A Tale of Two Cities
Shamelessly taking a cue from the opening lines of Charles Dickens’ “A Tale of Two Cities,” 2019 was the best of times for some retailers, the worst of times for others. Here are some salient comments, obviously my own, about what happened last year.
Discounters Rule the Roost
This was generally a good year for discounters Walmart and Target and the dollar stores beneath them in price. Add to the mix, there was good news throughout the outlet channel. All showed positive comparable store sales throughout the year signifying successful strategies in servicing increasingly value-oriented consumers. The flight to value is certainly not new but appears to be accelerating as lower and middle-class Americans find themselves under enormous sustained financial pressure despite record low unemployment but slowly rising wages. It’s increasingly apparent that Trump’s tax cuts haven’t really trickled down to the mass economy while insipid tariff-driven price inflation is now upon us.
- Walmart, which demonstrated impressive ongoing sales growth in brick-and-mortar stores and online, appears to have recognized the unsustainability of the levels of investments they’ve made over the last few years in ecommerce and have now begun to reign things in. They have, in fact, started to sell off some of the properties they acquired that unsurprisingly added no value to their brand. Jet.com has mostly disappeared from view and it’s anyone’s guess as to whether the company’s $16.7 billion acquisition of Flipkart in India will pan out or become yet another international disaster for the company.
- Target had an important breakout year last year, notwithstanding their surprisingly tepid November and December. A focus on new and improved assortments, investment in store conditions and presentation along with ecommerce features and benefits, all delivered positive results throughout the year. One caveat, however, is that Target is consistently driving sales through High/Low promotional pricing throughout the store – something that if not well managed will become unsustainable as it became for Mervyns — and now has seemingly become for Macy’s, Kohl’s and JC Penney.
- The dollar stores – Dollar General and Dollar Tree have been opening and continue to open thousands of new stores. Business has been consistently good reflecting the appeal these stores have for customers who see no stigma in doing business with them as they may have in the past. Dollar stores rule!
Simply Said: Off Price Is Unstoppable
Outlet Stores TJX, Ross Stores, Burlington, The Nordstrom Rack and Macy’s Back Stage, among others, all had banner years, mostly despite the ecommerce juggernaut that continues to roil the industry.
The Middle Market Continues to Be a No-Man’s Land
On the bad news side of 2019, middle-market legacy retailing remained a killing ground for the likes of Macy’s, Kohls, JC Penney.
- Macy’s made an ongoing series of pronouncements throughout last year with regard to the company’s optimistic forward-looking strategy. Virtually none of those efforts meaningfully influenced the company’s performance. Yes, there was some improvement in comparable-store sales in the Holiday Quarter, but beating the Street’s negative forecast is just one piece of a large-scale turnaround strategy.
Parenthetically I would have to say that declining or negative comparable store sales can actually be emblematic of a turnaround but only if it accompanies offsetting and striking improvements in gross margin and SG&A expenses. None of this was evident at Macy’s last year. I continue to ask the question, “Just what does Macy’s stand for and how does it differentiate itself from its decades-long reliance on the same old same old promotions and unsustainable vendor support?” Short answer, as far as I can see, “Nothing and no way.” In my opinion, BackStage is a toxic presence inside the house. Macys.com is still not a particularly compelling customer experience despite its sales volume. Closing 29 or so stores in 2020 is just a fraction of what will undoubtedly be necessary and is probably off by a factor of 10 or more. I believe Macy’s marketing looks just as it has looked over the past 25 years with endless One Day Sales (and other promotions of its ilk) alongside a sprinkling of vendor paid ads and television spots. Maybe Macy’s should consider the enormous value of its real estate and the television rights of the July 4th Fireworks Show and Thanksgiving Parade as an alternative to traditional, legacy retailing and call it a day.
- Much was made of Kohl’s decision to devote floor space to grocery and its deal with Amazon to serve as a returns center. With regard to the company’s Amazon collaboration, the company’s CEO continues to make strong but non-specific references to increases in traffic at Kohls from customers using the store as a return site and the conversion of many of those customers to incremental Kohl’s shoppers. These positive comments fly completely in the face of Kohls’s catastrophic holiday sales. The reality of Kohl’s recent 10 -15 years of modest positive performance flies in the face of the extraordinary collapse of the Sears apparel and accessories businesses, the unnecessary implosion at JC Penney and Macy’s loss of low end and mid-market volume. Sears is virtually gone. JC Penney is a shadow of its former self and Macy’s is now back in the low-end business via its Backstage outlet strategy. Add to that, a Kohl’s portfolio of once-prized, off-mall freestanding stores that were seen by customers as a highly convenient alternative to the congestion at the mall, now don’t appear to have that same appeal. Hundreds of these malls that Kohl’s is in close proximity to are now in decline. The well-documented drop off in traffic that these malls are experiencing is now plaguing Kohl’s as well. Customers who are increasingly shunning the mall are not visiting a nearby Kohl’s as they have done in the past. Finally, High-Low brand promotion, the very lifeblood of Kohls brand equity has increasingly become less compelling in the face of EDLP-driven ecommerce marketing. My question at hand, “Is Kohl’s merely in decline or is it heading into an eventual death spiral?” I don’t know, but I believe that the company’s current marketing rhetoric just isn’t good enough to ensure that blue skies will be out there anytime soon.
