Dov Charney is a Joke: A Dirty Joke and a Business Joke

Dov Charney, Portfolio, November 1, 2008The media at large has publicly exposed enough of the “dirty” part of this “jokester” that I don’t need to pile on more. Although it might be a more titillating read to add more dirt to the pile, I’ll just sign off on his disgusting behavior during his tenure as CEO of American Apparel by saying it’s equally disgusting to me that the board didn’t kick his butt out of there a long time ago. It never ceases to amaze me that too many boards are still weak on proper governance in protecting the shareholders from the egregious, deleterious behavior of miscreant CEO’s. And American Apparel’s board seems to be one of those.

But for the moment, let’s forget about Charney’s sexual proclivities, including allegations of abuse. Many top executives have been caught with their pants down, so to speak, albeit not all as flagrantly as Charney. Many were fired, yet many others have just had their dalliances swept under the rug.
Charney’s real dirty joke is that he is a business joke of the tallest order.

A Business Joke

Reluctantly, I feel it’s necessary to acknowledge Charney’s entrepreneurial accomplishment in creating a brand that hooked up with (no pun intended) young urban consumers in a sensuously charged way. It took off and spread like wildfire. It was at that moment in time when Charney should have removed himself from running the business and hired a CEO with management, operating and leadership credentials. Entrepreneurs, by definition, are creators and most often are not capable of managing and profitably growing a business. Charney is no exception.

Not only has he proven to be an inept CEO, given the continuing decline of the business (propped up by one loan after another), his maniacal micromanagement of every aspect of the operations has decimated whatever semblance of an organization there might once have been. Worse, his “everyone reports to Dov” insanity has driven off all of the skilled executives he briefly had. One example of his warped behavior was reported in a New York Times op-ed column by Joe Nocera: “In 2007, after the company went public and he had to bring in a chief financial officer, he told The Wall Street Journal that the man he hired was a ‘complete loser,’ which of course caused the man to quit.”

Anecdotally, anonymous observers provide a disturbing picture of his dysfunctional, really whacky, abusive management style and hodge-podge approach to a retail business. Here’s one observation: “There is no retail management for the 250 or so stores. Everyone reports to Dov, from the assistant store manager in Cincinnati, to the visual display assistant. Dov conducts a meeting generally from his bedroom every week. He has every store call in. Seoul Korea calls in. Santa Barbara calls in. Berlin calls in. Lots of time differences … and languages … but the one constant is that Dov does all the talking. If business is bad in a store, it becomes a weather report by Dov: ‘Toronto, your business was terrible! it rained (or snowed, or was hot).’ …Any reason for slow business was due to the weather. And the solution was always the same: ‘Toronto, if your business doesn’t improve next week I’m coming up there and cutting off your (expletive).’

“There is no allocation department. That area is the lifeblood of specialty retail. So, instead of an algorithm for allocating, it is all Dov: ‘Send 5000 to the stores! Its gonna get cold soon so we need to send a lot of jackets to the stores!’ Product development is all done by Dov, as well. Nail polish is made in downtown LA. It is not FDA approved, and several bottles have exploded.”

Another anonymous comment: “Dov’s favorite lines to his employees: ‘I’m gonna make you bleed. I’m gonna break you in half. You’re a fraud.’”  It is all Dov, all the time. There is no one else running the store.

Another blatant example of abusive behavior towards his employees, and one for which Charney is being sued, was reported in a recent Bloomberg Businessweek article: “In November 2012, Michael Bumblis, a store manager in Malibu, had accused Charney of rubbing dirt in his face because Charney was displeased with the store’s condition and performance. Bumblis’s lawyer, Ilan Heimanson, says he informed the company of evidence of the confrontation beyond the accounts of witnesses. The stores had security cameras, and Bumblis had access to the video. Among the details in the complaint was a phone call Charney had supposedly made to Bumblis about his store’s poor sales. ‘Get your f-?-?-ing s-?-?- together, fag. Where is your f-?-?-ing creativity? Get some f-?-?-ing girls in bikinis to stand on PCH [Pacific Coast Highway] and have them wave a f-?-?-ing American flag. Are you a fag? Do you not want to see girls in bikinis? Are you banging that girl you were with in Vegas? What’s her name?’ American Apparel’s lawyer said in a filing that Bumblis was a poor-performing employee who was dismissed and that his story is ‘entirely contrived or wildly exaggerated.’

The article went on to say: “That case could bring other complications. Heimanson asked a Los Angeles court to try the case rather than send it to confidential arbitration, as American Apparel requires in all such matters. The judge ruled that the documents all American Apparel employees have to sign are ‘unconscionable,’ according to legal filings. The agreements forbid workers from filing claims against the company, talking about the company, or sharing any information about the personal life of the CEO. If they do, they risk being sued for $1 million. The company is appealing the ruling. If it stands, ‘we’ll be able to shine sunlight on the backroom dealings of American Apparel and Dov Charney,’ says Heimanson.”

The Unravelling

Following its IPO in 2007, Charney put his ambitions on steroids along with his chaotic, micro-managing behavior. This combination of a publicly traded company being run by an overzealous entrepreneur with zero management skills with a looming recession was bound to become a train wreck. A tipping point likely came in 2009 when an immigration audit forced him to lay off over half of his illegal factory workers. The subsequent disruptions to the business while replacement workers were hired and trained just exacerbated the declining business.

Between 2009 and 2013, the business consistently hemorrhaged money in addition to taking on costly debt, ballooning from under $100 million to around $250 million. In the last three fiscal years, American Apparel lost $270 million and its stock traded for under 50 cents earlier this year, down from $15 at the end of 2007.

