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.





The bullet’s already been fired 

I’m fascinated by our capacity to get stuck, the many ways we craft a narrative in a vain attempt to avoid change, the stories we buy into as we hope to keep above the fray. Far too often, the power of denial seems endemic to individuals and organizations alike.

Go back to the 80’s and 90’s and ponder how a slew of successful retailers mostly did nothing while Walmart, Home Depot, Best Buy–and a host of innovative discount mass merchandisers and category killers–moved across the country opening new stores and evolving their concepts to completely redefine industry segments. Somehow it took many years for the old regime to realize what was going on and how much market share was being shed. For many, any acceptance and action came far too late (RIP, Caldor, Montgomery Ward, et al).

Witness how digital delivery of books, music and other forms of entertainment came into prominence while Blockbuster, Borders and Barnes & Noble spent years mostly doing nothing of any consequence. Two of them are now gone and one is holding on for dear life.

Starbucks revolution of the coffee business hardly occurred overnight. But if you were the brand manager of Folger’s or Maxwell House you apparently were caught unawares.

Consider how consumer behavior has been shifting strongly toward online shopping and the utilization of shopping data through digital channels for well over a decade. Yet many companies are seemingly just now waking up to this reality. And by the way, Amazon didn’t just spring out of nowhere. They will celebrate their 22nd anniversary this summer.

And lastly, examine how the elite players of the luxury industry have largely resisted embracing e-commerce–and most things digital–believing that somehow they were immune to the inexorable forces of consumer desires and preferences. Apparently they failed to notice, as just one example, Neiman Marcus’ rise to having 30% of their sales come from online and more than 60% of physical store sales now being influenced by digital channels.

More often than we care to admit, the bullet’s been fired, it just hasn’t hit us yet.

The good news is that while the pace of change is increasing in retail, we have a lot more time to react than we do in a gunfight.

The bad news is that the impact can be just as deadly if we are not prepared.



Omni-channel’s migration dilemma: Holiday edition

Last year I wrote a post about what I called retail’s “omni-channel migration dilemma” wherein I observed that while the deployment of so-called omni-channel strategies–i.e. making it easier for consumers to shop anytime, anywhere, anyway–improves the customer experience immensely, the outcomes for most retailers were, thus far, not quite so wonderful.

At the heart of this argument were three core points:

  • With few exceptions, omni-channel retailers’ total revenues remain essentially flat, meaning that robust growth online is mostly cannabilizing brick & mortar sales;
  • In many cases, the profitability of e-commerce is actually worse than a physical store sale. This is particularly true for lower transaction value players like Walmart and Target.
  • In their quest to become “all things omni-channel”, retailers are investing enormous sums–and in some cases–getting distracted from arguably higher value-added activities.

You don’t have to be a math whiz to understand that spending a lot of money to end up–if you’re lucky–with basically the same total revenue at a lower margin is not exactly a genius strategy. But this is where we find Macy’s and many other retailers right now.

The omni-channel frenzy around the holiday shopping season only shines a harsher light on the issue. By launching sales earlier and earlier, by pushing deep discount events like Cyber Monday and by offering free shipping pretty much throughout the season, the tilt toward online sales is exacerbated and margins continue to shrink. Consumers win through great deals. And retailers lose, as overall sales are likely to go absolutely nowhere.

Now some have argued that omni-channel is ruining retail. They are wrong. They’re wrong not only because it is pointless to fight reality, but also because efforts that are fundamentally rooted in the desire to improve the customer experience are rarely misguided. The key is not to confuse necessary with sufficient, nor “the what” with “the how.”

So we should not get distracted by analysts who try to extrapolate one or two days of sales as part of some trend.

And we should bear in mind that online sales for most omni-channel retailers remain far less than 10% of their total business. So even healthy e-commerce growth is not likely to offset seemingly small declines in physical stores sales. You don’t have to trust me on this. Do the math.

But mostly we should remember that the story is not about all things omni-channel, nor what happens on Black Friday, Cyber Monday or the few weeks that comprise the holiday shopping season.

It IS about which retailers are breaking through the sea of sameness with remarkable product AND a remarkable experience. It is about which retailers are eliminating friction for the consumers that matter the most in the places that matter most. It is about which retailers are eschewing one-size-fits-all strategies in favor of a “treat different customers differently” philosophy. It is about retailers that know where to focus and how to properly sequence their omni-channel initiatives, not blindly chase everything some consultant has pitched them.

