Retail Did This to Itself. Here’s How It Rebounds.
You can’t click on the news these days without seeing an article about how retail as we know it is swirling the drain. In the short-term the numbers are awful. A rash of chapter 11 bankruptcies including well-known brands such as The Limited, rue21 and RadioShack have kept retail’s mortal state top of mind for the past several years. To be fair, if you ask around, none of these are huge surprises. Many of the retail brands that have struggled the most have been mid-sized retailers with fickle niches or those that have stubbornly resisted the call to evolve. But bankruptcies are only one data point. Store closures among major retailers coping with the effects of a cross-cultural shift to e-commerce paint a similarly grim picture.
And this is just in 2017 which is only a little more than halfway over. Even worse is the long-term prognosis for the once-emblematic American shopping mall. Credit Suisse recently released a prediction saying that up to 25 percent of all shopping malls may close in the next five years. This is likely the most important data point as it demonstrates how the issue is categorical. The entire retail value chain is in crisis and few seem to be immune.
Even retailers once thought immune to this phenomenon have been slimming down with Wal Mart, the world’s largest retailer, closing hundreds of stores in 2016.
There are of course some bright spots – sort of like those odd moments in a horror movie when one of the characters makes an awkward joke as they hide out in the back seat of an abandoned car.
- Some of the more savvy retailers are adopting a digital first approach adding much needed value to the store experience. Blending digital and physical shopping tends to better reflect changing habits of modern consumers.
- Other retailers are working to implement efficiencies such as electronic self checkout wherever possible in an attempt to offer more of an express-type checkout experience. Retail Drive reported a record 49,000 self checkout terminal shipments to retailers in 2016.
- Outdoor “lifestyle centers” like Santana Row in Silicon Valley or The Domain here in Austin have been suggested by some to be the antidote for retail’s death spiral.
- And, of course, big data.
However, none of these are really solutions. While mobile is generally universal, retailers haven’t shown the ability to leverage the technology in a way that is natural and additive enough to generate mass adoption in the store-specific setting. Self check out is great if you have a small basket, but it’s not practical for typical bulk shoppers who tend to make up the lion’s share of retail expenditures. And as much as I like hanging out at The Domain having a beer at Culinary Dropout (imaged below), the success of these new centers is largely predicated on an almost exclusively high-end store selection.
So unless every retailer decides to trash their format and reinvent itself as the Apple Store the outdoor lifestyle center appears to be a stop gap measure as opposed to an antidote for shopping malls.
The worst part of all of this is how retail, as a whole, largely did this to itself. It’s easy to point the finger at Jeff Bezos and wag it at the predatory nature of e-commerce. But he’s been pretty open about how he’s just taking advantage of the opportunity he sees to better provide what people want which is really what gets lost in all the discussions of digital, lifestyle, etc. At the end of the day, Mr. Bezos looked at retail – one of the tent poles of the American and thus the global economy. He saw how slow and arthritic it had become and asked the trillion dollar question – is this really what people want? The answer, of course, was no.
In perhaps his most defining quote Bezos says, “In the old world, you devoted 30% of your time to building a great service and 70% of your time to shouting about it. In the new world, that inverts.” Under this banner idea he rolled up his sleeves and began to unwind the modern retail-customer relationship by attacking the sheer inconvenience of it all. Why go anywhere to get what you want? What was the point?
When compared to e-commerce, retail is on its face a woefully inefficient means of getting what you want. Making lists, scheduling whole chunks of the day and looking for parking are generally unpleasant experiences when you compare them to the ease of scrolling, clicking and waiting. Like many industries still struggling to understand what’s going on, retail didn’t get that it was sending a signal to consumers saying “this is as far as we’re willing to go and if you think it’s too much work, what are you going to do?”
Within every provider/consumer relationship lies a balance and this balance is based largely on perceived benefit. Consumers, end users, customers and the like are constantly asking a very specific question – “Who benefits more here? Me? or the provider?” Ask yourself that question in the context of a commercial airline flight. On your typical United Airlines flight, who benefits more from this – the passenger, or the airline? This effort equilibrium isn’t hard to calculate mentally. You can actually feel it.
As retail brands have continued to “optimize” their operations eeking out an additional $10 per square foot in revenue, all of the effort has been shoved onto the customer and the customer knows it. Head count reductions, big box formats and every other retail best practice intended to improve revenue have also served a secondary and equally important purpose – telling consumers they’re on their own.