James Cash Penney Continues to Spin in His Grave
JC Penney just reported another terribly disheartening quarter. At face value, the company’s new CEO appears to be saying and doing the right things, as well as assembling the right leadership team. But is it all for naught? Is it too little too late? My question: “Is the miserable performance of the hundreds of B and C malls killing JC Penney, or is JC Penney killing those malls in its own right?” My persistent question remains, “Just what does JC Penney stand for?” What happened to the millions of their former customers who in the past found great value in acquiring billions of dollars of private-label merchandise? Where have they gone since the mindless upheaval that the Apple Guy wrought in 2012-2013? Those customers clearly found somewhere else to shop. Can JC Penney ever get them back? At the end of the day, JC Penney has too much debt, too little time and too little to offer to survive much longer.
Sears: The Headless Horseman Likely Faces Its Last Year in Existence
With fewer than 200 stores soon to be left in operation, TransformCo is likely to be GoneCo in 2020. Shame on the bankruptcy judge for falling for the company’s pledge to protect stores and jobs if allowed to emerge from Chapter 11. This 20-year miserable saga of greed, avarice and incompetence at Sears (and Kmart) is finally about to end.
With fewer than 200 Sears stores left in operation, TransformCo is likely to be GoneCo in 2020. Shame on the bankruptcy judge for falling for the company’s pledge to protect stores and jobs if allowed to emerge from Chapter 11.
The Tyranny of the Stub
Once upon a time there were two really successful specialty retailers who brilliantly created winning subsidiary businesses. Those business successes eventually overtook the performance of their parents. So, in the name of value preservation, their owners have now sought to hive off these subsidiaries. But what happens to the stub? If Old Navy and Madewell successfully leave their motherships what happens to GAP and J Crew? Well, in my opinion, the stubs are likely to die.
Nordstrom: Survivor or What?
Nordstrom is arguably the last of the legitimate U.S. department stores. Much fanfare was attached to the company’s opening this fall of its New York City flagship. I was quoted very briefly in a CBS Sunday Morning segment saying, “New York doesn’t need another department store, and the United States doesn’t need another department store.” I stand by that view. The facts support my opinion: Nordstrom Rack continues to grow far more rapidly than the Nordstrom Store itself, while at the same time, nordstrom.com now drives more than 30 percent of the company’s business. Fortunately, virtually all of Nordstrom’s stores are in perfectly viable locations, but if you do the math, The Rack will overrun the Stores in volume and ecommerce will render the stores to become increasingly unproductive selling spaces. Sure, BOPIS is all well and good, but only if customers also consistently buy something while in the store to pick up their online orders. I think Nordstrom is eventually going to be at a crossroads that they don’t appear to want to talk about, at least not yet.
HBC: Another Retail House of Cards
Built upon excess leverage and foolish investments in ecommerce, outlet and European department store retailing, the company now appears to be headed to privatization. If successful, don’t be surprised if it tries again to acquire or merge with that other beleaguered debt-laden luxury house, Neiman Marcus. Nothing like another attempt to turn a sow’s ear into a silk purse. When will they ever learn?
And Then There’s Amazon
Jeff Bezos has said to his organization, “Eventually Amazon will fail.” Well, that didn’t happen last year and it is inconceivable that it will happen any time soon. The company hasn’t yet reported its sales (or profitability), but when it does, it will invariably be another incredible year for the company that Jeff built. Once again, Hail Amazon. Great assortments. Great prices, Great customer benefits, Great customer service. Amazon has redefined retailing and the very nature of the retail marketplace and continues to be a prime disruptor everywhere they venture forth. What more needs be said?
Note: Just before this piece was due to be published, Amazon released its holiday quarter performance which was nothing short of stunning. As reported by Reuters, “Net sales rose 21 percent to $87.4 billion while net income rose 8 percent to $3.3 billion – each over $1 billion more than analysts had expected.” In addition, AWS revenue and operating margins were up and maybe most tellingly, Amazon revealed that Prime membership is now at 150 million, 50 percent more than it was two years ago. It certainly looks like one-day shipping in concert with Prime is a winning strategy indeed.
So, What’s a Legacy Retailer to Do in this Age of Endless Disruption?
The march forward in technology, market access and market transparency is not going to abate. The “good old days,” if they ever were really that good, are gone forever. To survive, a legacy retailer must create differentiated and defensible assortments of merchandise and services, offered at appropriate prices, in a setting that is attractive and compelling. Stores must be well located, properly sized, wonderfully presented — and at the end of the day, always neat, clean, and friendly. Store and website presentation must become one and the same. Great customer service is really and truly the price of entry, not a premium feature. As for e-commerce, the customer has come to expect to have it all their way. Fast and free inbound and return shipping, whether to homes, offices or pick up in stores, represent a check box that every legacy retailer must deliver against.