Embrace the blur · Harmonized · Retail

Retail’s ‘halo effect’: New stores boost a brand’s website traffic by 37%, study finds

One of the recurring themes in my consulting, writing and speaking is that the distinction between online and physical shopping is increasingly a distinction without a difference. The key for most brands is to deploy a well harmonized, one brand, many channels strategy and to embrace the blur. Central to this notion is realizing that a physical store often serves as the hub of a brand’s ecosystem and that brick-and-mortar stores help drive e-commerce sales—and vice versa. While I’ve come to believe this through many years of direct experience, a just released study from the International Council of Shopping Centers sheds a lot more light on the subject.

One of the key findings in the report—which is based on a sample of more than 800 retailers and 4,000 consumers—is the so-called “halo effect.” It turns out that when a retailer opens a new store, on average, that brand’s website traffic increases by 37%, relative share of web traffic goes up by 27% and the retailer’s overall brand image is enhanced. This impact is even more pronounced for newer, digitally native vertical brands. Conversely, when a retailer closes a store, web traffic typically takes a big hit.

None of this is all that surprising. Established brands that started as mail order only but eventually expanded into their own stores—think Williams-Sonoma, REI, J. Crew—have recognized and benefitted from this insight for decades. For any retailer, but especially for direct-t0-consumer brands, a physical presence serves as marketing for the brand whether the customer ultimately chooses to transact physically or online. Brick-and-mortar stores also offer the opportunity for consumers to demo or try on products, talk to a salesperson and/or get a better sense for the price/value relationship, all of which improve conversion. Importantly, particularly for newer brands trying to profitably scale, customer acquisition costs can be lower in a physical store and product returns are typically lower—often dramatically.

While it’s taken the industry a while to understand the powerful symbiotic role that exists between a compelling physical and digital presence, the evidence keeps building. One clear sign is that digitally native brands, many of which have already opened dozens of stores, have plans to open more than 850 physical locations in the coming years. Warby Parker was one of the first disruptive retailers to understand the complementarity of digital and physical shopping. The pioneering eyewear brand will soon have more than 100 brick-and-mortar locations and already derives more than half its revenues from its physical stores.

We’re also seeing what some refer to as the “billboarding” of retail or, as retail futurist Doug Stephens refers to it, viewing stores as media. In these instances physical locations serve primarily to promote a brand rather than sell products in store. B8ta and Story are good examples of this. As this phenomenon expands, retail will require new metrics as traditional measures of sales productivity and same store sales become less relevant.

Understanding the critical relationship between a brand’s physical and digital presence is also essential to store closings and/or store downsizing decisions. Viewed from a channel-centric lens, many retailers will convince themselves that they need many fewer stores and that the stores they keep (or they intend to open) can be meaningfully smaller as more business moves online. Yet viewed from a holistic customer perspective it’s easy to see how this siloed thinking can backfire. Recognizing this, a number of retail CEOs have wisely resisted Wall Street’s pressure to close more stores because they understand how damaging such a move could be.

I’m hardly the first person to challenge the retail apocalypse narrative or to suggest that physical retail is definitely different, but far from dead. And the collapse of the middle continues to push retailers to become more intensely customer relevant. The move away from mediocre and boring requires making physical stores more unique and memorable. Yet without understanding the interplay between the customers’ digital and physical experience, how this gets executed can be quite different. The more a brand understands the overall customer journey and the role that all elements of the experience play—digital and analog—the better prepared they are to become remarkable.

Regardless, one thing is quite clear. The death of the physical store is greatly exaggerated.

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.  

November 8th I’ll kick of the eRetailerSummit in Chicago. For more info on my speaking and workshops go here. 

Embrace the blur · Frictionless commerce · Retail

Physical stores: Assets or liabilities?

Of course the obvious answer is “well, that depends.”

As the intersection of economic feasibility and consumers’ willingness to adopt new technology hit a tipping point, for retailers that had invested big bucks in the brick-and-mortar distribution of music, books and games, the answer changed rather dramatically. Today’s retail apocalypse narrative is nonsense. But it wasn’t so long ago that the tsunami of digital disruption very quickly turned the physical store network of Barnes & Nobles, Blockbuster, Borders and others into massive liabilities. While we can argue about whether any of those brands laid to waste by Amazon, Netflix et al. could have responded better (spoiler alert:the answer is “yes”), it’s hard to imagine a scenario for any of them that would have included a fleet of stores remotely resembling what was in place a decade ago.

Most of the so-called digitally native vertical brands that are disrupting retail today—think Warby Parker, Bonobos, Indochino—started with the premise that not only were physical stores unnecessary, they would soon become totally irrelevant. In fact, about six years ago, I remember asking the founder of one of these brands when they were going to open stores. He looked at me with the earnest confidence of someone who had just received a huge check with a Sand Hill Road address on it and said, “we’re never opening stores.” Clearly, at the time, he saw stores as liabilities. He wasn’t alone. Everlane’s CEO made a similar, but more public statement.

So for several years scores of startups attracted massive amounts of venture capital on the belief that profitable businesses could scale rapidly without having to invest in physical retail outlets. A key part of the investment thesis was that stores were undesirable given the high cost of real estate, inventory investment and operational support. Clearly the underlying premise was that stores were inherent liabilities. So it’s more than a little bit ironic, dontcha’ think, that my friend’s company has since opened dozens of stores, that Everlane just opened its second location (with more to follow I’m sure) and that many other once staunchly online only players are now seeing most of their future growth coming from brick-and-mortar locations.

