The Great Retail Charade – Diving Into an Economic Black Hole

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\"RR_Black_hole\"Charade is a nice way of describing what I believe to be the biggest issue in mainstream retailing today. The charade? “Spinmeistering,” including many of the top executives across all retail sectors — Nordstrom’s, HBC, (Saks Off Fifth and Lord & Taylor), Macy’s, Bloomingdale’s, Kohl’s, J Crew — and others believe they have a great growth strategy by accelerating the opening of off-price stores in pursuit of the younger value customer, who they claim will eventually graduate to their full-price stores. If you believe this, then I have a bridge in my hometown I’d like to sell you. And let’s be clear, these off-price stores … are not. At best, they are outlet stores. At worst, I would describe them as discount stores — because that is, in reality, what they are. For example, the consumer sees Saks connected to Off Fifth on the nameplate and they believe they are getting Saks Fifth Avenue goods at discounted prices, period. Over time as their discount stores outnumber their full-price stores (which is already the case for some retailers); consumers will perceive the flagship brand and the discount store brand to be one and the same. Sadly, they will happily continue to shop in the brand’s discount store where they can get it cheaper. The charade becomes the reality.

Retailers’ spin on this path to positive growth is a scary charade because it’s really a strategy of desperation. All retailers are desperate to find growth in a slow-to-no-growth, over-stored economy. For the public companies tethered to Wall Street, even more so. Because of the over-supply against tepid demand, requiring mind-numbing battles to capture share of a static market, it doesn’t take a Ben Carson to understand that the two paths of least resistance for growth are acquiring it or discounting. And discounting in all of its forms (including opening discount stores) is faster and easier.

There is now going to be no end to discounting because all the players must dance as long as the music is playing. And it will ultimately drag everything down with it, including brand image, potentially quality and essentially the value of all things. This will be at the expense of consumers; the very people retailers should be focused on and trying to win over through better and more innovative real value.

Into an Economic Black Hole

Where does it end? It ends where it started. Devaluation turns into deflation, turns into recession. And the recent Great Recession is where it all started. Instead of allowing free market, and Darwinism to work in 2008, harshly shedding the non-productive excess created in the “bubbles,” the Fed decided to avoid a depression by printing money and flooding the economy with it. (Refer to: Land of Opportunity And Barren Wasteland) This quantitative easing, or whatever other veiled terms economists use, was supposed to stimulate the economy by making cheap capital (close to zero interest rates) available to businesses. These companies would then, theoretically, invest in growth (on the supply side): new plants, equipment, stores, services, etc.; thus, more jobs and higher wages, which in turn would get consumers to buy, buy, and buy more. As consumption makes up roughly 70 percent of GDP, according to this theoretical master plan the economy would bounce back.

The theory didn’t work. In my opinion, forget what the current reported growth and lower unemployment numbers say. I believe most of our economy is still acting recessionary. The theory didn’t work because the “free money” was not used by corporate America to invest in organically building larger businesses and hiring more workers. Why? They simply could not see enough increased consumption on the demand side to warrant the investment in expansion.

Ironically, because of the conundrum of needing to deliver growth when there is little-to-no demand, corporate America is accelerating its use of “free money” to acquire growth. Unfortunately, in this environment, this does not drive any new demand and consumption or higher wages, it just provides the acquiring company a larger share of a pie that’s shrinking. Worse, rather than adding jobs, consolidations always eliminate the jobs that overlap between the merged companies, in addition to other cost-cutting economies of scale. This is not real growth.

Another investment irony is that we live in a crazy tech culture with billions of dollars rewarding startups. Amazon is the standard bearer for losing money to juice top line growth, expecting profits somewhere in the distant future when the business reaches some vague level of critical mass. Investors will continue to throw (cheap) money at Amazon and its wannabes until they do. Of course, eight out of ten of them never will, but while they’re burning through the investors’ cash, and giving away whatever it is they are selling, they are lowering all ships and simply exacerbating the discounting madness.

The Biggest Irony of All

This race to the bottom (to use my over-used phrase) continues. We are pumping and pushing more and more stuff out into a marketplace in which there’s not enough demand to sop it all up; so the cutthroat discounting (in all of its forms) continues. The great “value strategy” charade is that retailers actually believe discounting to be a whole new market for them. What they are really succumbing to is a competition for cheap, cheaper and cheapest, when they should be pursuing good, better and best.

At the end of the (not so pretty) day, retailers and brands will get exactly what they are asking for: nothing begets nothing. At some threshold on the way to the bottom “I got a great value,” simply becomes “I got this cheap, “and that will define their brands. There is no value in that proposition. There never was.



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