Omni-channel · Reinventing Retail · Store closings

Are mass store closings the start of an inevitable downward spiral?

At the recent inaugural ShopTalk Europe event in Copenhagen, Hudson’s Bay Company CEO Gerald Storch posited that retailers risk hastening their demise by taking an axe to their store counts. Clearly there are many factors that contribute to a brand’s march to the retail graveyard, yet there is mounting evidence that Storch’s observation is on the money. As I’ve said many times, show me a retailer that is shuttering a large number of outlets and chances are the intrinsic problem is not too many stores but that the brand is not sufficiently relevant and remarkable for the stores it has.

I first surfaced this concern more than four years ago in my post “Shrinking to prosperity: The store closing delusion” and revisited it more recently with an updated Forbes post. While in many cases store counts need to be rationalized to address the overbuilding of the past two decades and to optimize store footprints given the shift to e-commerce, with rare exception, the retailers that are closing a large number of stores are working on the wrong problem.

When physical retail still accounts for 75-90% of a category’s volume, it’s hard to understand how radical cuts in store counts help address a brand’s ability to maintain, much less grow, market share. When we know for a fact that brick & mortar locations are key to supporting a viable and growing e-commerce business (and vice versa), mothballing dozens (or even hundreds) of stores only serves to undermine a retailer’s ability to meet customers’ evolving omni-channel demands. When we recognize that it is often far cheaper to acquire and serve customers through physical stores, reducing store counts substantially can worsen a retailer’s long-term cost position. And, as Storch points out, mass store closings erode purchasing power and can send consumers a signal that a retail brand is on its way to oblivion, serving only to make matters worse.

In fact, I cannot come up with a single major retailer that has closed 20% or more of its stores and is now considered truly healthy. On the other hand, I can easily name many that went through multiple iterations of down-sizing that have either liquidated or are currently in bankruptcy proceedings–Sears Canada being the most recent example. I can also list many that seem to be in perpetual store closing mode (Sears US for one) that thus far have been spared a visit from the grim reaper yet continue to see their operating results deteriorate with little hope for resurrection. For many, sadly, it’s dead brand walking.

We should also ignore any analysis that tries to estimate the number of store closings that a retailer must undertake to get back to prior store productivity levels. First, anchoring success on past store productivity metrics is largely irrelevant as it ignores a store’s contribution to online volume growth. Minimally, we need to understand the growth and profitability of a trade area and incorporate both e-commerce and physical store performance. Nordstrom and Neiman Marcus–just to name two powerful examples–have seen their historical store productivity numbers weaken, yet they still have healthy financial performance overall. Second, any such analysis is merely a rote arithmetic exercise that erroneously assumes that massive store closings don’t have any adverse impact on e-commerce, nor make a brand less relevant and competitive in consumers’ minds nor serve to de-leverage fixed costs.

Ultimately, I don’t see a scenario where store closings will be the silver bullet that troubled retailers need to get back on track. They may be a key piece in a needed reinvention, but the critical work centers on taking the required actions to make these troubled brands sufficiently relevant and remarkable such that they can stem the share of wallet loss that got them into trouble in the first place.

Said differently, if sales are the problem, working on the cost side will never help breathe a dying retailer back to life.

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 · Omni-channel · Retail

Reports Of JC Penney’s Death Are Greatly Exaggerated

The last several years have not been kind to JC Penney. Not only have they been swept up in the long-term decline of the moderate department store sector, but they also hemorrhaged huge amounts of market share during Ron Johnson’s failed re-boot. Under current leadership, the picture has not improved much. In fact, last week shares sank again after a disappointing earnings report. The stock is off nearly 90% in the past five years and some 40% year to date.

Many observers have concluded that Penney’s is on a slow slide to oblivion. And while I agree that much more needs to be done to right the ship, I am cautiously optimistic. In fact, full disclosure, I bought some Penney’s shares last week. While investing in the company is clearly not for the faint of heart, I believe there are a few reasons to conclude that the news on Penney’s going forward is more likely to be positive than not.