For legacy retailers, particularly as e-commerce took off, many acted as if much of their investment in physical real estate was turning into a liability—or at least an asset to be “rationalized” or optimized. This underscores a fundamental misunderstanding of what was happening. Too many stayed steeped in channel-centric, silo-ed thinking and action. They saw e-commerce as a separate channel, with its own P&L. Because of this, they underinvested (or went way too slowly) because they couldn’t see their way clear to making the channel profitable. Before long they got the worst of both worlds: They found themselves not participating in the upside growth of online shopping while losing physical store sales to Amazon or traditional retailers that were pursuing a robust “omni-channel” strategy.

To be sure, the overbuilding of commercial real estate was going to lead to a shakeout at some point. Digital shopping growth enables many retailers to do the same (or more) business with fewer locations or smaller footprints. Yet I would argue that most of the retailers that find themselves with too many stores (or stores that are way over-spaced) rarely have a fundamental real estate problem—they have a brand problem. The retailers that consistently deliver a remarkable retail experience, regardless of channel, are closing few if any stores. In fact, brands as diverse as Apple, Lululemon, Ulta—and dozens of others—have strong brick-and-mortar growth plans.

What sets most of these winning retailers apart is that they deeply understand the unique role of a physical shopping experience in a customer’s journey and act accordingly. They know that digital drives physical and vice versa. They started breaking down the silos in their organizations years ago—or never set them up in the first place. They accept that talking about e-commerce and brick and mortar is mostly a distinction without a difference and know that it’s all just commerce. And they embrace the blur that shopping has become. They see their stores as assets. Different and evolving assets certainly, but assets all the same.

On the heels of recent strong retail earning reports (and an increase in store openings) some are starting to pivot from the narrative that physical retail is dying to one that is closer to all is now well. Both lack nuance. We can chalk up some positive momentum to the fact that a rising economic tide tends to lift all ships. We can peg some of the ebullience to Wall Street waking up to facts that were plain to see for quite some time.

What is most important over the longer-term, however, is to understand the root causes of why and where physical retail works and why and where it doesn’t. Whether it’s Casper, Glossier, Warby Parker, Nordstrom, Neiman Marcus, Williams-Sonoma, Sephora or many others, the formula is pretty much the same. Deeply understand the customer journey, and whether it’s a digital channel or physical channel, root out the friction and amplify the most relevant and memorable aspects of the customer experience.

When we do this we see the unique role a physical presence can (and often should) play in delivering something remarkable. The answer will be different depending on a brand’s customer focus and value proposition. But armed with this understanding we can design the business model (and ultimately the physical retail strategy) knowing that the channels complement each other and the desire is to harmonize them. At this point the question is not whether stores are an asset or a liability, it’s which aspects of brick and mortar’s unique advantages to lean into and leverage.

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.  

Over the next few weeks I’ll be in Dallas, Austin, Chicago, Toronto and San Antonio delivering an updated version of my keynote “A Really Bad Time To Be Boring.” For more info on my speaking and workshops go here.

Harmonized · Omni-channel · Retail

Many retailers still need a ‘Chief Silo-busting Officer’

For the last five years or so much of retail has been obsessed with becoming “omni-channel.” As I pointed out in Forbes piece last year, this ambition sounds good, but is often ill-defined and poorly focused. The point is not to be everywhere, but to eliminate friction and be remarkable and relevant in the places along the customer journey where it really matters. It’s why, as one of my 7 Steps to Remarkable Retail, I encourage brands to design and execute a “harmonized” shopping experience. Harmonized retail requires the important aspects of the customer’s journey to sing beautifully together, regardless of touchpoint or channel, completely devoid of discordant notes. It also requires that we let go of the dualistic notion of e-commerce and physical retail. In most cases, it’s all just commerce and the customer is ultimately the channel.

Beyond the semantics of “omni-channel,” “harmonized,” “unified” or “frictionless” commerce, it turns out that when brands garner deep customer insight around the shopping experience it’s not all that hard to figure out which pain points to eliminate and which product or experiential elements to amplify. Unfortunately many retailers have not even gotten all that far, as this recent eMarketer reportilluminates. That’s likely to end badly.

Yet even armed with this insight and a well articulated roadmap, many well intended “customer-centric” efforts fail. The primary culprit is usually the deeply ingrained silo-ed behavior endemic to many retailers’ operations. Most brick and mortar dominant retailers have developed intensely product-centric cultures where the merchandise (and merchant) is king. And if they had a catalog business it was run largely independently of the physical stores division. As e-commerce became a thing, it was typically bolted onto the existing mail order division (e.g. JC Penney, Neiman Marcus). For companies that needed to get into the direct-to-consumer world anew, the so-called dot-com business was often established as a completely separate entity, typically located away from the core business (in Sears’ case, for example, in a different part of its sprawling campus; in Walmart’s case, on the other side of the country). Either way, channel-centric silos were put in place or reinforced.

While there may have been initial merit to allowing the e-commerce business to get speed and traction absent the interference of the mother ship, over time the result is that executing against a well harmonized experience is fundamentally hindered by silos: silo-ed customer data. Silo-ed inventory. Silo-ed supply chains. Silo-ed metrics. Silo-ed incentives and compensation schemes.

