Fashion · Luxury · Retail

Going Private Could Be The Best Thing To Ever Happen To Nordstrom — With One Big Caveat

Recently a roughly $8.4 billion offer from the Nordstrom family to take the namesake retailer private was rejected as inadequate. The deal now seems at risk as the special committee in charge of evaluating a potential transaction indicated that the price needed to be “substantially” and “promptly” improved upon or they would terminate further discussions.

While there is one major concern that looms large in any such deal, my hope is that the Nordstroms can get this done. While as a brand Nordstrom faces most of the same challenges that confront just about all retailers in this era of digital disruption, allowing the company to operate without the harsh and impatient glare of Wall Street could be a major long-term win. Here are a few key benefits to going private:

Avoiding the obsession with growth. The fact is that Nordstrom is fast becoming a relatively mature business. It has few new store openings to execute within its core concepts, it is very well penetrated in e-commerce, and there are not a ton of readily accessible wholly new categories (or geographies) to expand into. The Street’s obsession with growth for growth’s sake often pushes maturing brands to expand their core business too far (think Gap and J. Crew’s fashion missteps, Michael Kors’ distribution overexpansion, or Coach’s — and many others’ — over reliance on the outlet channel).

Minimizing the focus on largely irrelevant metrics. As I’ve been suggesting for many years, same (or comparable) store sales is an increasingly irrelevant metric, and as Brent Franson and I tackled more recently, the shifting nature of retail demands a whole new set of performance measures. Not having to be as concerned about monthly and quarterly reports will free Nordstrom to worry less about pleasing equity investors in the short term and enable greater focus on what they need to do to win over the long term.

Freedom to invest in physical retail. Despite the retail apocalypse narrative, physical retail is not dead; boring retail is. Fortunately Nordstrom has crafted a compelling digital presence, a well executed store model and a harmonious experience across channels. For the most part, Nordstrom full-line and Rack stores are in excellent real estate and it’s unlikely that they will have many store closings on the horizon despite the carnage around them. Nordstrom understands well that physical retail drives e-commerce and vice versa. The challenge is to continue evolving to address changing consumer demands, the emerging importance of younger shoppers and the convergence of digital and physical channels. To thrive Nordstrom must have both a remarkable digital experience and a remarkable brick & mortar experience. Despite what some in the investment community think, for some retailers additional investment in physical retail is not only necessary to keep pace, it is essential to maintain competitive advantage. Nordstrom is firmly in this category.

Ability to think long term and take prudent risks. While some investors are willing to take big bets on silly moon shots (but enough about Wayfair), those that invest in “traditional” retail tend to be more short-term focused and risk averse. Yet we live in a world where the future is getting harder and harder to predict and what will ultimately pay off may take years to become clear. Few retailers will survive, much less thrive, without leaning into more risk and establishing a strong test and learn culture. Historically Nordstrom has shown a willingness to be more innovative than most of its peers, including testing new formats (such as Nordstrom Local), buying emerging concepts (Haute Look and Trunk Club), as well as acquiring two technology companies just last week. While Nordstrom is largely past the capital intensive nature of their major investments in omni-channel infrastructure and expansion into Canada and New York City, there is every reason to believe that the future will require considerable investment and a greater tolerance for risk in order to stay truly remarkable.

Unlike most others in the largely undifferentiated department store space, Nordstrom already has a lot going for it and is not burdened with a crushing debt load like Neiman Marcus. Which brings me to the one big caveat.

Quite a few retailers have gotten into trouble by taking on too much debt through a private equity buyout. Unlike Toys R Us and others, which were struggling with the fundamentals of their core value proposition when they took on considerable leverage, the Nordstrom business model is fundamentally sound, the real estate portfolio is solid, and the management team is excellent and deeply experienced. Nevertheless, financial flexibility, as well as strategic and operating agility, will be key to navigating retail’s future. As mentioned above, Nordstrom is fortunate to have already done much of the heavy lifting where plenty of others are struggling to catch up. Yet, layering on substantial debt and interest payments may limit the company’s ability to make acquisitions and/or the technology investments to stay on the leading edge.

