Slow motion crises

In the world of retail it’s pretty rare that brands get into trouble over night–much less over a matter of months or even years.

What will turn out to be the deathblow for Sears started with Walmart in the 1980’s, and was followed by Home Depot, Lowes and Best Buy chipping away at Sears core tools and appliance business as these insurgents opened new stores and improved their offerings over many, many years.

The ability to deliver books, music and other forms of entertainment digitally (or shipped directly to the consumer) just didn’t pop up one day. Blockbuster, Borders and Barnes & Noble had years to respond. They just didn’t in any especially powerful way.

Starbucks initiated its rapid store growth more than 20 years ago. And the broader reinvention of the retail coffee business by local independents, along with forays by Keurig, Nespresso and others, is hardly a recent phenomenon. Yet it’s hard to point to anything particularly innovative that industry leaders Folger’s and Maxwell House have done during this extended period, despite their brands continuing to lose sales and relevance.

As Macy’s, JC Penney, Dillards and other traditional department store players garner lots of negative press about their current struggles, we should remember that the department store sector has lost relative market share for more than two decades. Their problems are not simply a function of the growth of e-commerce. And even if they were, the best in class players were investing heavily in e-commerce–think Neiman Marcus and Nordstrom–more than 15 years ago.

Crises created by unforeseen events are one thing. Slow motion crises only reveal that we took our eyes off the ball, were too afraid to act or both.

The way to avoid a retail slow motion crisis is as follows:

  • Understand where customer value is being created on a go forward basis
  • Dissect your most valuable customer segments to understand where your brand is vulnerable and where you have potential leverage
  • Figure out where you can compete by modifying your core business and where you need to innovate outside of your core
  • Don’t be afraid to compete with yourself
  • Consider acquistions as way to build new capabilities quickly
  • Embrace a culture of experimentation
  • Spend more time doing, than studying.

 

 

 

 

Retail’s big reset

It’s been happening for a few years now, but the pace is accelerating.

Retailers waking up to the reality of a slow or no growth world.

Retailers beginning to understand that if you don’t garner share of attention, you have little or no shot at share of wallet.

Retailers starting to comprehend that it’s not about the silos of e-commerce, catalogs, social, mobile and physical stores. It’s about one brand, many channels.

Retailers seeing that it’s not only a digital first world, increasingly it’s a mobile first world.

Retailers coming to terms with having too many stores, and being confronted with the cold hard facts that the ones that should remain are often too large and, more importantly, too boring.

Retailers recognizing that continuing to offer up average products for average people is a recipe for either long-term mediocrity or inevitable bankruptcy.

Retailers realizing that most of their e-commerce growth is now coming from channel shift and that much of their “omni-channel” investments are proving unprofitable.

When historically strong brands like Nordstrom and Neiman Marcus start taking a big whack at their corporate staffs and pulling back on capital investments, it’s hard to argue that this is just about low oil prices and weak foreign tourist traffic.

The big reset is upon us.

Some get it. But too many clearly don’t.

Change is happening faster and faster. Disruption is now just part of the ecosystem.

If you believe, as I do, that we are in for an extended period of muted consumer spending, that we are way over-stored in most major markets and that the power has shifted irretrievably to the consumer, then business as usual–and relentless, but vague promises to become “omni-channel”–will not cut it.

The discipline of the market will be harsh. Good enough no longer is.

If you aren’t worried, chances are you should be.

And if you aren’t in a hurry, you might want to pick up the pace.

 

 

Umm, so then why aren’t your sales better?

You’ve probably heard quite a few retailers proclaim some version of “customers who shop across our multiple channels spend 2, 3, 4, even 6 times, that of our average customer.”

When I worked at Sears that is what we saw and that is what we said. Years later, when I headed up strategy and multichannel marketing for the Neiman Marcus Group, that was what our data showed and that is what we told the world. As “omni-channel” has become the clarion call of retail during the past several years, dozens of brands have employed this observation as a primary rationale for substantial investments in beefing up digital commerce and investing in cross channel integration.

But it raises an interesting question.

