Being Remarkable · Collapse of the middle · Retail

Retail earnings: The best of times, the worst of times

This is a big earnings period for retailers. As the reports roll in, it’s increasingly clear that it’s both the best of times and the worst of times for retail.

While performance overall is, on average, much better than a year ago, what continues to come into sharper relief are three inescapable conclusions. First, as I have been saying for years, the idea that physical retail is dying is abject nonsense. Second, retailers that are stuck in a cycle of boring are getting crushed, and the middle is collapsing. Third, as our friends at Deloitte have recently outlined in depth, the bifurcation of retail is becoming more pronounced. The overall conclusion is that the difference between the haves and the have nots is ever more distinct.

On the first point, strong performance from multiple brick-and-mortar dominant retailers, including Target and Home Depot, underscores that stores are not only going to be around for a long time, they will continue to have the dominant share of retail in many categories for the foreseeable future.

On my second point, significant underperformance ( JC Penney ), store closings ( Sears Holdings ) and bankruptcies (Toys “R” Us) continue to be concentrated among those retailers that have failed to carve out a meaningful position toward the more value, convenience-oriented end of the spectrum or, conversely, to move in a more focused, upscale experiential strategic direction. Those that continue to swim in a sea of sameness edge ever closer to the precipice. Increasingly, it’s death in the relentlessly boring middle.

The great bifurcation point, of course, is related to this phenomenon. Despite the retail apocalypse narrative, solidly executing retailers at either end of the spectrum continue to perform well. Sales, profits and store openings are robust at TJX Companies , Walmart and many others that play on the value end. A similar story can be painted for the premium, service-oriented retail brands such as Nordstrom and Williams-Sonoma.

As the scorecards continue to come in, there are a few key things we should bear in mind. The most important is that better is not the same as good. While positive sales and expanding margins certainly beat the alternative, the improved performance at brands like Macy’s and Kohl’s should not reflexively make us think that all is now well. Their sales growth is more or less in line with overall category growth. So there isn’t any reason to believe they are growing relative market share, which is generally a pretty good proxy for improving customer relevance.

Second, we should expect decent earnings leverage with improved sales, given the relatively fixed cost nature of the business. It’s more important to put the margin performance in the context of “best in breed” competitors. Here, most in the gang of most improved still fall short.

Third, a rising tide tends to raise all ships. This happens to be a particularly good time for consumer spending. It’s anybody’s guess if, and how long, retail expenditures will meaningfully exceed the rate of inflation.

From a more strategic, longer-term perspective, we need to sort out what is at the core of improving outcomes. If it’s riding the wave of a particularly ebullient economic cycle, that’s wonderful but not likely sustainable. If it’s starting to realize more fully the benefits of major technology investments, asset redeployment and/or picking up share from a rash of store closings on the part of competitors, that’s also nice, but those gains are likely to plateau fairly quickly. If margin improvement comes from big cost reductions, those often are more one-time gains and may ultimately weaken a given retailer’s competitive position over time.

What really matters, of course, is that most of the gains are coming from fundamentally being more intensely relevant and remarkable than the customer’s other choices. Viewed from this lens, many retailers’ improved results are necessary but far from sufficient.

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.  

September 6th I will be in New York for the Retail Influencer Network Kick-off.  On September 19th I’ll be speaking at Total Retail Tech in Dallas. The following Monday I’m headed to Austin to do the opening keynote at the Next Conference.

Innovation · Retail · Winning on Experience

Macy’s acquires Story: Game changer or much ado about nothing?

Last week Macy’s announced it had acquired Story, a New York-based concept store, and appointed founder Rachel Shechtman to be its new “brand experience officer.” And, for the most part, enthusiastic gushing ensued. Let’s simmer down, people.

As I regularly write and speak on retailers’ need to innovate and embrace a culture of experimentation, I would be a complete hypocrite if I failed to applaud Macy’s (and newish CEO Jeff Gennette’s) willingness to take bold steps. Yet before we jump on the silver-bullet train we might wish to consider a few important points.

Is Story Successful Beyond Generating PR?

There is no question that Story is cool and innovative. There is no question that Story has punched way above its weight when it comes to generating industry and media attention. And the notion of “store as media” is an intriguing one that is appropriately starting to change the way brands must think about their brick & mortar experience.