Fortunately the debt levels that are currently being contemplated don’t put the Nordstrom deal into the territory that ToysRUs and Neiman’s now find themselves. But obviously if the buyout price increases substantially it is likely the debt burden will as well. Investors also need to mindful of how well any company with considerable leverage would fare in a major economic downturn.

With any luck, a reasonable compromise can be achieved.

Fashion · Luxury · Retail

A tough agenda faces Neiman Marcus’ new CEO

Late last week the Neiman Marcus Group named former Ralph Lauren executive Geoffroy van Raemdonck as their new CEO, replacing company veteran Karen Katz (full disclosure: once my boss). While not terribly surprising given the company’s struggles under a mountain of debt, extremely rocky “NMG One” systems implementation and largely stagnant growth, the move does come at a critical time for North America’s leading luxury retailer.

As van Raemdonck takes the helm next month (and Katz moves to a Board position), he will be faced with addressing several important and vexing challenges. As I was SVP of strategy, business development & multi-channel marketing for the Neiman Marcus Group from 2004-08 (most of that time reporting to then CEO Burt Tansky) I have a somewhat unique perspective on what requires intense and urgent focus. Here’s my take:

Growing share in a mature and shifting market

As I wrote nearly a year ago, much of luxury retail has hit a wall. Many brands, including Neiman Marcus and its most direct competitor Saks Fifth Avenue, have struggled to grow both top and bottom line as core customers “age out” of peak spending years and very few new store locations exist. Neiman’s also has one of the highest e-commerce’s penetration in the industry and much of that growth is now merely channel shift.

Competition is also intensifying. In addition to the myriad online competitors, many of Neiman’s key vendors wisely continue to invest in direct-to-consumer growth strategies as they recognize the advantages of forging a direct relationship with consumers, the strategic brand control that operating their own stores and website affords and the opportunity for greater margins. Some are even pulling back from wholesale selling to create more exclusivity and more tightly managed distribution.

Affluent consumer behavior is also evolving markedly. After the financial crisis fewer customers seem willing to spend as conspicuously as before– despite a booming stock market and growing wealth inequality. Moreover, younger customers are starting to represent a growing percentage of the potential target market and clearly they are more digitally savvy, less logo conscious and don’t (yet?) seem to value the core elements of the luxury department store experience. All these factors create strong headwinds for Neiman Marcus’ hopes to restore significant revenue growth.

An overplayed hand

The work my customer insight team did on customer segment performance in 2007-08 revealed several alarming trends. While we were doing well with the uber-wealthy who tended to pay full price and were largely impervious to our raising average unit prices 7-9% per year, the rest of our business was weakening considerably and steadily. For customers who represented more than 2/3 of our profits, we were experiencing decreasing customer counts and lower transaction levels every year. In fact, literally all of our comparable store growth in the prior 5 years could be explained by the growth in average unit retail. While this was tolerated (and maybe even appreciated) by our very best customers, we were leaking business to Nordstrom (and others) as many very good customers found our ever increasing prices to be too high and our customer experience frequently lacking.

The strategy that had gotten Neiman’s to a leadership position was starting to run out of gas. Until the financial crisis hit (and Burt Tansky retired) little of substance was done to address this growing issue. While Karen Katz has made some inroads during her tenure, the brand still suffers from too narrow a customer base and little demonstrated ability to grow customer and transaction counts. This is the single biggest strategic challenge facing the company over the long term.

Unsustainable debt load

Neiman’s private equity owners paid way too much and saddled the company with a debt level that, unaddressed, will bring the company to its knees. There is simply no way for the brand to earn its way out of the problem. It is merely a matter of time before a significant restructuring of some sort must take place. The sooner this gets resolved the better, but thus far, despite the obviousness of the issue, neither the equity or debt holders have been willing to take the necessary haircut. Hope is not a strategy.

Limited degrees of freedom and flexibility

While Neiman’s has seen their operating performance improve somewhat, macro-economic factors explain much of it and there can be no certainly of that continuing. The fact is that the only way Neiman’s performance improves markedly is for them to start gaining significant share in a mostly flat market. That will almost certainly require substantial investment in new technology, re-inventing the customer experience at retail and extending their digital capabilities. Saddled with large debt and interest payments, the company will be severely constrained in having the cash to do what it will take.