As it turns out, most customer journeys that end up in a physical store transaction start in a digital channel. It turns out that some of the best enterprise customers get acquired in a physical store but then end up doing the bulk of their shopping online. In fact, it turns out that over the past 15 years, for every retailer where I have seen the actual data, customers that shop in multiple channels are the most profitable and loyal customers. And it turns out that customers don’t care about channels. Retailers that continue to organize, measure, pay and execute their operations as if this weren’t true are, unsurprisingly, falling further and further behind.

As others have pointed out, digitally-native brands that have moved into physical retail have largely avoided the silo issue, and therefore are often perceived as having an advantage over legacy retailers. Conceptually they do have an edge: partially because they did not have a culture to undo, partially because they had better customer data from the outset and partially because their technical infrastructure was built with a digital-first orientation. It’s also important that they decided to add stores because many now understand the amplification power of physical and digital convergence.

But let’s be clear. You don’t have to be some new disruptive brand like Warby Parker or Indochino to get this, act on it and perform well. Williams-Sonoma, Sur La Table, REI and a number of other decades-old retail brands never established the silos in the first place as they moved from direct-to-consumer into multi-channel. Nordstrom operated in a more silo-ed way in the early days of e-commerce. Yet more than a decade ago, they made the decision to break down the silos and began implementing process and technology changes necessary to lead in customer-centric, channel-agnostic, harmonized retail. As far as I can tell, they are the only multi-line mall-based retailer to gain meaningful share during the past decade. Coincidence? I don’t think so.

Now it’s true that plenty of retailers have put senior executives in charge of “omni-channel.” Others have named chief digital, chief customer or chief experience officers. Good for them. Necessary perhaps, but hardly sufficient if those executive don’t have the authority to break down the silos and drive the major cultural, process and technology changes that delivering on a harmonized retail experience demands.

The fact is that to survive, much less thrive, under-performing retailers need a “chief silo-busting officer.” And until the CEO sees that as his or her job, fully supported by the Board, all the talk about omni-channel, customer-centricity or a seamless shopping experience is really just that. Talk.

Silos belong on farms.

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.  

 

A really bad time to be boring · Reimagining Retail · Retail

Physical retail is not dead. Boring retail is.

It may make for intriguing headlines, but physical retail is clearly not dead. Far from it, in fact. But, to be sure, boring, undifferentiated, irrelevant and unremarkable stores are most definitely dead, dying or moving perilously close to the edge of the precipice.

While retail is going through vast disruption causing many stores to close — and quite a few malls to undergo radical transformation or bulldozing — the reality is that, at least in the U.S., shopping in physical stores continues to grow, albeit at a far slower pace than online. An inconvenient truth to those pushing the “retail apocalypse” narrative, is that physical store openings actually grew by more than 50% year over year. Much of this is driven by the hyper-growth of dollar stores and the off-price channel, but there is also significant growth on the part of decidedly more upscale specialty stores and the move of digitally-native brands like Warby Parker and Bonobos into brick and mortar.

People also seem to forget that, according to most estimates, about 91% of all retail sales last year were still transacted in a brick-and-mortar location. And despite the anticipated continued rapid growth of online shopping, more than 80% of all retail sales will likely still be done in actual physical stores in the year 2025. Different? Absolutely. Dead? Hardly.

I have written and spoken about the bifurcation of retailand the collapse of the middle for years. While I was confident in my analysis, I had concluded much of this through intuition and connecting the dots from admittedly limited data points. Now, a brilliant new study by Deloitte entitled “The Great Retail Bifurcation” brings far greater data and rigor to help explain this growing phenomenon. Their analysis clearly shows that demographic factors — particularly the hammering that low-income people take while the rich get richer — help explain the rather divergent outcomes we see playing out in the retail industry today.

In particular, wage stagnation and the rising cost of “essentials” is driving lower income Americans to seek out lower cost, value-driven options. Rising fortunes for top earners, most notably ever greater disposable income, creates spending power for more expensive retail at the other end of the continuum. Deloitte’s data clearly shows the resulting strong bifurcation effect: Revenue, earnings and store growth at both ends of the spectrum and stagnation (or absolute decline) in the vast undifferentiated and boring middle.

Notably, if we isolate what’s going on with retailers focused on delivering convenience, operational efficiency and remarkably value-priced merchandise, along with those retailers that differentiate themselves on unique product and more remarkable experiential shopping (including great customer service, vibrant stores and digital channels that are well harmonized with their stores), you would conclude not only that physical retail isn’t dead, you could well argue it is quite healthy.

Conversely, the stores that are swimming in a sea of sameness — mediocre service, over-distributed and uninspiring merchandise, one-size-fits-all marketing, look-alike sales promotions and relentlessly dull store environments — are getting crushed. A close look at their performance as a group reveals lackluster or dismal financial performance and shrinking store fleets. For these retailers, by and large, physical retail is indeed dead or dying. But so are their overall brands.

It’s been clear for some time that the future of retail will not be evenly distributed. Those that have looked closely know that the retail apocalypse narrative is nonsense. Yet, depending on where brands sit on the spectrum, the impact of digital disruption and the age of Amazon is affecting them quite differently. For some, at least for now, it’s much ado about nothing. For others, it should be sheer, full-on panic.

