Stop blaming Amazon for department store woes

Given Amazon’s staggering growth and willingness to lose money to grab market share it’s easy to blame them for everything that is ailing “traditional” retail overall–and the  department store sector in particular.

In fact, with announcements last week from Macy’s to Kohl’s and Sears to JC Penney that could only charitably be called “disappointing” many folks that get paid to understand this stuff reflexively jumped on the “it’s all Amazon’s fault” bandwagon. Too bad they are mostly wrong.

The fact is the department store sector has been losing consumer relevance and share for a long, long time–and certainly well before Amazon had even a detectable amount of competing product in core department store categories.

dept_store_sales_grwth_large

The fact is it’s just as logical to blame off-price and warehouse club retailer growth–which is almost entirely done in physical locations, by the way–for department stores’ problems.

dillards-2

The fact is that, despite other challenges along the way, Nordstrom, Saks and Neiman Marcus have maintained share by transitioning a huge amount of their brick & mortar business to their online channels and have closed only a handful of stores in the last few years. Nordstrom and Neiman Marcus now both derive some 25% of their total sales from e-commerce.

Don’t get me wrong, I’m not saying that Amazon isn’t stealing business from the major department store players. Clearly they are. And as Amazon continues to grow its apparel business they will grab more and more share.

But the underlying reason for department stores decades long struggle is the sector’s consistent inability to transform their customer experience, product assortments, marketing strategies and real estate to meet consumers’ evolving needs.

More recently, those brands that have been slow to embrace digital first retail are scrambling to play catch up. Those that still haven’t broken down the silos that create barriers to a frictionless shopping experience will continue to hemorrhage customers and cash.

Most importantly those that think they can out Amazon Amazon are engaged in a race to the bottom. And as Seth reminds us, the problem with a race to the bottom is that you might win.

seth-godin-quote-1-800x397

The outlet store long con

One of the hottest sectors in retail is the “off-price” or outlet segment. Established players like TJX, Ross and Nordstrom Rack continue to open stores at a solid clip while also expanding their e-commerce capabilities. Neiman Marcus, Saks and Macy’s have identified their outlet store strategy as a growth platform. Scores of fashion designers and other manufacturers have joined Ralph Lauren and Nike in filling up outlet centers across the globe. And despite their stumbles, so-called “flash-sales” sites like Gilt and HauteLook have developed significant market share.

Clearly there are aspirational customers at every price point, not to mention plenty of people who just simply hate to pay full price. For both types of customer segments the outlet store value proposition is straight-forward and compelling: well-known brand names at 20-60% off the regular price.

The appeal to brands can be compelling as well. An off-price strategy can be a sensible way of creating an “opening price” point format that generates incremental growth while bringing new customers into the brand’s eco-system. And to be completely transparent, I strongly advocated precisely this type of approach when I headed strategy at the Neiman Marcus Group–a version of which they have been implementing in recent years.

Yet with all the touted strategic benefits, not to mention all the hype that surrounds the sector, there is more and more deception and denial creeping in. I suspect it won’t be long before we see a major recalibration of the prospects for the sector and many of its participants. Here’s why.

The product con. While the industry tries hard to create the impression that the product in outlets is the same as the consumer would find in full-price stores, that is rarely the case. In fact, whether we are talking about Neiman Marcus’ Last Call Studio, Saks Off 5th or the Gap Factory Outlet stores, the vast majority of the merchandise carried is made specifically for those channels. For more on this check out this story on Racked.

The price con. So if most of the product was never for sale anywhere else how does the retailer come up with the  “compare at” price to calculate those big savings? Great question. Here’s the answer: They make it up–or as TJ Maxx likes to say,  it’s “estimated.”

The brand con. Any time a strong brand launches a derivative, lower-priced version they are entering treacherous waters. Done properly, the core brand suffers no loss of equity and benefits from a growing customer base. Done poorly, the effort can be highly dilutive, confusing and ultimately unprofitable. Nordstrom has done a masterful job of segmenting its customer base for the full-line and Rack stores and has been able, thus far, to make the strategy additive. But not every brand has been so disciplined (I’m looking at you Coach) and many are now opening outlet stores at such a rate–and out of proportion to their full-price business–that red flags need to be raised, even at Nordstrom.

The growth con. When the core business is stagnant, it’s easy for retailers to chase the growing bright shiny object. Yet it’s hard to escape the reality that North America is severely over-stored and that overall retail spending is barely growing above the rate of inflation. So for the many retailers opening many outlet stores over the next few years it’s mostly about grabbing market share. That’s fairly easy when it’s a few new locations. It’s not so easy when everyone is opening a lot of new stores and there are many new competing business models. When some of these new stores don’t make their numbers there will be pressure to “open the aperture” on product, pricing and promotion. And it’s Coach all over again.

Of course it’s fair to say that even if consumers knew the whole story they might not care. It’s fair to say that given the challenges to the traditional department store model, many of these retailers have no choice but to double down on outlet stores.

But it’s also fair to say that we’ve seen many of these companies overshoot the runway before. And it’s fair to say that in what’s becoming a zero-sum game not everyone can be a winner.