Fiddling with the Roofs

roofs2Remember the old adage that “retail follows the rooftops”?

If you do, then you probably have fond memories of the Eisenhower administration, the post World War II suburban building boom when Sears Roebuck and J.C. Penney ruled the retail roost, and Sam Walton’s 5&10 variety store in Bentonville, Ark.

So much for nostalgia!

For 2015 and beyond, following those rooftops — the population centers retailers crave to be near — will get trickier. Fewer of them are being built, and they are no longer where they once were. Concurrently, premium locations are getting more expensive and some lenders, unsure of what new retail formats will look like, are keeping a lot of cash on the sidelines until they see another shakeout. [Read more…]

Target Canada’s Ill-Fated Adventure

target_canadaIn what has to be one of the biggest retailing fiascos of all time, mass merchandiser Target has closed its 133-store Canadian division less than two years after it opened. Billions of dollars were lost.

Target’s misadventure in Canada holds many lessons for all retailers, including the very simple lesson that catastrophe invariably comes close on the heels of a retailer’s failure to offer consumers products they want at the price they’re willing to pay.

How could a retailer as big as Target is in the United States fail to grasp such an obvious concept as it moved across the border to Canada?

The answer is that pressures of competition and real estate forced hasty and ruinous decisions. [Read more…]

The Past as Prologue

coswalzonI recently spent some time looking 25 years into the future of retailing. Coincidentally, I played this game almost 25 years ago, exactly. I think it was July of 1989 when I was an executive at the May Department Stores Company. We were operating 19 department store names, two discounters (Caldor and Venture), 26 shopping centers, and a couple of specialty stores, including Payless ShoeSource, 25 years ago.  As we looked at the future then, we certainly missed the rise of online sales and mobile devices. We correctly guessed that there would only be one national name in the department store space, and we even guessed that the name of that store would be Macy’s. We missed that we would not own it.

We correctly guessed that Walmart would own discounting and we divested both Caldor and Venture because of that. (Both subsequently went broke.) We also thought that the discount store was going to own the $10-a-pair shoe business even though we owned that business with Payless ShoeSource in 1989. We divested Payless in 1996. We guessed that Ralph Lauren, Jones New York and Liz Claiborne would be the biggest vendors in the department store world in 2014. But in the reverse order! Only Ralph is still a winner.

We saw the rise of the specialty store, but it was well under way by 1989 and not that hard to see. We missed the success of the off-price sector and the outlets. We thought both were a side show that would have limited success. [Read more…]

A Holiday Fable

‘Twas the day after Christmas, when all through the mall,
Every shopping creature was stirring in a big free-for-all.

The sale banners were hung in the windows with twine,
In hopes that black ink would show up on the bottom line.
The merchants were hunkered down like well-tailored elves,
West Coast dock slowdowns having bared all their shelves.

Warren_saleCheap gasoline gave the season a boost,
Proving to be many a retailer’s surprise golden goose.
Walmart trotted out Kelly & Michael clones in their TV attack,
Having decided the entire season could now be called Black.

Target did its usual mix of cheap and chic kerfuffle,
Trying to forget the ghosts of breaches and Steinhafel.
Macy’s ran a record number of one-day sales with flair,
Doing enough business to never muss up Terry’s hair.

Sears and Kmart were largely invisible,
Eddie’s vision rapidly becoming a sinking dirigible.
Mike Jeffries & Dov Charney were two December casualties,
Undone by H&M, Zara & all the other fast-fashion casual Ts.

Radio Shack watched as the clock wound down tic by tic,
It couldn’t be saved by a bizarrely retro Weird Al Yankovic.
Kohl’s tried kash and koupons in every denomination,
Making sense of them caused customer consternation.

And Amazon finally opened an in-town warehouse sorter,
Promising deliveries even before a shopper places the order.
Best Buy had all its consumer electronics at the ready,
Hoping not to go the way of Circuit City and Crazy Eddie.