Clearly, the future of omni-channel will not be evenly distributed.

Don’t be blinded by the hype.

Small is the new interesting

It’s been at least 20 years now that most value creation in retail has been driven by big. Big stores–both physical and digital. Big assortments. Big advertising.

Walmart and Target. Home Depot and Lowes. Amazon and eBay. Best Buy, Ikea, Office Depot and on and on. Superstores, category killers and the “endless aisle” online guys have won big (heh, heh) on scale, efficiency and low prices.

There’s a lot to be said for pushing the frontiers of big. When your goal is to be the “we have everything store” your marching orders are pretty clear. When you have to be the winner in a price war, your focus is obvious.

The problem is that big has its limits. And a closer examination of many “winning” retailers’ strategies reveals that big is losing momentum.

It turns out that a strategy of big eventually faces diminishing returns. It turns out that most of the winners of the past decade or so are running out of new stores to build. It turns out that many of the mass promotions that drive incremental business lose money. It turns out that for most of these brands e-commerce growth is unprofitable. But mostly it turns out that big is boring. And consumers are starting to notice.

There’s no question that big is here to stay. There’s little doubt that for many consumers–and a vast number of purchase occasions–the quest for dominant product selection, convenience and great prices will remain paramount. But that doesn’t mean that’s where the future opportunities lie or that your strategy shouldn’t shift.

Shift happens. And it’s a shift away from mass marketing to becoming more personalized. Away from overwhelming assortments to editing and curation. Away from products that everybody has to items and experiences that the consumer creates. Away from the seemingly inevitable regression towards the mean to a deliberate choice to eschew the obvious and explore the edges.

Many brands will have a hard time breaking out of the pursuit of big. They are too vested in building scale, too scared of Wall St.’s reaction to a strategy pivot, too addicted to mass advertising.

Of course, therein lies our opportunity. Maybe it’s time to embrace small while the rest of those guys continue to flog big.


Creating meaning at scale

In case you haven’t noticed, there is a whole lot of bifurcation going on. And in many markets, the middle is all but collapsing.


At one end are the Walmart’s, the Home Depot’s, the Amazon’s–the low price, vast assortment guys. Their pitch is easy to understand. We have just about everything you could possibly want, virtually anytime you want it, at the low, low price. Operationally this is incredibly difficult to scale. But from the customer’s perspective, it couldn’t be more simple to grasp. Dominance and value (defined by price) creates meaning.

At the other end of the spectrum are the brands built around market niches, product differentiation and the somewhat intangible “brand personality.” What defines meaningfulness here is built on deep customer insight, emotional connection and, more and more, the ability to treat different customers differently.

Historically, luxury brands thrived by merchandising exclusive products in spectacular settings delivered face-to-face by well-trained sales associates. To the extent companies could replicate this model as they added stores, they could continue to create meaning and deliver it at scale. Yet, as all things digital become increasingly important, the notion of what constitutes a meaningful one-to-one “luxury” relationship is being challenged.

The best specialty stores have succeeded by curating merchandise for a particular “lifestyle” and presenting it in a distinctive environment that reinforced a unique brand image. These companies created a business model that was simple to replicate and led to the ubiquity of many of these brands in affluent malls and upscale shopping areas of most major cities. Now, with product choice and availability exploding and new micro-niche brands emerging online, the concept of “specialty” is being redefined.

The hyper-growth, venture-backed “pure-play” brands that have launched over the past few years–think Gilt, Bonobos, Warby Parker–found it comparatively easy to scale at first. They exploited many of the advantages of a direct-to-consumer model and employed low-cost acquisition techniques to build an initial base of customers–what I like to call the obsessive core.

But it turns out that creating meaning at the scale that will lead to profitability isn’t so easy (or economically viable). Too many newer customers of these high-flying brands have started to equate meaning with discounts. Others, it turns out rather predictably, need the meaning that comes from a physical presence to derive theirs. Many see this hybrid-model as an exciting new area of growth. Others see it as clear evidence that most e-commerce only brands are finding it very difficult to deliver meaning at scale.

In an anything, anytime, anywhere, anyway world, it’s getting harder and harder to break through the clutter, to win the battle for share of attention, to create the all essential meaning that matters for customers.

If you seem to be stuck in a sea of sameness, selling average products to average people, relentlessly promoting just to stay even, it’s time to get off the bridge. The collapse is near.

If your customer is choosing you mostly on price, you had better be the low-cost provider. Otherwise you will lose the inevitable race to the bottom.

