Michael Jeffries – A&F Genius Rides Into The Sunset

Earth in space with a flying asteroid, abstract backgroundMichael Jeffries is no Gary Cooper by any stretch of the imagination. When Cooper rode into the sunset, he was leaving behind whatever victory he won for the “good guys,” albeit Hollywood style. As Michael Jeffries heads into the sunset, he will be leaving behind a once victorious A&F brand that he brilliantly developed over the past quarter century that is now in tatters, In the movie High Noon, in which Cooper starred, he knew the three killers were coming after him seeking revenge. Alert and ready, he single-handedly (actually helped somewhat by his wife) blew them away in a gun fight.

Michael Jeffries in the real world, was blinded by meteoric success, in my opinion, and did not see his adversaries gunning for his consumers as his brand drifted off course.

Positioning Drift

That was Jeffries’ Achilles heel. He drifted older along with his original young customers. He kept his focus on his aging customers without looking over his shoulder at their younger siblings, most of whom wouldn’t be caught dead wearing their older brothers’ and sisters’ brand. This positioning drift blindsided Jeffries. In my opinion, even if he had foreseen the need to pivot to the next generation, Jeffries would not have been able to successfully reposition the brand.

Essentially, Michael Jeffries was A&F and A&F was Michael Jeffries. Both were one. Therefore, for him to reposition the brand, it would be as impossible as changing his own personality or DNA. And so far, he has not been able to do so.

A Shared DNA

Michael Jeffries was largely vilified for his exclusionary attitude regarding the hiring of overweight people or anyone not befitting the brand’s image of sexy, young and cool, as he defined it. He also often used derisive language when questioned about his position. Yet he created and sustained a premier position in the youth market for about 25 years. He captured the zeitgeist of youth in that period and all but owned the entire space. He did so by excelling in a superior implementation of what we all learned about branding in Marketing 101. He created the DNA of A&F precisely to fit the sexy, young and cool image of the products, store layout and design; the nightclub experience; the catalogue; and even by hiring sexy, young and cool associates. He created a holistic, super powerful brand all the way through the entire marketing process. He relentlessly focused on all of it with no divergence, almost maniacally so, to the point of making abusive public comments about the consumers he specifically did not want in his stores – namely anybody who was not sexy, young and cool. So regardless of his rather questionable style and unnecessary derision of anybody not fitting that image, he was a strict disciplinarian when it came to protecting the image of his brand. Therefore, he could arguably be called a brilliant marketer, and I have often given him credit for that.

During the meteoric rise of this iconic brand, its loyal consumers also became an extension of the brand’s persona, proudly exhibiting the highly visible A&F logo, plastered on all of their products. This indelible, neurological connection with its consumers allowed the brand to be sold at full price, never promoted nor discounted.

The hue and cry, as well as the pushback from consumers over his behavior, is not why A&F is in trouble today. The brand got caught up in positioning drift. As their young core consumers grew older, A&F drifted along with them. A&F failed to see and understand that the younger brothers and sisters (now the emerging Millennial cohort) had no interest in copying what their older siblings were doing and wearing. A&F did not react quickly enough to pivot the brand. Therefore, A&F’s original core of sexy, young and cool customers grew out of A&F into Brooks Brothers and other brands. Their young siblings bypassed A&F altogether, heading into the world of fast fashion.

The Beginning of the End

A&F’s space began to close down as three dynamics converged:

  • Competition kept advancing, including the other two ‘A’s’ (American Eagle and Aeropostale).
  • The onset of the Great Recession.
  • The early beginnings of the fashion trend shift among younger customers to the faster, newer and cheaper fashion churning brands like Zara, Forever 21, H&M, etc.

I don’t believe Jeffries connected these dots. He may have been aware of the growing competition in his original space, and he might have concluded that the combination of his direct competitors applying promotional pressure, along with the recession, was stealing customers who couldn’t afford A&F’s full prices. But I don’t think Jeffries recognized the fact that his original brand loyalists were growing out of the brand, and that A&F wasn’t attracting the younger brothers and sisters who were pouring into the fast fashion brands. Of course, further motivation for this trend shift among young consumers was the impact of the recession and the lure of cheaper fashion.