Store closings muddy the picture. The biggest reason for the miss on gross margin was from unusually high markdowns. Both Penney’s own store closings and those of competitors put pressure on pricing as stores liquidate merchandise. While clearly the industry is facing a great deal of promotional intensity, margin pressures should subside a bit as the pace of store closings slows.

New initiatives are gaining traction. Penney’s continue to expand its partnership with Sephora, opening 32 new locations and expanding 31 others. The beauty category is key to driving incremental traffic. The company also is growing its appliance showrooms and seeing positive sales momentum. The repositioning of its critically important apparel business also seems to be going well, with most categories seeing positive comps despite a difficult market.

Gaining share in a down market. Wall St. is overly focused on same-store sales growth, which I continue to deem retail’s increasingly irrelevant metric.  With nearly 20% of sales in Penney’s core categories occurring online it’s more important to understand combined e-commerce and physical store performance on a trade-area by trade-area basis. If Penney’s closed a bunch of stores but overall sales grew, it suggests that they gained omni-channel share, which speaks to their improving digital commerce capabilities. While there is considerable room for improvement, that’s still encouraging. And unlike some, Penney’s seems to get that stores drive e-commerce and vice versa–and they are acting accordingly and wisely.

Well-positioned to gain from Sears demise. While Sears may still technically survive as a holding company for intellectual property, it seems obvious that most of their mall-based department stores will be shuttered within the next year or so. That will give Penney’s a crack at hundreds of millions of dollars of home and apparel business, not to mention solid upside from their expanding appliance presence.

Maybe Amazon buys them? Amazon clearly has its eyes set on growing market share in traditional department store categories. And the reality is a physical store presence is going to be required to access the majority of the business. Both Macy’s and Kohl’s market caps are around $7b. Penney’s is under $2b. You do the math.

Of course, even if my prognostications prove accurate, I know other risks exist. JC Penney’s is highly leveraged. The Amazon Effect remains real. The off-price sector continues to steal share away from department stores. The full effect of retail consolidation is yet to be realized

However, the broader “retail apocalypse” narrative is nonsense and the notion that mall-based retail is doomed is overblown. Physical retail is different but far from deadMost malls are not going away. And recent earnings reports from many “traditional” retailers suggest the broader market is beginning to stabilize. Either way, more capacity needs to come out of the market before any of the struggling retailers have any shot at significantly improved performance. For Penney’s in particular, they need further work to make their assortments and experience more relevant and remarkable, while right-sizing their store fleet for optimal performance. They need to reduce their debt burden.

Perhaps it’s wishful thinking on my part, but I think they are fundamentally pointed in the right direction. Only time will tell.

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.

Retail · Store closings · The Amazon Effect

Department store quarterly performance: Better isn’t the same as good

Last week we had five major department stores report their quarterly earnings: Macy’sKohl’sNordstromDillard’s and JCPenney. It was a decidedly mixed bag relative to both expectations and absolute performance. Yet many observers seemed encouraged by the overall improvement in sales trend. Yet the overall sector is still losing market share, just not at quite as fast a rate. Which begs the question, is less bad somehow good?

It’s clear that one must pull out of a dive before an ascent can begin. It’s also obvious that reducing the rate of descent is no guarantee of a resurrection. Better is simply not the same as good. So to understand whether recent results provide a dose of optimism or are merely noise, it’s worth looking more closely at a few key considerations.

More rationalization must occur. The sector has been in decline for two decades–and not because of Amazon or e-commerce. The main reason is that department stores failed to innovate. They focused on expense reduction and excessive promotions, instead of being more remarkable and relevant. That won’t be fixed easily or quickly. So, in the meantime, there is simply too much supply chasing contracting consumer demand. Sector profitability isn’t going to improve much until Sears goes away and additional location pruning on the part of remaining players occurs.

