Physical stores: Assets or liabilities?

Of course the obvious answer is “well, that depends.”

As the intersection of economic feasibility and consumers’ willingness to adopt new technology hit a tipping point, for retailers that had invested big bucks in the brick-and-mortar distribution of music, books and games, the answer changed rather dramatically. Today’s retail apocalypse narrative is nonsense. But it wasn’t so long ago that the tsunami of digital disruption very quickly turned the physical store network of Barnes & Nobles, Blockbuster, Borders and others into massive liabilities. While we can argue about whether any of those brands laid to waste by Amazon, Netflix et al. could have responded better (spoiler alert:the answer is “yes”), it’s hard to imagine a scenario for any of them that would have included a fleet of stores remotely resembling what was in place a decade ago.

Most of the so-called digitally native vertical brands that are disrupting retail today—think Warby Parker, Bonobos, Indochino—started with the premise that not only were physical stores unnecessary, they would soon become totally irrelevant. In fact, about six years ago, I remember asking the founder of one of these brands when they were going to open stores. He looked at me with the earnest confidence of someone who had just received a huge check with a Sand Hill Road address on it and said, “we’re never opening stores.” Clearly, at the time, he saw stores as liabilities. He wasn’t alone. Everlane’s CEO made a similar, but more public statement.

So for several years scores of startups attracted massive amounts of venture capital on the belief that profitable businesses could scale rapidly without having to invest in physical retail outlets. A key part of the investment thesis was that stores were undesirable given the high cost of real estate, inventory investment and operational support. Clearly the underlying premise was that stores were inherent liabilities. So it’s more than a little bit ironic, dontcha’ think, that my friend’s company has since opened dozens of stores, that Everlane just opened its second location (with more to follow I’m sure) and that many other once staunchly online only players are now seeing most of their future growth coming from brick-and-mortar locations.

For legacy retailers, particularly as e-commerce took off, many acted as if much of their investment in physical real estate was turning into a liability—or at least an asset to be “rationalized” or optimized. This underscores a fundamental misunderstanding of what was happening. Too many stayed steeped in channel-centric, silo-ed thinking and action. They saw e-commerce as a separate channel, with its own P&L. Because of this, they underinvested (or went way too slowly) because they couldn’t see their way clear to making the channel profitable. Before long they got the worst of both worlds: They found themselves not participating in the upside growth of online shopping while losing physical store sales to Amazon or traditional retailers that were pursuing a robust “omni-channel” strategy.

To be sure, the overbuilding of commercial real estate was going to lead to a shakeout at some point. Digital shopping growth enables many retailers to do the same (or more) business with fewer locations or smaller footprints. Yet I would argue that most of the retailers that find themselves with too many stores (or stores that are way over-spaced) rarely have a fundamental real estate problem—they have a brand problem. The retailers that consistently deliver a remarkable retail experience, regardless of channel, are closing few if any stores. In fact, brands as diverse as Apple, Lululemon, Ulta—and dozens of others—have strong brick-and-mortar growth plans.

What sets most of these winning retailers apart is that they deeply understand the unique role of a physical shopping experience in a customer’s journey and act accordingly. They know that digital drives physical and vice versa. They started breaking down the silos in their organizations years ago—or never set them up in the first place. They accept that talking about e-commerce and brick and mortar is mostly a distinction without a difference and know that it’s all just commerce. And they embrace the blur that shopping has become. They see their stores as assets. Different and evolving assets certainly, but assets all the same.

On the heels of recent strong retail earning reports (and an increase in store openings) some are starting to pivot from the narrative that physical retail is dying to one that is closer to all is now well. Both lack nuance. We can chalk up some positive momentum to the fact that a rising economic tide tends to lift all ships. We can peg some of the ebullience to Wall Street waking up to facts that were plain to see for quite some time.

What is most important over the longer-term, however, is to understand the root causes of why and where physical retail works and why and where it doesn’t. Whether it’s Casper, Glossier, Warby Parker, Nordstrom, Neiman Marcus, Williams-Sonoma, Sephora or many others, the formula is pretty much the same. Deeply understand the customer journey, and whether it’s a digital channel or physical channel, root out the friction and amplify the most relevant and memorable aspects of the customer experience.

When we do this we see the unique role a physical presence can (and often should) play in delivering something remarkable. The answer will be different depending on a brand’s customer focus and value proposition. But armed with this understanding we can design the business model (and ultimately the physical retail strategy) knowing that the channels complement each other and the desire is to harmonize them. At this point the question is not whether stores are an asset or a liability, it’s which aspects of brick and mortar’s unique advantages to lean into and leverage.

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.  

Over the next few weeks I’ll be in Dallas, Austin, Chicago, Toronto and San Antonio delivering an updated version of my keynote “A Really Bad Time To Be Boring.” For more info on my speaking and workshops go here.

The price of waiting

It’s typically not difficult to calculate the cost of starting something, of moving ahead, of taking the plunge.

Perhaps it’s a new IT project or a marketing test. Possibly it’s a decision to try a pilot concept or invest in a promising technology. Or maybe we’re considering taking the next big step in a hopeful personal relationship.

