Goldman Sachs

Controlled Chaos: An Industry on Edge

rr_retail-chaos_finalComing out of the Goldman Sachs Annual Retail Conference last week, I had a very uneasy feeling (other than the fact that Goldman once again delivered a first class conference). As I sat through each presentation, I searched for the big message, looking for the driving points that would provide a clear picture of what might be around the corner. The picture that came to my mind was not pretty.

First of all, with a few exceptions, the overall conference was “low-energy,” to use a current political analogy. The terms “consumer malaise” and “cautious” best captured the tone and mood. And after filtering the major drivers, I felt there was a sense of chaos, not out in the open or on the surface, but hidden under cautiously hopeful presentations. And the chaos is being held under control by all sectors of the industry, still struggling with the dynamics of the technology-driven transformation that they must go through in order to just survive.

Being cautious in a consumer-malaise environment drives better-controlled inventory management and reduction, store closures and smaller footprints, all of which were common threads throughout the conference. Mall closures and re-purposing retail space were also discussed on one of the panels. In fact, an executive from General Growth Properties was audacious enough to say, (and I paraphrase), “…rather than saying we’re over-stored, I say we’re under-demolished.” Of course he wasn’t referring to the mainly A-level GGP malls. He went on to say that 30 percent of all retail square footage should be demolished. Since there are 24 square feet of retail space per capita, it would be reduced to 16, still substantially more than in the UK, with about three.

Another variable driving these right-sizing efforts is the rapid shift to e-commerce, although its final market share is impossible to predict. So while the digital shift is underway, traditional retailers can only react. The result is a chaotic mix of right-sizing, while at the same time, perfecting the very complex omnichannel model. Add to all this, the disruption of an incalculable number of startup online retail businesses who are being zealously funded and, amazingly, not required to make money for an indefinite length of time. This fantasy market model just adds more chaos as the startups chip away an inestimable share of market. Who’s the winner? Amazon continues to gobble up everyone else.

So let’s go back to the over-stored or under-demolished retail industry that continues to add net square footage, and this includes the unknown equivalent of online square footage. Right off the bat, to state the obvious, the consumer has more power of selection than ever, which when technologically enhanced, drives price transparency, which in turn, absolutely strips retailers of pricing power. In this dysfunctional closed loop, the path of least resistance to simply maintain share, then becomes the race to the bottom in an unwinnable pricing war.

And, what is one of the newest forms of discounting? Outlet stores are opening like crazy. So what does this contribute to the health of the industry? It adds to the over-stored, under-demolished retail square footage, while devaluing the brands’ image over time. How stupidly chaotic is that? How can any retailer quantifiably know how much footage to add or eliminate, both online and off, in a precarious economy, in which consumption drives 70 percent of GDP? And worse, we are living in a false economic balance because there is still more supply than demand warrants. Even worse, they don’t really know if or when consumers will snap out of their malaise.

If I were a retailer in the middle of this mind-boggling transformation, I would be on edge, 24/7.

And here’s the bottom line – seriously, the real financial bottom line. You can hear it from these industry leaders even when they are not saying it: They have multi-million-dollar capital investments that they must pump into technology and the omnichannel process and model just to survive, while their prices and margins keep declining. And they know that cost cutting can only go so far to offset these declines.

Regarding the million-dollar decisions on technology investments? There are many to choose from, but selecting the right one is a complicated process. The implicit risk is huge that another, better technology will be created tomorrow. And let’s face it. Most of today’s retail leaders have not been schooled in or even trained in technology. It would freak me out, and I know I am not alone.

Furthermore, these retailers must continue to show growth in both the top and bottom line, while Amazon and startup friends do not. And finally, and not just incidentally, retail leaders must give themselves a cultural transplant, to reposition their entire enterprises to satisfy the new demands of the millennial generation.

This situation is chaotic at best, and not sustainable at worst.

So, while I did read between a lot of the lines at the conference, and had to measure some of the hopeful, yet “cautious” remarks I heard, as I said, my big picture take away was not pretty. In fact, one might describe it as pretty ugly.

The industry is at a turning point, and it’s going to take all of us working smarter and together to reinvent, reengineer and re-ignite what used to be a noble and honorable profession: to offer people choice and a promise for a better and even happier life, and to make employees proud of the work they contribute. Let’s see how this controlled chaos plays out.

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