Attracting younger customers and executing the ‘customer trapeze’

While demographically oriented strategies are typically overly simplistic, demographics ARE destiny over the long-term. For Neiman Marcus to thrive in the future they must navigate what I like to call the ‘customer trapeze.’  They must deftly do their best to optimize value from their historical high spending core customers–who tend to be older, love the traditional in-store shopping experience and prefer the highest end brands– while simultaneously doing a much better job of attracting new customers who are largely “digital first” shoppers, prefer more relaxed and democratic personal service and tend to spend considerably less on average. Getting this portfolio right isn’t easy and will require Neiman’s to literally take significant share away from some very formidable competitors whose brands’ are currently better aligned with younger, more aspirational shoppers’ needs and values.

An inevitable merger with Saks?

Many people believe that both Neiman’s and Sak’s fundamentally have too many stores. They are wrong. Because of incredibly favorable rent deals and developer capital contributions, the break-even volumes for most stores are very reasonable. Even if their physical stores were to lose 10% of their volume you could count the number of stores that would be cash negative on one hand. More importantly, stores are critical to helping support the online business, which is nearly a third of Neiman Marcus’ total volume. We understood this relationship well when I worked there–and this dynamic has only gotten far stronger. Closing stores, for the most part, would weaken the brand, not help it.

Having said that, a long rumored merger with Saks holds the potential for value creation. There are some geographies where having Saks and Neiman Marcus duke it out directly only leads to mediocre profits for both, particularly as more business moves online. Rationalizing locations would increase the overall profit pool. Opportunities for eliminating redundant overhead are hardly trivial. Alas, the challenges of both companies’ current capital structures make this conceptually valid merger more complex than it might otherwise be.

Cultural pushback

When I joined the Neiman Marcus executive team one of the first things I noticed was how strong the culture was. This was good and bad. The good part was that most folks had worked together for a long time and the company was a well oiled execution machine. The bad parts were exactly the same thing. Strategy played second fiddle to execution, many senior managers lacked the requisite external perspective and, consequently, there were many blindspots.

Innovation as a discipline was also incredibly under-valued. Karen Katz deserves praise for moving the company forward on many of these fronts, but some of what is needed to take the company to the next level is not inherent to its DNA. van Raemdonck is the first outsider to run the company in some time. I expect a rocky road generally, as well as some departures of high level, long-tenured executives.

Unlike many decades old brands that are struggling mightily, Neiman has many strong core elements. And that’s clearly an advantage as van Raemdonck sets his agenda. Unfortunately, Neiman’s historical strengths are also at the center of many of its go-forward challenges. Until the debt issue is resolved, even under a best case scenario, their new leader will likely be hamstrung to move as quickly as he would like, not to mention at the pace that the company desperately needs.

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.


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.

Bricks and Mobile · Mobile · Omni-channel · Uncategorized

A very mobile Christmas?

It’s no secret that mobile is becoming increasingly important in consumers’ shopping journeys. Retail brands as diverse as Target and Neiman Marcus have alluded to the pivotal role that digital plays in driving both their online and physical store sales. And of course when we say “digital,” often we mean mobile. In fact, for many retailers, mobile is becoming the front door to the store.

If a just-released study by Adobe Analytics proves to be correct, an important milestone will be reached this holiday season. For the first time ever, more U.S. shoppers will visit a retailer’s site using a mobile device than a desktop computer. Because conversion rates remain higher on “traditional” devices, the amount of actual purchases made on desktops will still exceed those made on a smartphone or tablet. But that’s not likely to be true very much longer.

This shift is profound, and mirrors what other studies have shown about the growing integration of mobile devices across all dimensions of retail. For example, Deloitte has been tracking digital’s influence on physical store shopping, and their research shows that in 2016 some 37% of all brick & mortar sales were influenced by a mobile device. It seems certain that number will easily surpass 40% this year.

The reasons this year’s holiday numbers are so important are twofold. First, and most obviously, it’s the busiest shopping time of the year, so shifts in customer behavior are amplified. Second, for consumers seeking great gift ideas, in many cases they’ll be visiting new or infrequently trafficked sites. A poor (or even less than remarkable) experience can have a significant impact on customers’ future buying intent.