In 2011, Lion Capital, one of American Apparel’s major lenders and a Charney supporter at the time, urged Charney to hire an experienced C-level apparel executive to stabilize the business, reorganize the infrastructure and operating functions, and to strategically put the business on a profitable growth trajectory.

Obviously in an attempt to protect their interests and ward off a potential disaster, Lion Capital reached out to Marty Staff, former successful CEO of JA Apparel (owner of the Joseph Abboud brand) and previously, CEO of Hugo Boss. In my opinion, Staff was precisely what Charney needed to turn the business around.

It was a doomed relationship from the start. First of all, Charney gave Staff the title of President of Business Development. And as I wrote in an article for The Robin Report upon Staff’s departure after only six months on the job, (American Apparel: A Last Chance Lost) that title didn’t even imply operating authority. Charney just continued to micromanage every part of the business, and Staff got frustrated and left. This is not unlike the turnover of many other capable operating executives who wouldn’t put up with the tumultuous and chaotic working environment where it was impossible for them to develop and implement sound strategies for achieving growth.

I also wrote in that October, 2011 article: “Quite frankly, it amazes me that as CEO of a publicly owned company, given American Apparel’s financial condition and his questionable and storied behavior, Charney still has a job.”

Indeed, Staff was a “last chance lost” as American Apparel continues its downward spiral.

Enter The Money Guys

Now the money guys are circling. Lion Capital is demanding payment of its $10 million loan at 20% interest. Following his ouster by the Board, Charney requested New York investment firm Standard General to do a financial deal, which he hopes will be a mechanism to reinsert himself back into the business. And I guess Standard General believes there’s still a viable business that if turned around, could end up being a smart investment.
Standard General’s deal with Charney provides an immediate infusion of $25 million to shore up American Apparel’s financial mess, including repayment of the Lion Capital loan. Charney gets to keep a 43% share in the company but relinquishes his ownership control to Standard General. His fate for returning in any capacity to American Apparel, including reinstatement to the Board, is pending an investigation into his conduct and alleged wrongdoings. The deal also includes a commitment to continue manufacturing the apparel in the US, which has been a strong marketing position for the brand from its inception. The Board will be recast and, amazingly, Charney will be a paid consultant during the investigation period.

My Advice: Dump Charney

My final perspective amidst the cacophony of the media storm around this dirty business and dirty joke is one of disgust. Lion Capital and Standard General as well as all other funding sources that have thrown money down this cesspool ought to have their heads examined. I’ve been around long enough to know that most investors, no matter how deeply they analyze companies, don’t have a clue as to how businesses are run. The “numbers, the numbers, the “numbers” is their war cry. At the end of the day, it’s not about making a better America, about creating real value, or about improving the economy. It’s about making money.

Okay so be it. We live in a capitalistic economy. But from day one when Dov Charney luckily hit on a hot idea, all anybody with any common sense had to conclude was that it was not ever a question of whether American Apparel would collapse under his ineptness. It was only a question of when.
And now that the end is near, it’s equally incredible to me that Charney is being kept on on as a consultant, or even as janitor, as he so flippantly suggested to the press. Whatever his capacity, he has demonstrated from American Apparel’s opening day that he is not only an abusive micromanager, but also incapable of sustaining profitable growth.

Regardless of the outcome of the current investigation, if the American Apparel brand has any chance of being turned around, I advise the Board: Open your eyes and dump Dov Charney. Now.

How Hearts on Fire Is Poised to Light the Fire of Millennials

“Millennials shop in a very next generation way for things like cars or tablets. But buying a diamond engagement ring is a tradition-bound, emotional purchase, which makes it unique. So Millennials’ shopping process becomes blended – 50 percent is ‘new age’ and 50 percent is tradition.” Rich Pesqueira, Vice President Sales and Business Development, Hearts On Fire

For each succeeding generation, or at least since 1947 when DeBeers’ told consumers that “A Diamond Is Forever,” buying an engagement ring has been a rite of passage in adulthood. Today’s prime target market for diamonds and bridal jewelry are the Millennials, the leading edge of which turns 34 this year. Yet shopping for that diamond in a jewelry store today is not all that different from the way it was for their parents’ Baby Boomer generation in the 70s and 80s, or their grandparents’ post-war generation in the 40s, 50s and 60s. Even in the best-of-the-best jewelry stores – whether it is Tiffany’s or Cartier’s, or the local family-owned jewelers down the block – jewelry stores are more similar than different. They are caught in a time warp.

HeartsOnFireTo make matters worse for the diamond buyers, couples have to do a significant amount of research before they even dare to approach the retail counter to look at rings and stones. Like their grandfather and father before them, today’s Millennial diamond buyer must get indoctrinated into the mysteries of the 4Cs used to grade diamonds – carat, cut, clarity and color. The whole diamond buying experience, while it should be a joy that celebrates the coming wedding, can be such an ordeal for the customers that it can forever turn them off from crossing the threshold of a jewelry store.

The traditional, and largely negative jewelry-shopping experience gave online retailer Blue Nile the perfect “in” to disrupt the diamond engagement ring business. Blue Nile plays to the strengths of computer technology to catalog its massive collection of diamonds’ 4C ratings and let the buyer compare the specifications of each side-by-side, along with the price. The net/net is that Blue Nile, just like the traditional jewelers before them, have made customers think that the only difference between one rock and another is to be found on the specs sheet – how it measures on the 4Cs grading scale. Thus the Blue Nile process of shopping for, and buying a diamond engagement ring, largely becomes an unemotional rational decision, like the one used to buy a television, a lawnmower or a power drill. Nonetheless, Blue Nile is successful as an exclusively online retailer, designed for, and appealing to, how the Millennial generation seemingly prefers to shop.