By the way, the same combination of positioning drift and the recession befell American Eagle and Aeropostale. This raises an interesting question. Will the hot fast fashion brands, beloved by the Millennials, get caught in positioning drift, and grow older with their core consumers, thus missing the desires of their younger siblings?

Regardless, Michael Jeffries is left holding the proverbial bag, apparently not totally understanding what hit him. And even if he did, it would be too late to the party. While his DNA is still intact, it is no longer synonymous with A&F, the now-struggling brand he brilliantly launched and once dominated its space.

As he rides into the sunset, will A&F’s brand DNA be able to reposition itself for a new post-Millennial consumer? Or is it too late?

The Bottom Is Near: Thanks to the Millennials

three girls chatting with their smartphones at the parkIt came in with a bang! And it will end with a whimper. I’m talking about the now over-used phrase “the race to the bottom” of price promoting and every method of discounting imaginable and unimaginable. It explosively ramped up around the turn of the century, accelerated through the recession, mainlined on steroids post-recession, and is now limping to its end. This is not a Ron Johnson-like prediction when he bet the bank during his brief and tragic tenure as CEO of JC Penney (and which I naively doubled-down on). I now believe he may have been ahead of his time believing that “fair and square” non-promotional pricing would be desired by consumers. Of course, the JC Penney customers not only didn’t love it, they hated it and walked out the door.

Well that was a different time and a different customer.

The Millennials are going to change it all. They are viewing the industry’s discount madness as an overwhelming, frustrating, and exhausting “paradox of choice” (too many deals and too confusing to even make a choice). They will not only become inured to the onslaught of ubiquitous deals 24/7, they will begin to disbelieve them and cynically expect that another better deal will pop up at any moment – which they will also not trust. How can they believe what the real value of any offering is at this point? [Read more…]

Sears’ Last Gasp: In the Asset Leasing and Loan Business

RR_Blog_AssetI thought I wrote the final word and all that was worth saying two weeks ago about the inevitable collapse of Sears in my article Sears: Nothing Left But its Past.  As I said then, there’s nothing left but its past. Well, “Abracadabra, fast buck, Eddie-the-magician Lampert” has once again given me reason to write another missive on his uncanny ability to squeeze even more cash out of the sinking “twin Titanics,” (for those out of the “know” – twin losers Kmart and Sears).

The cash-squeezing model Eddie is now employing is what I would call the “robbing from Peter to pay Paul (aka Eddie)” model. Essentially he is now in the asset leasing and loan business. First of all, as pointed out in my previous article, ESL Holdings loaned the retail business $400 million. However, with a premium interest rate that gets paid to you know who, the loan is secured by Sears’ most valuable real estate, which eliminates the risk for, you know who.

In 2006, Lampert devised another risk-free concept to squeeze more cash out of the business. He transferred ownership of Sears’ Kenmore, DieHard and Craftsman brands to an entity named KCD (acronym for the brands), which in turn charges Sears a royalty fee to license the brands, which are now being sold in other stores. And I would bet that somewhere in this clever deal, Eddie and his ESL Holdings are reaping some financial benefit. The model sounds like it resembles a real estate investment trust, (REIT), whereby stores’ real estate are sold to the REIT which then turns around and leases them back to the retail business (which Eddie is now considering). Hey, maybe fast buck Eddie pioneered a new instrument: brand investment trusts or BIT. [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).

Algorithms, “Malgorithms” You Go Figure

iStock_000017120352_DoubleI find myself in a quagmire of confusion about all these new tech concepts, phrases, words, and now the overwhelming stream of algorithms. This technology era we are living in is as mysterious as it is magical. For example, algorithms, the tools of geeky mathematicians for calculating outcomes and sometimes predicting success, are no longer confined to labs. Today if you’re running a lemonade stand along the side of the road, your mom or dad may be running algorithms to determine car and foot traffic, gender types most likely to buy, how many pitchers of the stuff you will need—and, oh, yes, whether you charge a dime or a dollar.

Seriously, as pointed out in a Wall Street Journal article, Big Data’s High Priests of Algorithms, “the good news about data science and data scientists with PhD’s in astrophysics, bio-statistics, partical physics, computer science and several other disciplines—is that they can make six-figure salaries from the get-go working for new startups like Airbnb, Square, Etsy and so on.”