If it’s true that multichannel customers spend a whole lot more and all these companies have become much better at omni-channel, why aren’t their sales better?  In fact, why is it that most of the retailers who have made such statements–and invested heavily in seamless commerce–are barely able to eek out a positive sales increase?

Something doesn’t seem to add up. So what exactly is going on here?

The main thing to understand is the fallacy that becoming omni-channel somehow magically creates higher spending customers. A retailer’s best customers are almost always higher frequency shoppers who, obviously, happen to trust the brand more than the average person. When alternate, more convenient ways to shop emerge, they are most likely to try them first and, because they shop more frequently, it’s more likely that they will distribute their spending across multiple channels. Best customers become multichannel, not the other way around.

If it were true that traditional retailers are creating a lot more high spending customers by virtue of being more multichannel, the only way the math works is that they must at the same time be losing lots of other customers and/or doing a horrible job of attracting new customers–which somewhat undermines the whole omni-channel thesis. It’s also rather easy to do this customer analysis. I long for the day when I see this sort of discussion actually occur at an investor presentation or on an earnings call.

There WAS a time when being really good at digital commerce and making shopping across channels more seamless was a way for traditional retailers to acquire new customers, to grow share of wallet and to create a real point of competitive differentiation. Nordstrom is a great example of a company that benefitted from this strategy during the past decade, but is now starting to struggle to get newer investments to pay off as the playing field gets leveled.

So-called “omni-channel” excellence is quickly becoming the price of entry in nearly every category. Most investment in better e-commerce–or omni-channel functionality like “buy online pick-up in store”–is defensive; that is, if a brand doesn’t do it they risk losing share. But it’s harder and harder to make the claim that it’s going to grow top-line sales faster than the competition.

Retailers that find themselves playing catch up are primarily spending money to drive existing business from the physical channel to the web. That’s responsive to customer wants and needs, but it’s rarely accretive to earnings. It’s also a major reason we don’t see overall sales getting any better at Macy’s, Sears, Dick’s Sporting Goods and whole host of other brands that have invested mightily in all things omni-channel.

As we dissect customer behavior, as we understand the new competitive reality, as we wake up to the fact that most retailers are spending a lot of money to shift sales from one side of the ledger to the other, it’s clear that omni-channel is no panacea and that many of the promises of vendors, consultants and assorted gurus were no more than pipe dreams.

Yes, chances are you need a compelling digital presence. Yes, you had better get good at mobile fast. Yes, you need to assure a frictionless experience across channels. Yes, your data will probably show that customers who shop in multiple channels spend more than your average shopper. But so what?

If you’ve invested heavily in omni-channel and your sales, profits and net promoter scores are not moving up, could it be your working on the wrong problem?

 

 

 

 

 

 

Luxury retail’s big stall

Neiman Marcus and Saks both just reported disappointing sales and earnings. And both cast most of the blame on the strong dollar’s effect on their tourist business. There was also some whining about the unseasonably warm weather, low oil prices and volatile capital markets.

To be sure, these factors have not been helpful. But the problems in the luxury market go deeper, particularly among the department store players. First some quick context.

The widely held notion among analysts that luxury brands are immune from the vicissitudes of the economy reveals a fundamental misunderstanding of their actual customer base. Yes, a significant percentage of the business comes from the very wealthy, who are not very price sensitive and not affected much by the sturm und drang of the economy. But for all but the most rarified brands, most luxury retail spending comes from what I call the “solidly affluent” (others call them HENRY’s–High Earners Not Yet Rich). These customers have much more volatile spending and much greater price sensitivity (I know this well from 4 years at Neiman Marcus diving into the data and conducting scores of studies). When the economy wanes they pull back. When prices get too high they shop less frequently or trade down to lower priced brands.

