So, what’s a retailer to do? If you are Chicken Little and believe the sky will fall again, you will need the staying power to manage the deflation of your business down to some unknown bottom, and in an unknown time frame.
If you are a Bluebird of Happiness, and think the worst is over, I suggest you take a couple “downers” to bring you back into reality. Then you will probably be able to manage your business into a long, tougher-than-ever “new normal.”
Regardless of your outlook, either situation, going forward, would more aptly be called growth“ by a thousand cuts,” – very slow and painful, indeed, just as the real “death by a thousand cuts” was for victims of torture back in the day of Imperial China.
Even more resonant for our reality today is that it also refers to creeping normalcy – stuff happening so slowly that everyone begins to accept it as the new normal. Sound familiar?
And, if you’re a retailer, and therefore on the “front lines,” we might be talking a million cuts. And, I do not mean price cuts here, although, we know there will be more of those as well. What I mean is that, with the unemployment needle stuck around 10% and consumption driving 70% of GDP, achieving growth over the next several years will likely be slower and tougher than ever, on all fronts.
THERE IS GROWTH AFTER DEATH
Regardless of whether the economy sustains a deadly double-dip, or deflation, either of which will kill more retailers and drive the survivors to shrink their businesses even further, at some point the marketplace will stabilize, albeit at a lower bottom and at a slower pace. In the short term, there may be no growth at all, and perhaps a decline. But what about the long term? Without being flippant, why should achieving growth be any different over the next couple of decades than it was for the past quarter century, even during the booming economy? What am I talking about? Well, it’s hard for me to remember when businesses were not competing for market share in a slow-growing, over-stored industry. Over the years, I have been relentless in my characterization of our retail industry condition as a never-ending round of “share wars.” However, it is exactly how retailers and all consumer-facing industries are going to have to compete in the U.S. marketplace, long into the future.
THE “SHARE WARS” DRILL
To grow in “share wars,” one must either attract a consumer away from a competitor or get one’s own consumer to buy more, and/or more often from their current retailer. And, the only way to accomplish either of those growth options is to provide either the competitor’s consumer or your own something newer, and/or better, and/or cheaper, and/or more often, and now more importantly it must be an overwhelming experience, where, when, how and how often they want it. And, the last piece of the drill is to remember that it’s much less costly to get your existing customer to spend more with you than to gain a new consumer, and one existing customer is worth more to your bottom line than three new consumers. Having said this, it’s a no brainer that whatever you do to get deeper into your existing customer’s pocketbook is also likely to be compelling enough to attract your competitor’s customer. So, in the end it is not either/or, it’s a win-win.
“INVESTMENT -LITE” PRODUCTIVITY GROWTH
As I already mentioned, I am not talking about more cost-cutting here. It’s been done to the bone across all industries, and you can’t cost-cut your way to growth. I’m also not saying that capital expenditures and investment for growth should not be made in these uncertain times. However, with the certainty that even when some demand does comes back it is going to be at a lower than pre-recession level, investing in opening new stores or any other capital expenditures must have long-term, relatively risk-free strategies that support such investments. Domestically, the share war winners are going to employ “Investment Lite” strategies that increase the productivity of their existing space for little capital outlay, which some are already doing. These strategies have the power both to increase the “spend” of existing customers and to create a synergy that will steal new consumers away from competitors. In fact, these IL strategies, whether or not those implementing them realize it, have the power to fundamentally transform current retail and wholesale business models as well as the structure of the industry.
DEPARTMENT STORES AS MINI-MALLS
All space is not equal in its contribution to top and bottom line productivity and growth. During the recession, of course, average sales per square foot at most retailers has fallen. However, even before the downturn, retailers could typically identify three levels of retail space productivity: under-performing, performing on an acceptable average, and out-performing.
And, because traditional department stores have always been, well, departmentalized, boosting productivity was done by replacing the products in under-performing or even acceptably performing space with like (but hopefully better-performing) product.