It would appear that there is no going back in the move to mobile. As the folks at Google like to say (full disclosure: a recent client), we no longer go online; we live online. More and more, our smart devices are a constant companion in the shopping process. Whether it’s for product research, checking prices, locating the nearest store, downloading a coupon or making a transaction, employing mobile technology to enhance the customer experience is moving from novelty to habit.

The growing challenge for retail marketers therefore is to win these mobile moments that matter by being relevant and remarkable throughout the critical aspects of the shopping journey. Here the increasing role of mobile presents many important opportunities, most notably the chance to leverage context awareness in consumer engagement. But the limitations of mobile are apparent as well and must be navigated carefully.

A few things seem certain. Mobile will play a much larger role this holiday season and that momentum is likely to carry forward into 2018. Brands that have a compelling mobile presence will reap great benefits. For those where that is not the case, they can expect a big lump of goal in their stockings.


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 · Forbes · Omni-channel · Store closings

Honey, I shrunk the store

While the “retail apocalypse” narrative is nonsense, it’s clear that we are witnessing a major contraction in traditional retail space. Store closings have tripled year over year and more surely loom on the horizon. The “death of the mall” narrative also tilts to the hyperbolic, but in many ways it is the end of the mall as we know it, as dozens close and even larger number are getting re-invented in ways big and small.

While the shrinking of store fleets gets a lot of attention, another dynamic is becoming important. Increasingly, major retailers are down-sizing the average size of their prototypical store. In some cases, this is a solid growth strategy. Traditional format economics often don’t allow for situating new locations in areas with very high rents or other challenging real estate circumstances. Target’s urban strategy is one good example. In other situations, smaller formats allow for a more targeted offering, as with Sephora’s new studio concept.

By far, however, the big driver is the impact of e-commerce. With many retailers seeing online sales growing beyond 10% of their overall revenues–and in cases like Nordstrom and Neiman Marcus north of 25%–brick & mortar productivity is declining. It therefore seems logical that retailers can safely shrink their store size to improve their overall economics.

Yet the notion that shrinking store size is an automatic gateway to better performance is just as misunderstood and fraught with danger as the idea that retailers can achieve prosperity through taking an axe to the size of their physical store fleets. To be sure, there are quite a few categories where physical stores are relatively unimportant to either the consumer’s purchase decision and/or the underlying ability to make a profit. Books, music, games and certain commodity lines of businesses are great examples. But brick & mortar stores are incredibly important to the customer journey for many other categories, whether the actual purchase is ultimately consummated in a physical location or online.

Often the ability to touch & feel the product, talk to a sales person or have immediate gratification are critical. In other cases, lower customer acquisition and supply chain costs make physical stores an essential piece of the overall economic equation. Shrinking the store base or the size of a given store can have material adverse effects on total market share and profit margins. For this reason, retailers are going to need (and Wall St. must understand) a set of new metrics.

The worst case scenario is that a brand makes itself increasingly irrelevant by having neither reasonable market coverage with its physical store count nor a compelling experience in each and every store it operates. Managing for sheer productivity while placing relevance and remarkability on the back burner is all too often the start of a downward spiral. Failing to understand that a compelling store presence helps a retailer’s online business (and vice versa) can lead to reducing both the number of stores and the size of stores beyond a minimally viable level. But enough about Sears.

In the immediate term, we may feel good that by shooting under-performing locations and shrinking store sizes through the pruning of “unproductive” merchandise we are able to drive margin rates higherAlas, increasing averages does nothing if we are losing ground over the long-term with the customers that matter.

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.


Customer Growth Strategy · Omni-channel · Retail

Is off-price the next retail sector to go off the rails?

Amidst all the pain that most of the retail industry has endured during the past few years, the “off-price” sector has been one of the few shining stars.

While most retailers struggle to eke out any top-line growth, the segment’s big four–TJX, Ross, Burlington and Nordstrom Rack–have delivered solid growth. While many retailers are closing stores in droves, the off-price leaders have been opening new outlets at a brisk pace while announcing plans to open hundreds of stores over the next several years. TJX, the parent company of T.J. Maxx, Marshalls, HomeGoods and Sierra Trading Post, added nearly 200 stores this past year alone.