Yet physical retail is not going away. Brick & mortar retail is becoming very different, but it’s far from dead. There is no fundamental reason why any given department store cannot not have a viable operation with hundreds of physical locations, particularly when we realize that some 80% of all products in core department store categories are purchased offline.

You can’t shrink to prosperity. Wall Street seems to think that store closings are a panacea. They’re wrong. It’s one thing to right-size both store counts and individual store sizes in response to overbuilding and shifting consumer preferences. It’s another thing to make a brand’s value proposition fundamentally more relevant and remarkable. Department stores must spend more time working on giving consumers reasons to shop in the channels they have (note: excessive discounting doesn’t count) and abandon the idea that shuttering scores of locations is a silver bullet.

Same-store sales are an increasingly irrelevant metric. Wall Street needs to let go of its obsession with same-store performance as the be-all-end-all performance indicator. Any decent “omni-channel” retailer should be on its way to–or as is already true with Nordstrom and Neiman Marcus well past–more than 20% of its overall sales coming from e-commerce. So unless a retailer is gobbling up market share most of that business is coming from existing stores. The reality is that shifting consumer preferences are going to make it nearly impossible for many retailers (of any kind) to run positive store comps. That does not mean a brand cannot grow trade area market share and profits. And it doesn’t mean that a given store is not productive even if sales keep trending down. Stores drive online, and vice versa. Smart retailers understand this and focus on customer segment and trade area dynamics, not merely individual store performance in isolation.

It is going to take more than a couple of quarters to fully understand whether the department store sector has stabilized, much less turned the corner. As we look ahead, of the five that reported, Nordstrom is clearly the best positioned, both from the standpoint of having relevant and differentiated formats and possessing physical and digital assets that are the closest to being “right-sized” for the future. And call me crazy, but I sense that JC Penney is actually starting to gain some meaningful traction. Dillard’s is a mess and Macy’s and Kohl’s remain very much works in progress.

Regardless, with tepid consumer demand and over-capacity, no department store brand (and I’d include Neiman Marcus and Saks in the mix as well) does especially well until we see further consolidation. And even when that occurs, if department stores keep swimming in a sea of sameness and engaging in a promotional race to the bottom, they have zero chance of getting back to a sustainable, much less interesting, level of performance. Better is nice. Encouraging even. But it is simply not the same as good.

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.

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.

 

Being Remarkable · e-commerce · Growth · The Amazon Effect

With Kenmore Deal Amazon Is A Winner. For Sears, Not So Much.

Investors reacted quite favorably to the news that Kenmore appliances will soon be sold through Amazon. For Amazon, it’s clearly an interesting opportunity. While online sales of major appliances are currently comparatively small, being able to offer a leading brand on a semi-exclusive basis gives Amazon a jump start in a large category where they have virtually no presence. On the other hand, for Sears, it smacks of desperation.

First, some context. Way back in 2003 I was Sears’ VP of Strategy and my team was exploring options for our major private brands. Despite years of dominance in appliances and tools, our position was eroding. Our analysis clearly showed that not only would we continue to lose share (and profitability) to Home Depot, Lowe’s and Best Buy, but those declines would accelerate without dramatic action. Unfortunately, it was also clear that very little could be done within our mostly mall-based stores to respond to shifting consumer preferences and the growing store footprints of our competitors. Kenmore, Craftsman and Diehard’s deteriorating positions were fundamentally distribution problems.  And to make a long story a bit shorter, a number of recommendations were made, none of which were implemented in any significant way.

Flash forward to today, and Sears leadership in appliances and tools is gone. While in the interim some minor distribution expansion occurred, it was not material enough to offset traffic declines in Sears stores and the shuttering of hundreds of locations. More important is the fact that Kenmore and Craftsman still aren’t sold in the channels where consumers prefer to shop–and that train has left the station.

So last week’s announcement does expand distribution, but it does little, if anything, to fundamentally alter the course that Sears is on. Simply stated, making Kenmore available on Amazon will not generate enough volume to offset continuing sales declines in core Sears outlets, particularly as more store closings are surely on the horizon. Selling Kenmore on Amazon does not in any way make Sears a more relevant brand for US consumers. In fact, it will give many folks one more reason not to traffic a Sears store or sears.com.