Luxury brands kept their stores all orderly and neat,
Waiting for those big bonuses to come in from Wall Street.
JCPenney was still suffering from its Ron Johnson hangover,
Though the trouble was still too much merchandise holdover.

But no matter the channel, the site or the store,
The customer would only respond to more and more.
Now 10 percent off, 20 or even 30,
It took 40 or 50 for shoppers to get down and dirty.

In fact, only one store was sale-less and unflappable,
It bore the image of a fruit, of course, it was Apple.
So the endless sales and promos from very far to quite near,
Promised to stretch through well into the New Year.

It’s just how business is done in retailing these days,
Sadly, executives and customers are no longer fazed.
And longing for the good old days is just a wasted gesture,
Trying to do it any other way is meaningless conjecture.

So as the season ends and the stores turn out the light,
We wish you Happy New Year, it was one hell of a fight.

State of the Union

Union graphic-01

Generals huddle in their bunkers hammering out strategies for the next battle, while fighting by well-equipped opposition forces continues door to door, punctuated by brief and tentative ceasefires.

No, this isn’t the latest dispatch from the war-torn Middle East or the Ukraine, and the bunker here is a well-appointed lawyer’s office or a suite at the local Hilton.

But warfare is an apt metaphor for the endless battle surrounding labor relations and the war of words between retailers and unions—a war that is likely to escalate.

Retailing is seen as an increasingly viable route to economic development and job creation in many areas of the country, making the industry and its workers a more attractive target for union organizers. And in an industry that can have a 200% or 300% annual employee turnover rate, union organizers don’t have it easy. But sometimes things go their way. A case in point: The United Food and Commercial Workers (UFCW), which handles retail employees, got a boost from the National Labor Relations Board’s recent decision that a group of 41 cosmetics and fragrance workers at a Macy’s in Saugus, Massachusetts, could unionize. This precedent- setting decision may be a sign of things to come in retail, if unions are allowed to go after specific groups rather than having to organize an entire store.

In Southern California, the UFCW has reached a tentative accord with major supermarket chains covering 70,000 employees from the Mexican border to Monterey County, temporarily averting a debilitating walkout like the one that took place 10 years ago.

But these Californian chains will have to battle the Teamsters when negotiations begin on a new contract for drivers and warehouse workers this time next year. [Read more…]

Around the World with Paco Underhill

cooking_oilWhat We Can Learn From Emerging Markets

Merchants have a temptation to move up-market. We suspect this is a reflection of their desire to seek higher margins. While we can applaud the successes of luxury categories at the upper tier of the market, it is at the other end of the spectrum where we find insightful examples of merchant innovation. For many of the world’s consumer product goods companies, future earnings and sales growth are anchored in their ability to not only move up, but also to more effectively cover the down-market. But we may be missing some very special lessons in this traditional marketing strategy. We can learn from what’s hidden in plain sight in emerging economies by recognizing the transformation of our ideas and the ingenuity of adapting our concepts to local solutions. There is also a new wave of clever entrepreneurs who are retooling conventional retail and marketing in novel grassroots ways.

Sumba: Rethinking Trust and the Pragmatics of Third-World Recycling

The Indonesian Island of Sumba has the peculiar distinction of being the world’s southeastern-most home of the horse. Its equine culture is unique to the archipelago, and adventurous tourists invade the island for its horse festivals that involve ritual battles on horseback. Its welcoming villages are dominated by tall prehistoric megaliths, not unlike Easter Island. But in Sumba, these giant icons are made all the more startling by the vibrant human life that continues on the island, in contrast to the abandoned statues of Easter Island. Sumba has a few resorts that tend to be patronized by glitterati looking for places where the tabloids can’t find them. It is, in its way, paradise lost and found. [Read more…]

Memo from the Grinch: The Gas Price “Bonus” is an Empty Tank

RL_11-18-14_1Economists, experts, analysts, consultants, a lot of CEOs, casual observers and even my friend and CNBC regular Jan Kniffen believe lower gas prices are going to goose holiday retail sales. In what some call the “gas bonus,” this means that some $40 billion saved on fuel will end up being spent over the holidays in the nation’s retail stores. This is certainly a happy thought. On a CNBC panel the other day, Kniffen was almost giddy about it. And then when you add in a falling unemployment rate, followed by an increase in consumer confidence — at its highest level since 2007 — stock traders are already chilling the bubbly.