But let’s face it. A rational, left-brain perspective for buying a diamond engagement ring makes no sense at all. At its heart, buying a diamond engagement ring is a totally emotional decision. So the left-brain-dominated jewelry retailing strategy, especially perpetuated by brands like Blue Nile, is disconnected from customers’ ultimate romantic intentions.

Blue Nile Gets Disrupted!

Seeing the disconnect between the rational focus of diamond shopping and the customers’ emotional intentions, Hearts On Fire (HOF) founders’ Glenn and Susan Rothman recognized the opportunity to transform the entire diamond retailing process around its customers’ emotional needs. At the time, Hearts On Fire was already a well-established diamond jewelry marketer, with its brand positioning “The World’s Most Perfectly Cut Diamond.” Because of the HOF unique cutting process and the company’s careful attention to the quality of the uncut stone, customers don’t need to read the specs for a diamond they are considering; all they have to do is see it and fall in love with it.

HOF has their story down to a T. “Our diamonds are remarkably brighter and more lively,” explains Rich Pesqueira, Hearts On Fire’s vice president of sales and business development. “Our diamonds are cut to play with the light so it has the perfect balance of intense white reflections and beautiful rainbows. The magical, mystical property of the HOF diamond is especially noticeable in low light environments, like a candlelit restaurant. Customers tell us that they’ve had strangers come up to them and ask about their ring. They have never seen a diamond act so differently. That is the life of our brand.”

Selling the Hearts On Fire diamond, while it can be and is being done online, really requires that the customer have a literal hands-on experience, to touch, feel and see the diamond ring in different lighting conditions and at different distances. While the company has extended its reach though over 500 independent specialty jewelry retailers in more than 30 countries and supported those retailers with extensive sales training, including a bi-annual Hearts On Fire University, the Rothmans decided that the brand needed a totally new way to tell the Hearts On Fire story and to show customers how truly unique and different their diamonds are.

They needed a Hearts On Fire jewelry store experience as unique as the HOF diamonds. So in 2012, the company opened its first Hearts On Fire concept store in Las Vegas at The Forum Shops and expanded to the east coast with a store next to Neiman Marcus and across the way from Tiffany’s at the King of Prussia Mall, outside of Philadelphia. That is where I experienced the HOF experience firsthand.

Everything about the Hearts On Fire store says this is not your ordinary, everyday jewelry store.  It starts with the sheer curtains that hang inside the windows and the studied use of lighting to create a mood inside the store.  There are no overhead florescent lights in the store; area lighting is controlled by the store’s staff to create a sense of romance for the customers.  The store features several full length mirrors that give customers the chance to model the jewelry from head-to-toe. And because Millennials largely shop for bridal jewelry as a couple, there is a separate quiet area with a couch where couples can retreat to discuss this most important of purchases.

Most distinctive, however, there is not one endless glass-fronted jewelry display case to be found. Rather, there are eye-level “Jewel Box” display cases that spotlight a carefully curated selection of designs that guide the customer’s eye to each special piece. The display evokes a museum rather than a typical store with row after row of utilitarian look-alike jewelry cases. Access to the Jewel Boxes is from the front, not the back, as Pesqueira explains, “It’s the biggest principle in our retail concept. It creates a collaborative environment where the sales person and the customer work side-by-side to experience the beauty of perfectly-cut diamonds together, as opposed to the traditional model where you have sales person on one side of the counter and the customer on the other. We wanted to change the entire texture of the way that contact takes place.”

To top off the jewelry shopping experience, each HOF store has an Apple-esque high-tech keyless access to the Jewel Box cases and a ‘Knowledge Wall’ that digitally displays information about the brand and the diamond cutting process that creates the brilliance in the Hearts On Fire diamonds, along with pictures of models and celebrities wearing its distinctive pieces.

Technology Enhances the Customer’s Emotional Experience of HOF Diamonds

The Hearts On Fire in-store experience resonates on many different emotional levels aimed to enhance the customers’ total experience of the diamonds. It shifts the focus from the traditional diamond 4Cs spec sheet to how the diamond comes alive enhanced by technology that actually improves the customers’ emotional experience. Much of that technology is used in subtle ways to control the environment of the store and how the customer sees and experiences the diamonds. Yes, there are computer screens on display, and yes, the customer gets a high-tech vibe upon entering the store, but the essence of how HOF uses technology is to enhance the customer’s interaction with the jewelry. The ‘medium becomes the message’ is an apt description.
By reimaging what jewelry shopping can be and by challenging all the assumptions about the way the jewelry sales process should be done, Hearts On Fire has found a formula for attracting both high-tech and high-touch Millennials in search of the perfect engagement ring.

Ultimately the success of the Hearts On Fire store will hinge on how it delivers to the tech-savvy Millennial diamond buyer by offering a buying-decision process based on the emotional quotient of how the diamond will look on her hand and how it makes her feel. Pesqueira sums it all up, “For the same amount of money they can have a choice of a very ordinary offering, but trying to do it as big as they can within certain parameters that they decided are acceptable, or for that same amount of money, they can have the most beautiful, most lively, colorful diamond in the world without spending one penny more. Our challenge is helping the customer see that is the choice they are making when the whole industry has taught them that they need to nail down the specs, get the largest offering they can for the price and to save money. In the end they are not as fulfilled as they would be if they spent the same amount of money on the most beautiful diamond they can get.”

High-tech, high-touch Millennials are going to challenge retailers across all sectors of retail – get ready to disrupt and be disrupted!