These forces, along with the underlying macroeconomic factors that Deloitte illuminates in their report, bring far greater clarity to what many have been missing, leaving the savvy retail executive to conclude a few key things:

  1. Physical retail is not dead, but it’s very different
  2. The future of retail will not be evenly distributed
  3. The market is likely to continue bifurcating and, increasingly, it’s death in the middle
  4. It’s a really bad time to be boring
  5. Struggling retailers need to pick a lane
  6. If you think you are going to out-Amazon Amazon you are probably wrong
  7. Most likely you are going to have to have to choose remarkable
  8. You have to get started and you had better hurry
  9. What better time than now?

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.  

My next speaking gig is in Madrid at the World Retail Congress.  Check out the speaking tab on this site for more on my keynote speaking and workshops.

e-commerce · Omni-channel · The Amazon Effect

Here’s who Amazon could buy next, and why it probably won’t be Nordstrom

Since the Whole Foods deal, more than a few industry analysts and pundits have weighed in on which retailers might be on Amazon’s shopping list.

Various theories underpin the speculation. Some say Jeff Bezos wants to go deeper in certain categories, so Lululemon or Warby Parker get mentioned. Foursquare (is that still a thing?) crafted its own list from analyzing location data. The Forbes Tech Council came up with 15 possibilities. The always provocative, and generally spot-on, Scott Galloway of L2 and NYU’s Stern School of Business believes Nordstrom is the most logical choice.

Obviously no one has a crystal ball, and Amazon’s immediate next move could be more opportunistic than strategic. Given Amazon’s varied interests, there are several directions in which they could go. And clearly they have the resources to do multiple transactions, be they technology enabling, building their supply-chain capabilities out further, entering new product or service categories, or something else entirely. For my purposes, however, I’d like to focus on what makes the most sense to expand and strengthen the core of their retail operations.

Before sorting through who’s likely to be right and who’s got it wrong (spoiler alert: Scott), let’s briefly think about the motivating factors for such an acquisition. From where I sit, several things are critical:

  • Materiality. Amazon is a huge, rapidly growing company. To make a difference, they have to buy a company that either is already substantial or greatly accelerates their ability to penetrate large categories. This is precisely where Whole Foods fit in.
  • Fundamentally Experiential. There is an important distinction between buying and shopping. As my friend Seth reminds us, shopping is an experience, distinct from buying, which is task-oriented and largely centered on price, speed and convenience. Amazon already dominates buying. Shopping? Not so much.
  • Bricks And Clicks. It’s hard to imagine Amazon not ultimately dominating any category where a large percentage of actual purchasing occurs online. Where they need help is when the physical experience is essential to share of wallet among the most valuable customer segments. They’ve already made their bet in one such category (groceries). Fashion, home furnishings and home improvement are three obvious major segments where they are under-developed and where a major stake in physical locations would be enormously beneficial to gaining significant market share.
  • Strong Marginal Economics. We know that Amazon barely makes money in retail. What’s not as well appreciated is the inconvenient truth that much of the rest of e-commerce is unprofitable. Some of this has to do with venture-capital-funded pure-plays that have demonstrated a great ability to set cash on fire. But unsustainable customer acquisition costs and high rates of product returns make many aspects of online selling profit-proof. An acquisition that allows Amazon access to high-value customers it would otherwise be challenged to steal away from the competition and one that would mitigate what is rumored to be an already vexing issue with product returns could be powerfully accretive to earnings over the long term. Most notably this points to apparel, but home furnishings also scores well here.

So pulling this all together, here’s my list of probable 2018 acquisition targets, the basic rationale and a brief word on why some seemingly logical candidates probably won’t happen.

Not Nordstrom, Saks or Neiman Marcus

Scott Galloway is right that Nordstrom (and to a lesser degree Saks and Neiman Marcus) has precisely the characteristics that fit with Amazon’s aspirations and in many ways mirror the rationale behind the Whole Foods acquisition. Yet unlike Whole Foods, a huge barrier to overcome is vendor support. Having been an executive at Neiman Marcus, I understand the critical contribution to a luxury retailer’s enterprise value derived from the distribution of iconic fashion brands, as well as the obsessive (but entirely logical) control these same brands exert over distribution. Many of the brands that are key differentiators for luxury department stores have been laggards in digital presence, as well as actually selling online. Most tightly manage their distribution among specific Nordstrom, Saks and Neiman Marcus locations. If Nordstrom or the others were to be acquired by Amazon, I firmly believe many top vendors would bolt, choosing to further leverage their own expanding direct-to-consumer capabilities and doubling down with a competing retail partner, fundamentally sinking the value of the acquisition. While Amazon might try to assure these brands that they would not be distributed on Amazon, I think the fear, rational or otherwise, would be too great.

Macy’s, Kohl’s or J.C. Penney 

Amazon has its sights set on expanding apparel, accessories and home but is facing some headwinds owing to a relative paucity of national fashion brands, likely lower-than-average profitability (mostly due to high returns) and a lack of a physical store presence. Acquiring one of these chains would bring billions of dollars in immediate incremental revenues, improved marginal economics and a national footprint of physical stores to leverage for all sorts of purposes. All are (arguably) available at fire-sale prices. Strategically, Macy’s makes the most sense to me, both because of their more upscale and fashion-forward product assortment (which includes Bloomingdale’s) and because of their comparatively strong home business. But J.C. Penney would be a steal given their market cap of just over $1 billion, compared with Macy’s and Kohl’s, which are both north of $8 billion at present.