So with that as a backdrop–and going beyond the near-term headwinds– here are the key reasons I see a tough longer-term outlook for luxury retail–at least in North America:

  • Little new customer growth. Other than through e-commerce, luxury retail has had a tough time with customer acquisition for more than a decade. With e-commerce maturing, unfavorable demographics (see below) and few, if any, new store openings, luxury department stores, in particular, will struggle to replace the customers they lose.
  • Little or no transaction growth. While not widely appreciated, most of the comparable store growth in luxury retail for quite some time has come through prices increases, not growth in transactions. There is nothing to suggest this trend will change.
  • Unfavorable demographics. Affluent Baby Boomers have propped up the sector for the past decade or so. But as customers get older they spend less in general and quite a bit less on luxury products. The Baby Boomers are slowly but surely “aging out” of the sector. Gen X is a smaller cohort and there is little evidence they will spend as much on average 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. So far, most studies suggest Millennials will be more price sensitive and less status conscious then then the cohorts ahead of them.
  • Limits to price increases. For about 15 years, average luxury retail prices have grown at more than twice the general rate of inflation. In accessories it’s more like three times. Prices just don’t rise forever without affecting demand.
  • Shifts in spending. The affluent continue to value experiences and services over things–and are allocating their spending accordingly. Maybe this multi-year trend will start to reverse itself. Color me skeptical.
  • The omni-channel migration dilemma. Saks, Neiman’s and others are spending mightily on all things omni-channel and frankly the ROI is often terrible. Now they must do so to remain competitive. But it’s incredibly expensive to create a more integrated customer experience and, for the most part, the better you get at it the more you accelerate a shift to digital away from physical stores. Most often this is not accretive to earnings. For either Neiman Marcus or Saks to get a pay-off they need to grab market share. And the reality is they have more competition on the higher end part of their business from the wholesale brands that continue to open up stores and dramatically improve their e-commerce game. And on the lower end of their business they are playing catch up with Nordstrom.

For me, what I see is a sector that clearly has immediate term headwinds. But, more importantly, I see a sector that has much more profound long-term demographic and psycho-graphic headwinds. A sector that will have increasing difficulty wielding it’s tried and true big hammer of price increases. A sector that can no longer count on e-commerce for much new customer growth A sector that has 2-3 years of significant investment in digital and omni-channel capability building just to remain competitive.

Even if the dollar weakens or oil prices rise or we have colder winters, it’s still not a very pretty picture.

 

 

 

Attraction, not promotion (redux)

If you are familiar with 12-step recovery programs you know about the Eleventh Tradition of Alcoholics Anonymous, which goes as follows: “Our public relations policy is based on attraction rather than promotion.”

The obvious reason for this practice is that 12 Step programs have the anonymity of their attendees at their core. Moreover, AA–and its spin-off programs–reject self-seeking as a personal value. But it goes deeper.

Most people do not wish to sold to. If I have to hit you over the head again and again with my message, perhaps you are not open to receiving it. Or maybe what I’m selling just isn’t for you. Shouting louder and more often, or pitching all sorts of enticements, may be an intelligent, short-term way to drive a first visit, but all too often it’s a sign of desperation or lack of inspiration.

12 Step programs were among the first programs to go viral. They gained momentum through word of mouth and blossomed into powerful tribes as more and more struggling addicts learned about and came to embrace a recovery lifestyle. No TV. No radio. No sexy print campaigns. No gift cards. No ‘3 suits for the price of 1’. When it works it’s largely because those seeking relief want what others in the program have.

In the business world, it’s easy to see some parallels. Successful brands like Nordstrom, Apple and Neiman Marcus run very few promotional events and have little “on sale” most days of the year. And, it turns out, they sell a very large percentage of their products at full price and have low advertising to sales ratios. Customers are attracted to these brands because of the differentiated customer experience, well curated and unique merchandise and many, many stories of highly satisfied customers. Net Promoter Scores are high.

Contrast this with Macy’s, Sears and a veritable clown car of other retailers who inundate us with TV commercials, a mountain of circulars and endless promotions and discounts. Full-price selling is almost non-existent. How many of these brands’ shoppers go because it is truly their favorite place to shop? How many rave about their experience to their friends? Unsurprisingly, marketing costs are high, margins are low and revenues are stagnant or declining.

Migrating to a strategy rooted in attraction vs. promotion does not suit every brand, nor is it an easy, risk-free journey. Yet, I have to wonder how many brands even take the time to examine these fundamentally different approaches?

How many are intentional about their choices to go down one path vs. the other? How many want to win by authentically working to persuade their best prospects to say “I’ll have what she’s having” instead of beating the dead horse of relentless sales promotion and being stuck in a race to the bottom.