Since 2013 I have referred to Sears as “the world’s slowest liquidation sale”, owing to Eddie Lampert’s failure to execute anything that looks remotely like a going-concern turnaround strategy, while he does yeoman’s work jettisoning valuable assets to offset massive operating losses. Earlier this year, Sears fetched $900 million by selling the Craftsman brand to Stanley Black & Decker, one of the leading manufacturers and marketers of hand and power tools. So it’s hard to imagine that Sears did not try to do a similar deal with either a manufacturer of appliances (e.g. Whirlpool or GE) or one of the now leading appliance retailers. The Kenmore partnership with Amazon appears to have far less value than the Craftsman deal, despite being done just six months later–which speaks volumes to how far Sears has fallen and for how weak Sears’ bargaining position has become.

The cash flow from the Amazon transaction will do little to mitigate Sears operating losses and downward trajectory. In fact, it seems to be mostly the best way, under desperate circumstances, to extract the remaining value of the Kenmore brand given that no high dollar suitors emerged and Sears continues its march toward oblivion. Amazon, however, is able to take advantage of fire-sale pricing and create the valuable option to have Kenmore as a potentially powerful future private brand to build its presence in the home category.

Advantage Bezos.

dezhas8u0aac0fw

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.

Brand Marketing · Customer Growth Strategy · Luxury

Tiffany seeks to execute the ‘customer trapeze’

Last week the Wall St. Journal featured a story on Tiffany & Co’s “midlife crisis.” The piece highlighted the jewelry brand’s struggle to regain its “cool” and improve recently tepid sales and profits. A few days later they announced the hiring of a new CEO.

Yet Tiffany is hardly alone in dealing with what I have coined the “customer trapeze“, particularly as Millennials become an increasingly important demographic.

The customer trapeze is the idea of hoping to reach a new, highly desirable set of customers while letting go of those with less favorable characteristics. Most often we see it at play when brands face an aging customer base. Knowing full well that their customers will literally die off, companies will seek to update their image and strategy to seem more hip and trendy. This might include becoming more fashion forward, less expensive or attaching themselves to celebrities that appeal to different cohorts. The key to executing the trapeze move is to not let go of one group before being fully ready to take on the new one.

In Tiffany’s case, over the years they have introduced less expensive items and expanded their assortments in an attempt to widen their appeal. Most recently, they’ve taken on Lady Gaga and Elle Fanning as spokespeople and launched a new, more youthful ad campaign. They’ve even taken steps to lessen the predominance of their iconic blue in their brand imagery. The challenge, of course, is that many of these steps to attract new customers run the risk of alienating long-term, often highly valuable, ones.

Tiffany follows in the footsteps of many brands that see the demographic writing on the wall and take bold steps to attract new customers. Readers of a certain age may remember the “This Is Not Your Father’s Oldsmobile”campaign. This is a text book example of a brand that let go of one customer group before it could safely latch onto another one. The once legendary company went too far, too fast and, at the risk of pushing the trapeze analogy too far, suffered mightily from its aggressiveness and decision to work without a net.

There are many examples of brands essentially abandoning one customer group too quickly to chase a new, sexier one. Often this comes through an attempt to “trade up” the customer base by pushing more expensive and fashion forward products to attract more affluent consumers. The most recent disaster of this sort came under Ron Johnson’s failed reboot of JC Penney. While not (yet?) fatal, the company has been struggling to recover for over 4 years.

History reveals that very few established brands are able to successfully execute a dramatic re-configuration of their customer base–at least quickly. Once you get beyond Cadillac and IBM, the list grows short indeed. It’s not hard to understand why. The more a brand is known for one set of things, the harder it is to persuade consumers to believe something fundamentally new and different. To the extent a company starts to dramatically move away from what made it successful with its traditional segment in the hopes of cultivating a new group, it risks alienating its historical core. More often than not, the customers that are being de-emphasized are significant contributors to current cash flow. We saw this with JC Penney and I witnessed it first hand when we tried similar moves at Sears more than a decade ago.