Lowe’s

The vast majority of the home improvement category is impossible to penetrate from a pure online presence. Lowe’s offers a strong value proposition, dramatic incremental revenues, already strong omni-channel capabilities, and a vast national network of stores. The only potential issue is its valuation, which at some $70 billion is hardly cheap, but is dramatically less than Home Depot’s.

A Furniture Play

Home furnishings is a huge category where physical store presence is essential to gaining market share and mitigating the high cost of returns. But it is also highly fragmented, so the play here is less clear as no existing player provides a broad growth platform. Wayfair, the online leader, brings solid incremental revenue and would likely benefit from Amazon’s supply chain strengths. But without a strong physical presence their growth is limited. Crate & Barrel, Ethan & Allen, Restoration Hardware, Williams-Sonoma and a host of others are all sizable businesses, but each has a relatively narrow point of view. My guess is Amazon will do something here — potentially even multiple deals — but a big move in furniture will likely not be their first priority in 2018.

As I reflect on this list (as well as a host of other possibilities), I am struck by three things.

First, despite all the hype about e-commerce eating the world, the fact remains that some 90% of all retail is done in physical stores, and that is because of the intrinsic value of certain aspects of the shopping experience. For Amazon to sustain its high rate of growth, a far greater physical presence is not a nice “to do” but a “have to do.”

Second, the battle between Amazon and Walmart is heating up. While they approach the blurring of the lines between physical and digital from different places, some of their needs are similar, which could well lead to some overlapping acquisition targets. That should prove interesting.

Lastly, the business of making predictions is inherently risky, particularly in such a public forum. So at the risk of stating the obvious, I might well be wrong. It wouldn’t be the first time, and it surely won’t be the last.

But why not go out on a limb? I hear that’s where the fruit is.

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.

Customer Growth Strategy · e-commerce · Marketing · Retail

Unsustainable Customer Acquisition Costs Make Much Of Ecommerce Profit Proof

As much attention as both the growth and disruptive nature of e-commerce receives, few observers seem realize that often the economics of selling online are terrible (what I often refer to as “the inconvenient truth about e-commerce”). The fact is only a handful of venture capital funded “pure-plays” have (or will ever) make money and most are now embarked on a capital intensive foray into physical retail that even Alanis Morissette would find deeply ironic. Amazon, which accounts for about 45% of all US e-commerce,  has amassed cumulative losses in the billions, and even after more than 20 years still operates at below average industry margins. And while I have yet to see a comprehensive breakout, it’s clear that the e-commerce divisions of many major omni-channel retailers run at a loss–or at margins far below their brick & mortar operations.

So why is this?

Last month I wrote a post pointing out how high rates of returns, coupled with the growing prevalence of free shipping “both ways”, makes certain online product categories virtually profit proof. While the impact of this factor tends to be isolated to categories with relatively low order values and a high incidence of returns or exchanges (e.g. much of apparel), a different dynamic has wider ranging implications and profit killing power. I’m referring to the increasingly high cost of acquiring (and retaining) customers online.

Investors have been lured (some might say “suckered”) into supporting “digitally-native” brands because of what they believed to be the lower cost, easily scaled, nature of e-commerce. Seeing how quickly Gilt, Warby Parker, Bonobos and others went from nothing to multi-million dollars brands, encouraged venture capital money to pour in. What many failed to understand were the diseconomies of scale in customer acquisition. As it turns out, many online brands attract their first tranche of customers relatively inexpensively, through word of mouth or other low cost strategies. Where things start to get ugly is when these brands have to get more aggressive about finding new and somewhat different customers. Here three important factors come into play:

  • Marketing costs start to escalate. As brands seeking growth need to reach a broader audiencethey typically start to pay more and more to Facebook, Google and others to grab the customer’s attention and force their way into the customer’s consideration set. Early on customers were acquired for next to nothing; now acquisition costs can easily exceed more than $100 per customer.
  • More promotion, less attraction. As the business grows, the next tranches of customers often need more incentive to give the brand a try, so gross margin on these incremental sales comes at a lower rate. It’s also the case that typically these customers get “trained” to expect a discount for future purchases, making them inherently less profitable then the initial core customers for the brand.
  • Questionable (or lousy) lifetime value. It’s almost always the case that customers that are acquired as the brand scales have lower incremental lifetime value, both because on average they spend less and because they are inherently more difficult to retain. It’s becoming increasingly common for fast growing online dominant brands to have large numbers of customers that are projected to have negative lifetime value.

So it’s easy to see how an online only brand can look good at the outset, only to have the profit picture deteriorate despite growing revenues. The marginal cost of customer acquisition starts to creep up and the average lifetime value of the newly acquired customer starts to go down, often precipitously. Accordingly it’s not uncommon for some of the sexiest, fastest growing brands to have many customers that are not only unprofitable, but have little or no chance of being positive contributors ever.

While it’s not the only reason, this challenging dynamic explains in large part the collapse of valuations in the flash-sales market in total, as well as several major flameouts like One Kings Lane. It also helps explain why so many pure-plays are investing heavily in physical locations. To be sure, opening stores attracts new customers that are reticent to buy online. But another key factor is that customers can often be acquired in a store more cheaply than they can be by paying Facebook or Google.