Now take a look at what’s going on at Macy’s (M) and JC Penney (JCP). It seems they’re looking at their space differently, almost as a mall owner would. They’re now leasing space to high performance retail brands such as Sephora, Mango, Sunglass Hut, Motherhood Maternity and others, which is what the real estate guys do on a day-to-day basis.
However, unlike mall owners, I view the moves by these department store merchants as powerful long-term strategies. Certainly Macy’s must have that view, having recently appointed an EVP of fashion and new business development (which includes responsibility for procuring lease business opportunities).
As they put it, they will be pursuing retail specialty brands in niche categories that can fill their “white space.” I assume that also means as replacements for less productive existing space.
This strategy is potentially powerful enough to alter the retail landscape as we know it. It may drive the transformation of the traditional department store business model as we know it and have been condemning to death for years. First of all, this strategy creates a powerful synergy, in that the potential business for the retailer and brands working together is greater than the sum of the two working separately. Mango for example, has its core “youngish” fast-fashion loyalists, a consumer segment JC Penney does not attract. Mango on the other hand, gets “Investment Lite” real estate in high traffic malls, where their customers and potential new customers hang out. The synergy: JCP pulls in new young consumers seeking Mango, who may also buy a pair of Arizona jeans as they’re walking through the store. Mango gets national coverage, quickly and less capital intensive, and will likely attract JC Penney customers they would not otherwise have gotten. Further, the combined brands enhance the shopping experience, thereby strengthening each brand’s consumer connections. The same synergy works for Sephora and the brands leasing space in Macy’s.
While this leasing model is not new, and there are many earlier examples of restaurants, spas, and other services and product categories, I believe it will accelerate in part due to the need to find “investment-lite” ways to substantially boost productivity. Further, in the past, it was pursued opportunistically.
My view is that the real winners will see its powerful potential and develop it strategically, as evidenced by the Macy’s appointment. Finally, I would be remiss if I did not mention that that Sears in Costa Mesa, CA recently leased 43,000 square feet of space to fast-fashion retailer Forever 21. That space will comprise 14% of the total store when it opens early next year. Then, just a few weeks later, Sears announced the opening of an Edwin Watts golf shop in its store in Westfield Hawthorne mall in Vernon Hills. While I would like to dig into CEO” Eddie” Lampert’s intentions, whether they be based on sound strategy or just a “Hail Mary” pass, or his pass to a lifeboat off the Titanic. I’ll save it for another time.
Anyway, I see no reason why the space-leasing strategy could not be expanded to include strong national wholesale brands such as Ralph Lauren and others, who prefer to control and manage their brand and imagery wherever they are located.
My end vision of the transformed department store as “mini-mall” would be similar to what Selfridge’s has done to its London store. I know this is old news to some of my past readers, but because of the moves that are now taking place, I can actually see that model evolving in the US.Selfridge’s dismantled the departmental structure years ago and reorganized around lifestyles. It pursued compatibly positioned brands and leased space to them, and positioned Selfridge as a “go-to-first destination” for entertainment, food, events or just as a place to hang out.
PRIVATE AND/OR EXCLUSIVE BRANDING
Growth of private label or exclusive branding is another IL strategy that not only provides differentiation, it also gives the retailer more control over the merchandising, line mix, size specs, and seasonal flow. It allows for more efficient, flexible and responsive line and production cycles, enabling more frequent new lines.
It also gives brand owners control over presentation and the entire brand experience. Such control also enhances the ability to “localize” merchandise offerings according to local tastes, which Macy’s is effectively implementing.
Further, when we return to turtle-paced growth, owning the better part of both the wholesale and retail margins will help profit growth a lot.
This pursuit of private and/or exclusive brands has been going on for several years, but has recently accelerated. JC Penney, Kohl’s, and Macy’s have publicly stated that these brands account for well north of 40% of sales. It’s estimated that Target’s own apparel brands account for over 60%.