But lest anyone forget, Story launched in 2011 and has never expanded to another city, much less another location in the New York area. It’s pretty difficult to make the argument that Story has the potential to “reinvent retail” on any significant scale when after more than six years the number of customers it has validated its impact upon is teeny tiny. Every other truly interesting “disruptive” concept I can think of that launched around the same time (or even later) has attracted significant investment capital and is well into their expansion plans. So, to be blunt, there is far more evidence to suggest that Story is a way cool Manhattan phenomenon than there is to suggest it has any real ability to be relevant to Macy’s customers—and ultimately material to Macy’s strategy.

Do You Know How Much Macy’s Paid? 

No, I didn’t think so. So how can you say it’s a genius deal? I happen to own a pretty nice car. But if you were willing to pay me $100,000 for it you would be the opposite of a genius. Perhaps Macy’s paid less than it would cost to hire Shechtman as a consultant for a couple of years, in which case that sounds like a bargain. Maybe it paid millions for something it could have done itself years ago, in which case that sounds more dumb and desperate. Maybe we should say “who cares?” as regardless it’s probably chump change to a huge company like Macy’s. In any event, we just don’t know. So please hold your applause.

Macy’s Problems Run Deep

Macy’s has two huge and fundamental problems to address. First, it sits in a sector that has been in decades-long secular decline—and there is no reason to think that will change anytime soon. In fact, as Amazon and the off-price sector continues to expand aggressively in Macy’s core categories, it could easily get worse. Second, while Macy’s does a bit better than most of its department store brethren, it is still part of the epidemic of boring, struggling to carve out a sustainably relevant and remarkable position. It has a lot of expensive, risky and time-consuming work to do on both the customer-facing experiential parts of their business and their technological infrastructure. This all comes at a time when the company’s profits have stalled. That’s a very tall order and no one strategic initiative is likely to make a dent.

Does This Deal Fundamentally Change The Macy’s Story?

While Walmart paid silly amounts of money for Jet.com, Bonobos, et al., it now seems clear that the injection of “digitally native” senior talent has helped take the moribund retailer to an important new level. It also earned them some street cred. So acquisitions like Story can certainly contribute to an enterprise well beyond their straight discounted cash flows.

While some have referenced Macy’s earlier deal to buy Bluemercury as an analog, my guess is that if Story is to make a real difference it will be more similar to Nordstrom’s acquisition of Jeffrey over a decade ago. As that played out, it was founder Jeffrey Kalinsky’s impact on Nordstrom’s overall fashion strategy that was the source of value rather than the expansion of his eponymous stores.

The key in this situation will be whether Macy’s gives Shechtman the latitude to impact the trajectory of Macy’s brand to any material degree or whether the culture will eat her up and spit her out. And even if she gets that latitude, it is no easy task for even the most talented and experienced executive to make a big difference within an insular culture. There are far more examples of experiments that have gone awry than have worked out. We will have a far better idea about this critical dimension a year from now. Regardless, it won’t be easy.

The Opposite Is Risky

To be sure, retailers like Macy’s got into trouble because they mostly watched the last 20 years happen to them. Consciously or not, they acted as if deciding to embrace innovation was risky when, as it turns out, their reluctance to take chances was the riskiest thing they (and so many others) could have possibly done. The simple fact is, as Seth Godin reminds us, “if failure is not an option than neither is success.” The key is not to avoid failure, it’s to fail better.

Macy’s, like all those risking “death in the middle,” are desperately in need of a transformation. And that unequivocally means placing multiple bets in the hope of creating a vastly different future. Viewed from this lens, the acquisition of Story—and giving Shechtman a chance to impact the Macy’s culture and brand—is likely a pretty decent bet. As it’s highly unlikely to materially change Macy’s overall fortunes all by itself, it needs to be the first of many such wagers.

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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.  

On May 17 I will be keynoting Kibo’s 2018 Summit in Nashville, followed the next week by Retail at Google 2018 in Dublin.

e-commerce · Retail

Wayfair, StitchFix And Pure-Play E-commerce’s Scaling Problem

Late last month, Wayfair, the leading online-only furniture brand, reported dramatic sales growth and yet year-over-year profits fell significantly. Unsurprisingly the stock took a steep hit. In its most recent earnings announcement, Stitch Fix, the online styling subscription service, reported sales up over 25%, yet profits were essentially flat. When they signaled that profits were expected to get worse as they grew, their stock also took a beating. Several non-public online-only retailers are said to be facing similar issues of growing sales and non-existent profits. We shouldn’t be surprised.

Not too long ago it seemed like e-commerce was going to eat the world. Pundits, equity analysts and venture capital seeking entrepreneurs alike declared the death of physical retail. Many even predicted online shopping would surpass 50% of all retail sales by 2025 (spoiler alert: it will be lucky to break the 20% mark by then).

