A really bad time to be boring · Being Remarkable · Reinventing Retail

Retail reality: It’s death in the middle

I first pointed to what I called “retail’s great bifurcation”literally two years ago today. Though it wasn’t the first time that I had observed what I saw as the impending collapse of the middle. I began writing and speaking about that during 2011.

As we emerged from the financial crisis it seemed clear to me that retail brands were faced with the proverbial fork in the road. A strategy of being just about everything to everybody–of selling average products to average people in an average experience–was becoming increasingly untenable. While it’s easy to credit the “Amazon effect,” or the overall rise of e-commerce, that’s only part of the story. The fact is many factors conspired to squeeze the middle, while, for the most part, the two ends of the spectrum continue to thrive.

For years now brands that execute well on price, dominant assortments, buying efficiency and convenience are winning. Amazon, Walmart, Best Buy, Home Depot, Costco and virtually all the off-price giants and dollar stores, are driving strong growth and profits. And–I hope you are sitting down for this–despite the silly retail apocalypse narrative, they are all opening stores–in some cases lots of them. Similarly, we find many success stories at the other end of the spectrum. Most established luxury brands are experiencing strong growth, as are higher-end specialty retailers who have a tight customer focus, offer a superior experience and provide a real emotional brand connection. Think Apple, Bonobos, Nordstrom, Sephora, Ulta, Warby Parker and many more. Somehow living in the age of Amazon and digital disruption has not come remotely close to creating an existential crisis for these retailers.

Of course, the story is very different for others in the great, mostly undifferentiated, wasteland of the middle. Most of the retailers that have recently made their way to the retail graveyard or find themselves at the precipice suffer from a decided lack of relevance and remarkability. They have decent prices, but not the best price. They have some service, but nothing to get excited about. Their product assortments and presentations are drowning in a sea of sameness. The overall experience is dull, dull, dull. It’s not surprising that a quick perusal of a store closing tracker features names like Sears, J.C. Penney, Macy’s and Radio Shack; brands that staked out the moderate part of the market long ago and have failed to innovate in any material way. Most of these companies now lack the financial resources, time and organizational DNA to affect the necessary transformations. This will end badly.

While it’s tempting to blame Amazon for the deep troubles faced by mid-priced department stores, the category has been on the decline for more than two decades. Studies also show that the majority of market share lost by these players in recent years has gone to the off-price sector. To be sure, Amazon is putting pressure on most sectors of retail. Further, the rise of digital shopping has created a radical transparency that places the customer firmly in charge. In many respects what was once scarce–reliable product information, lower prices, access to products from across the country (and around the world), rapid delivery–no longer is. No customer wants to be average and today, in most instances, no customer has to be. And, for those brands that have seriously invested in deep customer insight and committed to a “treat different customers differently” strategy, there is no place for unremarkable competitors to hide. Good enough no longer is.

The bifurcation of retail is only going to become more pronounced. The fork in the road is more and more obvious. The collapse of the middle will only get worse.

It turns out it’s really bad time to be boring.

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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.  For information on keynote speaking and workshops please go here.

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.

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

For information on speaking gigs please go here.

Being Remarkable · Customer experience · Reinventing Retail

Flailing retailers need to learn to ‘sell the hole’

I cannot begin to tell you how many times executives at various retailers have said to me that “it’s all about the product.” Earlier in my career, when someone would spout this alleged truism, my somewhat smug thought would be that I could easily come up with many examples where that was demonstrably false. In more recent years, I’ve come to believe that it is precisely retailers’ false clinging to this notion that helps explain why so many find themselves standing at the precipice.

We can argue at length about how important product features and benefits are to consumers’ purchase decisions and long-term loyalty. And clearly that varies by industry segment and customer type. Yet by now it should be obvious that in the vast majority of cases good product is necessary, but hardly sufficient, in determining retail success. It should be clear that people buy the story before they buy the product.

Stated differently, when a consumer buys a drill, it’s because they want the hole. When someone pays $4 for a bottle of water they are mostly paying for how that water makes them feel, not for the better taste. If you think Apple products are always objectively the best functioning, you are only kidding yourself. And if you believe that $200 jar of eye cream works any better that the stuff you can get at Walgreen’s, prepare to be disappointed. Second-best and just plain old mediocre products win all the time. It’s clearly not only about the product; it’s about the solution, the feeling, what our purchase says about us. As noted retail strategist Bill Clinton might say: It’s the experience, stupid!