If you believe you have the ability to be meaningful to a well-defined set of customers who choose you over the competition for specific, sustainable reasons, good on you.

Just remember, as Bernadette reminds us, it’s not so easy to create meaning at scale, particularly if you need that scale to stay in business.

The discount ring

I’m amazed that Wall Street analysts are “surprised” that as hot brands get bigger (think Michael Kors, kate spade), their level of discounting increases. Apparently they were all sleeping during their first year economics course when supply and demand was covered.







Whether it’s Walmart or Chanel, at the center of any brand’s customer bullseye will be customers who don’t need a discount (or any extra incentive) to buy. This is what I referred to in my recent obsessive core post. As we move out in the rings, away from the center, we encounter customer segments that are less and less intrinsically loyal and thus more in need of extra incentives to buy.

Since Walmart’s value proposition is largely about price–whereas Chanel’s rests on a high percentage of full-price selling–the composition and dynamics of these various customer segment rings will obviously be quite different. But the fact remains that as a brand grows by casting a wider net for customers it will, at some point, develop a discount ring.

As the name implies, customers in the discount ring don’t buy unless they get a deal. In fact, most brands will have multiple discount rings. There will be a ring that needs only minor or modest incentives to pull the trigger. Others only come off the sidelines when prices hit a much deeper level of markdown (or some other incentive).

Unless we are examining a brand that has decided strategically to shun price discounting completely–or assessing certain companies early in their life-cycle–the existence (and relative growth) of a discount ring should surprise no decent analyst.

The real question for anyone trying to understand the validity of a brand’s long-term customer growth strategy is whether the company has a firm grasp of the dynamics within each of these rings and is intelligently balancing the portfolio of these different customer segments.

Coach is a brand that in recent years lost its grip on its customer portfolio and pushed too far on the discount ring. They have paid a steep price and are now trying to rebalance.

In Michael Kors’ case, there are only so many customers willing to pay at or close to full-price for their core offering. Sustaining growth means appealing to more customers. And that means they will need to become more reliant on more price sensitive customers.

Ultimately the point at which the discount ring becomes meaningful is mostly a matter of brand maturity and math. If you get shocked by that it just means you’re not paying attention.

The starting point–the pivotal matter of strategy and intelligent customer development–is to build a level of deep insight about each relevant customer segment. Then we must become intentional about how each plays into the brand’s long-term growth. Having a discount ring emerge is not automatically a matter of good or bad. How it plays out over time is a strategic choice.

Choose wisely.

Sears: The world’s slowest liquidation sale

“I see dead people…they only see what they want to see.  They don’t know they’re dead.”

– Cole Sear in The Sixth Sense

There probably was a time when Eddie Lampert honestly believed that Sears and Kmart could be resurrected as competitive retailers. But the concept of putting together a mediocre (and declining) department store, with an also-ran to Walmart and Target, was failed from the start.

In the intervening nine (!!!) years, Lampert has never once articulated a strategy for fundamentally improving the value proposition of either brand that made any sense.

On the contrary, he organized product and business unit teams into “competing” merchandise categories despite overwhelming evidence that consumers wanted more integration, not less. He required that every individual product earn a competitive ROI when every winning retailer on the planet understood the notion of category management and market-basket profitability. He starved both nameplates of capital when each was already woefully behind best-in-class competitors. He cut expenses to the bone when it was clear that both Sears and K-mart had a revenue problem, not a cost problem. He closed dozens of stores, further exacerbating both brands’ lack of critical mass in many markets.

Of late, he’s been pushing two ridiculous notions. The first is the idea that Sears is becoming a “membership” company. Please. This is mostly a transparent customer data grab. The value proposition of “Shop Your Way” is weak and the idea that being a member conveys any real sense of brand loyalty, engagement or fundamental profitability would be laughable if the whole endeavor weren’t so sad.

Crazy Eddie’s other big idea is transforming Sears into an “integrated digital platform.” For this to work you have to believe that Sears can compete effectively with Amazon–not to mention a whole host of leading multi-channel retailers–or that you can somehow win in an omni-channel world with a crappy, declining and shrinking brick and mortar base. Both defy basic logic.

Whether Lampert is delusional or not remains irrelevant. Whether by design or desperation, Sears has been liquidating for years.

Sears can certainly create liquidity for a bit longer by continuing to off load assets. But any realistic hope that Sears can pull out of this dive has, sadly, long since passed.

Dead man walking.