When we have to ante up additional time, write that big check, invest more emotional commitment, the price tag often seems pretty obvious.

Yet what we get wrong (or dramatically underestimate) are the consequences of our hesitation. We lean on the desire for better data and convince ourselves we need more time to weigh or explore our options. We become a slave to the pull of our perfectionism. We tell ourselves the time is just not quite right to act.

Ultimately, what keeps us stuck, what causes us to not pull the trigger, is our fear of getting it wrong, of looking stupid, of being judged, of fully experiencing and feeling our vulnerability.

It’s not hard to see how waiting too long to innovate has been the death knell for many companies. Think Blockbuster, Netflix, RadioShack and (soon) Sears. They paid (or are paying) the ultimate price for waiting.

My guess is that with whatever organizations you’ve been involved in you can readily point to opportunities that were missed because moving ahead was deemed too risky, when just the opposite proved to be true.

And maybe we’ve let real love and connection allude us for similar reasons.

Indeed, sometimes the waiting IS the hardest part.

Alas, other times it’s all too easy.

And we realize how high the price is when it’s all too late.

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Plunge

There are two basic ways to enter a swimming pool.

The first involves testing the water, cautiously inching your body into the pool as you slowly descend the steps or the ladder. It’s all about deliberateness and the hope that this “safe” approach will allow you to avoid any unpleasantness.

The second, of course, is to simply jump in–to plunge.

The avoiders come from a place of fear. The plungers embrace the risk, accept the trade-offs and commit. Once you are in the air, there is no turning back.

I wonder where Osama bin Laden would be if the Obama administration were afraid to plunge?

I wonder where the entrepreneurs behind Groupon, Netflix, Gilt Groupe and so many other share grabbing innovative businesses would be if they were afraid to plunge? And where the competition would be if they hadn’t been afraid?

I wonder what would be different if you took the plunge?

Taking Pitches

In baseball we often see a batter “take a pitch.”  In other words, before the ball is thrown the batter decides he’s not going to swing regardless of how good the pitch is.  Sometimes this is a tactic to tire his competition–the pitcher–out.  Sometimes it’s an attempt to draw a walk because that’s the best the batter can hope for under the circumstances.  Sometimes it’s a strategy to wait things out, figuring a better opportunity will present itself later.

Lots of businesses take pitches.

When Sears allows discounters and category killers to erode their core customer base and chip away at their dominant market share, they are taking pitches.

When Blockbuster fails to mount a compelling response to NetFlix and Redbox, they are taking pitches.

When Neiman Marcus, Saks and Nordstrom allow flash-sales sites like Gilt and RueLaLa to build brands with significant market value, they are taking pitches.

When dozens of companies deny the future of social networking and location-based marketing, they are taking pitches.

Of course there are times when it makes sense to wait things out–to study and analyze before placing a big bet.    Customer-centric companies know who their most important customers and prospects are, and when the metrics on those customers deteriorate, they dig in to understand the drivers and take action.

You don’t always need to swing for the fences, but it’s hard to win without a few hits.

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Wrong Turn at Lung Fish: Critical Decisions in Strategic Evolution

Twenty years ago the brilliant Chicago-based Steppenwolf Theater Company debuted Garry Marshall and Lowell Ganz’ play Wrong Turn at Lung Fish.  This farcical piece is an inquiry into the often harmful peculiarities of human behavior.  In a pivotal scene, one of the characters wonders whether mankind may have made a profound wrong turn along the Darwinian path of evolution.  The “wrong turn at lungfish” sets humanity on a path of despair, and ultimately begs the question whether our fate is inevitable, or could pain be averted with different decisions at critical junctures?

With the benefit of hindsight, it would appear that many businesses have made profoundly wrong turns in the evolution of their business models.  Sears failing to enter (or acquire into) the big box home improvement category.  Blockbuster neglecting to launch a serious alternative to RedBox and NetFlixCircuit City’s decision to exit appliances and abandon its high service sales model.   Any number of smaller retail formats laid to waste in Walmart’s wake.

These are retail examples, but virtually every industry has multiple stories of brands that were on top, but that failed to evolve to the changing customer and competitive environment.  Before long they found themselves dropping from leadership positions to also-rans or, in some cases, filing for bankruptcy and possibly disappearing altogether.  And indeed for some their fates may have been inevitable.

Yet, in the Sears, Blockbuster and Circuit City examples, it’s clear that those companies had the opportunity to know-and the resources to act–to change their course.  Through a lack of customer insight, faulty economic analysis and a fundamental misperception of risk, they somehow failed to see what was obvious to many others.

For these brands the worst case scenario has come true, or the day of reckoning is drawing ‘nigh.  Their fates are sealed.

Chances are, however, that you still have time to act, to develop deep customer insight, to understand your vulnerabilities to competitive innovation, to realize that you should be the one to cannibalize your cash cow.   It is easy?  No.  Is it more than a little scary sometimes?  Of course.

But I always think about the guy on the way to the bankruptcy hearing and what they wish they had done differently when they had the chance.  I bet what they are about to go through seems a lot harder and a lot scarier than what they could have gone through.   Don’t be that guy.

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