What got lost in the hype were two fundamental things. First, in many instances, brick-and-mortar locations actually add value to the shopping experience. It turns out lots of consumers prefer going to a physical store for all sorts of reasons and for all sorts of products and services. So it’s hardly shocking that once digital-only brands are now opening stores and that many “traditional” retailers continue to add to their store fleets as well. Second, and more importantly, a great deal of e-commerce remains unprofitable and often struggles from significant diseconomies of scale. This latter factor likely helps explain what’s going on underneath the surface of recent earnings concerns, including from brands as disparate as Blue Apron and Walmart.

Without access to internal data it’s impossible to say for sure, but having analyzed several pure-play brands’ customer metrics over the years I can hazard a guess at the challenges these brands are facing. Here’s a typical growth pattern for a pure-play online brand and why most eventually hit a wall, some never to recover.

Phase 1: The Liftoff

Having identified an interesting market niche and put together a solid business model, the brand launches. The first tranche of customers are acquired relatively easily as they quickly “get” the new concept and are already comfortable shopping online. They tend to be acquired inexpensively as they are the quintessential “heavy users” who are apt to learn about the brand through social media and word-of-mouth. Accordingly, many are likely the perfect fit customers, likely to be loyal and less reliant on discounting. Lifetime value is very high, cost of acquisition low. Bingo!

Phase 2: Momentum Builds

With success in Phase 1, the buzz starts to build, and flush with a big round of VC money the website gets optimized, investments in branding are made and marketing is expanded. Growing awareness leads to the relative ease of aquiring “look-alike” customers at a generally attractive cost of acquisition. It may take a bit more promotion to incentivize trial, but hey you got to fuel the rocket ship right?

Phase 3: Time To Go Find Customers

In this phase it becomes readily apparent why building an online-only brand isn’t so easy. Here, in order to sustain hyper-growth, the brand must start moving beyond its obsessive bullseye core customer to the outer rings where, on average, the customer spends less per year, is less loyal and is more promotionally driven. There also tends to be more direct competition as a brand expands. It also turns out that to break through all the marketing noise and gain the attention (and first sale) from these more promiscuous shoppers, the brand has to start spending more on expensive highly targeted marketing channels (i.e., Google and Facebook). Cost of customer acquisition starts to escalate, gross margins start to be depressed and the average lifetime value of the marginal customer acquired declines.

Phase 4: ‘Ruh ‘Roh

Here despair starts to set in for many as it becomes apparent that the cost of acquiring a marginal customer is often greater than the lifetime value of the customers being acquired. In the initial stages of Phase 4, the best brands are playing around with their marketing mix, finetuning their assortments and generally optimizing all manner of things to try to see if they can change this trajectory and convince investors that they aren’t throwing good money after bad. Some conclude that the only way to sustain growth and have a chance at profitability is to open physical stores (oh, irony, you are a cruel mistress). This is also often the time someone calls Bentonville or other deep-pocketed “strategic partner” in hopes of securing a lifeline.

Phase 5: Crossroads

Quick, name the pure-play e-commerce brands that made it through Phase 4 and came out alive (it doesn’t count if they got acquired by Walmart). To be fair, it is still too early to say whether many of the brands that find themselves at this difficult crossroad will make it out alive or join the many others in the retail graveyard. And to be sure it’s certainly not unusual for customers that get added later in a company’s growth cycle to be less profitable. What is different for pure-play e-commerce brands is that it is almost impossible to avoid rapidly escalating marginal customer acquisition costs (which is only like to get worse as Instagram and Pinterest figure out how to raise their prices for targeted ads). Rising cost of acquisition with declining lifetime value is a difficult equation to work through.

When it starts to look like every incremental customer that gets added to a brand makes profits worse, investors might want to start think about heading for the door.

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 keynote speaking and workshops please go here.

Being Remarkable · Digital-first · Omni-channel · Retail

A baker’s dozen of provocative retail predictions for 2018

2017 was one of the most transformative years for the retail industry that I can remember. 2018 is likely to be just as wild and woolly, albeit in somewhat different ways. Here’s my attempt to go beyond the obvious and go out on the limb just a bit.