Low paid/unmotivated associates, poorly-planned store formats, haphazard stocking schemes, difficult to find products buried at the far corner of a 25,000 square foot Goliath and the like all add up to an easy target. Retail finds itself in this position because it overplayed its hand believing that since it had access to products people needed, they had no choice but to come to them to get it. We’ve collectively seen how that turned out.
So what does retail do about it? Encircled, seemingly doomed, what can retail do? As with any moral or existential moment, the answer isn’t in the bullet points or details. The answer can be found in history – specifically it can be found in retail history. More specifically, the answer may come from a deceased Austrian architect who immigrated to the United States just before World War II.
A BRIEF HISTORY OF CONSUMPTION
It may be hard to imagine but not so long ago people were just people. We weren’t “consumers” in the modern sense. Things that we’ve taken for granted like grocery stores, outlet malls, circulars, CRM, promo codes, Instacart, etc. not only didn’t exist, they didn’t conform to the way people lived or even thought. Mass consumerism and its myriad extensions is a relatively new concept.
Just 100 years ago (three to four generations back – think your great grandparents) commerce was actually hyperlocal, not just hyperlocal like Groupon would like you to think about it. Most people were self reliant and many grew at least a portion of their own food. Many made or at least maintained their own clothes and often supplemented a portion of their income with the fruits of their labor whether that was food, handmade goods or in-kind labor service. Shopping wasn’t a “thing.” Shopping was a bulk action. And it was hard. This was before the advent of mass transit and the modern highway system which wouldn’t come to be until the 1950s.
It wasn’t hard for the reasons you can relate to. It wasn’t hard because you had to call home to ask your spouse to look and see if there was something in the fridge. It wasn’t hard because you had to park at the end of the parking lot and couldn’t remember where you parked. It was hard because there were few paved roads. It was hard because there were few cars. It was hard because you worked all the time. The modern weekend is a relatively new idea. And because mass consumption was such a chore it generated a hardened mission mindset. Most attacked consumption like a necessary evil – the birth of the modern shopper mission. You prepped, you made arrangements, you got in, you got out and you didn’t make a mistake.
All of that changed thanks in large part to Victor Gruen. Victor Gruen was the father of the modern American shopping mall and there is a whole cyclical story there. But the shopping mall actually detracts from his genius. Gruen was essentially the father of modern American consumerism whether he wanted to own it or not.
Gruen grew up and apprenticed under famed Austrian architect Peter Behrens in Vienna where European history and culture had washed over time buffing it down like river over a rock. European city squares had a combination of commerce, culture and socialization. When you went to town you could shop, transact, catch up or observe or be entertained. You could have a delicious coffee (Starbucks) or you could get groceries (Whole Foods 365) or you could take care of banking (Chase Private Client) not unlike the supposed modern lifestyle centers that are supplanting American malls.
Examples of Victor Gruen design.
This was in contrast to the upstart United States (remember, we’re talking just 80 years ago) where the town square paled in comparison So when he immigrated here in 1938 after the Austrian occupation and set his mind to his trade, the current way of life made no sense. Gruen’s thinking and influence breathed life into the modern shopping experience. Consumers who entered the areas he designed were overwhelmed to the extent that they reportedly experienced a mild, disorienting euphoria. This has come to be known as the Gruen Effect.
More to the point, Gruen gave a reason to shop in very human terms. People had a reason to go out and transact which is something they cannot say today.
HOW RETAIL REBOUNDS: DEFINE PURPOSE
Retail, as a category, is currently in a race to the bottom in hopes that it can weather the storm – not unlike Ned Stark as he warns that, “Winter is coming!”
The shuttering of stores and investment in e-commerce modernization (aka business transformation) is seen as a mandatory evolutionary step for almost all retailers if they hope to live to fight another day. However, these are only half measures and are not the long-term answer for the category if only because the category is essentially playing into the hands of the business model that put it there in the first place. Put in plainer language, if you are on the playground and another kid who’s been taking karate his whole life beats you up, the answer isn’t to start to take karate classes and call him out the next week. You will just end up face down in the dirt again. You have to do something he’s not capable of dealing with, even if it means dropping down on him from a tree branch.