It’s not all that difficult to understand how traditional retailers became overly product-centric. Take a look at the leadership at most retailers and most came up through the merchant ranks. While the era of the “merchant prince” is on the wane, there are still an awful lot of CEOs who are long on merchandising skills and short on customer experience and digital bona fides. And that mindset permeates the cultures of many struggling brands. It needs to be blown up.

Go through the list of bankrupt or severely struggling retailers and it should be readily apparent that while there may have been merchandising issues that contributed to their problems, their big issues emanate from a failure to deeply understand shifting customer preferences and to respond to those changes. As a result they ended up with a largely irrelevant and utterly unremarkable customer experience. And, as it turns out, they picked a really bad time to be so boring.

If flailing retailers — be they Toys ‘R’ Us, JCPenney, Macy’s or dozens of others — are to survive, much less thrive, the answer isn’t going to be found in shrinking to prosperity, trying to out-Amazon Amazon or being hyper-focused on improving their product assortments.

The answer is going to be found in crafting a truly remarkable and relevant customer experience that is far more about the hole than the drill.

Toys-R-Us

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.

Being Remarkable · Omni-channel · Retail

Reports Of JC Penney’s Death Are Greatly Exaggerated

The last several years have not been kind to JC Penney. Not only have they been swept up in the long-term decline of the moderate department store sector, but they also hemorrhaged huge amounts of market share during Ron Johnson’s failed re-boot. Under current leadership, the picture has not improved much. In fact, last week shares sank again after a disappointing earnings report. The stock is off nearly 90% in the past five years and some 40% year to date.

Many observers have concluded that Penney’s is on a slow slide to oblivion. And while I agree that much more needs to be done to right the ship, I am cautiously optimistic. In fact, full disclosure, I bought some Penney’s shares last week. While investing in the company is clearly not for the faint of heart, I believe there are a few reasons to conclude that the news on Penney’s going forward is more likely to be positive than not.

Store closings muddy the picture. The biggest reason for the miss on gross margin was from unusually high markdowns. Both Penney’s own store closings and those of competitors put pressure on pricing as stores liquidate merchandise. While clearly the industry is facing a great deal of promotional intensity, margin pressures should subside a bit as the pace of store closings slows.

New initiatives are gaining traction. Penney’s continue to expand its partnership with Sephora, opening 32 new locations and expanding 31 others. The beauty category is key to driving incremental traffic. The company also is growing its appliance showrooms and seeing positive sales momentum. The repositioning of its critically important apparel business also seems to be going well, with most categories seeing positive comps despite a difficult market.

Gaining share in a down market. Wall St. is overly focused on same-store sales growth, which I continue to deem retail’s increasingly irrelevant metric.  With nearly 20% of sales in Penney’s core categories occurring online it’s more important to understand combined e-commerce and physical store performance on a trade-area by trade-area basis. If Penney’s closed a bunch of stores but overall sales grew, it suggests that they gained omni-channel share, which speaks to their improving digital commerce capabilities. While there is considerable room for improvement, that’s still encouraging. And unlike some, Penney’s seems to get that stores drive e-commerce and vice versa–and they are acting accordingly and wisely.

Well-positioned to gain from Sears demise. While Sears may still technically survive as a holding company for intellectual property, it seems obvious that most of their mall-based department stores will be shuttered within the next year or so. That will give Penney’s a crack at hundreds of millions of dollars of home and apparel business, not to mention solid upside from their expanding appliance presence.

Maybe Amazon buys them? Amazon clearly has its eyes set on growing market share in traditional department store categories. And the reality is a physical store presence is going to be required to access the majority of the business. Both Macy’s and Kohl’s market caps are around $7b. Penney’s is under $2b. You do the math.

Of course, even if my prognostications prove accurate, I know other risks exist. JC Penney’s is highly leveraged. The Amazon Effect remains real. The off-price sector continues to steal share away from department stores. The full effect of retail consolidation is yet to be realized

However, the broader “retail apocalypse” narrative is nonsense and the notion that mall-based retail is doomed is overblown. Physical retail is different but far from deadMost malls are not going away. And recent earnings reports from many “traditional” retailers suggest the broader market is beginning to stabilize. Either way, more capacity needs to come out of the market before any of the struggling retailers have any shot at significantly improved performance. For Penney’s in particular, they need further work to make their assortments and experience more relevant and remarkable, while right-sizing their store fleet for optimal performance. They need to reduce their debt burden.

Perhaps it’s wishful thinking on my part, but I think they are fundamentally pointed in the right direction. Only time will tell.

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.

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.