What retailers can take away from the Hearts On Fire story is that just as soon as one competitor thinks they’ve nailed down the next-generation Millennial shopper, like Blue Nile did, another competitor will discover that there are still unmet, underserved needs that can ultimately be tapped. As high-tech as this generation is, they also demand real, meaningful emotional experiences. Hearts On Fire discovered how to use technology, not just as a shopping tool that allows a customer to compare and contrast numbers on a 4Cs spec sheet and get the cheapest price, but to deliver an emotional experience to the customers who are anxious about making a huge emotional investment in their future.

The HOF store isn’t selling technology, like Apple, or selling through technology, like Blue Nile, but selling with technology in subtle, behind-the-scenes ways that gives the customer confidence that he or she is in both a high-tech and high-touch world where they feel comfortably in charge and in command. So HOF is poised to disrupt the original jewelry disruptor, Blue Nile, by bringing back the emotion in buying diamond jewelry in a real-world touch-feel-see way. By studying what HOF has done, other retailers can learn new ways to marry the two worlds – technology and emotion – that their customers already comfortably inhabit.

The Coming Crash of Michael Kors…Take it To The Bank

MK_Blog_graphic-01Michael Kors, the brand, is becoming ubiquitous, and that’s the kiss of death for trendy fashion brands, particularly those positioned in the up-market younger consumer sectors. Its distribution is racing towards ubiquity, wholesale and retail (online, its own stores, outlet stores and internationally). Even worse, a rocket-propelled accelerant to ubiquity is its expansion into multiple product categories and sub-brands, so they can compete at all price points. Some would argue all of those segments will simply end up competing with each other, thus cannibalizing the top end of the spectrum. [Read more...]

Chico’s Reviving and Disrupting

Chicos_Volunteer_Day_Giving_Day_006My closet is filled with a variety of on-sale purchased high-end designer clothing and shoes, nearly all black and suitable for almost every New York occasion, but not for the trip to Israel I was planning in March, 2014. I consulted my chicest, best-dressed friend, a long time fashion industry executive and insider who’d taken a similar trip a year earlier. “What clothes did you wear?” I asked, searching for wardrobe clues. “Chico’s, I think. Mostly black, matte jersey.” Chico’s!!! I couldn’t quite believe it. This is a woman who is a fashion icon, but clearly not a fashion snob. So, I followed her lead and headed to Chico’s in search of clothes that would be comfortable, suitable for multiple occasions, seasonless, packable and, dare I hope, fashionable.

What I found surprised me.

[Read more...]

Malls are the New Anchors…

Robin_Mall_blog_finalAnd the Internet is not the Only Culprit

A lot has been written and spoken recently about dying malls, my participation included. Well, here’s another one. In the middle of this protracted conversation, I discovered an interesting irony. As originally defined, the term, “mall anchor,” is now an oxymoron. Major retailers defined by mall and shopping center owners as “anchors” for their ability to generate traffic, now feel as though they are literally anchored to the mall, not able to cut loose as its Titanic-like host is going under. So the term “mall anchor” has now converged figuratively and literally.

With the exception of a hundred or so A malls, the B, C, and D malls are learning the hard way what they should have anticipated and acted upon a decade ago. Instead of the heavy dependence on their anchors for generating traffic and profitable growth, mall developers should have realized that nothing stays the same forever. As the Internet loomed larger by the minute, it didn’t require a rocket scientist to predict that technology would drive a fundamental transformation across the entire industry and threaten to the very existence of retailing, as we knew it.

With every mall and store in the world resting comfortably in consumers’ pockets or in their living rooms, who needs to spend the time and effort to actually go to, and shop through the mall when they can let their fingers do the walking and can shop virtually for an unlimited selection in a matter of minutes? All while sipping coffee.

Had mall owners foreseen the devastating plunge in traffic and the waning drawing power of their anchors, they would have proactively collaborated with their tenants to come up with a strategic transformation to unshackle from the anchor model. However, they didn’t. Therefore anchor positions have become an albatross around the necks of both successful retail anchors who now want a more compelling location, and the failing anchor stores who just want to get the hell out.

The Internet is Not the Only Culprit

While the Internet, rocket-fueled by the smartphone, has been the big disrupter, many malls have become irrelevant aided and abetted by three other major drivers:

1. Millennials Are Replacing Boomers as the Largest Consumer Segment

Aging Boomers, the largest consumer group ever, are retiring or starting to die off. And those among the living are downsizing, trading big homes for smaller ones, or renting in urban areas where they find more freedom in less burdensome and maintenance free apartment living. They just don’t need or want more stuff. “Stuff” expenditures for this group are now being transferred to purchasing experiential travel, leisure, and entertainment, as well as health and wellness. The Great Recession has changed shopping behavior, and whatever lesser amounts Boomers are still spending on stuff is being spent more online as opposed to a fatiguing and annoying trip to the local mall.

Millennials, who are replacing the Boomers to become the largest consumer segment (projected to account for about 30% of all retail sales by 2020), are also shaping a different lifestyle. Currently about 80% of the US population lives in urban areas. That number is growing due to Millennials preference for urban living, further influenced by the fact that many cannot afford to buy a home. Some are burdened with paying down school loans, and many of them still struggling to find decent paying jobs commensurate with their college-grad degrees. So renting an apartment is more often than not, their only choice.

Other lifestyle characteristics of this generation do not bode well for the future of massive suburban malls and shopping centers. Less is more for Millennials, and quality of lifestyle is desirable over big quantities of everything. Smaller, intimate and interesting environments trump giant stores and massive choice. High-tech and even higher-touch experiences are requisites. Ostentation is eschewed for the understated. Special-just-for-me, highly personalized brands beat out over-exposed badges of luxury. And social gathering places don’t always need physical spaces. But when they do, these places are not going to be impersonal, mega-scaled shopping centers.

