Simple Analytics To Explain Why Traditional Retail Is Imploding

Life doesn't have to be hard, and you don't have to "leverage" Big Data to understand what is going on.

Do me a favor - run three analyses for me.

Analysis #1:  Take all customers who only purchased from Retail Stores in 2015. Measure where future dollars were spent in 2016. Then re-run the analysis for 2010 / 2011.

• 2015 Retail Only Customers = $90 in stores in 2016, $30 online in 2016, $120 total.
• 2010 Retail Only Customers = $115 in stores in 2011, $15 online in 2015, $130 total.

Analysis #2:  Take all customers who only purchased online in 2015. Measure where future dollars were spent in 2016. Then re-run the analysis for 2010 / 2011.

• 2015 Online Only Customers = $50 in stores in 2016, $70 online in 2016, $120 total.
• 2010 Online Only Customers = $35 in stores in 2011, $95 online in 2015, $130 total.

Analysis #3:  Take all customers who only purchased online+stores in 2015. Measure where future dollars were spent in 2016. Then re-run the analysis for 2010 / 2011.

• 2015 Online+Retail Customers = $60 in stores in 2016, $60 online in 2016, $120 total.
• 2010 Online+Retail Customers = $80 in stores in 2011, $50 online in 2015, $130 total.

This is a common outcome. There are two trends happening.

1. Customers are spending less today than five years ago.
2. Customers shifted spend away from stores and instead are spending more online.

(1) is a Merchandise Productivity issue. There are many aspects to merchandise productivity, of course, and competitive challenges are key to merchandise productivity. If the competition has a better value proposition, then your merchandise productivity will decline.

(2) is a Channel Shift issue. Notice that even after accounting for the drop in Merchandise Productivity, retail stores are significantly under-performing. The customer shifted from buying in stores to buying online, to some extent.

(2) is a big deal, because this is the portion of store closures that we are causing ourselves. We are told that we must be "digital", so we calibrate our businesses to prioritize digital, we practically beg our customers to shop online instead of visiting stores ... and then we're stunned when the customer shops online and not in stores and we lack foot traffic.

(2) causes reduced foot traffic. (2) causes "brand" to close weak performing retail stores. This further reduces foot traffic across all stores in a mall, causing other "brands" to close stores, further reducing foot traffic.

(2) causes us to lower prices in stores to drive more traffic into stores. Think about the logic of this one for a moment. We spend a half-decade begging a customer to shop online, and the customer listens to us. Then the customer doesn't visit a store, so we respond by lowering prices in stores via discounts and promotions to get the customer back into a store. This reduces profitability, which causes us to close stores.

To recap.

• Business isn't great.
• But after accounting for the fact that business isn't great, we spent a half-decade begging customers to shop online.
• Customers listened, they shopped online.
• Retail sales declines.
• Sales declines rendered below-average stores to become unprofitable.
• Now that we trained customers to shop online, we try to re-train customers to go back into stores and shop, and we offer the customer 40% off to 50% off to visit stores once again.
• 40% off and 50% off in stores is an unprofitable proposition.
• This causes us to close more stores.
• When we close stores, we reduce foot traffic across the rest of the mall.
• With less foot traffic, other "brands" have to close stores, reducing foot traffic across the rest of the mall.
• With less foot traffic, we increase discounts/promotions to increase foot traffic.
• Because we need to have an integrated voice across channels, out discounts have to be applied online as well.
• By offering the discounts online, we change customer expectations of us, making it very hard to sell at full price again.

Simple analytics can be used to demonstrate that we are killing ourselves.

Amazon is not the enemy.

We are the enemy!