So while it’s easy to blame Amazon for department stores’ troubles, there is ample evidence that it’s been the major share grab on the part of the off-price and outlet sector that’s inflicted a great deal of the pain.

Of course, the bifurcation of retail has been going on for some time. Consumers have been steadily shifting their spending toward more price-oriented brands since the recession. In some cases it has been driven by an economic need to spend less. In other cases by a realization that strong value can be obtained at a lower price, whether that is from a traditional retailer (e.g. Walmart), a leading fast fashion brand (e.g. H&M and Zara), a newer business model (e.g. Gilt and Farfetch) or, of course, Amazon.

Yet there is growing evidence that the segment is beginning to mature and that future results may be quite different from the boom of recent years. In the most recent quarter, TJX saw same-store sales growth slow to 1%. Archrival Ross posted better results but struck a decidedly cautious note. Nordstrom Rack, which has been the star within Nordstrom, has seen its growth slow to below the industry average.

So while one or two quarters do not indicate cause for alarm, there are several reasons why investors might want to beware.

Sluggish apparel growth

Average unit prices for apparel continue to contract, the discounting environment shows no sign of abating and consumers continue to shift their spending away from products to experiences. This means most sales growth must come from stealing share. That’s not likely to come easily.

Growing competition.

Competition is always intense in retail, but with the number of new stores that are opening, the rapid growth of online competition and Amazon’s growing and intense focus on apparel and home products (including an almost certain big push into private fashion brands in the next couple of years), sales and margin pressures are certain to become more pronounced.

Here comes e-commerce–and its challenges.  

The off-price industry was slow to get into digital commerce. Some of this was for good reason: it’s almost impossible to make money online in apparel with low transaction values and high rates of returns. But given consumer demand, the convergence of channels and pressure from growing competition, none of these brands have a choice but to invest heavily. But as e-commerce becomes an important growth driver, much of that growth will come through diversion of sales from a brand’s own physical stores–and often at a lower profit margin (what I call “the omnichannel migration dilemma”). As e-commerce becomes a more important piece of the overall business, the economics of physical stores will become more challenging, calling into question the reasonableness of the current store opening pace.

Brand dilution and saturation. 

The key driver of the off-price business has been offering major brand names at deeply discounted prices. While this is a bit of a con, the consumer is either blissfully ignorant or doesn’t care–at least so far. But as more brands grow through heavily discounted channels the risk of brand dilution goes up. And we’ve already seen several major brands pull back from factory outlet channels and tighten their distribution to wholesale channels where discounting was rampant. As Nordstrom, Neiman Marcus, Saks, Macy’s and Bloomingdales emphasize off-price growth (both physical store openings and online) the brand dilution concern to their “parent brands” looms large.

Overshooting the runway on store growth.

The over-expansion of most major retail chains is plaguing much of the retail industry right now. So far the off-price sector has escaped this fate, largely because the sector has been gaining share. But if growth continues to moderate and a greater share of the business moves to e-commerce, today’s store opening plans seem awfully aspirational. This is not a 2017 issue, and probably not one for 2018 either. But if I were a betting person, I’d wager that in 2019 we will view today’s plans as incredibly optimistic.

While the off-price sector is unlikely to experience the shockwaves of disruption pummeling its retail brethren anytime soon, we should remember that no business is immune from fundamental forces. And no business maintains above average growth forever. Investors would be wise to take a more cautious approach.

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.  

Customer-centric · Digital · e-commerce · Retail

‘Same-store sales’ is retail’s increasingly irrelevant metric

The retail industry has used “same-store sales” (or “comparable store sales”) as a key indicator of a retailer’s health for decades. From where I sit, its usefulness is rapidly fading, if not bordering on irrelevance.

While it remains to be seen whether retail traffic declines will last forever, most traditional retailers will struggle to grow physical store sales in the face of the significant and inexorable shift to online shopping. With few exceptions, so-called “omnichannel” retailers are experiencing flat to slightly down brick-and-mortar revenues while their e-commerce business continues to grow 10-20%. The mostly moribund department store sector points to this new reality. While overall revenues are basically going nowhere, online sales now account for over 30% of total revenue at Neiman Marcus, over 20% at Nordstrom and Saks, and some 18% at Macy’s (according to eMarketer), with the percentage growing every quarter.