With rare exception, brands simply cannot survive, much less thrive over the long-term without being really good at acquiring profitable new customers to replenish those that leave or naturally decrease their spending. But executing this transition is not so easy. Like any trapeze act, the customer trapeze is all about speed, coordination and timing. Let go at the wrong time, be it too late or too early, and the fall can be disastrous.

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.

Digital · e-commerce · Retail · Store closings

Sears must think we’re stupid or gullible. Here’s why.

Having spent my first 12 years in retail as an executive at Sears, I’ve followed the company’s trials and tribulations with more than a passing interest. And considering my last role at the once-storied brand was leading corporate strategy–where my team was mostly focused on trying to fix the mall-based department store format and making the Lands’ End acquisition work–I am far from an impartial or unknowing observer.

Arguably, I’ve taken Sears to task too many times over the years. When I left Sears in 2003 (a year before Sears and K-mart merged), I had already concluded that the once iconic brand was on a slow slide to oblivion. Combining a deteriorating, mediocre chain with a terrible one did not change my view. Over the years Eddie Lampert’s misguided leadership has been a frequent target of criticism on my blog. In 2013, I labeled Sears “The World’s Slowest Liquidation Sale” as it became abundantly clear that after nine years Lampert still had no viable turnaround plan. In 2014, I lampooned the futility of their efforts in an April Fool’s post and went on CNBC arguing that investors would be better served by a swift liquidation rather than perpetuating an increasingly delusional strategy that only served to lower asset values.

So, years later, Sears is still hanging around and Lampert is still peddling his special brand of snake oil. How is this possible?

Let’s answer the easy question first. Sears has endured longer than they deserve to because they had enough assets to unload (real estate, private brands and fungible business units) to cover the massive operating losses they’ve racked up during the past decade. The fact that Sears has very low operating costs (partially because of favorable rents, partially because Lampert has cut overhead to the bone) has extended their life. But, make no mistake, they are very close to the end of the runway.

To answer the other question we must conclude that investors are either stupid or gullible–or at least Lampert is counting on it. Before we get to the most recent nonsense, it’s worth mentioning some of the whoppers we were supposed to believe over the years:

  • That Sears and Kmart would create some magical synergy
  • That Sears’ problems could be fixed by cutting costs rather than investing in the customer experience
  • That it made sense to have merchandise categories compete internally with each other, rather than focus on the customer and external competition
  • That Sears could disinvest in stores and profitably transition much of its business online
  • That selling once enormously valuable private brands like Kenmore, Craftsman and DieHard in off-the-mall formats and Ace Hardware Stores was a sufficient antidote to the massive share loss to Home Depot, Lowe’s and Best Buy.

Today, the company continues to make a big deal about how it is a “member-driven” company, touting its “Shop Your Way” program and “ecosystem” as some sort of important differentiator and value contributor. The facts are that a) it is, at best, a mediocre loyalty program, b) customer engagement is driven almost exclusively by a high rate of discounting, c) margins have declined since its introduction and d) sales continue to slide. Referring to customers as “members” may sound good, but it connotes a strength of relationship and value that clearly does not exist. The program has always been an expensive gimmick to collect customer data. Suggesting anything else defies credulity.

In an apparent attempt to distract from the collapse of its mall-based stores, Sears Holdings also continues to announce “innovative” new store formats like an appliance & mattress store (which isn’t a new idea at all) and a DieHard Battery Center. These might be interesting formats to franchise when Sears ceases to be a significant retail operator, but the notion they will somehow be material to a turnaround is just silly.

More broadly–and most stupefyingly–Lampert continues to claim turnaround efforts are on track. This from a company that has had precisely one-quarter of positive sales growth in seven years, operating losses that continue to worsen, an acceleration in store closings and rampant departures of key executives. Moreover, the moves detailed in the most recent press release are all about financial restructuring and say nothing about actions to improve customer relevance. If Sears does not quickly and dramatically improve its performance with its customers nothing else matters. Period.

