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Retail’s Mid-Year Physical Exam

2018 has lived up to its billing. The year promised zaniness amid the industry-wide “crack-up,” and it has not disappointed. The last six months have raised as many questions as answers. It is appropriate that we now pause and pull our heads above water to take a closer look at the industry’s mid-year report card.

Required Annual Exam

Now that I am in my forties, an annual physical exam has become a rite of passage. Everything that can be checked is checked, everything that can be drawn is drawn and everything that can be brought up to scare the living sh*t out of me is brought up.

The retail industry deserves the same tongue-depressing, bedside humor that comes with a good physical exam – it too should have to turn its head and cough on demand as it ages.

So, to play my part, I looked back over everything I have written nationally and in my Omni Talk blog this past year, made note of the retailers most in the headlines, and put my stethoscope to the chest of each of them to assess their current state of health and prospects for longevity.

Like any good physician, I gave them each a diagnosis and prognosis, using a five-point scale that is meant to draw attention to their conditions, and, if necessary, to scare the living hell out of them too.

The scale is notated below, incredibly scientifically, as follows. Please note I deliberately used men because men need more objectifying, even undead men like Dracula.

  1. Bela Lugosi (famous for playing Dracula, aka the walking dead)
  2. Tom Cruise (he keeps trying, but just looks older and more botoxed regardless of how many stunts he does himself)
  3. Matt Damon (it could really go either way for him around the mid-section and the jowls)
  4. George Clooney (aging gracefully and his enthusiasm and curiosity keep him young)
  5. Brad Pitt (dude is 55 and still looks great)

All told, 10 “retailers” caught my eye more than any others at the start of 2018. Some are old (Walmart), some are turning the corner on middle age (Wayfair), some are up-and-coming, wet behind the ears adolescents, with their salad days still in front of them (Glossier), and some are modern-day Ponce de Leon’s, continually finding the fountain of youth (Amazon).

While many patients are clearly sick, the industry is nowhere near the hospice cries of the “apocalypse.” There is reason for optimism in both the retailers we know and in the new-world retailers we are just getting to know better.

Here then are retail’s 2018 mid-year physical exam results (in descending order of healthy prognosis):

Retail’s Mid-Year Exam Results

Kohl’s

Diagnosis – Patient acts much younger than its age. Addicted to plastic surgery and augmentation, but bad genes and general aging are inescapable.

Prognosis – 2 (Tom Cruise)

I hate to break it to you folks, but no one receives the dreaded “Bella Lugosi” prognosis in this piece. It is just too easy to label the likes of JCP and Sears as the walking dead and frankly you deserve more insight.

Instead patient numero uno on our list is Kohl’s, with a prognosis of 2.

I really want to buy into Kohl’s. I really do. Incoming CEO Michelle Gass appears to be making some bold moves – courting millennials with Amazon and Aldi partnerships, for example — but I still do not like how these strategies project ten years out from now.

Kohl’s does not offer the convenience play it once did for people that preferred not to go to shopping malls. E-commerce now offers a better solution in that arena. Grocery partnerships might feel like a way to get traffic, but other retailers have deployed this strategy and still struggled when times were normal, and soon the grocery business is going to be anything but normal. Direct-to-consumer grocery is about to heat up quickly (see Amazon, Walmart, and Kroger’s recent investment in Ocado).

The Amazon partnership is not enough for me either. Even if the idea works, it is super easy for others to emulate. Package and return drop-offs are already popping up with regularity across the nation.

So, Kohl’s is like Tom Cruise. Tom Cruise keeps botoxing and doing all his own stunts to dazzle us, but he just does not excite any of us like he once did. Sure, he may deliver a blockbuster again in the short-term, but his days as an action star are numbered.

I would love to feel differently, but I have to be authentic. And, I also hope that I am wrong.

Macy’s

Diagnosis – Patient is sick but thankfully following the doctor’s orders to a T.

