Finance and Economics, Robin’s Blog

Happy New Year!

RLewis-NewYearNot Much Happy or New About It, Except…

This Holiday Season, Santa’s sleigh was so overstuffed that he was able to leave a lot of nearly-free, and even-free gifts under the trees of our nation’s homes. So Daddy, Mommy and the kids were pretty happy. But following his rounds to all those happy homes, he still had so much stuff in his sleigh that it crashed. Santa survived with a few cuts and bruises, but he was unable to unload his second round to the nation’s retailers, all of whom were hoping to further discount their already-discounted unsold merchandise at their outlet stores. Little did they know that he was going to be dropping coal down their chimneys instead of leaving a little something under their trees, like profits. Sugarplums didn’t dance in their heads this year.

After the giftwrap and ribbon made it to the recycling bin, what most retailers got was a huge New Year’s Eve hangover. And if it were simply a headache, a couple of Advil might have worked. But this hangover was more like a migraine on steroids. Metaphorically, all the stuff (read inventory) that went down with Santa’s sleigh ended up back with the retailers. Now they have to figure out how to get rid of it all. Gee, will they default to even more egregious price slashing? And hey, how will they finagle their financials to keep Wall Street happy?

Bottom line (pun intended), retailers did their best in spreading cheer among consumers over the past year. But in doing so, they will enter 2016 worse off than their entry into 2015, spreading less cheer for themselves, if not downright misery. Holiday verdict: There is not much happy or new about this New Year as retailers face the challenge of bottom line growth … except for those that fundamentally transform their strategies and the way they do business.

If you want to stop reading this article right now because it depresses you, I totally understand. But if you have the stomach to digest the ongoing realities facing the industry, then it behooves you to read on. If you understand these realities and adapt to them, you will be able to transform your business to succeed and win.

Three New Models

Having said there is not much new about this New Year, I’m referring to the negative issues and challenges, both macro and micro, that have haunted retailers’ growth for over a quarter century. They are not about to go away in 2016, and this article will once again raise those issues.

However, what is once again new (and even newer) this year, and keeps leapfrogging itself annually since the lid blew off in Silicon Valley around 2005 when the world of technology went on steroids, is the fact that the multitude of new technology innovations spewing forth almost daily is now in the hands of the largest and most powerful emerging consumer group in U.S. history: the Millennials.

They know how to use these new tools. Hey, they created them. As consumers, their use of them is driving major changes to traditional retail models. And, as entrepreneurs, they are developing these tools to create a landscape of new business models so disruptive that they are replacing entire industries.

So while the old world plods along against all of the old headwinds, trying hard to evolve their models and incorporate the new technologies to serve this tech-empowered new consumer, the same consumer, cum entrepreneur, is rapidly finding ways to wipe out the old paradigms and change the world. The old world is evolving slowly. The new world revolution is happening at warp speed. And to make the world more complex, these entrepreneurs are being funded to get big fast by investors who know that 80 to 90 percent of the new models will fail. Investors know that they will not make any money until their entrepreneurs reach some vague definition of scale. God knows when that will be.

To defer the apocalypse, we have to engineer three major retail models.

  1. The first will be the old world winners that will successfully transition into the new world by embracing and leveraging technology to serve consumers in ways they demand to be served. We’ve seen iconic brands including Burberry’s, Macy’s, Nordstrom, Walmart, and Target evolving their current models.
  2. The second model represents retailers that got big fast and finally started to make money, including Amazon, Warby Parker, RealReal, RentTheRunway, and any number of other retail concepts based on sharing, auctioning, swapping, renting, etc.
  3. Then there is the third model that is really changing the world. These are the disrupters and game changers transforming entire industries: think Uber, Airbnb, and Instacart.

The most profound commonality among these three winning models is that they all ironically represent a “back to the future” concept. Think about the first commercial transactions that took place centuries ago. One person created something of value and sold it to another person. Simply, this type of control over creation, presentation and distribution, essentially control over one’s entire “value chain” and directly connecting with one’s consumer, will be the characteristic common among all three sectors. Technology is making this possible and will reverse the 20th century paradigm of centralization, consolidation and massification into a 21st century long tail move to decentralization, de-massification and personalization. The new transactional landscape will be comprised of an infinite number of finite market niches being served by an infinite number of finite brands and retailers.

In the Meantime

Lifting you out of your depression with some promise for a wonderful changed world, which I hope I will live to see, we need to examine the old headwinds that are still blowing against this industry. These are serious issues and challenges that even the newly emerging entrepreneurs must also address if they are to succeed, no matter how much technology they’re armed with.

