It Gets Complicated When You*&^!% it Up.

The Retail Wasteland.

The mall, the venerable and vaunted retail pinnacle of the ‘80’s, now resembles what remains of the once global leading U.S. manufacturing heartland. Malls owned by SPG, Westfield, GGP, etc. are replete with empty storefronts, pop-up retailers that reflect the bazaar, peculiar and short-lived and end-capped by struggling big box (e.g. J. C. Penney, Belk, Sears, Macy’s, etc.). They’re a reflection of the evolution of our behavior as consumers. We’ve seen this coming for 20+ years, so why did so many retailers fail to evolve, and what can be done to prevent the hastening of the demise of consumer choice?

A summary, for those who want the SparkNotes™ version is included below.

· The Retail Wasteland

· Short term(ism) — Decades of missed opportunity

· You’re either the end of the supply chain or an “experience” — Choose wisely

· Solving the Rubik’s Cube

The Retail Wasteland

The “wasteland” is a reflection of shifting behavior driven by convenience, while also by the “us. vs. them” mentality, or arrogance of nearly 15 years of lack of recognition. As a digital strategist w/ 25 years of experience, yes, I began my career when we had 4 colors and a 1.44MB disk, so I’ve been around, the narrative isn’t different from other industries. When companies fail to adapt, reinvent or completely reimagine their business model over decades as new channels emerge with new market entrants and differing financial models, the outcome is, effectively, pre-destined. If IBM was still focused on selling legacy mainframes vs. cloud computing or Marriott only sold inventory through travel agents or its own websites, how would they compete in today’s environment? Yes, these may seem basic examples, but they’re real, just as automotive companies have evolved from a labor intensive manufacturing process to highly automated, retail has been forced to change. Let’s take a brief step back.

So why are there so many struggling retailers? First, there’s too many retailers vs. demand. In 2019, there were a total of 442,597 brick-and-mortar retail stores in the U.S. Second, the consolidation of buying power for commodity products is held by the largest retailers, so price competition is incredibly difficult without a very large SKU base and geographic dispersement. For context, Walmart’s percentage of total consumer retail spend in Q2, 2020 was 10.2 with Amazon’s at 9%. Collectively, two companies represent nearly 20% of the total consumer retail market. Third, we’ve exposed a channel that was once a back-office function. For companies that had/have unsophisticated supply chains, the ability to provide a comprehensive and valuable digital consumer experience is significantly challenged. If a retailer can’t provide a “connected experience” between brick and mortar and digital with visibility to inventory for in-store pick-up or home delivery, the experience fails to achieve basic consumer expectations. Fourth, the shift from bespoke manufacturing and “owned” brands or owned manufacturing to third-party manufacturing w/ low MOQs in places such as Bangladesh, Turkey, Vietnam and China has commoditized large percentages of product categories, making low-cost, high volume retailers more efficient. In this scenario, the velocity of volume must overcome the low cost / low quality of products in order to achieve a large enough revenue base to support sufficient EPS.

Short term(ism) — Decades of missed opportunity

Objective + Strategy + Operations +Financing + Audience = Outcomes. This may seem straight forward, but it’s incredibly nuanced. Let’s break this down. Retail operations that are viewed as “technology first” companies are financed differently with different equity analyst criteria for performance. These companies can invest in technology and focus differently from traditional, legacy brick and mortar retail where expectations for investment in technology and R&D (investment in general) is effectively viewed negatively by equity analysts and investors. Traditional brick and mortar retail performance is viewed through category management and alignment of assortment to trend and demand. While this clearly isn’t a “universalism,” it provides significant context for the challenges faced by many legacy companies such as Sears, J.C. Penney’s, Pier 1 imports, Stein Mart, Tailored Brands, and Neiman Marcus, among hundreds of others. The common themes include:

• Significant delays in recognizing the implications of digital
• Lack of investment in new technologies
• Traditional retail merchandising focus vs. supply chain / logistics
• Burdensome, long-term real-estate commitments
• Lack of access to capital for dual market strategy (i.e. brick and mortar + digital)
• Inability to attract digital talent
• Legacy operating models
• Unsustainable debt (e.g. In its most recent quarter, J.C. Penney’s sales fell nearly 8%, to $3.4 billion, from the same period a year ago. Income was $27 million, down from $75 million a year ago. Total outstanding debt was approx. $3.7B)

You’re either the end of the supply chain or an “experience” — Choose wisely

The truth of the matter is — either model can work; it’s a matter of the desired outcome. If a retailer finds itself somewhere in between, the pace of the flashing “end of life” signals hasten. Let’s use J.C. Penney’s and Neiman Marcus as examples. The two cater to significantly different audience segments, yet arrived at a similar inflection point with both companies having experienced bankruptcy filings in 2020. Whether basic goods or high-end designer labels, both of these companies suffered from common themes / issues. In fact, if you look at the financial details contained in their respective bankruptcy filings, there are significant parallels. As for the “in between,” let’s assess the issues:

• Category management focused on generic, unrecognizable brands and / or identical merchandise from large, recognizable brands as carried by other retailers at non-differentiated or disadvantaged pricing premiums.
• Lack of exposed inventory availability online for in-store pickup. These brick and mortar stores are essentially the equivalent of a “flea market.” ERP systems batch nightly data to legacy systems that maintain (periodic) vs. real-time (perpetual) inventory availability. Walk through a Macy’s, Sears, etc., and the experience is consistent — it’s inconsistent. Products, colors, sizes, pricing, etc.+ availability = a random shopping outcome.
• Product pricing strategies that are misaligned to markets. With browser extensions that shop pricing (e.g. Keepa, WikiBuy and Honey) and the simplicity of a Google search or Google Shopping, visibility of elasticity in pricing exposes companies that exist “in between” with pricing strategies that are non-competitive.
• Long term REIT commitments for real estate footprints that no longer align to desired shopping patterns. With mounting bankruptcies and a steepening downward trend in foot traffic (pre-COVID) and accelerated post, companies such as Simon Properties and GGP don’t have the capital to update / improve “mall” experiences. For retailers, the burdened costs of legacy real-estate precludes capital investments. The result:

vs.

The concept of “the end of the supply chain” is reflected in the business models of Walmart, Costco, The Home Depot, Aldi, Amazon and Wayfair, among others. These companies are highly efficient supply chains built on sophisticated ERP platforms. These are less “retailing” models by the purest definition and more back-office functions exposed to the customer. For these businesses, their success is predicated on the efficient movement of goods and dynamic pricing. Walmart began this push nearly 4 decades ago with today’s brick and mortar landscape serving as a reflection of the implications for those companies that failed to adopt similar approaches to efficiency and SKU volume. The end of the supply chain model is built primarily to serve the “surgical shopper” segment with sub-segments by demographic (HHI, age, gender, etc.). Within this model, there are consistencies as they relate to the infrastructure of the physical plant “buildings” and technology deployed in support of an efficient flow of inventory.

The “Experience” model is predicated on the value of the collective product + service + showcase. These retailers are focused less on commodity with a preference to address discretionary purchases. This model supports both the surgical and recreational or impulse shopper. The end of the supply chain vs. the experience seems straight forward, but the details are a reflection of the degree to which either is successful. The cost of “experience” retail is significant and ultimately demands a higher product margin to address the incremental expenses. In a December 18, 2019 published study by Accenture, 47% of shoppers stated they would be willing to pay more for a shopping experience that exceeded their expectations, but frustrated consumers were twice as likely to say they would pay more for an exceptional experience. This same study that included 20,000 consumers across 19 countries noted that the same percentage (47%) of respondents who were frustrated with a recent shopping experience said they would avoid purchasing from that retailer or brand in the future.

Retailers that live in the wasteland of the “in between” fail to deliver on the Walmart driven experience of mass availability, low cost and efficient shopping, while not delivering an “experience” that fulfills the desire of a non-surgical shopper — those who are recreational or impulse. Macy’s, J.C. Penney’s, Dillards, Nordstrom, Neiman Marcus, etc. are all living “in between” attempting to improve their digital experiences with a “last ditch” effort to become relevant, while having to make difficult decisions regarding expenditures as revenue continues to decline. The challenge between digital and physical becomes more pressing as investments in one channel requires sacrifices in another. As capital expenditures are spread thin, brick and mortar retail suffers with outmoded experiences from the shopping environment to the technology used to support transactions. The next time you go to an “in between” retailer, pay attention to the POS devices, the in-store displays, the store flow / layout, etc. You will most likely be viewing an experience that was concepted in the mid 1960’s through consumer research. Unfortunately, all of the lessons of the past 50+ years aren’t reflected in these retail environments.

The statement “Choose Wisely” is an accurate reflection of the risk of the “in between.” Retail is a margin game managed by Finance, driven by category management. Those companies that are industry leading pioneers understand the need to be either a. “lowest cost,” b. proprietary in product experience (e.g. Lululemon, Peloton, Target — with its exclusive collaborations with Issac Mizrahi, Anna Sui, Lilly Pulitzer, etc., c. efficient and effective with digital channel experiences or d. unified omni-channel (order online, pickup in-store, etc. / search available inventory in-store via online for in-store shopping).

Solving the Rubik’s Cube

For those retailers that thought they had it figured out with their online experience, changes to third-party data rules (third-party cookies) are now fundamentally impacting how they operate; although, they’re still in a better place than those who failed to deliver through their digital channels.

The irony of the Rubik’s Cube is that it’s solvable. We all know this, but how many Cubes are sitting in a closet unsolved? For those frustrated, weary of the never ending pursuit to return the Cube to its original perfect state, this is how many retailers feel. They know the challenge can be solved for, but it’s the “how” that continues to be just out of reach.

Having spent decades addressing retail strategy, the answers lie in a number of key themes. Future articles will address each one. These include:

• Should a company have a physical presence if the merchandising strategy is aspirational?
• Technology investment should be cloud-based, SAS solutions w/ a core focus on blockchain, AI and ML-based platforms.
• Long lifecycle proprietary ERP development is a recipe for failure.
• Product inventory needs to either be proprietary, lowest cost to value or a balanced combination.
• The days of traditional loyalty programs are numbered. There is an alternative.
• The perception of experience always matters, regardless of channel and audience objectives (e.g. Surgical vs. Recreational or Impulse).
• Cost out is a single element in a much larger ecosystem of opportunity.

For all those retailers that fall into the *&^!% it Up category, the specter of bankruptcy is looming.

Share your thoughts and perspectives.

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