is weighing on most “traditional” retailers does not appreciate the degree to which the company has outstanding real estate (~95% of full-line stores are in “A” malls), one of the few materially profitable and superbly-integrated digital businesses, strong customer loyalty and important differentiators in customer service and merchandise offerings. Moreover, most of its out-sized capital investments (including expansion into Canada and NYC) will soon be behind it.

Nordstrom will never have the upside that Amazon (or even TJX) has. But it is one of the best positioned, well-executed retailers on the planet. I don’t expect that to change any time soon.

Maybe it’s time for a little bit more respect?

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.  

I’m honored to have been named one of the top 5 retail voices on LinkedIn.  Thanks to all of you that continue to follow and share my work.

Retail earnings: The best of times, the worst of times

This is a big earnings period for retailers. As the reports roll in, it’s increasingly clear that it’s both the best of times and the worst of times for retail.

While performance overall is, on average, much better than a year ago, what continues to come into sharper relief are three inescapable conclusions. First, as I have been saying for years, the idea that physical retail is dying is abject nonsense. Second, retailers that are stuck in a cycle of boring are getting crushed, and the middle is collapsing. Third, as our friends at Deloitte have recently outlined in depth, the bifurcation of retail is becoming more pronounced. The overall conclusion is that the difference between the haves and the have nots is ever more distinct.

On the first point, strong performance from multiple brick-and-mortar dominant retailers, including Target and Home Depot, underscores that stores are not only going to be around for a long time, they will continue to have the dominant share of retail in many categories for the foreseeable future.

On my second point, significant underperformance ( JC Penney ), store closings ( Sears Holdings ) and bankruptcies (Toys “R” Us) continue to be concentrated among those retailers that have failed to carve out a meaningful position toward the more value, convenience-oriented end of the spectrum or, conversely, to move in a more focused, upscale experiential strategic direction. Those that continue to swim in a sea of sameness edge ever closer to the precipice. Increasingly, it’s death in the relentlessly boring middle.

The great bifurcation point, of course, is related to this phenomenon. Despite the retail apocalypse narrative, solidly executing retailers at either end of the spectrum continue to perform well. Sales, profits and store openings are robust at TJX Companies , Walmart and many others that play on the value end. A similar story can be painted for the premium, service-oriented retail brands such as Nordstrom and Williams-Sonoma.

As the scorecards continue to come in, there are a few key things we should bear in mind. The most important is that better is not the same as good. While positive sales and expanding margins certainly beat the alternative, the improved performance at brands like Macy’s and Kohl’s should not reflexively make us think that all is now well. Their sales growth is more or less in line with overall category growth. So there isn’t any reason to believe they are growing relative market share, which is generally a pretty good proxy for improving customer relevance.

Second, we should expect decent earnings leverage with improved sales, given the relatively fixed cost nature of the business. It’s more important to put the margin performance in the context of “best in breed” competitors. Here, most in the gang of most improved still fall short.

Third, a rising tide tends to raise all ships. This happens to be a particularly good time for consumer spending. It’s anybody’s guess if, and how long, retail expenditures will meaningfully exceed the rate of inflation.

From a more strategic, longer-term perspective, we need to sort out what is at the core of improving outcomes. If it’s riding the wave of a particularly ebullient economic cycle, that’s wonderful but not likely sustainable. If it’s starting to realize more fully the benefits of major technology investments, asset redeployment and/or picking up share from a rash of store closings on the part of competitors, that’s also nice, but those gains are likely to plateau fairly quickly. If margin improvement comes from big cost reductions, those often are more one-time gains and may ultimately weaken a given retailer’s competitive position over time.

What really matters, of course, is that most of the gains are coming from fundamentally being more intensely relevant and remarkable than the customer’s other choices. Viewed from this lens, many retailers’ improved results are necessary but far from sufficient.

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.  

September 6th I will be in New York for the Retail Influencer Network Kick-off.  On September 19th I’ll be speaking at Total Retail Tech in Dallas. The following Monday I’m headed to Austin to do the opening keynote at the Next Conference.

JC Penney goes back to the future, but it’s likely too little, too late

At one level, the announcement that JC Penney was going to stop wooing younger customers in favor of focusing on baby boomer moms seems to make a lot of sense.

During the devastating Ron Johnson era, Penney’s was practically driven out of business by trying to execute what I call the customer trapeze way too quickly while simultaneously doing a number of other bone-headed things. In a bid to “contemporize” the brand, Johnson dropped many (it turns out profitable) lines that were deemed old and stodgy in favor of more fashion-forward assortments aimed at attracting younger customers. And sales promptly fell off a cliff. The more-than-a-century-old retailer has been trying to dig itself out of this hole ever since.

In the intervening five years, Penney’s has tried a more balanced approach. Yet despite adding back some customers’ preferred brands, launching new products and services, retooling many aspects of its go-to-market strategy and having hundreds of its competitors’ doors close, the retailer has failed to build any sustained momentum. As I wrote a couple of months back, clearly Penney’s needs to try something new, and unquestionably it needs to do it with great urgency. Unfortunately, this latest gambit is very unlikely to work.

The most obvious problem with a return to focusing on middle-age moms is that it is essentially the strategy Penney’s was executing against before Ron Johnson showed up. And while Johnson set the house on fire, Penney’s was far from lighting things up during the years leading up to the failed “transformation.” In fact, growth and profits had stalled, and the stock was selling at less than half its historical high.

So as Penney’s goes back to the future, the one thing we know for sure is that the market it was trying to succeed in almost a decade ago is now considerably smaller and quite different. On-the-mall, moderate apparel and home stores have been steadily losing share to off-price/value-oriented off-the-mall competitors for many years. More recently, Amazon and other online players have set their sights on the segment as well — and most department stores are struggling mightily to keep pace. By going back to its old customer focus in a market that has shrunk considerably, Penney’s would have to gain more market share than it was able to do when things were far less competitive. That strikes me as a very tall order.

Even under the assumption that a more tightly focused customer strategy has merits, Penney has plenty of other hurdles to overcome. Like most retail brands stuck in the boring middle, it continues to swim in a sea of sameness, with repetitive products, me-too promotions, mediocre service and mostly uninspiring stores. Going deeper on a particular customer segment may provide some incremental upside in the short term, but it is hardly sufficient to make it materially more relevant and remarkable.

The retail formula for growth is, at one level, simple. Target a big enough audience. Increase traffic. Increase conversion. Increase average spending. Increase frequency. Rinse and repeat.

Doubling down on any one customer cohort may hold the promise of performing materially better on one or more of these factors. But given how the particular part of the market Penney’s is returning to has contracted, one has to make some pretty incredible assumptions to believe it can possibly drive meaningful and enduring profitable growth.

Moreover, I would argue that no retailer can sustain itself over the long term without a powerful customer acquisition strategy. And here demographics are hardly JC Penney’s friend. A decade ago Penney’s was struggling partially because it had not done a good job of attracting new, younger customers. It’s no different today as Millennials are sure to become a more significant potential source of volume.

To survive, much less thrive, Penney’s must learn to walk and chew gum at the same time. It must avoid, as Jim Collins likes to say, “the tyranny of the or” in favor of “the genius of the and.” A portfolio approach to customer acquisition, growth and retention is at the heart of any good strategy, and Penney’s must find ways to both leverage its historical core and attract the next generation of customers.

Plenty of retailers have suffered from casting too wide a net and ending up not being relevant and remarkable to any group of consumers in particular. Yet brands can cast too narrow a net as well. My fear is that this is exactly what Penney’s is electing to do. From where I sit, it simply cannot afford any more strategic missteps.

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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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