On a geo-political level, we cannot ignore terrorism and the chaos, mayhem and fear it has caused around the world. We cannot yet anticipate the ultimate effect it will have on global consumer confidence and shopping behavior, and how long it might last. Will we have TSA type screening in every store and mall? Will police be patrolling every floor? Will consumers eschew shopping in malls and stores for e-commerce?

Another uncertainty is the global economic situation. A clearly visible up-ramp for growth seems non-existent anywhere in the world. Stuck in what economists call secular stagnation, Europe continues to teeter on the edge of recession. Japan never got out of it. China manages their economy to bumble forward trying to institute a consumption driven economy. Australia, Africa, South America and countries that are exporting their resources to fuel the rest of the world’s infrastructure and industrial growth are stagnating, along with their customers. And the U.S. is not in such great shape either. Regardless of all the rhetoric one hears, GDP growth at 2-2.5 percent puts us in the secular stagnation camp. As I’ve said a million times, since consumption comprises 70 percent of GDP, when demand dries up, GDP dries up. And demand is just plain tepid across almost all sectors.

A Retail Bubble That Never Pops? Impossible

Let’s face the facts. In the face of tepid to zero demand, we continue to pump more retail space into a bubble that so far refuses to pop. What are we thinking? Since 1995, the number of shopping centers in the U.S. grew by more than 23 percent and GLA (total gross leasable area) almost 30 percent, while the population grew less than 14 percent. Do the math.

Currently there is close to 25 square feet of space per capita (roughly 50 square feet if small shopping centers and independent retailers are included). In contrast, Europe has about 2.5 square feet per capita.

And of course, all of those buildings and stores are not empty. So if the U.S. is over-stored, it is also way over-stuffed. And, by the way, this physical space is measurable. But how are we to translate hundreds of millions of e-commerce sites into retail square feet? It can’t be done. Bubble, bubble, toil and trouble.

Economics 101 instructs us that in free-market Capitalism, supply and demand will always be in a state of equilibrium. Well, free-market dynamics are not working any longer. Although each year there are mall and store closings, the elimination of retail space, and occasionally websites, is not occurring as rapidly as the emergence of new and replacement space/sites entering the marketplace. The primary, underlying reason for this condition, and why it will continue ad infinitum, is that the growth expectations/demands of shareholders, independent owners and Wall Street are higher than the growth of the real economy. This has been the case for the last 25 years. So as businesses continue to operate in this delusional reality, I offer a cautionary list of some of the more self-deluding tactical decisions that businesses typically make for quick (or any) growth. Self-deluding, because in the aggregate, these decisions simply lower all ships by exacerbating the ongoing and long-term increase of over-capacity.

  • Every time a retailer opens a new door it’s an immediate new revenue stream for growth. So why not?
  • There are financial barriers to closing under performing stores, not the least of which are penalties for breaking lease covenants.
  • Realtors’ willingness to incentivize (cut deals) for retailers enables them to stay in business.
  • As long as an under performing door in a chain is “breathing,” it may be financially less costly to keep it open than to close it.
  • Productivity of under performing doors and/or space is not always easily or measurably identified.
  • Many under performing malls are repurposing or relocating as neighborhood, lifestyle, shopping villages. This is not a bad idea. However, it simply moves the space to another area without reducing the overall footprint.
  • Outlet store shopping centers are growing at a rapid pace. Traditional full line retailers are opening more outlets than full line stores because they provide greater growth and profitability.
  • Off-price retailers are rapidly expanding.
  • Just as there is too much stuff sloshing around the globe, so, too, there’s too much capital in pursuit of investing in even more capacity and/or propping  up “losers” (iconic brands that investors believe can be fixed). This is sort of like the Fed and “Government  Motors” (the bailout of General Motors) and, of course, Sears and other losing retailers who continue to get bailed out.
  • The liberal and strategic use (or misuse) of bankruptcy during which businesses shed debt, renegotiate contracts, and emerge as new low cost competitors, helps perpetuate overcapacity.
  • There is a continuous stream of foreign brands and retailers entering the U.S. marketplace believing that “if you build it, they will come.” They totally misunderstand the most congested and complex marketplace in the world.
  • Finally, of course, the unrelenting acceleration of e-commerce, with virtually no barriers to entry, including financial, is building incomprehensible overcapacity. This is an unprecedented phenomenon and there are no measures that indicate these enormous additions to the supply side are being offset by  corresponding declines in brick-and-mortar and other retail sectors.
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Path of Least Resistance to Share Wars

So the state of the industry is one of an ever-inflating retail space combined with an e-commerce bubble masterminded by retailers trying to gin up enough consumer demand to buy it all. All of this futile effort is occurring in an economy in which consumers’ wallets are barely growing at best, and shrinking at worst. Competitors must battle each other for enough of a share of this rather stagnant market (growing 2-3 percent) to grow their own businesses at a high single, or low double-digit rate. And they must do so profitably. How is this possible?