What we do know, and what’s important to grasp and appreciate, is that physical stores are critical drivers of e-commerce success–and vice versa. For most retailers, a brick-and-mortar location sits at the heart of a brand’s ecosystem for a given trade area. Any retailer with a decent level of channel integration employs stores to acquire new customers, to serve, buy online, pickup in store orders (and returns) and to convert shoppers that start their shopping online but need to touch, feel or try on a product before buying. The decision of “digitally native” brands like Amazon, Bonobos, Warby Parker and others to open stores underscores this fact. Conversely, legacy retailers must be careful to avoid closing too many stores or they risk damaging the overall brand, slowing e-commerce growth and accelerating a downward spiral.

Customers shop brands, not channels or touchpoints. A robust one brand, many channels strategy requires management teams to understand precisely how the various marketing, experience and transactional channels interact to make a more relevant and remarkable whole. With this understanding, same-store sales performance may still have some utility, but “same trade area” performance–which accounts for all sales regardless of purchase channel within the influence area of a store–becomes a far more interesting and useful metric. Critically, it also provides the basis for understanding the drivers of customer segment level performance at a more granular and actionable level.

Rapidly declining same-store sales performance may suggest the need for aggressive action, including shuttering stores. Unquestionably, the great de-leveraging of retail store economics is cause for real concern. But without a broader view of how digital commerce and the in-store shopping experience work together, an obsession with same-store sales performance will inevitably lead to some very dumb decisions indeed.

 A version of this story recently appeared at Forbes, where I am a retail contributor. You can check out more of my posts here.  
Fashion · Luxury · Omni-channel · Retail

Should Hudson Bay Buy Neiman Marcus? The Case For And Against.

Tuesday morning the Neiman Marcus Group reported another quarter of disappointing financial results and announced that it was going to “explore strategic alternatives.”

To be sure, some of Neiman’s problems are idiosyncratic, largely owing to a botched systems implementation and a now crushing debt load taken on in a 2013 private equity buyout. Yet the brand’s continuing struggles also underscore how luxury retail has hit the wall and how it now seems increasingly likely that the storied company may need to run into the arms of yet another owner.

Recent reports have suggested that the Hudson’s Bay Company was hot on the trail of Macy’s. Yet to many, the notion that HBC would acquire a badly wounded company several times its size, seemed a bit crazy. But the rationale for HBC–the owner of Saks Fifth Avenue and Gilt–to acquire Neiman’s seems, at least at face value, more strategically sound and (perhaps) more easily financed.

When I worked for Neiman Marcus as the head of strategy and corporate marketing we took a hard look at acquiring Saks. Years later, many of the pros and cons of combining the #1 and #2 luxury department stores remain the same.

The Case For

It seems increasingly obvious that the luxury department store sector is quite mature. While e-commerce is growing (now representing 31% of Neiman’s total revenues), most of that is now merely channel shift. Moreover, there are virtually no new full-line store opportunities for either Saks or Neiman’s, and the jury remains out whether or not US brands can find a meaningful number of store openings outside their home markets. Shifting demographics also do not bode well for long-term sector growth.

Faced with this reality, consolidation makes a lot of sense. If Saks were to merge with Neiman’s there would be considerable cost savings from combining many areas of operations. Rationalization of the supply chain would yield material savings as well. Managing the two brands as a cohesive portfolio would allow for optimization of marketing spending and promotional activity. There might even be some benefits from combining buying power to extract greater margins from vendors. Less tangible, but potentially meaningful, is the ability to cascade best practices from each organization.

The more interesting benefits could come from addressing store overlaps. As the market matures and more sales move online, there will be a growing number of trade areas (and specific mall locations) where Saks and Neiman’s going head-to-head only waters down the profitability of each respective location. Selectively closing stores and redeploying that real estate could drive up the remaining locations’ profitability dramatically, while unlocking the underlying real estate value of certain locations. All of which certainly plays into Richard Baker’s (HBC’s Chairman) strengths.