Once again, I find myself the naysayer. Let’s start with the gas theory. The Robin Report Chief Strategy Officer Judith Russell looked at the monthly change in gas prices and retail sales for the past eight years. And as indicated in the chart below, there is neither a significant bump up, nor down, in retail sales accompanying rising or falling gas prices. She even looked at regressions with different segments in retail, and found that there simply does not seem to be a correlation, period. In other words, the gas theory is an empty tank.

Having said that, Walmart had a slight increase in third quarter sales of .5%, for the first time since 2012, which they believe was partially due to lower gas prices. So, one may conclude that the entire discount sector will gain from the gas bonus, putting more cash in its lower-income consumers’ pockets. On the other hand, one might conclude, as I did, that Walmart is clawing back its customers whom they lost to the thousands of smaller neighborhood dollar stores during the recession when gas prices were high and low-income shoppers had a shorter ride to those local stores, thus saving fuel costs. In fact, Walmart said in its 3Q conference call that the Walmart Express strategy (smaller footprint convenient neighborhood stores) is beginning to facilitate their clawback of market share from the dollar stores.

Therefore, this hypothesis would suggest that rather than the gas bonus lifting total spending among low-income consumers across the entire discount sector, it’s simply shifting shares around within the sector.

Click to Enlarge

Click to Enlarge

If consumers do take their fuel savings and decide to spend them, while the discount retail sector may minimally benefit, it’s more likely they will spend more on health care and entertainment, as well as home improvement. And since income growth is flat, they could just as well decide to save the gas “bonus.” In fact, the savings rate has been ticking up.

And there was certainly no additional gas bonus spending among the mid-to-higher income consumer segments. In fact, Macy’s CFO, Karen Hoguet told analysts a week ago, “shoppers are spending more of their disposable dollars on categories we don’t sell, like cars, health care, electronics and home improvement.”

Lastly, the low overall inflation rate, even disinflation in some major merchandise categories, is allowing consumers to get more value for their money, which doesn’t result in an increase in sales, because they’re not buying more stuff per se. Consumers and particularly the growing Millennial cohort are shifting toward a “less is more” mentality, eschewing buying more stuff to seeking more experiential satisfaction out of life, which is why restaurant sales and entertainment spending are strong. And now with a strong dollar, we might see people opt to travel more often. So these dynamics, much of which has to do with a demographic and cultural shift, will also divert any part of the gas bonus that might have made its way into mainstream retailing.

The final word: dream all you want about getting your hands on a piece of the $40 billion gas bonus, but when you wake up on January 1st with a hangover, it won’t be due to the bubbly that the stock traders are currently chilling. It will be due to the fact that the dream was really a nightmare about the passing gas bonus, pun intended).

Walmart Collateral Damage

iStock_000043854262LargeWhat if Walmart opened a big fleet of new-format stores and no one came?

We might find out really soon. After years of tinkering with its small-format, food driven Neighborhood Market model, Walmart has started to roll them out in earnest. There are now about 350 Neighborhood Markets and Walmart expects to open them at the rate of about 200 per year, ultimately achieving about 2,000 stores.

At about 40,000 square feet each, Neighborhood Markets are integral to Walmart’s strategy for future growth. Its main store model, the huge food and nonfood supercenter, needs a boost since it has just about reached market saturation and is facing dwindling consumer engagement.