This strategy also fits well within the “enclosed mini-mall” vision, attracting more traffic with special, unique and locally appealing goods.
Not so “Investment Lite,” but, imperative, and a huge growth opportunity, is global expansion. This is one of those long-term investment commitments that although not without risks, holds much greater upside potential for growth than any U.S.-based strategy.
It’s not simply the need for growth that presses a sense of urgency with regard to global expansion. The world has become “flat,” and so inter-connected in all ways, that if brands and retailers fail to gain a preemptive presence globally, they will find their home-based positions severely weakened. Consumers and their lifestyles now transcend international borders. They are globally “mobile,” literally and electronically, therefore, brands must be distributed to wherever their customers are. Furthermore, the brand experience must also be consistent worldwide.
Adding urgency to preemptive global expansion is the fact that the infrastructures in many countries are still relatively fluid. As they begin to mature, the opportunities will have declined, and in some, may simply be gone. The challenges of expanding internationally are many, and vary widely, depending on the myriad political, economic, social, consumer, and marketplace issues of the host country. An equal number of issues exist for the business choosing to expand globally.
Among the “first movers,” or sector preemptors, in global expansion have been the luxury businesses, such as LVMH and its 50 brands, Gucci, Armani, Prada, Calvin Klein, Ralph Lauren, and others. What’s happened to-date is just the tip of the iceberg. With more technologically advanced and easier global distribution capabilities, as well as increasing wealth in many of the emerging countries, particularly China, the luxury and volume-priced brands and retailers are simply accelerating their expansion.
Also among the first movers are the high-volume hyper-markets, Carrefour (CA), Wal-Mart (WMT), and Tesco (TSCDY). Most of these companies are experiencing much more rapid growth in the non-US portion of their businesses.
The emerging and rapidly growing middle classes in developing countries will be a major catalyst for global expansion. These markets are ripe for many of the more mainstream brands and retailers such as Gap (GPS), American Eagle Outfitters Inc. (AEO), The North Face, and Abercrombie & Fitch (ANF). Even Macy’s is reportedly considering China as a potential global expansion. Others, such as Lee and Wrangler jeans, Levi Strauss & Co., Guess Jeans and Nike footwear are already established in many of those markets and will continue to expand.
Among all the emerging markets, China is a primary target with its middle class projected to reach almost 800 million people by 2020, according to a recent study by the Asian Development bank. India, with the second-fastest-growing middle class populations, projects growth to over 600 million by 2010.
Gap’s Asia-Pacific region head, John Ermantinger, spoke of his firm’s China strategy in a 2010 WWD article. Of Gap’s $14 billion plus in sales, roughly 10 percent comes from its international business. However, they expect China to become the “cornerstone” of its global strategy. Ermantinger clearly sees Gap preempting its competitors. He stated: “There are a lot of brands in China, but in our space, there is not an American representation yet, so Gap is looking forward to being that authentic purveyor of casual apparel.”
Nike has reportedly gained the largest share of athletic footwear in China, having reached almost $500 million in annual sales. Guess Jeans anticipates a five-fold increase in stores from 40 to 200 between 2010 and 2015. Iconix envisions the number of Candies’ stores growing from 50 to 500 over the same period. And, VF Corporation (VFC) projects a 40 percent increase in the distribution of its Lee and Wrangler brands through its roughly 400 stores and more over the next five years.
The urgency for US retailers to implement international expansion has never been higher. In those countries experiencing the highest and sustainable rates of growth, they provide an open “field” for those seeking early preemption of dominant share. How long the opportunity lasts before market “ congestion” sets in, is an unknown. So, every consumer business should have a matrix of global markets prioritized by market attractiveness (e.g. size, growth, competitive intensity etc) for their products and services, the potential mix of distribution options for that market (including all of the latest digital platforms) and the investment required to support different options. Those that succeed in executing against these global priorities will be those that thrive. And, the capital investment, even while struggling in a weak domestic market, will have been worth it.