Slowly but surely the world is starting to wake up to this phenomenon. The nonsense that is the meal-kit business model is finally getting the scrutiny it deserves as people start to question whether Blue Apron is a viable business if it spends $400 to acquire new customers. Spoiler alert: the answer is “no.” Increasingly, many “sophisticated” investors are backing off the high valuations that digitally-native brands are seeking to fuel the next stage of their growth, leaving these companies to thank their lucky stars that Walmart seems to relish its role as a VC bailout fund. More folks are starting to realize that physical retail is definitely different, but far from dead. And, in another bit of irony, some even are starting to see that many traditional brands (think Best Buy, Nordstrom, Home Depot and others) are actually well positioned to benefit from their stores and improving omni-channel capabilities.

It may take some time, but eventually the underlying economics tell the tale.

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.

Bricks and Mobile · Customer-centric · Digital · e-commerce

Physical retail: Definitely different, far from dead

From recent headlines you might assume that sales in brick & mortar stores must be falling off a cliff. You’d be wrong. Yes, e-commerce is growing at a much faster rate, but revenues in physical stores remain positive (1%-2% growth depending on the source). There is also a sense that online shopping is becoming the dominant way most people shop. In fact, even with a dramatic share shift, e-commerce still represents less than 10% of total retail sales and is expected to remain below 20% even 5 years from now.

Moreover, if physical retail is dying somebody should tell well established (and quite profitable) retailers like Aldi, Apple, Costco, TJX, Dollar General, Dollar Tree, Nordstrom, H&M, Ulta and Sephora. Collectively they’ve announced plans to open about 3,000 stores. Newer brands–think, Bonobos, Casper, Warby Parker–that were once dubbed geniuses for their “digitally native” strategy are now opening dozens of physical stores as their online-only plans proved limited and unprofitable. A little outfit from Seattle also has recently made a pretty big bet on physical retail.

So the constant media references to a “retail apocalypse” may serve as great clickbait, but they lack both accuracy and nuance. I believe we’re all better served by not painting the industry with too broad a brush and spinning false narratives.

Nevertheless, it is crystal clear that years of overbuilding, failure to innovate on the part of most traditional retailers, shifting customer preferences and market-share grabs from transformative new models that aren’t held to a traditional profit standard (mostly the little outfit in Seattle) are creating fundamentally new dynamics.  Physical retail is not going away, but digital disruption is transforming most sectors of retail profoundly. Here are a few important things to bear in mind:

Good enough no longer is. Mediocre retailers were protected for years by what was once scarce: scarcity of product and pricing information, scarcity of assortment choice, scarcity of strong local competition, scarcity of convenient ways for product delivery. Digital commerce has created anytime, anywhere, anyway access to just about everything and the weaknesses of many retailers’ business models have been laid bare. Traditional retailers’ failure to innovate over the past decade has put quite a few in an untenable position from which they will never recover. It turns out they picked a really bad time to be so boring.

E-commerce is important. Digital-first retail is more important. The rise of e-commerce is having a dramatic effect on shopping behavior but it is not the most disruptive factor in retail. What’s far more transformative is the fact that most customer journeys for transactions that ultimately occur in a brick & mortar location start in a digital channel–and increasingly that means on a mobile device. In fact, digitally-influenced physical stores sales are far greater than all of e-commerce. Many brands’ failure to understand this reality caused them to waste a lot of time and money building strong online capabilities at the expense of keeping their stores and the overall shopping experience relevant and remarkable.

Physical and digital work in concert. A retail brand’s strong digital presence drives brick & mortar sales and vice versa. When different media and transactional channels work in harmony, the brand is more relevant. When any aspect is unremarkable or creates friction, the brand suffers. Too often, traditional retailers treat digital and physical retail as two distinct entities when most customers are, as some like to say, “phygital.”  Moreover, with the exception of products that can literally be delivered digitally (books, games, music), there is rarely any inherent reason why the rise of e-commerce should make a substantial number of physical stores completely irrelevant. Retailers that are closing a lot of stores most often have a business model problem, not a “too many stores” problem.

The future will not be evenly distributed. Clearly, there are brands and retail categories that are being “Amazon-ed.”  There are also sectors that have been in long-term decline (department stores and many regional malls), whose troubles have little to do with what’s transpired most recently. Still others have remained largely immune from the disruptive forces that are hitting others so hard. Off-price chains, warehouse clubs, dollar stores and gas stations all come to mind. Grocery shopping has also seen little impact, though that’s likely to change. It’s also important to note that some forces that are shaping the industry have little to do with e-commerce vs. physical stores shopping or the notion that Amazon is eating the world. Many sectors are being hit by a fundamental change in shopping behavior (a shift to experiences away from stuff, a tendency to trade down to lower price points) that has nothing to do with how spending is being reallocated away from brick & mortar to online. Your mileage may vary.

To be sure, a degree of panic is appropriate in some circles. It’s obvious that many retailers spent more time defending the status quo and burying their heads in the sand during the past decade than they did understanding the consumer and being committed to innovation. Some retailers need to adapt. Some need to transform the customer experience fundamentally. Others just need to go away. Most need to take bold and decisive action to stay relevant and remarkable in a very different and constantly evolving world.

The big question is whether they will act while they still have time.

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.

Innovation

The future of retail will not be evenly distributed

If you follow retail at all you’ve no doubt read multiple recent stories claiming that we are in the midst of a “retail apocalypse.” Like Chicken Little, these journalists and pundits see the sky falling on physical stores and a veritable tsunami of store closings, mall foreclosures and bankruptcies. I imagine they also expect a plague of locusts to descend upon us at any minute, as darkness covers the land.

