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.

jc-penney-store-1200xx2048-1152-0-107

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.

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.

Growth · Retail · Store closings

Shrinking To Prosperity: Can Store Closings Save Struggling Retailers?

It seems as if major store closing announcements are becoming a nearly daily occurrence. Earlier this week Michael Kors, the once high flying accessible luxury brand, announced it would close at least 100 stores over the next two years. They now join the ranks of Payless Shoes, Macy’s, JC Penney and a host of other major players that have recently decided to shutter a significant percentage of their store fleet.

In fact, some retailers are closing all of their stores hoping to thrive as an online only retailer. Bebe, Guess, Wet Seal and The Limited have all chosen to go this route–and it seems like both Sears and Radio Shack are headed there as well; they just haven’t made it official. In any event, if you want follow the action along at home my friends at Fung Global Retail maintain a store closing tracker.

While its clear that more and more struggling retailers are embracing a strategy to get much smaller, this ultimately begs the question whether it’s really possible to shrink your way to greatness.

Take a moment to make a list of brands (don’t worry, I’ll wait) that have intentionally walked away from a significant percentage of their revenue and been successful over the long-term. I’m not talking about conglomerates that have jettisoned under-performers in their portfolio or companies that have exited specific lines of business with challenging profitability. I’m talking about brands that have willingly stopped doing business in major geographies and/or with large numbers of core customers. It’s not easy it?

The truth is that it is far easier to name brands that closed stores merely as an intermediate step on their way to oblivion. Think Blockbuster and Borders (or Bradlee’s for you old timers). And that’s just the B’s. The retail graveyard is chock-a-block with once mighty merchants that spent years closing stores only to eventually succumb to the inevitable.

I have maintained for some time that when retailers start to close a lot of stores the issue is rarely that they have fundamentally too many outlets. Rather it’s that their value proposition is not sufficiently relevant and remarkable for the locations they have. We know that the notion that physical retail is dead is just silly. We know that plenty of “traditional” retailers are opening stores. Ulta, Sephora, Dollar General, Costco come readily to mind. We know that the hottest brands in retail–from giants like Amazon to specialty players like Warby Parker and Bonobo’s– are opening stores. We know that in most cases the economics of physical stores are superior to e-commerce. We know that the combination of digital AND physical is most often what customers want and what yields the best results. We know that it is virtually always the case that when retailers close stores their e-commerce revenues in the vacated trade area go down.

Clearly, on balance, there are too many stores. And for most retailers the size, configuration, operations and many fundamental aspects of the in-store experience must be changed, in some cases radically. Often the “need” to close stores is borne of desperation, propelled by multiple years of management neglect and failure to innovate. Often, as a practical matter, there is no choice, because there is no way to make up for the sins of the past in the here and now. While I cannot definitively say that mass store closings indicate the beginning of a downward spiral, I would definitely reject that notion that they are a panacea. And we absolutely shouldn’t conclude that such moves suggest a sustainable long-term strategy.

Over three years ago I posited that retailers were delusional if they thought that store closings would be their salvation. Today, as the pace of these closings accelerate, I still fundamentally reject the notion that more than a handful of brands can shrink their way to greatness. I hope I’m wrong.

michael-kors-closing-stores

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

Macy’s: After Big Earnings Whiff, Here’s What It Needs To Do

Last week Macy’s missed its revenue and earnings forecast for the first quarter, sending its shares tumbling.

While the talk of a retail apocalypse is just so much hype, the intense waves of digital disruption and shifting consumer preferences assure that the future of retail–and the impact on many large and lumbering players like Macy’s–will not be evenly distributed.

We now live in a digital-first world where the line between brick & mortar sales and e-commerce is mostly a distinction without a difference. Fellow retail analyst Doug Stephens describes this new landscape as “phygital.” But whatever you label it, the consumer’s path to purchase has changed substantially–and with it the role of the store. And, increasingly, same-store sales are a largely irrelevant metric.

Nevertheless, the continuing overall poor performance of Macy’s is concerning and underscores the problems faced by many legacy brands. To get back on track, Macy’s needs to aggressively address several fundamental problems.

  • Eschew the sea of sameness. Macy’s, like so many other retailers, picked a really bad time to be so boring. Redundant, repetitive and fundamentally uninteresting product has become the norm. If customers don’t have a compelling reason (other than price) to traffic either their website or store, Macy’s will continue to hemorrhage market share.
  • It’s the experience stupid! Having remarkable and relevant products is critically important and a necessary foundation, but it’s hardly sufficient. If Macy’s continues to provide me-too visual presentation, marketing that is indistinguishable from every other department store and lackluster customer service they will continue to make price the deciding factor for most consumers.
  • Omni-channel is dead, at least in the way many have been pursuing it. Macy’s spent a lot of time and money trying to be all things to all people. Channel ubiquity with continued mediocrity is pointless. All retailers need to think about how to best harmonize and simplify the shopping across the moments of truth that matter the most for customers. Otherwise we’re just spending a lot of money to move customers between channels, not gaining relevance, share of wallet and profits.
  • Strategically re-imagine the store and the store footprint. Analysts are going to keep pushing Macy’s to close stores. And to be sure, shrinking of both store counts and store size is probably required. But the reason this is even a talking point has much more to do with the weakness of Macy’s value proposition, not their sheer number of stores. Online helps stores and stores help online. Period. Mediocre retailers that close a lot of stores are likely starting a downward spiral from which they will never return. The key is to understand the store as the hub of an ecosystem for the brand, not an asset to be merely fine-tuned for productivity. Focus on being remarkable instead of mediocre and focus on how stores strategically drive online (and vice versa) and the store closing discussion recedes into the background.
  • Don’t start a price war. With pricing pressures from Amazon, outlet stores and all the off-price players there might be a tendency to get overly focused on pricing. But don’t forget, the problem with a price war is you might win.
  • Become a testing machine. It’s easy to blame Amazon for the troubles facing the industry. But by far the biggest reason retailers are in trouble is their abject failure to innovate. Every retailer needs an R&D budget and every retailer needs to test, fail and test again. Retailers were too scared to fail and now their failing because of it. As Seth reminds us “if failure is not an option, than neither is success.”

Of course all of this is more easily said than done, particularly as Wall Street pushes for short-term fixes and Amazon continues to lower its thin margin hammer on most sectors of retail. Yet it’s hard to escape the fact that more of the same at Macy’s will only yield more of the same.

What Macy’s needs is a lot more innovation.

What investors need is just a bit more patience.

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.  

Innovation

The future of retail will not be evenly distributed

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

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

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

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

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

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

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

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

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

Apocalypse? No.

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

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

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

william_ford_gibson

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

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.