The Case Against

By far the most challenging element of any buyout of Neiman’s by HBC (or by anyone for that matter) would be the price and the related financing. Neiman’s was sold in 2013 for $6 billion dollars and still carries about $5 billion in debt. Since the buyout the company’s EBITDA has gone south, with no prospect for an imminent major turnaround. Given the maturity of the sector and the company’s recent weak operating performance, it’s hard to see why anyone would pay the sort of multiple that would make the current equity and/or debt owners whole.

Unless the real estate value can be unlocked in a transformative way, the only rationale for a merger hinges on the ability to generate operational efficiencies and optimize trade area by trade area market performance. With regard to the former, this isn’t trivial. The Saks and Neiman’s cultures are very different. To say one is very New York and the other is very Texas merely hints at the challenges. It’s easy to sketch out the synergies on paper. Making them actually happen is another thing entirely.

With regard to the latter, the fact is that Saks and Neiman’s are very similar concepts (though Neiman’s historically has been operated far better). When I was at Neiman’s we struggled with how we would operate two virtually identical brands often operating in the same mall–or in places like San Francisco, Beverly Hills, Boston and Chicago–just down the street. Even if we could get out of a lease (or sell the store), would closing a shared location actually be accretive to earnings? If we continued to go head-to-head could we shift the positioning of each brand enough to actually grow market share and profits. Ultimately, other issues trumped this particular concern, but this issue isn’t trivial either and the degree to which it is important mostly comes back to the ultimate price to get a deal done.

Without access to proprietary data it’s impossible to completely assess the likelihood of an HBC/Neiman’s deal. But it seems increasingly likely that something dramatic needs to happen with Neiman’s capital structure and it’s difficult to imagine how another leveraged buyout gets done with private equity sponsors. And it’s hard to see another strategic buyer that makes much sense. More and more, HBC looks like the only game in town.

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

Being Remarkable · Luxury · Retail

Luxury retail hits the wall

For a long time, the conventional wisdom has been that the luxury market was largely impervious to the ups and down of the economy. Yet recent results suggest otherwise and even with an improving macro-economic picture and booming stock market, most U.S.-based luxury retail brands continue to struggle.

A little over a week ago, reports surfaced that Neiman Marcus was looking to restructure its debt after a series of disappointing quarters. While Neiman Marcus faces unique challenges owing to high leverage from its 2013 buyout and a botched systems implementation, they are also being hit by a general malaise affecting the sector. HBC’s Saks Fifth Avenue division revenues have stalled during the past year. Nordstrom, which was once a shining star in the retail pantheon, has seen five straight quarters of declines in its full-line stores. Tiffany and Kors are among other brands facing similar declines. So what’s going on here?

The most common explanations for faltering performance have been the strong dollar’s impact on foreign tourism and a weak oil market. To be sure, these factors have not been helpful. But the problems in the luxury market go deeper, particularly among the department store players. Even an improvement in foreign tourism or the oil market are unlikely to return the sector to its former glory. Here’s why:

  • Little new customer growth. Other than through e-commerce, luxury retailers have had a tough time with customer acquisition for many years. With e-commerce maturing–and most recent reported gains merely channel shift–unfavorable demographics (see below) and very few new store openings, luxury brands are struggling to replace the customers they are losing.
  • Little or no transaction growth. While not widely appreciated, most of the comparable store growth in luxury retail has come through prices increases, not growth in transactions. To change this dynamic companies need to appeal to a wider range of customers and that’s proven difficult to execute in an intensely competitive environment. Brands must be also be careful not to dilute their brand relevance and differentiation in an attempt to cast a wider net.
  • Unfavorable demographics. Affluent baby boomers have propped up the sector for more than a decade. But as customers get older they tend to spend less overall, and quite a bit less on luxury in particular. Baby boomers are slowly but surely aging out of the segment. Gen X is a smaller cohort and there is little evidence they will spend as much as the boomers. Over the longer term, millennials will need to make up for the boomers who, to put it bluntly, will be dying off. Most studies suggest millennials will be more price-sensitive and less status conscious then then the cohorts ahead of them. This is a major long-term headwind.
  • Growing competition. Strict control over distribution largely insulates the luxury market from intense price competition and having to go head-to-head with Amazon. Nevertheless, full-price luxury is increasingly being cannibalized by retailers’ own growing off-price divisions. Luxury brand manufacturers are also aggressively investing in their own direct-to-consumer efforts by improving their e-commerce operations and continuing to open their own stores. Luxury websites like Net-a-Porter are gaining share of a no longer expanding pie.
  • Shifts in spending. Affluent consumers continue to value experiences and services over things–and are allocating their spending accordingly. Perhaps this multi-year trend will start to reverse itself. Perhaps.
  • The omni-channel migration dilemma. Luxury retailers are spending mightily on all things omni-channel, as they must to remain competitive. But it’s incredibly expensive to create a more integrated customer experience. The better a retailer becomes at this, the more business shifts from physical stores to digital. Most often this is not accretive to earnings as brick & mortar economics get deleveraged and online shopping is plagued by high returns and expensive logistics.
  • Looming over-capacity. While the luxury sector does not face the pressure to close stores that the broader market does, stagnant sales and a continued shift to digital channels will start to put more and more pressure on full-line store economics. Moreover, there is growing evidence that the high-end off-price sector is approaching saturation. The rationale for a Saks and Neiman merger may start to make more sense and some pruning of locations seems inevitable.

Notwithstanding the capital structure issues Neiman Marcus must deal with, the luxury market does not face nearly the same immediate challenges that many parts of retail must address. Nevertheless, there is mounting evidence that the sector’s struggles go beyond foreign currency woes and the vagaries of the oil market.

Profound change is coming to luxury as well and most of the headwinds simply aren’t going away.

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

Digital · Retail · Winning on Experience

What if retail traffic declines last forever?

The results keep pouring in and they don’t bode well for brick & mortar retail. Across just about every sector and virtually every time period, traffic to physical stores continues to decline.

Of course, for the most part, we aren’t buying less, we are shopping differently. The obvious dominant trend is the explosion of e-commerce, and the one player accounting for the most growth is Amazon. Yet the real news for everyone else is how shoppers are diversifying the channels in which they research purchases and ultimately transact. This so-called “omni-channel” world is wreaking havoc with traditional retailers’ underlying economics and, like most things, the future will not be evenly distributed.

The vast majority of retailers have now likely entered a period where comparable store traffic will never increase again for any sustained period of time.

That’s profound. And more than a bit scary.

Drops in store traffic almost always dictate sales declines. Given that physical stores have relatively high fixed costs (rent, inventory, staffing, etc.) a material drop in revenue deleverages operating costs and profits fall disproportionately. This long-term (and increasingly widespread) trend is causing a great deleveraging across many retail segments and is the primary reason so many stores are being closed. It’s also causing brands to rethink the size and operating nature of the stores that remain or they plan to open. These shifts will prove seismic.

While there is a belief that e-commerce’s economics are superior to brick & mortar stores, that frequently is not the case, primarily owing to challenging supply chain costs, high product returns and compressed margins. As traditional retailers invest heavily in building their digital operations–and creating the much vaunted seamlessly integrated shopping experience–many are merely spending a lot of money to move sales from one channel to the other, often at lower profitability. Even brands such as Nordstrom, Neiman Marcus and, to a lesser degree, Macy’s, that are often touted as omni-channel pioneers and have industry leading online penetration, have seen profit growth stall despite massive investments.

Roughly 90% of all retail is still done in physical stores. Yet the growth of e-commerce will continue unabated and the resulting drop in store traffic is an undeniable and unrelenting force. With rare exception, there is little any retailer can do to stem this tide. One key focus must therefore be on right-sizing store counts and the remaining stores’ footprints and operating costs. But the far more important strategy is to create a remarkable customer experience across all channels that reflects how consumers shop today and the intersectionality of digital and physical channels. Ultimately the key is to maximize customer growth, loyalty and profitability irrespective of where the customer decides to transact.

The pain of store traffic declines is inevitable.

The degree of suffering from it remains optional.


This post originally appeared on Forbes where I recently became a contributor. You can check out more of my writing by going here.