At one level, I get why Lampert apparently chooses to create the illusion that Sears can actually stay in business. He needs vendors to keep shipping product to mitigate a complete unraveling. He needs employees to keep the lights on and greet the few customers who might wander into the ever shrinking store fleet. He needs to avoid looking too desperate to dodge fire sale pricing on the few remaining assets he must unload to make it through the holiday season. And he needs creditors to give him more time to try to pull another rabbit out of his hat.

Yet, let’s be clear, to believe that Sears is somehow going to make it much longer as anything remotely resembling a national, fully operating retailer is beyond folly. I have no idea whether Lampert truly believes Sears can be saved. I hope not because that would be quite sad.

But for the rest of us, there is simply no reason to be stupid or gullible. The reality is there for all to see. A story and, most importantly, the one spinning the tale–only has power if we allow them.

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.

Retail

Sears’ March Toward Bankruptcy: Gradually, Then Suddenly

I get the nostalgic love for Sears.

Sears was a pioneer in catalog shopping, the creation of the department store, the boom in suburban regional malls and the advent of powerful private brands. They even sold houses through the mail. Years ago, when I was an executive at Sears, I remember sitting in focus groups and hearing some customers talk glowingly about how Sears was the only company to give them a credit card when they got out of school and how nearly everything they bought for their first home came from Sears. Kenmore. Craftsman. Diehard. All iconic.

I get the disdain for Sears too.

Consumers have suffered through years of mismanagement and, at times, what seemed like episode after episode of willful neglect. Long-term employees have seen their pride turn to embarrassment and sorrow. Investors have endured a roller coaster, with each plunge from the top growing deeper and deeper.

What I don’t get is the wishful thinking.

Despite more than a decade of steady declines in performance, despite the absence of a coherent turnaround strategy, despite the massive operating losses, some investors return to the stock like they might return to a bad love affair. In fact, since the company stated last month it had substantial doubt about its ability to survive, the stock has rallied. And some pundits continue to opine on the various ways Sears could survive as a leaner, meaner version of its storied past. Don’t be fooled.

Since Eddie Lampert still has a few things to sell to raise the mountain of cash necessary to fund ongoing operations, it’s possible he can stave off bankruptcy a bit longer. But make no mistake, the end is in sight.

It turns out that Sears is having a hard time unloading some of its few remaining significant assets, most likely because potential buyers realize their value declines along with Sears fortunes and that they might, in fact, do better in bankruptcy court.

It turns out that Sears has been quietly closing even more stores than they previously announced.

It turns out that the idea that retailers can shrink to prosperity is typically the first sign of a death spiral.

It turns out Sears has been slowly liquidating itself for years. Dead brand walking.

I’d like nothing more than to see Sears survive as a vibrant and sustainable retailer. But, sadly, all the wishful thinking in the world will not change the inevitable.

Now, whenever I think of Sears, I’m reminded of what Hemingway wrote in The Sun Also Rises. When one of the characters is asked how he went bankrupt, he replies mournfully: “Two ways. Gradually, then suddenly.”

 

 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.  
Omni-channel · Retail · Store closings

Wall Street’s Misguided (And Dangerous) Fascination With Retail Store Productivity

An unprecedented number of retail store locations are closing this year and more announcements are surely coming–though perhaps not quite as many as I suggested in my April Fool’s post.

Given the lack of innovation on the part of traditional retailers, rampant overbuilding and the disruptive nature of e-commerce, this ongoing and massive consolidation of retail space was both inevitable and overdue. Yet much of the way the investor community sees the need for even more aggressive store closings is wrong and, one could argue, pretty dangerous.

One of the more ridiculous ways Wall Street firms have tried to determine the “right” number of store closings is to calculate how many locations would need to be shuttered to return various chains to their 2006 store productivity levels. A somewhat more responsible, though still alarming, analysis comes from Cowen, which focused more on the need to more closely align retail selling space supply and demand.