Brand Marketing · Customer Growth Strategy · Luxury

Tiffany seeks to execute the ‘customer trapeze’

Last week the Wall St. Journal featured a story on Tiffany & Co’s “midlife crisis.” The piece highlighted the jewelry brand’s struggle to regain its “cool” and improve recently tepid sales and profits. A few days later they announced the hiring of a new CEO.

Yet Tiffany is hardly alone in dealing with what I have coined the “customer trapeze“, particularly as Millennials become an increasingly important demographic.

The customer trapeze is the idea of hoping to reach a new, highly desirable set of customers while letting go of those with less favorable characteristics. Most often we see it at play when brands face an aging customer base. Knowing full well that their customers will literally die off, companies will seek to update their image and strategy to seem more hip and trendy. This might include becoming more fashion forward, less expensive or attaching themselves to celebrities that appeal to different cohorts. The key to executing the trapeze move is to not let go of one group before being fully ready to take on the new one.

In Tiffany’s case, over the years they have introduced less expensive items and expanded their assortments in an attempt to widen their appeal. Most recently, they’ve taken on Lady Gaga and Elle Fanning as spokespeople and launched a new, more youthful ad campaign. They’ve even taken steps to lessen the predominance of their iconic blue in their brand imagery. The challenge, of course, is that many of these steps to attract new customers run the risk of alienating long-term, often highly valuable, ones.

Tiffany follows in the footsteps of many brands that see the demographic writing on the wall and take bold steps to attract new customers. Readers of a certain age may remember the “This Is Not Your Father’s Oldsmobile”campaign. This is a text book example of a brand that let go of one customer group before it could safely latch onto another one. The once legendary company went too far, too fast and, at the risk of pushing the trapeze analogy too far, suffered mightily from its aggressiveness and decision to work without a net.

There are many examples of brands essentially abandoning one customer group too quickly to chase a new, sexier one. Often this comes through an attempt to “trade up” the customer base by pushing more expensive and fashion forward products to attract more affluent consumers. The most recent disaster of this sort came under Ron Johnson’s failed reboot of JC Penney. While not (yet?) fatal, the company has been struggling to recover for over 4 years.

History reveals that very few established brands are able to successfully execute a dramatic re-configuration of their customer base–at least quickly. Once you get beyond Cadillac and IBM, the list grows short indeed. It’s not hard to understand why. The more a brand is known for one set of things, the harder it is to persuade consumers to believe something fundamentally new and different. To the extent a company starts to dramatically move away from what made it successful with its traditional segment in the hopes of cultivating a new group, it risks alienating its historical core. More often than not, the customers that are being de-emphasized are significant contributors to current cash flow. We saw this with JC Penney and I witnessed it first hand when we tried similar moves at Sears more than a decade ago.

With rare exception, brands simply cannot survive, much less thrive over the long-term without being really good at acquiring profitable new customers to replenish those that leave or naturally decrease their spending. But executing this transition is not so easy. Like any trapeze act, the customer trapeze is all about speed, coordination and timing. Let go at the wrong time, be it too late or too early, and the fall can be disastrous.

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.

Innovation · Leadership

The crushing force of retail insularity

Urban Outfitters is the latest retailer to be called out for the insularity of its board leadership. And rightly so. The lack of diversity, measured on just about every relevant dimension, has been a persistent and intractable issue for many large company boards.

It’s hard to imagine an industry that is more in need of outside, diverse and challenging perspectives than retail. New technology, shifting consumer desires and disruptive business models have been wracking the industry for more than a decade, with the pace of change only seeming to accelerate. We now face profit squeezes, layoffs, store closings and bankruptcies at unprecedented rates.

Yet few of the legacy retail brands being hammered (some to the point of extinction) by these seismic changes have done much, if anything, to bring in Directors with deep knowledge of the changing technology, business model and consumer landscape. I warned about this five years ago, spurred on mostly by noting the appalling lack of relevant expertise on the J.C. Penney board to effectively challenge the reckless “hail Mary” strategy being promulgated by then CEO Ron Johnson. While clearly Penney’s needed to do something bold to get back on track, it should have been obvious how wrong-headed many of the ideas were. A stock that traded around $40 per share when Johnson started now trades at under $6.

The insularity on the part of corporate boards is but one issue plaguing traditional retail. The last two retailers I worked for as a senior executive, as well as many of the consulting clients I have advised, suffer mightily from a culture of insularity that extends beyond board composition. Show me an organization that is losing customer relevance (and resultant market share) and chances are you’ve shown me a company that is inwardly focused on process, budget allocations, cost reduction and intramural warfare between rival internal factions. These brands know appallingly little about the competition and potentially game-changing technology. They lack deep and actionable customer insight. Mostly, they are paralyzed by analysis and unwilling to take the risks that today’s fast-moving retail industry demands.