Of course, this is all nonsense. The reports of traditional retail’s death are, to paraphrase Mark Twain, “greatly exaggerated”–as several of my esteemed colleagues have rightly pointed out. Barring an asteroid hitting Earth, the vast majority of retail will still be done in brick & mortar stores for a long, long time. Most of the major retail brands we know and love will remain household names. Hundred of regional malls will not only survive but continue to do quite well, thank you.

While the disaster scenarios are fake news, one can’t be too sanguine either. Yet, at the other end of the spectrum, we now have an emerging cadre of apocalypse deniers, who counter the claims of the alarmists with their own equally false narrative. Let’s take a look at their most common arguments.

Retail is still growing. This is true, but very misleading. First, the tepid growth in physical retail is not keeping pace with inflation, contributing to a profit squeeze for most players. Second, the main thing that nudges the number into the positive is the concentrated out-sized growth in a few categories, most notably off-price and dollar stores. So the growth in retail is good for a few–and pretty much sucks for everyone else.

Overbuilding of stores is causing a one-time correction. I’d rate this one “true-ish.” The US has been over-stored and over-malled for more than a decade and eventually, the bubble had to burst. But the rationalization and consolidation of commercial real estate go beyond a mere correction, however deep. We are witnessing a fundamental re-structuring of both the number of retail locations and the size and configuration of those boxes. Certainly, a big whack to the stores counts of flagging retailers was (and remains) overdue. And I do expect that the pace of store closings will subside substantially after the first quarter of next year. But anyone who doesn’t see the profound shift is missing the big picture.

Besides lots of new stores are opening. Yes, and this is one of the reasons that physical retail is far from extinct. But–and it’s a big but–while thousands of new stores are opening, they are, almost across the board, much smaller footprints than the stores being shuttered AND they are typically located in very different types of real estate. Hundreds of TJ Maxx and Dollar General stores don’t come close to offsetting the impact of hundreds of Sears, J.C. Penney and Macy’s closings. And while the store openings of  “disruptors” like Bonobos and Warby Parker get a lot of press, not only are their stores tiny, they are very likely to slow their pace substantially unless they can begin to demonstrate profitability.

Malls and retailers are re-inventing themselves with an emphasis on experience. Without question, the most successful malls are reformatting, adding restaurants, theaters, hot specialty formats and other experiential elements to differentiate themselves and drive foot traffic. The problem is bulldozing a mall anchor and/or replacing failed retail tenants with a steak house, juice bar or art show may be smart business for the developer, but it doesn’t necessarily help the retailers that are struggling. As far as retailers themselves, yes, a few are investing in experiential improvements, but for every cool Nike or Apple store there are dozens of retailers that haven’t invested a bit in innovation (or have limited themselves to some gimmicky shiny object that has an immaterial impact on customer relevancy).

The issue is that the future of retail will not be evenly distributed. Far from it.

Even a small shift of spending online (or failure to maintain real growth) can cause a great deleveraging of physical store economics. The closing (or massive re-purposing) of lower quality malls will be highly disruptive to particular major tenants. Online is growing disproportionately, affecting certain categories far more than others. Customers’ continued willingness to trade down and shop for discounts puts greater pressure on retailers with weaker value propositions and poor cost positions. And on and on.

Apocalypse? No.

But the suggestion that most retailers are not seeing their world’s rocked mightily is both misguided and dangerous. Similarly, the blanket notion that the sky is falling on everyone is equally wrong-headed.

Yet the harsh reality is that few retailers will escape unscathed from the seismic changes affecting the industry. Indeed we stand at a precipice. Without radical change and heretofore unseen levels of innovation, many major players are in for a world of hurt.

The clock is ticking. I’d hurry if I were you.

william_ford_gibson

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 · Digital · Omni-channel · Personalization · Retail

The fault in our stores

Last week Target became the latest retailer to report weak earnings and shrinking physical store sales. They certainly won’t be the last.

As more retail brands disappoint on both the top and bottom lines–and announce scores of store closings–many may conclude that brick-and-mortar retail is going they way of the horse-drawn carriage. Unfortunately this ignores the fact that roughly 90% of all retail is still done in actual stores. It doesn’t recognize that many retailers–from upstarts like Warby Parker and Bonobos, to established brands such as TJMaxx and Dollar General–are opening hundreds of new locations. It also fails to acknowledge the many important benefits of in-store shopping and that study after study shows that most consumers still prefer shopping in a store (including millennials!)

Brick-and-mortar retail is very different, but not dead. Still, most retailers will, regardless of any actions they take, continue to cede share to digital channels, whether it’s their own or those of disruptive competitors. To make the best of a challenging situation, retailers need a laser-like focus on increasing their piece of a shrinking pie, while optimizing their remaining investment in physical locations. And here we must deal with the reality that aside from the inevitable forces shaping retail’s future, there are many addressable faults in retailers’ stores. Here are a few of the most pervasive issues.

The Sea Of Sameness

Traditionalists often opine that it all about product, but that’s just silly. Experiences and overall solutions often trump simply offering the best sweater or coffee maker. Nevertheless, too many stores are drowning in a sea of sameness–in product, presentation and experience. The redundancy in assortments is readily apparent from any stroll through most malls. The racks, tables and signage employed by most retailers are largely indistinguishable from each other. And when was the last time there was anything memorable about the service you received from a sales associate at any of these struggling retailers?