The most obvious problem with this type of analysis is its focus on ratios. The fact is that many stores with below average productivity are still quite profitable, particularly department stores, given their low rent factors. So while closing a lot of locations may yield a temporary productivity boost it often has a direct and immediate negative impact on earnings, which is a far better indicator of a retailer’s health.

The bigger issue is an underlying misunderstanding of the role of brick & mortar stores in retail’s new world order. Just as “same-store” sales is an increasingly irrelevant metric, so are store productivity numbers. Yes, more stores need to close. Yes, many of the stores that remain need a major rethink with regard to their size and fundamental operations. But what many still fail to grasp is how a retailer’s store footprint drives a brand’s overall health and the success of its e-commerce operations.

A given store’s productivity can be below average and decline yet still contribute to a retailer’s overall success, particularly online. Stores serve as an important–and often low cost–channel to acquire new customers. Stores serve as showrooms that drive customers online. Stores serve as fulfillment points for e-commerce operations. Stores are billboards for a retail brand. Without a compelling store footprint, a brand’s relevance will likely decline and its e-commerce business almost certainly will falter. Stated simply, store productivity numbers, taken in isolation, no longer get at the heart of a brand’s overall performance in an omnichannel world.

While there surely is merit in closing stores that drain cash and management attention, store closings can often make a bad situation worse. Ironically–as Kevin Hillstrom from MineThatData does a great job of illustrating–closings stores to respond to e-commerce growth can actually have the opposite effect. In fact, from my experience, massive store closings often initiate (or at least signal) a coming downward spiral.

Store closings are hardly the panacea that Wall Street seems to believe. And the notion that a brand can shrink its way to prosperity is typically horribly misguided. Macy’s, J.C. Penney and a host of others need to close more stores. And Sears and Kmart just need to go away. But, as I’ve said many times before, show me a retailer that is closing a lot of stores and you’ve likely shown me a retailer that doesn’t have too many stores, but a retail brand that is no longer relevant enough for the stores it has.

The danger of closing too many stores is increasingly real. The danger that struggling retailers will continue to appease Wall Street’s thirst for taking an ax to store counts instead of working on the underlying fault in their stores seems, sadly, clear and present.

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.  

Winning on Experience

Every Single Retail Store in the US To Close Permanently By Month’s End

In a surprise move that underscores the sweeping changes faced by the retail industry, the National Retail Federation, speaking on behalf of all of its members, announced today that every brick & mortar location of every retailer in the United States would close forever within the next few weeks. For nearly a decade “traditional” retailers have been struggling with profitability as sales shifted online and more consumers started to notice that many retailers appeared to have given up years earlier. Yet the move to close down every single store in America still came as a shock to most industry observers.

Speaking on condition of anonymity, a CEO of one major retail brand remarked “I would have thought that the fact that 90% of all shopping is still done in physical locations would have been enough to warrant keeping at least a few stores around. I guess I was wrong.” Former Texas Governor Rick Perry, who was recently named Sears’ 13th CEO in as many months, seemed surprised as well. “Wait, most shopping is still done in stores? I guess maybe we should have worked on making our stores better rather than thinking that closing them down would somehow make things better? Oops.”

Jeff Bezos, CEO of Amazon, the brand that has benefitted the most from consumers’ growing love of e-commerce, was approached for comment after delivering his keynote at the annual World Hyperbole Conference in Geneva, but would not speak to reporters. He was, however seen high-fiving Elon Musk off stage and doing what some described as a “clumsy Irish jig” upon learning the news.