Millennials are shopping differently, largely due to the fact that they were born into, and are using the full empowerment of the Internet and technology. They continue to accelerate their use of the Internet, fueling its double-digit growth rates. Therefore the shopping mall, unless it has a compelling enough reason for these young people to hang out, is being replaced by local grass-roots gathering places where the Next Gen can be with their friends to shop as well as work on their personal projects assisted by their smartphones and MacBook Airs. Mall-based teen specialty brands are struggling because they haven’t changed their models and store designs accordingly.

On the other hand, if Millennial shoppers do seek a more mall-type experience, they prefer clusters of smaller, freestanding stores in local neighborhoods or in mixed-use “village lifestyle centers.” These new public plazas offer a more compelling social and community experience, with streets of shops, outdoor cafes, restaurants, movie theatres, bakeries, and the like. Developers are keyed into this seismic shift, as many of these villages are designed with offices or apartments located above the shops.

2. Cash-Strained, Lower Income Consumers

The rich are getting richer. The A malls that largely cater to them will likely survive, although, they too, must elevate the shopping experience. However, many of the B, C and D malls catering to lower income consumers, many of whom are getting poorer, will either close altogether or be repurposed as walk-in medical clinics, health and wellness centers, video game complexes, movie theatres, etc. These cash strained consumers are reducing the number of visits to the mall to save on gas. At the same time, the dollar stores opened thousands of small, freestanding stores in lower income neighborhoods, more accessible and convenient for these paycheck-to-paycheck shoppers. Furthermore, Amazon offering rock bottom prices on just about everything, has stolen huge share of market from all the brick-and-mortar discounters serving this segment.

To throw more fuel on the fire that’s burning up mall traffic, both Walmart and Target are fighting back to regain some of their market share moving away from the mall and accelerating their small-store neighborhood strategies to compete with the dollar and convenience stores. The big-box guys are also aggressively increasing their omnichannel capabilities to better compete with Amazon.

Two other culprits are JC Penney and Sears. They are anchor tenants in roughly half of the mainstream US malls. The tale of these two retailers is not a happy one. JCP is struggling to right its ship after losing roughly a third of its business, which will require them to close many of those mall locations. Sear’s tale is one of a slow and painful death (in my opinion), which means they will ultimately close or sell the locations they own. Whatever small amount of traffic these former giants are still generating for the malls will continue to decline.

3. Outlet Malls On Fire

As retailers from luxury to mainstream continue in the value race to the bottom, in which price has become the weapon of choice, outlet stores are actually just another ruse to discount. Since the overhead for running these operations is much lower than full-line stores, the opportunity for faster and more profitable growth is intoxicating for all retailers who have been drastically slashing prices in their full-line stores, thus decimating margins.
Saks Off Fifth, Nordstrom Rack, Bloomingdale’s The Outlet Store, and Neiman-Marcus Last Call are all aggressively opening new outlet stores while they have few, if any new full-line openings planned. Even mainstream Macy’s is opening an outlet, and will probably find that it’s a highly-effective distribution channel for new growth. Just by example, upscale Coach generates 70% of total revenues from their outlet stores. Chico’s, Gap, even J Crew, are all opening more outlet stores, along with many others.

Of course, the elephant in the room is how this type of discounting is going to have on the credibility of the brands over the long term.

What’s an Anchor to Do?

If you happen to be a retailer “anchoring” dying malls, you need to determine how you can get the heck out of there without paying huge penalties. Then craft a new, smaller neighborhood store strategy that can be freestanding or as a part of one of the new lifestyle “villages” mentioned earlier.

And if you’re one of the dying mall owners, you have to figure out how to repurpose your space or simply close it down entirely. If you do, please take it down with the wrecking ball. These abandoned malls with their piles of cracking cement, broken windows, and huge empty parking lots, are horrible blights that devalue the whole area.

Repurposing examples abound. A laundry list of ideas: walk-in medical clinics, health and wellness centers, video game complexes, bigger Cineplex theaters with more Imax screens, university extension schools, 3D printing centers, gun ranges, aquariums, gyms, go-cart tracks, maker faires, community theatres, bowling alleys, day-care facilities, indoor parks, community centers and churches. And a huge opportunity; conversions to ethnic, culturally thematic malls such as the Fiesta Mall in Atlanta, totally focusing on Latino customers and all of the things they enjoy as they spend the day shopping with their families.

So the message to the anchor-store mall owners or anchor-retailers, un-anchor yourselves and embrace the revolution. Disrupt yourselves and “bite the bullet” on whatever financial hit you must take to change your business model. Quickly. As they say, “sink or swim.”

Passion Can’t Be Found In A Spreadsheet

iStock_000021559265SmallThe distance between Vere and Portman streets in central London is 528 yards; an easy walking distance encompassing the two solitudes of retail today: stores that behave as product sheds and those that behave like retail theater. Taking center stage in the dichotomy are three stalwarts of the British department store industry: Debenhams at the start; Selfridges in the middle; and Marks & Spencer at the end. The headlines on these companies say it all:

“Debenhams shares dive…the biggest obstacle to profits comes from a higher level of discounting as the retailer struggles to attract shoppers…”

“Marks & Spencer’s recent figures show the retailer losing market share faster than any of its rivals…”

“Selfridges turnover for the year is ahead 9% while pre-tax profits rose 40%…”

But the headline I find most illuminating of all is this:

“The latest problems at Debenhams will pile pressure on its finance director, Simon Herrick, who was already seen as likely to exit the company…”

If businesses are to prosper they need customers who are engaged and willing to spend, and I can assure you the lack of interest on the part of shoppers for Debenhams isn’t because of Mr. Herrick’s finance competency. While this headline comes from an analyst, it’s indicative of a common corporate failing: too often finance departments are asked to make right in a business what it takes an entire executive team to figure out, namely how to be more meaningful to a buying public who has the freedom to spend their time and money wherever they want.