  1. Physical retail isn’t dead. Boring retail is. A lot of stores closed in 2017. Often forgotten is that a lot opened as well. Many stores will close in 2018. Many will open as well. By this time next year roughly 90% of all retail will still be done in physical stores, so please can we shut up already about the “retail apocalypse.” The train left the station years ago on products that could be better delivered digitally. What’s happened most recently has everything to do with a long over-due correction of overbuilding and the collapse of irrelevant, unremarkable retail. The seismic changes in retail have laid waste to the mediocre and those that have been treading water in a sea of sameness. Great retail brands (Apple, Costco, Ulta, Sephora, TJX, etc.) continue to thrive, despite their overwhelming reliance on brick & mortar stores. Ignore the nonsense. Eschew the boring. Chase remarkable.
  2. Consolidation accelerates. In many aspects of today’s retail world, scale is more important than ever and this will continue to drive a robust pace of mergers and acquisitions. In some cases, capacity must come out of the market to create any chance for decent profits to return. The department store space is a great example. Moreover, large, well capitalized companies will take advantage of asset “fire sales” or technology plays to complement their skills and accelerate their growth.
  3. Honey, I shrunk the store. Small is the new black in many ways. Many chains will continue to right-size their store fleets to better align with future demand. Others will reformat or relocate to smaller footprints to better address the role of online shopping. We can also expect to see more small format stores as a way to cost effectively extend customer reach and further penetrate key customer segments.
  4. The difference between buying and shopping takes center stage. Buying is task-oriented, more chore than cherished, and is typically focused on seeking out great assortments, the lowest price and maximum convenience. This is where e-commerce has made the greatest inroads. Increasingly, Amazon dominates buying. Shopping is different. It’s experiential, it’s social, tactile–and the role of physical stores is often paramount. The trouble is when retail brands don’t understand the distinction and invest their energies trying to out-Amazon Amazon in a race to the bottom. And, as Seth reminds us, the problem with the race to the bottom is you might win. Or worse, finish second.
  5. Amazon doubles down on brick & mortar. For Amazon to continue it’s hyper-growth–and eventually make some decent profits–it needs to go deeper into the world of shopping vs. buying (see above). And this means greater physical store presence, particularly in some key categories like apparel and home. In addition to opening its own stores I expect at least one major acquisition of a significant “traditional” retail brand.
  6. Private brands and monobrands shine. A key part of winning in the age of Amazon and digital disruption is finding ways to amplify points of differentiation. Most often this can be done through product and experience. With the over-distribution of many national brands and the ease of price comparison, more and more smart retailers are looking for ways to differentiate on unique product. For some–including Amazon–deepening their commitment to private brands can be a source of competitive advantage. Well positioned monobrand retailers like Uniqlo, H&M, Primark and Warby Parker also will continue to steal share from less compelling multi-brand stores.
  7. Digital and analog learn to dance. As much attention as e-commerce gets it turns out digital channels’ influence on brick & mortar shopping is far more important for most brands. In fact, many retailers report that more that 60-75% of their physical store sales are influenced by a digital channel, hence the rise of the term “digital-first” retail. Side note: anyone who has adopted this term in the last 12 months has simply informed us that they were paying no attention to what has been going on in retail for nearly a decade. Regardless, clearly in-store technology must evolve to support this rapidly evolving world. Yet as much as technology can enhance the shopping experience the role of an actual human being in making the customer experience intensely relevant and remarkable should not be forgotten. Many retailers would be wise to see sales associates as assets to invest in, not expenses to be optimized.
  8. The great bifurcation widens. And it’s death in the middle. It’s been true for some time that the future of retail will not be evenly distributedWhat became abundantly clear in 2017 is how different the results have been between the industry’s have’s and have not’s. At one end of the spectrum retailers with a strong pricing story, from dollar stores to off-price to Costco and Walmart, did well. At the other end of the spectrum, many luxury brands and well focused specialty retailers continued to thrive. Meanwhile the fortunes of Sears, Macys, JC Penney and others who failed to get out of the undifferentiated and relentlessly boring middle diverged markedly. This will end badly.
  9. Omnichannel is dead. Digital-first, harmonized retail rules. Too many retailers chased being everywhere and ended up being nowhere. The search for ubiquity led to disjointed, poorly prioritized efforts that fattened the wallets of consultants but often did little to create what most customers want and value. The point is not to be everywhere, but to be relevant and remarkable where it matters, to understand the leverage in the customer journey and to root out the friction and amplify those elements of the experience that make the most difference. Most customer journeys will start in a digital channel (and more and more this means on a mobile device) and the challenge is to make all the potentially disparate elements of the shopping experience sing together as a harmonious whole.
  10. Pure plays say “buh-bye.” With rare exception, so-called “digitally native” brands were always a bad idea. Despite venture capitalists initial enthusiasm–and Walmart’s wet kiss acquisitions–only a handful of pure-play models had any chance to scale profitably. And many arrogantly declared they’d never open stores (I’m looking at you Bonobos and Everlane) when anyone who understood the high cost of returns and customer acquisition saw a physical store strategy (or bankruptcy) as inevitable. We’ve already seen some high profile blowups and more are surely on the way (Wayfair? Every meal delivery company?). This year the shakeout will continue and it will become clear that for the brands that survive most of their future growth will be driven by brick & mortar stores not e-commerce.
  11. The returns problem is ready for its close up. Product returns were the bane of direct-to-consumer brands well before e-commerce was a thing. Lands’ End, Victoria’s Secret, Neiman Marcus and many others regularly experienced return rates in excess of 30% from their catalog divisions. When you could actually charge for delivery this was a problem, but not necessarily the achilles heel. The near ubiquity of free returns & exchanges may be a consumer bonanza, but it drives a lot of expensive behavior and makes much of e-commerce unprofitable. Customers regularly order multiple colors and/or sizes of the same item hoping that one of them will fit or be to their taste. The retailer then eats the expense of some or all of the items coming back, including handling costs and often additional merchandise markdowns (which can be especially ugly for seasonal or fashion items). The disproportionate growth of e-commerce means outsized growth and expense for retailers. It’s not sustainable. Consider yourself warned.
  12. “Cool” technology underwhelms. There is plenty of incredibly useful technology that continues to transform retail, notably around mobile, predictive analytics and the like. There is also a lot that ranges between gimmicky and not yet ready for prime time. Augmented and virtual reality? Wearables? IotT? Blockchain? Digital mirrors? Someday, maybe. 2018? Not so much.
  13. The search for scarcity and the quest for remarkable ramps up. As most things came to be available to just about anyone, anytime, anywhere, anyway, access to great product was no longer scarce. As various marketplaces, peer-to-peer review sites and various forms of social media made data about product quality, reliable alternatives and pricing universally available, information was no longer scarce. As various tools emerged to put the customer in charge, the retail brand’s advantages were diminished and the power of the channel started to evaporate. It’s really hard to get folks to pay for what is widely available for free. And it turns out the moat that protected a lot of brands has dried up and been paved over. Good enough no longer is. The brands that will not only survive, but actually thrive in 2018 and beyond, will deliver consistently and remarkably on things that are highly valued by customers, can be seen as scarce and can be made proprietary to that brand. It’s not easy, but frankly, more times than not, it’s the only choice.