This growing conundrum of increasing overcapacity is now exploding, fueled by insane price promoting, all manner of discounting (including major brands accelerating outlet and off-price store openings), and diffusion and sub-branding among the luxury players. And this is exacerbated by the daily onslaught of new e-commerce businesses, many of which do not make any profits as they tap into multiple rounds of funding, thus affording them the advantage of setting prices below costs to capture share of market.

So discounting, which used to be the tactical weapon of choice, is now the strategic weapon of necessity. In this race to the bottom, where exactly is the bottom? Is it when there are no more costs that can be cut? When margins are eroded to the point at which retailers are barely able to stay in business? And worse, does that rock-bottom price become the consumer’s new and much lower measure of the value of your brand or store? Indeed, the share wars metaphor is an understatement.

Consumer Power, Shifts and Expectations

While tearing your hair out trying to figure out how to escape this sucking vortex, there are five major trends that add to the complexity of staying one step ahead. We’ve covered them before,
and they are worth reiterating.

  1. Widening Income Gap – This gap is expected to continue and bodes well for luxury, discounters, off-pricers and outlet sectors.
  2. Urban Migration – More than 80 percent of the population lives in cities and it’s growing. This drives small, neighborhood store strategies like Walmart Express, CityTarget, Bloomingdale’s and many others as well as the accelerating growth of neighborhood lifestyle shopping villages and small independent shops in urban areas.
  3. Population Shift – Millennials will replace the Boomers. By 2050, Millennials, all 95 million of them, will comprise 75 percent of the workforce. The Next Gen is expected to account for 30-40 percent of all retail sales by 2020. Boomers are retiring and downsizing their lives, spending more on travel, leisure, entertainment, health and welfare than on stuff. Both of these shifts will drive key strategic planning.
  4. Racial and Ethnic Diversification – In the U.S., the white population will shrink 23 percent by 2050; blacks will increase by 11 percent; Asians by 74 percent; and Hispanics by 57 percent. This demographic shift will drive huge strategic and structural changes.
  5. Consumers Are the New POS – With every mall, store and brand in the world sitting comfortably in consumers’ pockets (smartphones), all businesses must now be digitally and physically accessible to each consumer whenever, wherever, how and how often they so desire, and only if they have granted you permission to enter their space. Consumers wield the power of overabundance of choice, now on technological steroids. They have unlimited and instantaneous access to whatever their hearts desire, a key tap away, or in another store across the street. Consumers will continue to call the shots and their personal power adds even more fuel to the retail fire.

How to Win In Share Wars

Just as swimmers are advised to swim sideways when being pulled out to sea by a rip tide, retailers can move sideways out of the sucking vortex. Take a strategic pause and go back to “101” basics. Since the consumer is in the center of the proverbial universe, reigning supremely omnipotent, you can thrive by answering the following six questions — and then, of course, implementing them. Hint: Technology and data science are key facilitators.

What is the unique, sustainable experience that I am creating or co-creating with my target consumer?

Best product/brand/service, best price, and immediate access are just the price of entry today.

How is this experience being increasingly personalized for each unique consumer?

Data science, technology and the Internet make this possible today.

Do I need to create consumer access to my brand, stores or website at multiple price points? If so, how?

Analytics and technology can determine how well consumers accept different tiers of credible value.

How do I increase the flow and rapidity of new product and experiences into every point of distribution?

Technology and data science can reduce cycle times and manage lean inventories with a more rapid flow.

The seamless integration and interchangeability of omnichannel can drive the right products and quantities to the right places (distribution point) at the right time (when, where and how often the consumer wants it).

Do I understand and connect with every community that is important to my target consumers, both online and off?

Does my brand, store, product or service understand and connect with the values of my consumers as well as their definition of the value of my offering? Data science and technology facilitate this kind of connection, development of community and customer insight.

How can I utilize technology to create a better experience for the consumer both online and off?

This starts with technology driving speed, efficiencies and productivity in the back end of the value chain. Data science manages the precise, timely distribution into each distribution point. And smartphones, apps, and technological devices delight the consumer and elevate the experience at the POS, both online and off.

These seemingly simple questions require sophisticated systemic answers and implementation. We need to look at our businesses holistically, understanding how systems-thinking provides awesome solutions. If you can nail these questions with precise and clear answers, create a playbook understandable throughout your organization, and have the systemic horsepower to roll out those strategies across your enterprise, then you will be the Jedi Knight blasting Darth Vader into oblivion. Your share wars will be over. And 2016 may be the portal for you to travel back to the future with businesses that are run on smart, sophisticated systems designed to enhance customers’ lives, strengthen the communities in which you do business and unleash innovation and imagination to surprise and delight.

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