Other industry veterans were more circumspect. Ryan Gozzi, a prominent Wall Street analyst who has been pushing many retail brands to shutter locations to improve profitability, commented “honestly I think this just goes too far. I always envisioned retailers would cut and cut until they had just a handful of stores that did like $15,000 per square foot, you know like Warby Parker, Bonobos and Birchbox.” When asked what he thought of today’s announcement Ron Johnson, who oversaw a failed attempt to re-invent JC Penney, looked earnestly into the interviewer’s eyes and exclaimed “Apple. Apple. Target. Apple. Target. Apple. Apple,” then added “golly that’s big news. I was only able to decrease Penney’s sales by about 40%. So signing up for destroying 100% of sales is truly transformative. Gosh I’m impressed.”

The complete shut down of all stores comes after many retailers had aggressively explored new strategies to revive their fortunes. According to multiple sources, newly appointed Macy’s CEO Jeff Gennette recently presented his Board with a bold plan to turn the storied retailer around. The strategy, developed with a team of 2nd year Wharton MBA students, was designed to transform the Macy’s culture and incorporate many of the components that have allowed so-called “digitally native” brands to grab market share away from traditional player while transferring billions of dollars from venture capitalists to consumers without anyone apparently noticing or caring.

The new plan reportedly called for the company to relocate its headquarters to a loft-building in the Pearl District of Portland where employees would receive complimentary Stumptown Coffee and Voodoo Donuts, in addition to an enhanced benefits package. Reports that corporate staff would be required to bring their dogs to work could not be independently confirmed. According to multiple sources, sales associates were to be re-named “customer service sensei’s” and the company would guarantee 15 minute delivery of any product anywhere in the continental United States for free. Initial plans also called for consumers to receive 1,500 Plenti points with every order over $50 but were dropped when research revealed that no one knew what Plenti points were.

According to insiders the plan hinged on four key elements:

  • Liberal use of the words “disruptive” and “transformative” in conversation, written communication and speeches at analyst meetings and conferences.
  • Getting on the cover of Fast Company.
  • A willingness to lose a cumulative $27 billion over the next 10 years.
  • A miracle happening in year 11.

The Board was reportedly initially intrigued, but the strategy lost support when one member pointed out that the plan was mostly just a description of Amazon’s strategy and that nothing was being done to improve the products Macy’s sold or the actual shopping experience. Ultimately a growing malaise crept over the Board despite plans to hold their Board dinner that evening at Masa. According to one long time Macy’s Director “while we were excited to dine together that night at arguably the best sushi restaurant outside of Japan, we couldn’t get past the realization that when it came to our business we had nothing. Absolutely nothing.”

While today’s announcement would seem to doom many once leading brands to the retail graveyard, some believe Walmart might come out ahead. The Bentonville, Arkansas based company recently began aggressively acquiring online-only brands in a bid to become “more customer relevant and digitally savvy.” Sean Spicer, Walmart’s newly appointed VP of Cash Incineration Initiatives, told the Wall Street Journal that the shuttering of all physical stores only validated what Walmart has been saying all along and that anyone who says otherwise is either stupid or lying. Challenged on that remark Spicer added: “Hold on, hold on, hold on. We’ve always maintained that the future of retail is selling cheap stuff that Americans need, shipping it to their house, losing money on every order and making it up on volume. If you can’t see that you haven’t been paying attention.” He then told reporters to direct any further questions to the Justice Department.

The economic impact of closings tens of thousands of stores and putting hundreds of thousands of people out of work remains unclear, but many were concerned it could lead to a recession. It also cast serious doubt on President Trump’s claim that ‘we would be winning so much we would get tired of winning.” Prior to today’s news a recent Gallup survey confirmed that most Americans weren’t remotely tired of winning.

Many commercial real estate investors also expressed concern that billions of square feet of vacant retail space coming on the market all at once would have a depressive effect on rents. Despite this widely shared belief, General Michael Flynn, recently named President of the Association for Commercial Real Estate Over-Capacity Denial” noted that the industry had gone through multiple down cycles over the years and that any excess supply would quickly be absorbed. “For every Home Depot or Target that closes there are plenty of Soul Cycles and expensive juice bars with that one employee awkwardly standing there to take their place” Flynn said.

 

For real stuff please follow me on Twitter and @Forbes