Success and Failure in Retail Neither Begins Nor Ends at the CFO’s Door

Where these stores are located is the area of Oxford and Regent streets in central London, home to one of the world’s premier retail districts. Every year 150 million shoppers put the lie to the notion that ‘stores are dead’ and many pass the windows of Debenhams, Selfridges, and Marks & Spencer. There are clearly plenty of prospective customers, but they show a declining desire to make two of those stores a destination. A simple visit to these fading retail icons and you’ll immediately understand why: bad lighting, inelegant visual merchandising, and disinterested staff in the fading stores, whereas Selfridges is famed for its excitement and dynamism. The two in trouble feature environments where dreams of fashion and style go to die; in the stand-out you’ll find experiences that draw people in record numbers who are willing to pay more, and seem to do so gladly based on the numbers. And remarkably, executives of all three can walk the floors of their competitors in five minutes and experience what makes the difference.

So it makes you wonder: can retail executives even see the experience through the eyes of a shopper? Each of these three companies has the size, financial clout, and reputation to attract the best and brightest talent. I’m sure none of them lack for MBAs and finance people, yet it would seem that common sense and instinct – the soft skills that humanize the business of retail – have been subverted by higher education when their executives can’t seem to see the solution for better performance when it’s staring them in the face.

Quality Retail Experiences Rely on Store Executives to Make Them That Way

Too often, retail leaders describe the measure of their personal success based on their vertical roles in the business: the ability to deliver faster, cheaper and to reduce costs; rarely on the need to add value back into the store environment. Their idea to develop greater customer loyalty is all too frequently based on low price. Why? Many leaders feel that to innovate and engage consumers through the experience of their environments is overshadowed by transactional cultures that view process as the end, not the means. It seems few big companies remember what it was that made them what they are. Their worlds revolve around revenue rather than value; demographic segments instead of people. And what requires good common sense becomes over-analysis of the abstract. The new silver bullet of ‘big data’ is crazy given the way so many business people use it to define their strategic priorities – what’s the point of knowing more about your customer if you’re not able to truly understand or reflect why your business should matter to them?

The opportunity for offline retail has never been greater, but retail’s existential threat is itself. Who’d choose to shop online if they could get the benefit of price as well as experience? This model starts by offering a better way by asking if what you’re presenting to the buying public actually matters. If it does you win; if it doesn’t you discount.

Amazon’s Threat Isn’t From Being Online, It’s By Being Customer Obsessed

Ironically the one business that retailers fears most is Amazon. Yet, in that company’s 2013 letter to shareholders, Jeff Bezos wrote:

“We are internally driven to improve our services, adding benefits and features, before we have to. We lower prices and increase value for customers before we have to. We invent before we have to. These investments are motivated by customer focus rather than by reaction to competition. Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. Take a long-term view, and the interests of customers and shareholders align.”

So the company that makes every retailer question whether there’s a future for brick-and-mortar has customer delight at the core of its DNA. The same business that’s been referred to as “socialist” in its ideals by investors focused exclusively on short-term results has proven that long-term success can only come by thinking first about customers. Not surprisingly, you find a similar philosophy at the heart of the one retailer whose performance on Oxford Street outperforms the others.

The Weston family that owns Selfridges is the second largest luxury retailer in the world with holdings that include Brown Thomas in Ireland, de Bijenkorf in the Netherlands, Fortnum & Mason and Primark in the UK, and Holt Renfrew in Canada.

Their retail philosophy, expressed by Alannah Weston, the Selfridge group’s Vice Chair, is that there’s a lot more to the experience of their stores than just shopping. Her vision is to be the destination for exceptional experiences and believes that with such an enormous space the bounds of creativity have to be limitless. In a recent interview she explained that, “In an all-access shopping culture, remaining relevant is essential because you can buy anything at the airport shop, so why come to a department store?”

Weston’s advice for success is that you’ve got to have passion, “If you don’t believe it, you won’t do it well.” It’s simple: you’ve got to matter to your stakeholders if you’re to succeed. And while there’s little passion to be found in a spreadsheet, you may just find it in yourself by walking the shop floor, listening to customers, hearing what really matters, and by attempting to build back into your business that one thing which you can take true pride in. If you do a walkabout, invite your colleagues along – retail is a team sport.

Is Joe Fresh Still Fresh Enough?

IMG_2103I heard good things about Joe Fresh from a friend a couple of years ago, so I visited the Madison Avenue store, which initially opened in October, 2011 as a pop-up. It was a bright, fun place in a convenient neighborhood location. I bought a cotton V-neck cardigan in orange, Joe Fresh’s signature color, for about $19. I returned several times to buy Christmas gifts that season. Joe Fresh seemed a good resource for low priced, colorful, clean looking, basics. A poorer woman’s JCrew, perhaps a bit younger, certainly much, much cheaper — decent enough quality for the price, with a teeny bit of a contemporary edge. Joe Fresh has a much narrower, more classic and basic-focused assortment than H&M, with equally low prices, and is a refreshing, lower priced alternative to the now muddy Gap.