One Brand, Many Channels

Too many stores still operate as independent entities, rather than an integral piece of a one brand, many channels customer strategy. Most customer journeys that result in a physical store visit start online. Many customers research in store only to consummate the transaction in a digital channel. The lines between digital and physical channels are increasingly blurred, often distinctions without a difference. Silos belong on farms.

Speed Bumps On The Way To Purchase

How often is the product we wish to buy out of stock? How difficult is it to find a store associate when we are ready to checkout? Can I order online and pick up in a store? If a store doesn’t have my size or the color I want can I easily get it shipped to my home quick and for free? Most of the struggling retailers have obvious and long-standing friction points in their customer experience. When in doubt about where to prioritize operational efforts, smoothing out the speed bumps is usually a decent place to start.

Where’s The Wow?

As Amazon makes it easier and easier to buy just about anything from them, retailers must give their customers a tangible reason to traffic their stores and whip out their wallets once there. Good enough no longer is. Brands must dig deep to provide something truly scarce, relevant and remarkable. Much of the hype around in-store innovations is just that. For example, Neiman Marcus’ Memory Mirrors are cool, but any notion that they will transform traffic patterns, conversion rates or average ticket size on a grander scale is fantasy. Much of what is being tested is necessary, but hardly sufficient. The brands that are gaining share (and, by the way, opening stores) have transformed the entire customer experience, not merely taken a piecemeal approach to innovation.

Treat Different Customers Differently

In an era where there was relative scarcity of product, shopping channels and information, one-size-fits all strategies worked. But now the customer is clearly in charge, and he or she can often tailor their experience to their particular wants and needs. Retailers need to employ advanced analytical techniques and other technologies to make marketing and the overall customer experience much more personalized, and to allow for greater and greater customization. More and more art and intuition are giving way to science and precision.

Physical retail is losing share to e-commerce at the rate of about 110 basis points per year. While that is not terribly significant in the aggregate, this erosion will not be evenly distributed and the deleveraging of physical store economics will prove devastating to many slow to react retailers. This seemingly inexorable shift is causing many retailers to reflexively throw up their hands and choose to disinvest in physical retail. The result, as we’ve seen in spades, is that many stores are becoming boring warehouses of only the bestselling, most average product, presented in stale environments with nary a sales associate in sight.

The fault in our stores are legion. But adopting an attitude that stores are fundamentally problems to be tolerated–or eliminated–rather than assets to be leveraged and improved, makes the outcome inevitable and will, I fear, eventually seal the fate of many once great retailers.

PurpleCow

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

Being Remarkable · Customer Growth Strategy · Omni-channel · Retail · Share of attention

The store closing panacea

There has been a strong and growing narrative that the single smartest thing a struggling retailer can do is to close stores and, in some cases, a lot of them. I first touched on this nearly three years ago in my post “Shrinking to prosperity: The store closing delusion.”

There is no question that, in aggregate, the United States has too much retail space. There is no question that, in concept, the growth of e-commerce can allow an omni-channel retailer to serve some trade areas more profitably without a store and some trade areas with a smaller box. The key is to understand “some” and that starts with understanding why a given brand is under-performing in the first place. The other key is to understand the role that brick & mortar locations play in driving e-commerce–and vice versa.

In most cases, as recent events are bearing out more and more, store closings make an already irrelevant retailer less relevant. And frequently much less profitable as well.

Nearly 90% of traditional retail is still done in physical stores. In five years it will still be about 85%. The math is not that complicated.

Make it harder to get to a store OR make returns in a store OR order online and pick up in a store OR go to a store to research potential purchases OR learn about the brand, etc. and a retailer is almost certain to lose way more business (and margin dollars) to a competitor’s physical store in the vacated trade area than the brand “rationalizing” its store count will ever be able to make up through its website. This is why JC Penney, Home Depot and Lowes should write Eddie Lampert thank you notes pretty much every day.

Moreover, the symbiotic nature of digital and physical channels should not be ignored, yet often is. Several retailers–Sears is perhaps the best example–made the assumption that by investing in digital at the expense of physical stores they could more profitability serve their customer base over the long-term. As it turns out (and as more retailers are learning), e-commerce is often less profitable at the margin than brick & mortar operations and that when you close stores you actually make it more difficult for your e-commerce business to thrive. Oops.

Any retailer in trouble should absolutely analyze whether closing and/or “right-sizing” stores will be accretive to cash-flow. But that analysis MUST include the impact on long-term competitiveness and digital channel sales in the affected store’s trade area. Thinking you are helping when in fact you are merely initiating a downward spiral is a pretty big mistake to make.

Any analyst pushing for store closings and footprint down-sizing should be mindful that it is almost never the case that a struggling retailer’s ills are because they have too many stores or that the stores they have are fundamentally too large. Rather, it is because their brand relevance is not big enough for the channels, both physical and digital, that they have. Be careful what you wish for.

Show me a retail brand that is remarkable and relevant enough to command the share of attention that drives share of market and I’m virtually certain their executives are not spending a second on down-sizing. In fact, most are opening physical stores (e.g Nordstrom, Warby Parker, Amazon, TJX) and, in many cases, a bunch of them.

Show me a retail brand that is consumed with store closings and expense reduction and there is a pretty good chance they are a dead brand walking.

 

Thanks to those who have encouraged me along my path as I took a six month break from writing this blog. During my sabbatical I started a new blog on waking up to a life of love, purpose and passion at any age, which can be found at www.IGotHereAsFastAsICould.blog.