In my opinion, the bad news is that we are taking many of these mathematicians and scientists away from professions where they might actually change the world for the better, and instead luring them into professions where they help shoppers find a better hotel room, a better mate, or a trendy pair of pants.

This is just one more example of our obsessive, consumption-addicted, ostentatious culture. Yes, many of our current traditional business models and even whole industries will be disrupted and transformed through the use of new technologies—perhaps for the better. However, so many of our new tech-based businesses are aimed at providing the purchase and pleasure of the moment.

If we devalue shared life-giving or challenging issues, such as the environment, and increase the value of making another buck by upselling another glass of lemonade, we’re going to be in a lot of trouble.

Human beings. We’re a strange species.

Value is in The Eye of the Beholder…Who is Blind

PrintThere is a binary system governing value. The first “beholders”of value are its creators and sellers. The second are its consumers. Unfortunately,the first beholders have become blind to what their intrinsic value really is, or should be. As a result, they are blinding the second beholders by devaluing their products, leaving these consumers to conclude that the default “real value” is the lowest price.

No, I’m not getting all philosophical on you. Or maybe I am, if you’re able to fully understand the magnitude of what I’m about to serve up. It’s an enormous message for all businesses and, by extension, our economy as well.

It’s about the real, universal, global and all-encompassing definition of value, not just for the consumer, but also how you define it and hold it for your products, services, business and, indeed, your life.

For starters, before I take on the task of defining value and explaining why its creators and consumers are both blind to any common understanding of what it actually is, I submit that the collective “we” have been marking down value for a long time. The devaluation of value seems to be accelerating, particularly with the explosion of online businesses that don’t yet make a profit, relying on waves of funding and price promoting to stay afloat. This business model simply exacerbates the “marking down” syndrome. And this fragile model is also exacerbated by ongoing overcapacity throughout our economy, in which price promoting and endless methods of discounting become “weapons of necessity.” The end of this vicious cycle, of course, is worthlessness—AKA, zero value.

[Read more…]

Retailers and Wholesalers: Yesterday’s Fish Wrap

Direct_to_consumerThe retail and wholesale business models, separately and in conjunction with each other, are collapsing. Along with their demise, the actual terms, retail and wholesale, will literally cease to exist. In fact, as I write this article, major traditional wholesale brands such as The North Face, Timberland and other VF Corporation brands, along with PVH brands, Calvin Klein and Tommy Hilfiger, among many other giant wholesale brands, are achieving faster and more profitable growth in what they are referring to as their DTC (direct to consumer, including e-commerce) business, than through their traditional wholesale to retail to consumer model. Essentially the DTC model that these wholesale brands are adopting is simply the branded apparel specialty retail model that was launched by the Gap, Esprit and other brands in the 1960s. A phrase often used to describe the model is “the brand on the door is the brand in the store.” Likewise, and to some degree in response to their branded wholesale vendors’ accelerating focus on the DTC model, traditional retailers — from Nordstrom and Macy’s to Walmart –- and across all retail sectors, will be forced to transform their business models to better control and accelerate their own brands’ direct engagement with consumers. In fact, Nordstrom and Macy’s, to cite two examples, are proactively beginning to transform their models. [Read more…]

Amazon Finally Gets It: The Next Big Thing For All Pure Digital Players

amazon_openingAmazon’s announcement of its first physical store opening on Manhattan’s 34th Street is not a surprise to me, as I predicted it four years ago in the first edition of my co-authored book, The New Rules of Retail, published in 2010.

The logic was the same then as it is now.  Amazon has a huge database, estimated to be larger than the Pentagon’s — and they know how to use it. The data provide them with laser-sharp knowledge, such as what Jane Doe — who is married with two kids and a dog and is living on the east side of Manhattan (or anywhere in particular) — is eating for breakfast; what brand of jeans she wears; the charities she gives to; the music she likes; and so forth. Therefore, as Amazon rolls out its stores nationally, it can assort each location precisely with those items that are preferred by specific shoppers. The stores will also have screens for downloading information and selecting from Amazon’s massive inventory.