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 keynote speaking and workshops please go here.

A really bad time to be boring · Being Remarkable · Retail

Holiday 2017: The fault in our stores

By all accounts this holiday shopping season looks to be pretty solid overall–perhaps the best since 2010. Aggregate sales will likely be up between 3.5% and 4.0%. E-commerce year-over-year growth will come in around 17%. Retailers’ inventories seem to be generally in good shape, which should allow most to deliver strong gross margin performance. And despite the silly retail apocalypse narrative, I’ll even venture to say that sales in physical stores will show a slight increase.

Of course a given retailer’s mileage will vary; often considerably. The future of retail will not be evenly distributed. As we’ve seen in recent years, the fortunes of the have’s and have not’s continue to diverge. For more and more retail brands it’s death in the middle.

While we can be certain that the coming weeks will be filled with stories dissecting this season’s winners and losers, the truth is we already know the outcome. The retailers that consistently offer a relevant and remarkable value proposition–and execute well against it–are growing, making good money and (hold on to your hat) opening stores–sometimes a lot of them. We see this across a spectrum of price points. Off-price retail, warehouse clubs and dollar stores doing well; great, typically higher-end, specialty stores gaining share and delivering solid profits.

The simplistic notion that physical retail is going away is clearly flat out wrong. The continuing rise of Amazon does not spell doom for all of retail. The rapid growth of e-commerce hardly represents the death knell for traditional brick & mortar stores. For every Sears, Radio Shack and Borders, there is a Best Buy, Walmart or Nordstrom. The failed (and failing) retailers are the ones that did not innovate, that thought the physical store and e-commerce were the channels, when the customer was the channel all along. Somehow they believed they could cost cut their way to prosperity instead of evolving to where the customer was moving. Lower costs and drastic pruning of store locations mean precisely nothing if when the dust settles you are still drowning in a sea of sameness.

Physical retail is not dying. Boring retail is.

The fault is not with stores, it’s with stores that are irrelevant and unremarkable.