In 2004, Loblaw’s, Canada’s largest retailer with 1000 corporate and franchised stores, serving 14 million customers weekly, reached out to Joe Mimram, the co-founder, of Club Monaco, to create a clothing line to be sold in Loblaw’s supermarkets. Loblaw’s had extensive and successful experience with private brands, including President’s Choice, the maker of the Decadent Chocolate Chip Cookie, the number-one selling cookie in Canada. But those cookies were not enough to meet the threat of Walmart’s ever expanding Canadian Supercenters. And so, a well priced, well designed clothing line for Loblaw’s made sense. Joe Fresh was launched with women’s apparel in 40 Loblaw stores in 2006 and exceeded sales expectations. Today, Joe Fresh is sold in 340 Loblaw’s stores and includes women, children and men’s clothing, shoes, accessories, cosmetics, bath and body. In 2010, Loblaw’s launched the first Joe Fresh stand-alone store in Vancouver, and there are now 16 in Canada. [Read more...]

Will it Be Made in America?

FINAL image_Anastasia‘Made in America’ is quite the hot topic right now, grabbing up headlines left and right; from the backlash about Ralph Lauren’s 2012 Olympic uniforms (the company quickly learned its lesson—the 2014 ones were made in the US) to retail beast Walmart’s declaration to increase its purchase of American-made goods by $50 billion during the next 10 years. It’s a hopeful story—fostering patriotism while supporting the return of jobs to US soil.

There are those who say that domestic manufacturing is simply not feasible at certain price points, while others have found a significant shortage of skilled workers as a blocking point. Despite these obstacles, will apparel manufacturing sprout again in the US?

Our take is yes.

Companies are manufacturing clothing in the US today and have been for a long time. Take Martin Greenfield Clothiers, for example. The menswear company offers fine, hand-crafted tailored clothing including made-to-measure suits and tuxedos, made 100 percent by hand in its Brooklyn, New York factory. The company’s customers aren’t too shabby either—Presidents, Ambassadors, major motion pictures, the list goes on.

You may be saying, well of course a company that produces such high-end garments can charge a premium and not worry about paying extra for production. And we agree. But many companies are finding success producing in the US at all different price points. In fact, according to a recent study by Boston Consulting Group on the shift in global manufacturing, China’s manufacturing cost advantage over the US has shrunk to less than five percent, while Mexico currently has lower manufacturing costs than China. This shift highlights how American companies can now consider their home turf as a viable manufacturing option, keeping production closer to the end consumer.

Brand names like Ralph Lauren, Club Monaco, Frye and Brooks Brothers are now producing a percentage of their pieces on home turf as well. Designers like Nanette Lepore are outspoken on the topic; she organizes Save the Garment Center rallies and is vocal with lawmakers in Washington to support the American fashion industry.

America’s Research Group found that approximately 75 percent of consumers would pay more for American-made goods, up from 50 percent in 2010. Thus, people are seeing this as a business opportunity, evident by the rise of startups dedicated to US manufacturing. Look at American Giant, a direct-to-consumer apparel company that makes high-quality, affordable basics, including hoodies, t-shirts and sweatpants. After a December 2012 Slate article declared the company’s best-selling sweatshirt as the “greatest hoodie ever made,” there was a months-long waiting list. American Giant pledges to never outsource jobs overseas.

An important element to consider is the fact that this ‘repatriation’ movement isn’t unique to the US. There is also a push for ‘Made in Britain.’ British companies were dealing with the same challenges—wage increases in China, higher transportation costs, hard to control supply chains; there was also a wave of patriotism following the Olympics and the Jubilee. Many companies have been able to spark an onshoring resurgence, with Mulberry, Marks & Spencer, Topshop, Christopher Nieper and John Smedley being just a few examples.

The moral of the story is: if other higher wage countries are successfully moving toward domestic production, there’s no reason the US can’t follow suit.

We may end up eating crow because of our stance on this topic as only time will tell.

Fabric Substitution Needles Home Textile Shoppers

Preference for Cotton Remains Paramount

Click to See Chart Full-Sized

Click to See Chart Full-Sized

Housing starts and existing home sales are not only good economic indicators, but they are also strong predicators of future growth in other areas like home textiles. As the turnaround in the housing market gains steam, the home textiles market benefits – but consumers are increasingly paying higher prices for lower quality and less cotton-rich items, and they are not satisfied.

Textile World recently reported that housing starts could increase by as much as 15 to 20% over the course of 2014, despite the harsh winter, leading to potentially brisk business for the home textiles sector. While January building permits were 5.4% below the December rate, they were still 2.4% above the January 2013 estimate, according to the Department of Commerce, hinting at an upswing in the industry that could carry over to home textiles.

Cotton remains the favored fiber for home textiles like bedding and sheets; more than eight in 10 (81%) consumers prefer their sheeting to be made from cotton and cotton blends, and 75% of consumers prefer their bedding to be made from cotton and cotton blends, according to the Cotton Incorporated Lifestyle Monitor™ Survey. But that’s not always evident at retail. [Read more...]

Don’t Overestimate or Misunderstand “Disruption”

DISRUPTIVE-INNOVATION_rdRemember the phrase “innovate or die?” Well, it died. Taking its place today is “disrupt or die.”

Disrupt this, disrupt that. We’re in the throes of it. As I write, another disruptive concept is being born. And if you don’t see it coming and don’t adopt or adapt to it, you may get mowed down in its path. In fact, the true winners are disrupting and transforming themselves before an outside disrupter gets to them. The chic label of disruption aside, I would argue that innovation and disruption could be synonymous in their commercial results.

It’s all happening fast, faster, and like a pinwheel, and still accelerating in a whirling blur. It’s a new liftoff every day, rocket-fueled by venture capitalists that have invested close to $30 billion in 2013, a 7% increase over 2012. So if you’re in the game, don’t find yourself standing still on the launch pad. Get a blast on it.