Maybe you can win on price for a little while. Maybe you can out shout the other guys for a bit. Maybe, just maybe, if you can coerce a few more suckers, er, I mean customers, to give you a try, you can make this quarter’s sales plan.

And sure we didn’t make any money, but we’re investing in the future, right?

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When cheap rules

In case you haven’t noticed, the retail apparel market is kind of a hot mess. Sales are going nowhere. Profits are waning. Many store closings have occurred, with more on the horizon. And for two basic reasons.

First, we aren’t buying as many items. It turns out that we actually don’t need so much stuff. It also turns out that, more and more, we are starting to value experiences over things. As Millennials become more important contributors to the market–which, after all, is merely the passage of time–this likely only gets worse.

Second, the average unit price of what customers are buying is declining. Some of this is due to the frenzy of discounting that most retailers can’t seem to break out of. But mostly it’s a substitution effect: people trading down from Neiman Marcus to Nordstrom, or from department stores to off-price stores, or from specialty stores to places like H&M, Zara and Primark.

In many cases, the consumer is saying “no” to excess, unwilling to pay a lot merely for status. Still others are reticent to support a high markup that goes to what they have come to see as needless frills and overhead.

As leaders of brands we are powerless over the first factor. But when it comes to the second we have choices. Many of us are trying to solve for this market shift by cutting expenses and closing stores. Others have launched discount versions of their core brand and are aggressively investing behind this cheaper version of themselves. Some of us are doing a combination of both.

When cheap rules it’s certainly fair game (and simply good management) to look at our cost structure, to consider rebalancing our assortments, to seek ways to become more effective and efficient.

But as leaders–as a matter of strategy–we face the proverbial fork in the road. Do we chase cheap or do we seek reasons other than price for consumers to choose us over the competition? Do we risk entering a race to the bottom or do we choose to become more personal, more relevant, more remarkable? Do we go with the flow (and what Wall St. seems to demand) or do we confidently embrace a stance of “yeah, we’re more expensive, here’s why and we’re worth it.”

Every brand is different, so the right answer must be situation specific. But we shouldn’t lose sight of the fact that it is a choice. We shouldn’t forget that once a brand trades-down there is usually no turning back. And we should always remember that the biggest problem with a race to the bottom is that we might win.

No new stores ever!

What if your company could never open another store? I’m not talking about relocations. I mean a truly new unit that adds top-line growth for your brand.

That’s pretty much the case in the US department store sector. Macy’s, JC Penney, Dillard’s and Sears (obviously) are closing far more full-line stores than they will open.

The generally more resilient luxury sector isn’t exactly booming. Nordstrom will open only 3 new stores in the US over the next 3 years. Neiman Marcus will open 2 full-line stores over 4 years. Saks is probably done finding viable new locations. It’s hard to imagine how this current outlook will get better.

Major sectors like office supplies and specialty teen are going through wrenching consolidations and hemorrhaging sites. And for every Dollar General, Charming Charlies and Dick’s Sporting Goods that have decent opportunities for regional expansion and market back-fill, there are far more that have overshot the runway.

“But Steve”, you say, “we’re seeing great growth in our online business. That’s our future.” That may be true, but how much of that is actually incremental growth? For most “omni-channel” retailers–particularly those that aren’t playing catch up in basic capabilities (I’m looking at you JC Penney)–more and more of what gets reported as digital sales is merely channel shift.

In fact, you don’t have to be Einstein to understand what’s going on when brands report strong e-commerce growth, yet overall sales growth is barely positive. For a great discussion of this check out Kevin’s blog post on hiding the numbers.

The fact is we have too many stores and most consumers have too much stuff.

The fact is the retailers that operate the most stores and sell the most stuff are rapidly reaching the point where, for all practical purposes, they will never open a new store.

The fact is very few large retailers are experiencing much incremental growth from e-commerce and, either way, that growth is small relative to their base and beginning to slow substantially.

The fact is, going forward, most brands will only grow the top-line above the rate of inflation by developing strategies that steal market share. And the me-too tactics and one-size-fits all customer strategies that currently account for the bulk of most brands time and money simply won’t cut it.

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