The fault in our stores lies in seeking to be everywhere and ending up being nowhere. The fault in our stores lies in aiming to be everything to everybody and being mostly “meh” to just about everyone. The fault in our stores emanates from retailers failing to understand the customer journey and committing to ruthlessly rooting out friction points and amplifying the experiences that really matter along that journey. The fault in our stores rests in retailers unwillingness to experiment and take prudent risks.

The shift of power to the consumer is not going away. What was once scarce rarely is anymore. Most customer journeys will start in a digital channel. Seamless integration across channels is now table-stakes. Good enough no longer is. Today’s basis for competition is being redefined, often radically.

As it turns out it’s an especially bad time to be boring.

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 keynote speaking and workshops please go here.

Being Remarkable · e-commerce · Strategy

Going private: Here comes Amazon’s next big wave of disruption and dismantling

While Amazon is often falsely blamed for all of retail’s woes, the “Amazon Effect” is both profound and well-documented. While the company’s overall market share is relatively low (under 5%), Amazon now accounts for nearly half of all e-commerce sales and its pricing and supply chain supremacy continues to put margin pressure across many categories of retail.

Yet, lost among the stories about the showdown between Amazon and Walmart or the impact of the Whole Foods acquisition or the company’s many stymied attempts to become a major fashion player is potentially an even bigger and more interesting narrative. What should be added to the list of things that keep both manufacturers and retailers up at night is Amazon’s rapidly evolving private brand strategy. The massive potential for a “go private” thrust to be another key component in what L2’s Scott Galloway has called Amazon’s systemic dismantling of retail and brands is huge.

Here’s why:

Private brands can have powerful consumer appeal. A well-executed private brand strategy allows for equal (or even better) quality products to be delivered at much lower prices. Store brands have moved well beyond the generic product days into being desired brands in their own right and have become significant lines of business for many retailers.

Private brands typically have greater margins. By controlling both the product design and supply chain–and avoiding the need for large marketing and trade allowance budgets–proprietary store brands can deliver a better price to the consumer and better gross margins for the retailer. Therefore the brand owner has a greater incentive to push its captive brands over national brands.

Amazon has already created a solid base of private brands. It turns out that Amazon already has a solid stable of proprietary brands. Some are more basic commodity items sold under the Amazon name. Some have their own identity, like Mama Bear and Happy Belly. Others tilt toward the more fashionable. With the Whole Foods acquisition, the company also controls the 365 Everyday Value brand which, rather unsurprisingly, is now available at Amazon. Recent reports suggest they are jumping into the athletic wear business.

Amazon’s private brands are on fire. While specific financial data is relatively sparse, most indications are that the company is thus far yielding strong performance with its own products. According to one report, many of these brands are experiencing hyper-growth.

The Amazon chokehold. Ponder for a moment the amount and quality of customer data Amazon can leverage to both design and target its own stable of higher margin products. Consider that more than 55% of all online product searches start at Amazon. Reflect on the reality that Alexa’s algorithms already give preference to Amazon’s private brands. Contemplate how easy it will be for Amazon to systematically design its website to feature the brands it wants to promote. Meditate on the freedom Amazon has to pursue the long game given its strong cash flow and Wall Street’s current willingness to value growth over profits.

Because of its sheer size, as well as the need to feed the growth beast, Amazon must both grab more market share in categories where it already has a material position, while also entering and penetrating significant new opportunity areas. At some point, Amazon will also have to demonstrate that it can make some decent money outside of its Amazon Web Services business. The opportunity in private brands serves both Amazon’s long-term revenue and margin objectives.

For the most part, Amazon’s private brand aspirations have operated under the radar. But from where I sit, it won’t be long before they reach critical mass in many key categories. And when they are ready to truly step on the gas–both from their organic efforts, as well as from what I believe will be at least one more major brick & mortar acquisition–another wave of brands (both wholesale and retail) will get caught in the wake.

For the competition, it’s time to be afraid. Very afraid.

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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 · Digital · Omni-channel

The End Of E-Commerce? These Days, It’s All Just Commerce

Given the continued rapid growth of online shopping, it might seem crazy to suggest that the era of e-commerce is coming to an end. Yet while we are used to talking about e-commerce as a separate thing — and isolating statistics for digital transactions versus brick-and-mortar same-store sales — it’s increasingly clear that these are becoming distinctions without much of a difference. For consumers, it’s simply “commerce,” and retailers that want to thrive, or survive, need to fully embrace a one brand, many channels strategy.