The perpetrators of much of this disruption are 20- and 30-somethings, many of them now nearly-overnight billionaires. And by the way, do you remember the term “burn rate,” before the dot.com crash (how much cash one would burn through in a month)? It was the measure of success. Now the badge of honor is the “round of funding” one is on. I guess in the end, it’s pretty much the same thing. Just ask veterans Jeff Bezos, the Google boys, and Mark Zuckerberg — and new darlings, Brian Acton and Jan Koum

So What is Disruption?

One handy definition of these disrupters comes from us — our columnist for The Robin Report, Warren Shoulberg. In our upcoming print issue Warren says a disrupter is “the guy who comes into your market and screws up your business by doing something different.” That works for me.

However, “doing something different,” can “screw” up your business or market in three different ways. Furthermore, most of the disruption or innovation we see today is due to the technology era, including the Internet, providing the new tools for disruption. Note I said “tools,” precisely because that’s all they are — tools to facilitate innovative or disruptive ideas.

And this technology era is now in its third retail iteration: first, its boost to efficiency and speed from factory floor to the warehouse; second, from the warehouse to the store; and, now, in its final iteration, with the smartphone as its accelerant. The Internet and technology are driving the part of the value chain that connects with the consumer with incredible, fundamentally game-changing and disruptive new ways that also empower them with unlimited and instantaneous access to whatever, wherever, whenever and however, their little hearts desire.

So, what are the three levels of disruptive intensity that are meant to “screw up” your business or market?

First is an incremental innovation, which some would argue is not really a disruption. Lululemon, Whole Foods, and Gilt Groupe, in my opinion, are incremental innovations. They are easily knocked off, which we have seen happening more than once. How long it takes to “copycat” the model varies. But while they are dominating the new space, they have first-mover pricing power, until of course, competition enters and that power gets leveled.

The second and third disruptive levels consist of fundamental innovations, either changing the game, or creating a whole new game. These disrupters are not easily copied. Starbuck’s changed the coffee shop model and consumers’ behavior along with it. Facebook created a whole new game, as did Twitter. Uber is changing the taxi model as Amazon changed the game of distribution. Since they are all ultimately able to be duplicated by other clever entrepreneurs, only time will tell if these icons will have the sustainable dominance to have created a whole new game in which new competitors may enter later, but will never share the number-one space.

Speed rules in this disruption game. Why do you think Jeff Bezos’ mantra from “Day One” as he called it, has been “get big fast,” and he has built on that mantra every year to get big faster. And we all know he has a complicit Wall Street behind him, willing to go along with his top line “get bigger faster” mantra at the expense of making nothing on the bottom line.

I believe a lot of the disrupters in tech world, many with truly unbelievable valuations, are benefiting from an Amazon-like growth strategy — to say nothing of round after round of insatiable funding. The challenges are enormous for last century’s business models to adopt and adapt technology and the Internet as tools to disrupt themselves to achieve the new century’s measures of success, all without Wall Street’s complicity.

However, if a business sees “disruption” coming their way, they can avoid being “screwed up,” or worse, decimated, by acting fast and embracing whatever the disruption is that’s headed for their space. Furthermore, in many cases, “disruptees” may very well gain a competitive advantage by adopting disruptive concepts that fit their models and leveraging these innovations to their already powerful brand and customer base. And watch out! They have the potential to turn around and disrupt the original disruptor. And so it goes in the never-ending spiral of disruptive innovation.

At the end of the day, if we are not creating new today, we will be gone tomorrow.

The “Great Disruption”

Finally, the “Great Disruption” is yet to come. At some point along the way, retail and wholesale models will cease to exist (along with their increasingly irrelevant terms), as technology will enable goods and services to be seamlessly and instantaneously transferred from creator to consumer. And in another wave of disruption, creator and consumer may just be the same person.

Reading Consumer Behavior in a Tentative Time

Sarah_ Spendin_Rd1The global economy has entered a period of transition. After the high hopes so many had pinned on the rise of the BRIC nations — Brazil, Russia, India and China — and other emerging economies, their seemingly inexorable ascent has proved all too exorable, with global demand for raw materials slackening and internal economic indicators demonstrating a cooling in overall economic growth.

But there are other factors making for the creation of a climate of transition — and, to a certain degree, of uncertainty. The existence of both exogenous and endogenous forces, not least of which are the seeming return of great power geopolitics in Eurasia and the South China Sea, the discovery and exploitation of new energy sources within the U.S. — thus creating a new source of instability in the Mideast — and the continuing struggle to make an integrated Eurozone a reality — all contribute to the atmosphere of watchful waiting. [Read more...]

Your Local Fruit Stand is a Bellwether

IMG_0139On the corner of 7th Avenue and 12th Street in Manhattan is a fruit and vegetable cart. Others just like it are scattered across New York City. They tend to be run by hardworking immigrants willing to stand up all day and put up with whatever weather comes their way. I’ve passed this stand thousands of times as I walk to and from work. Last fall, I stopped for the first time noticing that the same blueberries and blackberries that have now become my breakfast staples were cheaper than in the grocery store down the street; the same box and brand, but 25% less.

In retrospect, it makes perfect sense since my grocery store pays more in rent than the street vendor does. It wasn’t just that the berries were cheaper; when I actually compared the other fruit and vegetable prices, everything else was too. I started buying avocados, eggplant, onions and melons. Not only was it cheaper, but it was more convenient. Yes the selection was narrow, but it met my needs. The vendor was friendly, and his name was Ali. [Read more...]