Prognosis Grade – 2.5 (The in-between of Tom Cruise and Matt Damon – Keanu Reeves)

When I first sat down to pen this column, I was about a level 2 on Macy’s, but the last few months have buoyed my spirits. Despite Jeff Gennette’s lackluster speech at Shoptalk 2018 (his strategy sounded like it could have been written in 2012), there may be more to Gennette than meets the eye.

Therefore, Macy’s gets the prognosis of Keanu Reeves. Keanu is not Tom Cruise and definitely not Matt Damon. But, damnit, none of us would be surprised if Keanu were to have more than a few blockbusters on his hands down the road (Bill and Ted 3 anyone?). Plus, Keanu is still kind of we-don’t-know-why hot too.

So, like Keanu, Gennette might just pull it off.

Gennette’s recent moves, namely the acquisition of Story and, just recently, b8ta are the exact right moves for Macy’s. Story could bring experiential retailing to new heights on a national scale, something a mall anchor tenant like Macy’s desperately needs, and b8ta’s retail-as-a-service technology platform could make it easier for Macy’s to execute its Market @ Macy’s pop-up shop concepts within its stores. This last move could enable Macy’s to allow long-tail brands to bypass difficult integrations into its legacy IT architectures and therefore stand up new and rotating experiences within Macy’s stores quickly week in and week out.

But here’s the rub. Macy’s is still really big. The albatross around its neck could be its size and history – specifically its existing cultural, architectural, technological, and operational debt. Gennette is making the right moves, but can he actually turn the aircraft carrier around with the agility of a speedboat amid these turbulent times?

Macy’s Growth 50 initiative may not be enough. It could be too slow and incremental. Instead, the proof point will be when Macy’s attempts to molt itself – to take a store offline and to imagine a new retail concept, fresh from the ground up, and then molt its creation back into its existing store base over time.

Then and only then will I believe Macy’s has the right approach to turn what just recently was a slow-limping caterpillar into a butterfly more beautiful than the Macy’s we know today.

Digitally-Native Pure Plays

Diagnosis – Vigorous. Alive. Alert. A whole lifetime in front of them.

Prognosis – 3 (Good Will Hunting version of Matt Damon)

Several retailers fall into a similar category – Glossier, The RealReal, Instacart, and Wayfair – so I have lumped them together for efficiency. All four are digital pure plays and all have different business models. Only time will tell the survival rate for each of them.

First, Glossier. Glossier is the first penguin in the water on the new model of retailing, a brand that allows its customers to be its voice and expression of the brand. It’s a bottom up vs. top down branding approach. We should be long on them. Glossier’s future is bright.

Second, The RealReal. The resale market is hot, and The RealReal’s luxury consignment concept is even hotter. The RealReal has carved out a formidable niche against digital competition. Its business model requires human intervention (i.e. people to place a value on high-end products), and every sku it sells online or in store is unique, which takes the treasure hunt idea to an even greater extreme.

Third, Instacart. Instacart just keeps growing. Its valuation is now over $4B. Instacart plays the middle game, for now, as the third-party last-mile delivery provider for grocery, but over time the data Instacart will collect geographically on the habits of the American shopper could make them a formidable retailer in their own right or one hell of a valuable acquisition target.

Four, Wayfair. Wayfair has done well carving out a niche as the online specialist in furniture, but questions remain on Wayfair’s customer acquisition costs relative to customer retention and value. Meanwhile, Ikea continues to press forward into urban markets with transformative showroom concepts. Wayfair could get squeezed out over time if it does not build a brand with more soul and embark on a store strategy soon.

Walmart

Diagnosis – Unsinkable Molly Brown. Too big to fail. Pick your euphemism. Essentially the genetic composition of crazy Uncle Larry who keeps drinking, smoking, and eating bacon and cheese omelets every day and somehow keeps on ticking.

Prognosis – 3.5 (The spawn of genetically combined Matt Damon and George Clooney)

Walmart will be around for the long term. We just don’t know in what shape or form, kind of like the mental picture of what the petri-dish spawn of young Matt Damon and George Clooney would look like.

Walmart’s 2018 announcements were incessant and nauseating. Their press releases included Flipkart, Humana, killing scan-and-go testing, a new Walmart.com design, the departure of Jet.com’s president, selling Asda, and even plays in VR and vegan cookie dough.