And in an unexpected twist, Neighborhood Markets in many areas are pulling dollars from the pockets of the same supercenters shoppers, so net sales increases aren’t growing at the anticipated rate. In fact, Walmart’s net sales are actually dropping in some areas. And guess what? Local supermarket operators are starting to relax about the competitive threat Neighborhood Markets pose. [Read more…]

Wellness on the Verge of a Revolution

shutterstock_185901890The past 50 years have seen a transition in healthcare from the Marcus Welby model of a kindly physician taking charge, even ownership, of a patient’s well-being to a phenomenon called participatory medicine, where physicians play the role of senior, expert collaborators with an individual in their plan for health.

In the past, the medico/hospito/pharmaco players were gatekeepers who doled out medical information and care with schedules at places that served their needs. Today’s patients demand greater and more convenient access to health information and medical care. They want care to be provided with the convenience of any other retail service. Simply said, they want it now, wherever they want it… now.

Healthcare On Demand

An early manifestation of “retail” convenience in healthcare was the standalone, limited service clinic. This movement began in the workplace with employers contracting with companies such as CHS Health Services to operate health clinics. These services have offered free services to employees as a benefit, and for the employer as a means to reduce absenteeism and healthcare costs. CHS, newly merged with Walgreens-owned Take Care, operates more than 500 workplace clinics for major US companies. [Read more…]

Whole Foods Market: Conscious Capitalism or Unconscious Greed?

wholefoods_webSo are we adding a luxury food brand to the “designer derby” of racers seeking more growth (for its own sake) by reaching down to consumers who are reaching up? Or is the CEO of Whole Foods, John Mackey, spreading his high-end food among the masses at prices they can afford, simply out of the goodness of his democratic heart? I’m speaking of the Whole Foods launch of pilot stores in more down-tier areas of Detroit, New Orleans and Chicago’s South Side. And about this strategy, Mackey made this rather magnanimous and altruistic statement: “For every penny we cut off the price, we reach more people who can afford to shop with us.”

What a wonderful thing to say. And, what a wonderful thing to do for the less well-heeled people living where the stores are being launched. And I suppose it will be a wonderful thing for new growth, at least for the foreseeable future. [Read more…]

Amazon: Trouble in River City?

Or Wall Street’s Magical Leprechaun

Amazon Unveils Its First SmartphoneJeff Bezos does have that “Leprechaunish” look about him. Wall Street certainly bought into the fable that Mr. Bezos (symbolically toiling over his “shoe making”) would deliver a pot of gold at the end of some yet to be defined rainbow. For 17 years, the Street has believed in his magic ever since he wrote in his SEC filing in 1997: “The Company believes that it will incur substantial operating losses for the foreseeable future, and that the rate at which such losses will be incurred will increase significant from current levels.” He also stated that he wouldn’t run the company to make profits, rather he would pour investment into growing the business to “get big fast.” Wall Street took a deep breath and bought into his strategy, hook, line and sinker. The Street believed that at some unknown distant point in time, and at the end of some rainbow, the Leprechaun would magically deliver his pot of gold.

Well, talk about “substantial operating losses” (which Amazon has lived up to for these past 17 years), this recent second quarter earnings report, revealing a net loss of $126 million, takes the cake. Worse, Amazon rather flippantly, with no explanation as to why, says it will lose between $410 and $810 million in the current quarter. Pot of gold? It’s more like a pot of coal. [Read more…]

Housekeeping

Houskeeping_Collage_FinalThe summer is usually not a time for great reflection: more often most of us spend as much time as possible getting away from the real world, via vacations, trashy novels and the latest super-duper hero movie sequel. But for some reason, it seemed like the right moment to revisit some of the many retailers of home furnishings that have been injected, inspected, detected, infected, neglected and selected in this space over the past few years. Many of the stores have experienced some pretty important developments since last encountered, some for the better, many for the worse. So, in no particular order – OK, maybe in some order – lets see what these guys have been up to.

Target

What a mess they’ve made in Minneapolis recently. A big-time security breach of Snowdean proportions; a Canadian launch best described as the Great White North – Not; bad comps; and a CEO forced out of his corner office via the self-checkout line, Target is in free fall right now. [Read more…]