The retailers that succeed will be those that discover and inject real purpose into their customer experience while simultaneously leveraging what’s best about e-commerce inclusive of delivery, returns, shipment tracking and the like. It’s actually a very simple strategy:
- Slim down the store and get rid of on-premise inventory
- Lean into the opposition’s best practices (next-day or two-day delivery, free returns, shipment tracking, etc.)
- Re-apply capital savings to cultivate and retain expertise (as opposed to minimizing personnel costs and overhead) as well as in-store environment to drive overall experience
- Give consumers a real reason to come in that reflects a renewed sense of function or utility and need
Bonobos is a perfect example. The model is brilliant – so much so that Walmart recently acquired the brand for $310 Million. For me this sucks because my favorite sport coat is a Bonobos which is now a Walmart jacket. But it still fits amazingly.
The Bonobos model revolves around “guide shops” where experts warmly greet you and help you select clothes based on your specific style and frame. What makes this different from other clothiers is the store. Because the guide shop is tiny, the typical customer can’t roam around perusing.
It’s almost like wandering into a well done apartment in Manhattan. If you want to buy great, if not, you spend about two minutes there because unlike a big box retail store, there’s really nowhere to go. The staff have superlative training, emulating an older school British haberdasher that just happens to be young, hip and cool and even have business cards. They likely won’t have exactly what you are looking for, but using size, color and style examples they pretty much spell out for you what you will get. The best part – it’s just like Amazon! You’ll have it in two days and if you don’t like it, just send it back. This is the key. Style and personal curation are the purpose, not the store and the selection. Money saved downsizing the big box isn’t reapplied to earnings or e-comm, it’s invested in decor and expertise. And when it works out, you look great.
You don’t go to a place like Bonobos to get clothes. You go there to learn how to dress well based on your own personal style. And it doesn’t matter if you’re not wealthy, thin or even particularly fastidious. That’s worth leaving your house for. It’s the equivalent to dropping out of the tree onto the karate kid bully – the current day equivalent of the Gruen Effect. “You mean the people in the store will work with me all day to curate a style based on me and when it arrives two days from now, if I don’t like it I just dump it in the mailbox… wth?”
All of this comes from a time tested model that explains commoditization. Clayton Christensen talks about it in his seminal work, “The Innovator’s Dilemma.”
In this book Christensen explains how all new offerings start off as a function in the customer’s life. What fundamental job is the product or brand doing? What role does it serve?
Once the market as a whole understands that job attention turns to reliability. Users ask themselves which brand provides the most consistently the most often. Once the median of the market sees a banded, acceptable range of reliability attention turns to convenience asking, “who is the easiest to work with?” When all of that is the same – essentially all providers perform the same job, are relatively equally reliable and equally convenient (or equally inconvenient in so many categories today) then cost becomes the sole consideration.
It’s this consistent revisitation of the job that needs to be done that will offer the much needed purpose into the retail model and offer justification for investment. But the purpose alone isn’t the solution. Rather, it’s one of four specific actions that needs to take place.
HOW RETAIL REBOUNDS: EMBRACE COMPLEXITY AND SUBJECTIVITY
One of the challenges in talking about retail is that it’s inherently massive and diverse with any number of different businesses nested inside its ecosystem. Retail encompasses food, sporting goods, electronics, personal care, professional services, office supply, pet products, clothing and pretty much anything else you might think of. So to talk about retail generally can open one up to all sorts of anecdotal examples of why your thinking may be flawed.
One shining spot in retail over the past few years has been home improvement. While other retailers are downsizing, home improvement has been showing steady gains and the dominant players in the category have seen significant revenue and stock gains while other parts of retail wither on the vine.
All business success is complicated. As a result you can’t trace growth to any one exclusive action. Many have credited The Home Depot’s success to its aggressive shift into e-commerce. Others credit a surging housing market.
While these are important they don’t explain how home improvement as a category has stood resolute in the face of Amazon’s onslaught. If all it took was economic tailwind and online ordering Amazon would be shipping you nails and 2x4s.
No, the answer is complexity. Home Improvement is an infuriatingly complex undertaking that often requires special skills thus creating a very real barrier to click it and forget it transactional scenarios. Unless you are a very well defined professional contractor the opportunity for subscription based programs in most areas of home improvement are almost non existent with the exception of maybe lawn care.