Extreme insularity within retail organizations is, arguably, the single biggest barrier to a brand making the changes necessary to thrive, must less survive, in what some call the “retail apocalypse.” Providing leadership opportunities (board or otherwise) to folks with diverse backgrounds is, in my mind, a moral imperative. But more than that, it is just smart business. Action must be taken, not just lip service. As Jack Kornfield reminds us: “The trouble is you think you have time.”

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

Omni-channel · Retail · Store closings

Wall Street’s Misguided (And Dangerous) Fascination With Retail Store Productivity

An unprecedented number of retail store locations are closing this year and more announcements are surely coming–though perhaps not quite as many as I suggested in my April Fool’s post.

Given the lack of innovation on the part of traditional retailers, rampant overbuilding and the disruptive nature of e-commerce, this ongoing and massive consolidation of retail space was both inevitable and overdue. Yet much of the way the investor community sees the need for even more aggressive store closings is wrong and, one could argue, pretty dangerous.

One of the more ridiculous ways Wall Street firms have tried to determine the “right” number of store closings is to calculate how many locations would need to be shuttered to return various chains to their 2006 store productivity levels. A somewhat more responsible, though still alarming, analysis comes from Cowen, which focused more on the need to more closely align retail selling space supply and demand.

The most obvious problem with this type of analysis is its focus on ratios. The fact is that many stores with below average productivity are still quite profitable, particularly department stores, given their low rent factors. So while closing a lot of locations may yield a temporary productivity boost it often has a direct and immediate negative impact on earnings, which is a far better indicator of a retailer’s health.

The bigger issue is an underlying misunderstanding of the role of brick & mortar stores in retail’s new world order. Just as “same-store” sales is an increasingly irrelevant metric, so are store productivity numbers. Yes, more stores need to close. Yes, many of the stores that remain need a major rethink with regard to their size and fundamental operations. But what many still fail to grasp is how a retailer’s store footprint drives a brand’s overall health and the success of its e-commerce operations.

A given store’s productivity can be below average and decline yet still contribute to a retailer’s overall success, particularly online. Stores serve as an important–and often low cost–channel to acquire new customers. Stores serve as showrooms that drive customers online. Stores serve as fulfillment points for e-commerce operations. Stores are billboards for a retail brand. Without a compelling store footprint, a brand’s relevance will likely decline and its e-commerce business almost certainly will falter. Stated simply, store productivity numbers, taken in isolation, no longer get at the heart of a brand’s overall performance in an omnichannel world.

While there surely is merit in closing stores that drain cash and management attention, store closings can often make a bad situation worse. Ironically–as Kevin Hillstrom from MineThatData does a great job of illustrating–closings stores to respond to e-commerce growth can actually have the opposite effect. In fact, from my experience, massive store closings often initiate (or at least signal) a coming downward spiral.

Store closings are hardly the panacea that Wall Street seems to believe. And the notion that a brand can shrink its way to prosperity is typically horribly misguided. Macy’s, J.C. Penney and a host of others need to close more stores. And Sears and Kmart just need to go away. But, as I’ve said many times before, show me a retailer that is closing a lot of stores and you’ve likely shown me a retailer that doesn’t have too many stores, but a retail brand that is no longer relevant enough for the stores it has.

The danger of closing too many stores is increasingly real. The danger that struggling retailers will continue to appease Wall Street’s thirst for taking an ax to store counts instead of working on the underlying fault in their stores seems, sadly, clear and present.

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.  

Winning on Experience

Every Single Retail Store in the US To Close Permanently By Month’s End

In a surprise move that underscores the sweeping changes faced by the retail industry, the National Retail Federation, speaking on behalf of all of its members, announced today that every brick & mortar location of every retailer in the United States would close forever within the next few weeks. For nearly a decade “traditional” retailers have been struggling with profitability as sales shifted online and more consumers started to notice that many retailers appeared to have given up years earlier. Yet the move to close down every single store in America still came as a shock to most industry observers.

Speaking on condition of anonymity, a CEO of one major retail brand remarked “I would have thought that the fact that 90% of all shopping is still done in physical locations would have been enough to warrant keeping at least a few stores around. I guess I was wrong.” Former Texas Governor Rick Perry, who was recently named Sears’ 13th CEO in as many months, seemed surprised as well. “Wait, most shopping is still done in stores? I guess maybe we should have worked on making our stores better rather than thinking that closing them down would somehow make things better? Oops.”

