January 10, 2015

Describing What Is Happening In Retail - It's A Lot Like Cataloging, A Decade Later

Here's one for you, to kick off your weekend ... a story about Dying Malls (click here).

I ask you to read the article, of course, because the article de-emphasizes the effect of online sales in the deterioration of retail. The article instead focuses on the impact of too many stores, too much square footage, and not enough middle income demand to pay for all the square footage.

Everything we are seeing in retail in 2015 we saw in cataloging in 2005. We are simply choosing to ignore the past.

Now, I built a successful consulting practice by not being a futurist, but instead by identifying trends that are 1-3 years away, and then finding profitable ways to deal with the trends only for the companies who are open minded enough to consider the near-term future. The current trend in retail mirrors the past decade of cataloging so closely that it is embarrassing

Most of us cannot see the trend, because our financial incentives are designed to not allow us to see the trend.

Today, I share the trend with you.

Ten years ago in catalog marketing, the trend was "multichannel". You had to sell online, and you had to sell via a catalog. Those who did both were deemed winners. The rest were told that they were "dead". But is turns out that multichannel actually killed businesses. Multichannel was like chemotherapy. The solution was needed to keep the patient alive, but once the online channel was developed, the continuation of the solution actually poisoned the patient. 


In cataloging, you have pages. Online/Digital hates inefficiency. Pages are inefficient - they are not appealing to all customers, are they? Over time, with decades of constant messaging telling the customer to go online, we trained existing catalog customers (mostly Judy, some Jennifer) to shop online, rendering half of all the pages mailed inefficient. We all lived through this transition, didn't we? Since 2007, more than 40% of all printed catalog pages are no longer mailed. In my projects, online customers are 50% to 70% organic, meaning that the printed page only drives 30% to 50% of the sales for that customer (vs. 100% fifteen years ago).

And worse, online trained an entire generation of customers (Jennifer) to stop shopping catalogs (and to instead shop with Amazon). In most of my projects, half of the population is younger than 45 ... but 85% of the catalog customer file is older than 45 years old. Multichannel cut off the bottom half of the population from catalogers, making it terribly hard for catalogers to grow. Eventually, the catalog customer file and merchandise assortment became disconnected from the overall population.

In other words, multichannel digitization destroyed catalog marketing, the opposite of the promised outcome.
  1. Marginal circulation became unprofitable circulation, and was removed from the marketing ecosystem.
  2. Pages in catalogs were trimmed, because pages became unprofitable. More pages were removed from the marketing ecosystem.
  3. Weak catalogers simply went out of business - they couldn't adapt fast enough. Their remains were purchased by private equity and catalog portfolio brands.
  4. Multichannel alignment caused a rapid evolution of the merchandise assortment toward "core customers", causing anybody under the age of 45 to not like the catalog merchandise assortment. Co-ops accelerated this trend by funneling 55-65 year old customers to catalogers. Judy loved this, and kept shopping with catalogers. Jennifer hated this, and chose Amazon instead.
  5. More than 40% of the pages mailed eight years ago are gone today.
Now on to retail.

Catalog Pages = Retail Square Footage.

Catalog Multichannel = Retail Omnichannel.

Catalog Ineffectiveness With Jennifer = Retail Ineffectiveness With Jasmine.

Today, you're told that you must be "omnichannel" or you are dead. There are myriad experts promoting the omnichannel thesis, using Macy's as the poster child for success, a company that can't grow in-store sales and is closing $130,000,000 of sales across 14 stores because those in-store sales have become unprofitable. That's what success looks like.

In retail, omnichannel means full digitization. You have to have a strong online presence. You have to have a strong mobile presence. You have to have a strong social media presence. You have to digitize the in-store experience with beacons or any other form of technology designed to make vendors profit. You have to do these things, or you are "dead".

And retailers have dived-in, head-first, no, not to the level required by the experts who get paid when retailers dive-in, but let's be honest - when Sears does north of four billion dollars online, when Macy's does more than four billion dollars online and a billion from items shipped home from stores, we have proof that retailers dived-in, head-first.

One little problem.