This is a very, very important consideration and one all retailers must understand. There is a very real connection between complexity and frequency. A less correlated but equally important consideration is quality (which is something Amazon will have to grapple with in food delivery and grocery).
In fact the relationship between frequency and complexity is essentially a governing dynamic that most managers ignore at their own peril. Anyone who has mindlessly strolled through their usual grocery store to be find the bread aisle has moved and fallen to pieces as a result knows this all too well. Humans create systems to manage complexity and those systems are largely regulated by how often we do something. The more often we do something the more likely we are to automate it. When those systems are disrupted we feel very real confusion and negativity.
This relates to home improvement because the job to be done is almost always complex. The simpler tasks such as re-ordering filters, getting a new smoke detector and the like can all be handled online. Putting together a deck or heaven forbid anything that involves the words install, electrical or plumbing – most of us are wading into murky waters and end up in the store. Actually, many of us end up there two or three times often in the same day, often looking progressively shabbier and more worn out each time we are there.
It should be noted that there are exceptions to the relationship between frequency and complexity. Parenting is a great example. You do it every day and you automate it at your own peril. Parenting, when done right, is a defining life element though and not a commercial transaction (for most).
Home improvement is only one example. In a recent issue of Harvard Business Review, author Michael D. Harris makes a very similar point in his piece, “When to Sell with Facts and Figures, and When to Appeal to Emotions.”
As Harris notes in his article, “Here’s the short rule of thumb: Sell to Mr. Rational for simple sales, and Mr. Intuitive for complex sales.” In this context Mr. Rational is focused on dollars and cents which leans heavily towards e-commerce sales, online price comparisons and the like. Conversely Mr. Intuitive is the more human side full of hopes, dreams and fear of purchase regret. Mr. Rational will likely want to go into the store as well he should to actually inspect the merchandise, get a feel for the component parts and make sure the complex system, when cobbled together, will look like what he likely has in his head.
Understanding the complexity of your product or service proposition should give you a good indicator as to how much your organization can rely on the store model to any degree. More importantly, retailers who have some complexity in the potential product mix but have largely relegated managing that complexity to its customer base will likely suffer as a result. This balance between complexity and expertise is a critical element in the jobs retailers can do for customers.
HOW RETAIL REBOUNDS: DO A BETTER JOB OWNING THE PRODUCT
Retailers have a long history of salting their own products into the store. The aforementioned The Home Depot has Hampton Bay. Texas’s favorite grocer, HEB, has its own line of foods and often times pharmacies offer generic equivalents to popular drugs. Clothing retailers like The Gap only sell their own line. But more often than not retail product or service ownership is generally minimized so as to focus on what retailers know best which is the channel.
The television entertainment category has taught us that there’s actually a lot of wisdom in controlling product that defines customer expectation. Movie and television channels are in many ways similar to retailers only most actually call themselves channels. They take what the studio offers, mark it up and put it on display.
Movie and television distributors have been facing an eroding business model at least as long as retailers. However unlike retailers, the most successful have taken control of their destiny into their own hands. Once upon a time it would be unheard of for HBO to have original programming. Yet just this past week HBO shattered its own records with the premiere of Game of Thrones Season 7.
Early moves by broadcasters to take back their business models may have been met with some skepticism but adherence to the model has paid off in spades. To this point, Netflix shares recently hit an all time record after announcing an eye-popping additional 5 million subscribers in the past quarter.
While Netflix has invested heavily in personalization and fought valiantly to keep up streaming quality, most credit growth to its investment in original programming in shows such as House of Cards, Narcos and Orange is the New Black. In fact Netflix original programming garnered a total of 91 Emmy nominations this year. This was surpassed only by HBO with 111.
So as we see, it’s not just about having your own product, it’s about having product that defines customer expectations. By offering standard bearing content, Netflix, HBO and the like have essentially upped the ante for anyone who wants to play on their platform.
There is little doubt that retail as a business model will continue despite the punditry. Amazon’s recent moves into brick and mortar all but signal that in fact the retail channel has a very bright future. However, it will look radically different. Finding purpose, taming complexity, refocusing in-store experience, leveraging what’s best about e-commerce and creating standard bearer products or services are the DNA that will guide the next iteration of retail well into the future.