I recently attended shop.org, the annual conference historically focused on digital commerce. What struck me most (beyond the dwindling attendance) was that speakers mostly ignored online shopping as a stand-alone concept. Instead, many emphasized the importance of brick-and-mortar stores in delivering a remarkable customer experience. Moreover, the majority of technology providers in the expo offered solutions that were very much anchored in online/offline integration or leverage, not e-commerce optimization, as was true in the past. Rather than buying into the retail apocalypse narrative and seeing brick-and-mortar stores as liabilities, most were clearly in the camp of believing that stores were (wait for it) assets. Physical retail might be different, but it clearly is not dead.

Notably, Mark Lore from Walmart/Jet spoke of the need for retailers to be channel agnostic and highlighted how Walmart’s stores give the brand a distinct advantage. TechStyle CEO Adam Goldenberg showcased statistics on how Fabletic’s overall brand performance has been enhanced through the opening of stores and on how the merging of cross-channel data gives them an edge. Kohl’s spoke of the role of mobile as a constant companion in the shopper’s journey from online to offline (and vice versa). While using somewhat different language, numerous other speakers acknowledged that customers shop everywhere and the best retailers need to meet them where they are. Clearly, more and more, it’s just commerce now.

Of course, the lines have been blurring for years, and study after study shows that a well-integrated shopping experience across channels (what some call “omni-channel” and what I prefer to call “harmonized retail”) is what customers desire and what often determines a brand’s ultimate success. The increasing investments in physical stores byAmazon and other digitally native brands serve to underscore this growing reality. Those of us who are familiar with retailers’ customer data know that, typically, a brand’s best customers are those who shop and/or are heavily influenced in both digital and physical channels. We also know that opening stores drives increases in e-commerce in that store’s trade area, just as closing a store often leads to dramatic declines in online shopping. It’s all just commerce.

This realization does not negate the fact that a meaningful percentage of shopping occurs in a purely digital fashion (particularly downloading books, music and games). It does not minimize that Amazon has achieved a total share of retail rapidly approaching 5% almost entirely without a physical presence. But as we move ahead, it’s important to realize the significant contributions to what we label “e-commerce” that are derived from traditional retailers’ online divisions. It’s important to recognize that Amazon will struggle to maintain outsized growth without deepening its investment in brick and mortar. It’s critical to grasp that digitally influenced physical-stores sales far exceed sales rung up online.

And ultimately it’s essential to realize that it is rarely an online-vs.-offline battle, but a struggle that is won when we accept that it’s all just commerce and strive to bring the best of offline and online together on behalf of the customer.

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

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Digital · e-commerce

Walmart’s E-commerce Strategy: Pure Genius Or Venture Capitalist Bailout Fund?

Some believe Walmart should be pilloried for its laggard status in e-commerce. Many of these same folks are now cheering the company’s decision to put all e-commerce under internet wunderkind Mark Lore, as well as its new aggressive strategy to acquire online brands (Jet, ModCloth, ShoeBuy, MooseJaw and–apparently any minute–Bonobos). At last, they say, the company is serious about taking on Amazon.

The contrarian view is that Walmart was right to go slow in online shopping because of how hard it is to make money, and that encouraging too much volume to shift from physical to digital channels would de-leverage brick & mortar store economics unnecessarily. Moreover, spending billions to acquire brands that seem to have little prospect of ever being cash positive may appease Wall Street, but it is throwing good money after bad. More than a few folks have also intimated that Walmart is mostly bidding against itself in these deals as the “smart money” now sees how crazy many so-called digitally-native brand valuations have become.

I tend to side with the latter camp. And, full disclosure, I’ve never understood how Jet.com could ever make any real money. I’ve also been on record for some time in my view that much of e-commerce is profit proof and that most digitally-native brands will never turn profitable. Of course, the jury is still out on most of this, but the collapse of the flash-sales market and recent big write-downs of some high-fliers should give investors pause and encourage them to see past the hype and to dig deeper.