Jeff Bezos, CEO of Amazon, the brand that has benefitted the most from consumers’ growing love of e-commerce, was approached for comment after delivering his keynote at the annual World Hyperbole Conference in Geneva, but would not speak to reporters. He was, however seen high-fiving Elon Musk off stage and doing what some described as a “clumsy Irish jig” upon learning the news.

Other industry veterans were more circumspect. Ryan Gozzi, a prominent Wall Street analyst who has been pushing many retail brands to shutter locations to improve profitability, commented “honestly I think this just goes too far. I always envisioned retailers would cut and cut until they had just a handful of stores that did like $15,000 per square foot, you know like Warby Parker, Bonobos and Birchbox.” When asked what he thought of today’s announcement Ron Johnson, who oversaw a failed attempt to re-invent JC Penney, looked earnestly into the interviewer’s eyes and exclaimed “Apple. Apple. Target. Apple. Target. Apple. Apple,” then added “golly that’s big news. I was only able to decrease Penney’s sales by about 40%. So signing up for destroying 100% of sales is truly transformative. Gosh I’m impressed.”

The complete shut down of all stores comes after many retailers had aggressively explored new strategies to revive their fortunes. According to multiple sources, newly appointed Macy’s CEO Jeff Gennette recently presented his Board with a bold plan to turn the storied retailer around. The strategy, developed with a team of 2nd year Wharton MBA students, was designed to transform the Macy’s culture and incorporate many of the components that have allowed so-called “digitally native” brands to grab market share away from traditional player while transferring billions of dollars from venture capitalists to consumers without anyone apparently noticing or caring.

The new plan reportedly called for the company to relocate its headquarters to a loft-building in the Pearl District of Portland where employees would receive complimentary Stumptown Coffee and Voodoo Donuts, in addition to an enhanced benefits package. Reports that corporate staff would be required to bring their dogs to work could not be independently confirmed. According to multiple sources, sales associates were to be re-named “customer service sensei’s” and the company would guarantee 15 minute delivery of any product anywhere in the continental United States for free. Initial plans also called for consumers to receive 1,500 Plenti points with every order over $50 but were dropped when research revealed that no one knew what Plenti points were.

According to insiders the plan hinged on four key elements:

  • Liberal use of the words “disruptive” and “transformative” in conversation, written communication and speeches at analyst meetings and conferences.
  • Getting on the cover of Fast Company.
  • A willingness to lose a cumulative $27 billion over the next 10 years.
  • A miracle happening in year 11.

The Board was reportedly initially intrigued, but the strategy lost support when one member pointed out that the plan was mostly just a description of Amazon’s strategy and that nothing was being done to improve the products Macy’s sold or the actual shopping experience. Ultimately a growing malaise crept over the Board despite plans to hold their Board dinner that evening at Masa. According to one long time Macy’s Director “while we were excited to dine together that night at arguably the best sushi restaurant outside of Japan, we couldn’t get past the realization that when it came to our business we had nothing. Absolutely nothing.”

While today’s announcement would seem to doom many once leading brands to the retail graveyard, some believe Walmart might come out ahead. The Bentonville, Arkansas based company recently began aggressively acquiring online-only brands in a bid to become “more customer relevant and digitally savvy.” Sean Spicer, Walmart’s newly appointed VP of Cash Incineration Initiatives, told the Wall Street Journal that the shuttering of all physical stores only validated what Walmart has been saying all along and that anyone who says otherwise is either stupid or lying. Challenged on that remark Spicer added: “Hold on, hold on, hold on. We’ve always maintained that the future of retail is selling cheap stuff that Americans need, shipping it to their house, losing money on every order and making it up on volume. If you can’t see that you haven’t been paying attention.” He then told reporters to direct any further questions to the Justice Department.

The economic impact of closings tens of thousands of stores and putting hundreds of thousands of people out of work remains unclear, but many were concerned it could lead to a recession. It also cast serious doubt on President Trump’s claim that ‘we would be winning so much we would get tired of winning.” Prior to today’s news a recent Gallup survey confirmed that most Americans weren’t remotely tired of winning.

Many commercial real estate investors also expressed concern that billions of square feet of vacant retail space coming on the market all at once would have a depressive effect on rents. Despite this widely shared belief, General Michael Flynn, recently named President of the Association for Commercial Real Estate Over-Capacity Denial” noted that the industry had gone through multiple down cycles over the years and that any excess supply would quickly be absorbed. “For every Home Depot or Target that closes there are plenty of Soul Cycles and expensive juice bars with that one employee awkwardly standing there to take their place” Flynn said.

 

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