The personalized knowledge that Amazon continues to build on, and that all retailers are pursuing, is collected over time across all accessible consumer browsing and transactional points, and it’s game changing. It tracks consumer-shopping behavior and can be drilled down to individual profiles.  This is the big deal part of the buzz concept, Big Data, because it tells the retailer not only what brands the Jane Does on the East Side prefer, it can also indicate what kind of shopping experience, environment and service they expect. Most traditional retailers have not yet scratched the surface on big data analytics and its laser-like ability to localize, even personalize the shopping experience. It will be interesting to see how Amazon uses its analytical advantage in this area. [Read more…]

Sears: Nothing Left But its Past

Lampert_Sears_logoEddie “fast buck” Lampert is squeezing the proverbial turnip for more cash — as the musicians aboard the sinking “Titanic” are now truly playing “Nearer My God to Thee.” The cash he’s squeezing out is his own, in the form of a $400 million loan from his hedge fund, ESL Holdings. And regardless of his sinking ship, he’s got a life saver in the form of a healthy interest rate and a loan secured by valuable real estate. So “abracadabra Eddie” keeps the ship afloat. For now.

Unfortunately the music is about to end, and as he continues to sell off the “deck chairs” (read: assets), Sears and its bleeding sister, Kmart, will finally sink into the briny. Some experts predict this will happen by 2016. Regardless of the financial predictions, these two retail brands are “dead men walking” as I write. [Read more…]

The Forecast: Share Wars For Rest of 2014

RL_Blog_9-10-14Forget about all of the holiday projections soon to be bandied about by the legions of economists, analysts, pundits, experts and faux experts. This is the one you can take to the bank, and it comes from none other than Macy’s CEO Terry Lundgren. Crisply, clearly and without hesitation, he nailed it at his presentation at the Goldman Sachs Annual Retail Conference.

“The rebound that we were all expecting in this year hasn’t happened. The consumer has not bounced back with the confidence that we were all looking for. And so the performance I think we had in the second quarter, and we expect to have in the second half, is going to be a continuation of what we’ve been able to do over the last several years — and that is to capture market share and get the most out of the consumers that are in our stores.”

In other words, folks, there will be no overall market growth this holiday season; only share wars in which the great retailers will steal share from the not-so-great, resulting in a zero-sum game. So, here you have it, The Robin Report official holiday projection: Zero Percent Growth. [Read more…]

Is Alibaba Really Worth It?

alibaba_newOn the verge of becoming the biggest initial public offering in US history, one has to wonder if it’s really worth the $187 billion some analysts are projecting. As we witness Jack Ma, former schoolteacher and founder of Alibaba, strut across a stage portraying himself as Jeff Bezos and Steve Jobs combined, at least he’s talking the talk. Walking the walk, as we all know, is a horse of a different color.

And to that point, off stage he’s been on a wandering and random acquisition binge, making some 30 investments since the beginning of the year, worth close to $7 billion. Whether or not he was just trying to find stuff to invest all of the cash gushing through the business, the deals he has made seem highly questionable. [Read more…]

Apple Addicts Still Mainline Steve Jobs

X Japan Wax Figure UnveilingExcerpted from the New, New Rules of Retail
By Robin Lewis and Michael Dart

On January 9, 2007, on a big stage at the Macworld convention at the Moscone Center in San Francisco, Steve Jobs unveiled the first iPhone. With the already unprecedented cult following of Apple—and for that matter, of Jobs himself—this would be the first of many launches that would further fuel one of the most powerful brand-consumer connections ever.

This unveiling, of course, was merely the warm-up. Steve Jobs’ grandly staged presentation would trigger an intense anticipation among Apple “addicts” that would be satisfied only by the actual sales release of the iPhone itself.

This would happen at 6:00 PM local time on June 29, 2007, as the doors opened at Apple Stores nationwide to welcome hundreds of cult followers anticipating their fix, so to speak. Some media sources at the time were dubbing the iPhone the “Jesus phone.” In fact, in New York City the line started forming twelve hours before Apple’s flagship store opened and ended up winding around two city blocks, or roughly a quarter mile, with more than a thousand avid cultists in it. Some had even camped out overnight. Obviously the Apple addicts had learned that if they wanted the new phone, they had better be present when that door opened, or be forced to wait for weeks.

Apple’s connection with its consumers has gone way beyond the simply emotional. It has succeeded by actually connecting with their minds. In our updated second edition of The New Rules of Retail, released on August 12, 2014, we called this neurological connectivity. [Read more…]