Either way, there are a few important things to consider as Walmart’s strategy unfolds:

  • Shopping behavior is morphing dramatically. While e-commerce remains small to the total, it is growing much faster than physical store shopping. More importantly, most shopping trips start online. Any retailer that fails to have a strong digital presence and does not offer a well integrated shopping experience will be at a distinct competitive disadvantage. Walmart, like every other retailer, needs to respond to this trend aggressively even if the marginal economics aren’t always so favorable.
  • A digital-first mindset is critical. Here is where most “traditional’ brands get stuck. When a culture is rooted in the old way of doing business and holds on to product-centric thinking and siloed organizational structures, much needed innovation is thwarted and vast numbers of opportunities are missed. Arguably, the greatest value from Walmart’s new acquisition strategy is that they are injecting a new mindset into the organization and jump-starting a cultural transformation that can pay vast dividends.
  • Demographics are destiny. The core Walmart model is rapidly maturing. Walmart has never done well with more affluent consumers and they are likely not doing particularly well with acquiring increasingly important Millennial customers. One way or another, to sustain growth Walmart needs to figure this out and scale it quickly.
  • Organic growth is hard and time is not our friend. Most large companies struggle to move the needle on growth in any material way through their own internal efforts. If anything, the pace of change is accelerating. Clearly, a smart acquisition strategy is one way to address both of these challenges.
  • E-commerce valuations are mostly irrational. I have consulted to multiple investment firms and conducted due diligence on quite a few e-commerce deals–including one of the brands that Walmart acquired. In every case the prices that were being discussed at the time either proved to be ridiculously high (as evidenced by subsequent write-downs) or the company could not present a compelling roadmap to profitability. Clearly there are, and will continue to be, exceptions. But irrationality does not last forever. Bubbles eventually burst.

As skeptical as I am, Walmart needs to do something big and bold. Minimally, their culture will get shaken up, likely in a very good way. Managing a portfolio of innovative brands should give them plenty of useful learning. And, in the scheme of things, a poor ROI on a few billions dollars will hardly bring them to their knees.

Yet mostly I am struck by the words of a venture capitalist who has been struggling mightily with how he was going to salvage a multi-million dollar investment in a “disruptive” online brand that has garnered gobs of good PR but is burning through cash with no end in sight.

As he reflected on Walmart’s most recently announced acquisition he told me this: “Now I wake up every day and thank God for companies like Walmart.”

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.

 

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Digital · e-commerce · Omni-channel

An inconvenient truth about e-commerce: It’s largely unprofitable

The disruptive nature of e-commerce is undeniable. Entirely new business models are revolutionizing the way we buy. The transformative transparency created by all things digital has revolutionized product access, redefined convenience and lowered prices across a wide spectrum of merchandise and service categories. The radical shift of spending from brick & mortar stores to online shopping is causing a massive upheaval in retailers’ physical footprint, which looks to continue unabated.

But the inconvenient (and oft overlooked) truth is that much of e-commerce remains unprofitable–in many cases wildly so–and many corporate and venture capital investments have no prospect of earning a risk-adjusted ROI.

While it was once thought that the economics of selling online were vastly superior to operating physical stores, most brands–start-ups and established retailers alike–are learning that the cost of building a new brand, acquiring customers and fulfilling orders (particularly if product returns are high) make a huge percentage of e-commerce transactions fundamentally profit proof. Slowly but surely the bloom is coming off the rose.

Despite the hype–and a whole lot of VC funding–it’s increasingly clear that most of pure-play retail is dying, as L2’s Scott Galloway lays out better than I can. We have already seen the implosion of the flash-sales sector and the collapsing valuations of once high-flying brands like Trunk Club and One King’s Lane. Just the other day Walmart announced it was acquiring ModCloth, reportedly for less than the cumulative VC investment. A broader correction appears to be on the horizon and I suspect we will see a number of high-profile, digitally native brands get bought out at similarly discounted prices. And, ironically, we will continue to witness a doubling down of efforts by many of these same brands to expand their physical footprints, some of which is certain to end badly.

The challenges for traditional retailers and their “omni-channel” efforts are even more vexing. Walmart, Pier 1, H&M and Michaels are among the many retailers that have been criticized for their slowness to embrace digital shopping. Yet I suspect their seemingly lackadaisical approach owes more to their understanding of e-commerce’s pesky little profitability problem than corporate malfeasance. Alas, more and more retailers are increasing their investment in online shopping and cross-channel integration only to experience a migration of sales from the store channel to e-commerce, frequently at lower profit margins. Moreover, this shift away from brick & mortar sales is causing these same retailers to shutter stores, with no prospect of picking up that volume online. The risk of a downward spiral cannot be ignored.

Given the trajectory we are on it’s inevitable that more rational behavior will creep back into the market. But with Amazon’s willingness to lose money to grow share and investor pressure on traditional retailers to “rationalize” their store fleets, I fear it will take several years for the dust to truly settle.

In the meantime, e-commerce continues to be a boon for consumers and a decidedly mixed bag for investors.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts here.