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.

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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.

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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.

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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.

 

 

 

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.

 

Built for me

We’ve all been there.

We walk into a new store, check out a just opened restaurant, surf a recently discovered website or perhaps slip into the front seat of that new model car and instantly it hits us: whoever designed this must have had me in mind.

The overall feel, the tiniest details, the careful editing, all seem built around our particular wants and needs. We can’t wait to come back and there is a pretty good chance we’re eager to tell all our friends about our new-found love.

Contrast that experience with the brands we engage with infrequently, or try once, never to return. In many cases–as a point in strategy–that’s not only fine, it’s desirable. It’s not supposed to be for us. Walmart is not trying to get the Saks customer. And vice versa.

But if you aren’t winning with the consumer segments your brand is supposed to be for, than clearly you’ve got work to do.

More and more, building deep engagement, loyalty and “remarkability” in a world of constant connection, ever-expanding choices and a blitzkrieg of marketing communications, demands that you become the signal amidst the noise.

Increasingly retail is shifting toward  “Me-tail.”

If your core customer segments don’t resonate with a “built for me” notion,  you need to get at the root cause. And you need to get busy.

 

 

It’s time to let go of that hammer

You probably know the saying: “If all you have is a hammer, everything looks like a nail.”

This explains a lot of behavior we see with the leadership at struggling retailers.

If you came up through the merchant ranks, chances are you obsess about product–rather than the consumer–and fall woefully behind in creating a compelling omni-channel shopping experience. Today, you are desperately playing catch-up.

If the only way you know to drive revenue is through relentless price promotions, you now sit lamenting the lack of customer loyalty and your shrinking margins.

If you made your money through financial re-engineering and scorched earth expense reductions, you assume your latest investment will cost cut its way to prosperity, rather than realize that your overwhelming issue is top-line growth (I’m looking at you Eddie Lampert!).

If you drove same-store sales through price increases rather than customer and transaction growth–as the US luxury retail industry did for many years–post-recession you find yourself with too narrow a customer base to sustain profitable growth. You now are working overtime to win back customers you priced out of your brand.

All of these problems were caused by a monolithic view of strategy and a failure to gain deep insight into customer behavior. Most were preventable.

Of course, the past is history and the future is a mystery.

But there is no mystery in the failed wisdom of clinging to the past and continually wielding the hammer that got you into trouble in the first place.

Let go.

Move on.

Get some new tools.

 

 

 

Competing with yourself

One of the biggest mistakes companies make strategically is failing to compete with themselves.

The only reason Sears is no longer the leader in the retail home improvement industry–and now on a slow slide into oblivion–was their unwillingness to build or buy an off-the-mall response to Home Depot when they had the chance. Having personally participated in 2 separate strategic studies in the early and mid 1990’s, I can tell you that the big hang up in making the plunge was leadership’s fear of sales diversion from the “core” mall-based department stores.

Whoops.

So it was refreshing yesterday to see Nordstrom’s acquisition of HauteLook, one of the leading flash-sales sites.

The luxury/fashion off-price market has exploded in the past 3 years with upstarts like HauteLook, GiltGroupe, RueLaLa, et al creating a $1 billion+ (and growing) sub-segment through daily online sales. And it’s clear that a lot of that business has come at the expense of traditional players like Nordstrom, Neiman Marcus and Saks.

It remains to be seen whether the price Nordstrom paid was sensible. And time will tell how well they will be able to leverage their capabilities and customer database to accelerate HauteLook’s growth and profitability. But one thing is clear. The other industry incumbents have been slow to react–or have responded with utterly unremarkable tactics–and have let many start-up companies steal market share and attract new customers in a space they could have easily dominated.

Retailers are pretty good at firing people when they don’t make their seasonal sales plan or manage their budgets well. When they let hundreds of millions of dollars of potential shareholder value slip through their hands by failing to act on business that is rightfully theirs, you rarely hear a peep.

That needs to change.

And you need to be willing to compete with yourself. Last time I checked you don’t any credit for your competition’s sales.

 

Luxury’s back!!! Uh, not so fast.

With last quarter’s improved earnings–and a string of positive same-store sales reports–many have declared that the luxury market is once again booming.

While there is no question that business is on fire in developing luxury markets like China, the results in mature markets suggest a business that IS dramatically improved–and on a much more positive trajectory–but recovered? I beg to differ.

Better is not the same as good.  Let’s look at a few examples.

Neiman Marcus (full disclosure: my former employer and I still own an equity stake) is the clear leader in full-line luxury retail and today reported a December sales increase of 4.7%  In their most recently released quarterly earnings, Neiman’s reported a 7% same-store sales increase and a 33% increase in operating earnings compared to last year.

Today Saks reported a 11.8% increase in December sale-store sales.  In their last quarterly report, they showed a year over year sales increase of 4% and a doubling of their operating income.

This is all sounds pretty good until you compare these results to the same period just before the recession started.  Compared to the comparable quarter in 2007, Neiman’s sales are 18% below where they were–and this is after opening several new stores and having a rapidly growing e-commerce business.  More dramatically their quarterly earnings are still only half of what they were at their 2007 peak.

Same basic story at Saks: their sales are still down some 17% compared to 2007 (though they have closed a few full-line stores) and pre-tax operating earnings are down 30%.

Nordstrom–the best in class “accessible luxury” player–was affected less during the recession and has bounced back more strongly.  Their overall sales are pulling ahead of 2007, buoyed by new store openings, a leading omni-channel capability and a more broadly accessible offering.  While they have clearly gained market share, their earning are still about a third less than they were three years ago.

I have little doubt that virtually every player catering to the high end will report significantly improved earnings this next reporting period. And I’m delighted to see this positive trend.  But very few will have truly recovered.

A complete recovery will require more than just return of the ultra-high net worth customers and a bounce off the bottom.  It’s going to take a broader consumer recovery.  It’s going to take a better in-store customer experience.  It’s going to take building in more tangible value to the merchandise offering.  It’s going to take making the brand more accessible, while preserving the core customer.  It’s going to take a more compelling omni-channel strategy.  Fundamentally, it’s going to mean that all these players become more customer-centric rather than product-centric.

It can happen–it needs to happen–but it won’t fully happen anytime soon.

I had some surgery a couple of years ago and for some time I was hobbling around, feeling a fair amount of pain.  I realized–as did those around me–that each day I was feeling a little bit better.  And that was good.  But while I was still limping, nobody was deluded that I had completely recovered.

When it comes to the luxury recovery, let’s not kids ourselves either.