November 10, 2014

Chicos and Retail

Have you read this ditty about Chicos (click here please)?

I've talked extensively about retail ... as e-commerce takes over (not next year, but over time), pressure is placed on the profit and loss statement. Given that so many retailers owe a ton of debt on retail stores, there is double whammy about to hit. In other words, it will get harder and harder to generate profit in a physical retail store, while at the same time, the expense structure of the store is saddled with debt ... interest and principal payments that do not change.

So if you have fixed debt payments and reduced income, something has to give.

In the article, the future of retail is clearly articulated.
  • Stores are going to get smaller.
  • Expenses must be cut.
  • E-commerce must pick up the slack to cover the debt.
  • Only best sellers will be made available.
  • An assumption is made ... customers will enter a store, not find what they want to purchase, and then be perfectly happy shopping online while standing in the store chatting with strangers who instantly become dear friends. 
  • The online purchase may or may not be credited back to the store.
The assumptions are the biggest piece of this puzzle. We hear this all the time ... we assume that if the customer doesn't find what s/he wants, s/he will buy it online while standing in the store.

Big, big assumption.

Catalogers know all about this dynamic. Large catalogers actively measure the relationship between reduced space and reduced demand. The relationship looks something like this:


What do we observe here?

With a 96 page monthly catalog, $2.00 million is generated that month.

With a 72 page monthly catalog, $1.86 million is generated that month.

With a 48 page monthly catalog, $1.71 million is generated that month.

With a 24 page monthly catalog, $1.41 million is generated that month.

Without a monthly catalog, $1.00 million is generated that month. Without a catalog, half of the demand flows online anyway.

This, then, is the secret to the alleged omnichannel movement. This is the theory. If the store gets smaller (or even disappears), and if only best sellers are offered in the store, the theory suggests that customers will still spend $1.86 million, or $1.71 million (instead of $2.00 million), even though the store is 75% or 50% the size it used to be and only offers best sellers. The theory is that the customer will, even if standing in the store, shop online. The theory suggests that it is ok to have the entire assortment online, only selling best sellers in-store.

Theory does not equal reality.

But the theory could be proven correct.

That's what makes work so much fun!!