The only things missing were lions and tigers and bears.

Last year Walmart’s prospects would have been 4 to 4.5, but now? Not so sure.

Marc Lore was hailed as a digital messiah, but his strategies are e-com 101. Grocery is under increasing pressure from Amazon and Kroger (via their Ocado investment) and the Flipkart acquisition was expensive ($16B) and could be incredibly distracting. Case in point, what right does Walmart have to win in India, especially given Walmart’s dubious digital legacy and the sheer fact that Amazon has already been stealing share from Flipkart?

And, let’s not forget the prospect of a Prime-subsidized Amazon Go meets Whole Foods at Walmart prices either. If Amazon pulls that off, it is a whole new ballgame beyond what any of us can fathom right now.

While too large to go away, Walmart’s leading man status could be over and about to sag faster than Matt Damon’s likely mid-life paunch.

Costco

Diagnosis – Clean bill of health despite advanced age. Daily exercise and healthy habits are working wonders.

Prognosis – 4 (George Clooney)

Costco continues to perform well in the face of many obstacles. Costco is laser-focused on its value proposition. Bulk buying and treasure hunt finds (TJX falls in this latter category as well) are hard to simulate online. Competitors have tried (Boxed), but the combination of both a digital and a physical experience still matters.

The only red flag in Costco’s lab results is that no business model remains unchallenged forever. Walmart, if it can unlock Jet’s pricing algorithms in store and via mobile, is one company that stands a chance to disrupt Costco. But given Walmart’s recent decision to halt scan-and-go, Walmart’s heads might be so far up their you know what’s right now that this likely won’t happen anytime soon.

Expect at least another three to five years of smooth sailing for Costco.

Starbucks

Diagnosis – Lab results of a virile 25-year-old, and fathering children with greater proclivity than Anthony Quinn.

Prognosis – 4.5 (Love child of Ocean’s Eleven George Clooney and Brad Pitt – because they were really hot in that movie)

Starbucks has the best omnichannel experience in the industry right now. Starbucks is far ahead on mobile payments (recent reports conclude that more people use Starbuck’s mobile app for payments than Apple Pay) and also has best-in-class and frictionless order ahead and pick up in-store capabilities.

Look no farther than this analogy of addiction – a friend of mine recently told me his daughter orders Starbucks for delivery to her high school via DoorDash every day. Crazy.

But, while formidable, Starbucks should not rest on its laurels. Micro concepts from the likes of Amazon Go, Amazon/Whole Foods, WeWork, and others could begin to challenge Starbucks’ supremacy.

Starbucks will have to maintain its pace of innovation to stay out front.

Amazon

Diagnosis – Incredible genes. Healthiest patient on record.

Prognosis – 5 (Brad Pitt)

Amazon’s flywheel is the equivalent of Brad Pitt’s abs in Thelma and Louise – no matter how much we want to turn away, we just can’t stop surrendering to the curiosity they invoke.

Amazon’s bets on the universal truths of convenience, selection and low prices have gone beyond the tipping point. Amazon gets stronger with every use, and the American public gets more addicted to its heroine every day. Coffee is one addictive drug, but it is nothing compared to the drug of convenience.

But as with all living things, even the amazing Brad Pitt, Amazon too will age, and one of four things will likely crease the first wrinkle on Amazon’s brow:

  1. Community blowback. Amazon only cares about growth, almost in a maniacal 1980s Gordon Gecko-like manner. Future generations will expect more from companies, so there could be a generational backlash against Amazon at some point.
  2. Screwing up its investments in physical retail. Amazon still does not know the artistic side of retailing. Acquisitions like Whole Foods and investments in Amazon Go will help them to develop the muscle memory required for physical retailing, but it won’t be easy, and the years and the mistakes Amazon could make along the way may still leave room for others to carve out important niches.
  3. Amazon also gets too big. “Bigness” plagues many of the companies discussed above. There is no reason to believe Amazon will not face similar issues, especially as it opens more physical stores across the country.
  4. The government. Enough said.

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