Digital hates inefficiency. Hates it. Renders it useless. Digital destroyed nearly half of all catalog pages, rendering them unprofitable. In omnichannel, we're seeing the exact same trend. There were too many square feet of shopping space to begin with. So a 10% hit to retail sales, thanks to omnichannel initiatives designed to drive the customer online, renders a break-even square foot an unprofitable square foot. Malls are dying. Retailers are going to shrink their in-store portfolio - I see 30%, and I will undoubtedly be wrong ... it might be 10%, it might be 50% ... but it will happen. It is happening. Online renders marginal in-store square footage unprofitable. Period.

Worse, omnichannel is yielding the same outcome in retail that multichannel yielded in cataloging. If you are Macy's, you are actively analyzing the average age of the customer shopping your business. Your customer is getting "older". See, when you digitize your business, you digitize it for your core customer. As a result, your core customer appreciates the digitization of the business, and buys merchandise that core customers like. This dynamic cuts off the younger portion of the customer file.

This dynamic is playing out all across retail - exaggerated in brands like Aeropostale and Wet Seal, where digitization cut out the younger fast-fashion mobile audience.

For catalogers, Amazon's merchandising approach captured a younger audience, cutting the younger audience out from catalogers. For retailers, fast fashion (yes, merchandise always wins) and mobile cut out a younger audience from retailers anxiously digitizing the business for e-commerce success.

Omnichannel is like chemotherapy. It appears to cure the cancer afflicting retailers. But once chemotherapy has been applied and the patient is "cured", continued application poisons the customer.

Poison is coming to retail.

Macy's is closing stores.

JCP is closing stores.

Coldwater Creek - dead.

Sears is dying, has been for a long time.

Aeropostale and Wet Seal and many other younger brands who focused on old-school e-commerce and merchandising techniques are losing out to fast-fashion mobile techniques that cater to younger customers.

Office Depot and Office Max merged. Pay close attention to the store count, folks.

Healthy companies like Nordstrom are no longer opening Full-Line Stores. Let that one sink in for a moment.

Pier 1 is going to "rationalize" the store portfolio, with 60% of store leases up in the next three years.

30% of retail square footage is going to go away. Just run the numbers, you'll see it yourself, you cannot help but see the reality of what is coming. You have to be an omnichannel brand, and the outcome won't be positive. But if you don't go down the omnichannel path, you're toast anyway. So maybe the answer isn't omnichannel (clearly, it isn't). Maybe, the answer is merchandise.

H&M / Zara and others thrive ... they chose merchandise brilliance over channel brilliance. Yes, you can be highly successful in retail. There will be many winners, just like in cataloging, where we saw many winners as well (but far, far more losers).

I could go on and on, forever. Your homework assignment is to go read SEC filings and Press Releases from leading retailers - the message is contrary to the narrative we're being sold.

For you, the catalog / retail / e-commerce reader of this blog? There is plenty of reason for optimism. Plenty.

Big malls & the best shopping centers will only get bigger and better. The internet is destroying anything average, the internet rewards big. Your omnichannel dreams will come true for the top 20% of your locations.

Then the rules change. For everybody else ...

Your problem isn't that customers need more channels to buy your merchandise. Everybody markets through numerous channels. That's not the issue.

Your problem is merchandise (vendors make money by selling you omnichannel solutions - you make money by selling merchandise). There are two problems, one of the problems applies to your business.
  1. Your core audience does not like your merchandise assortment.
  2. Younger customers do not like your merchandise assortment.
There is plenty of room for optimism. Focus on merchandise. Solve (1), and you'll be highly profitable for a decade. Solve (2) and you can own the next two decades. There's a ton of business to be had. Go make it happen!

And create a great experience. You don't hear Williams Sonoma moaning about the future - and they send catalogs ... catalogs for crying out loud! They're successful. They create in-store reasons for customers to visit a store. They cater to their core audience. Their merchandising and entertainment strategy cause customers to purchase, making channel strategy appear profitable. But without the merchandising / entertainment strategy, their channel strategy is rendered pointless.

More than 80% of the Merchandise Forensics projects I've worked on illustrate merchandising problems that are costing the business +/- 10% of annual sales - enough sales to generate enough profit to override the impact of digital on store performance. This is where our focus needs to be. We fix merchandise, we generate profit, and we can ignore this whole essay - my entire essay is irrelevant if we improve merchandise productivity.

Focus on merchandise. Focus on your entertainment strategy. You can be profitable catering to your core audience. You can attract a younger audience. It's up to you! Go do it!