The Perfect Storm
I avoid department stores because of the people who work in them, not because I prefer online shopping.
I often find assistants at department stores to be slow-moving and uninspired. They seem disinterested in making the shopping experience pleasant or even just easy. Recently, some goods I purchased were delivered with breakages and manufacturing flaws. “Bring them back into the store,” they told me, “we will ship them to the manufacturer and call you when you can come to collect the replacement.” The items weighed a total of more than 50 pounds! Do these people not see the writing on the wall, or do they just not care? They, manager included, reminded me of the Titanic’s complacent passengers enjoying cocktails on the deck, oblivious to their impending demise. Retail as we know it is antiquated. It has failed to reinvent itself. In its current model, retail must go. It needn’t have been this way. If retail would identify the real challenge to its future, it could transform itself and thrive. Retail regards Amazon as its enemy; but it isn’t. Retail is its own enemy.
It is time to revolutionize the retail model. While some retail organizations have begun to embark on this journey, most are trapped in a defensive spiral, deeming themselves as the inevitable victims of digital. Their response to the retail apocalypse that started a while back has been unimaginative—simply downsizing to save costs.
J.C. Penney closed 40 stores in January 2015 and another 138 this year. Sears is closing over 250 stores this year after having closed some 300 stores between 2014 and 2016. In August 2016, Macy’s announced the closure of 100 stores after having closed about the same number in the previous few years. In January 2016, Walmart announced the closure of 269 stores. Last year, retail laid off over 50,000 people. The fate of stores on Main Street is not much better. Most retailers have slapped an e-commerce website onto their platform, hoping their customers will shop there rather than on Amazon. These measures have failed to slow the onslaught.
Although as recently as 2014 there was still strong growth in the U.S. shopping center industry with year-over-year growth in occupancy rates, rents, and net operating income, a new report from Credit Suisse predicts that within five years, 20-25 percent of existing malls in the U.S. will close. Some experts believe that number will be higher. The same report expects nearly 9,000 stores to close by the end of this year. Moody’s Investor Services just classified 22 major retailers as CAA, meaning they are “subject to very high credit risk.” Moody’s senior retail analyst, Charles O’Shea, earlier this month dubbed the environment facing many large retailers “the perfect storm.”
Inventiveness vs. Loss of Faith
In the last three years, Amazon’s revenue has nearly doubled; its free cash flow and its stock have increased nearly four times. Although much of its success is due to its cloud services rather than its retail sales, Amazon invests heavily in retail sales and since 2015 has expanded into physical stores. Consider its six physical bookstores with six more on the way, its first physical grocery store in Seattle at the end of last year, and now its bid for Whole Foods. Amazon’s core thinking around its acquisition of Whole Foods is unlikely just about lower prices, as Annie Gasparro and Laura Stevens suggest in their WSJ piece. It is likely to be about reinventing the supermarket experience. Grocery chains should feel more threatened by Amazon’s inventiveness than by its muscle, scale, and online capability. The response to Amazon should not just be cost-cutting. It needs to be transformation.
Amazon, the disruptor-in-chief of retail, still believes in physical retail—and they aren’t alone. The Nordstrom family, exploring the possibility of taking their company private, “are making a long-term bet on the future of retailing,” and TJX is adding 250 stores this year to its existing 3,800 T.J. Maxx and Marshalls stores. Home Depot’s stock price has doubled since 2014, and in the first quarter of this year its sales grew 16 percent, seeing increases in both the number of transactions and the average amount spent per customer.
The only people who have lost faith in retail is the retail industry itself. Instead of reinventing the retail experience (an experience that humankind has pursued since its inception and one that isn’t going away), retail has tried to cut costs and compete with Amazon. The truth that seems to elude conventional retail is that online shopping creates an unprecedented opportunity for physical stores to transform.
Transform and Allure
Here’s the opportunity: People are trapped in a matrix of digital hyper-connectivity with little authentic human connection. They are spending more and more time working, reading, watching movies, and eating without leaving the confines of their ever-smaller homes. Home claustrophobia is setting in and people want to get out. They yearn for variety, inspiration, and true human connection. They eagerly leave their homes in search of these experiences—going out to the movies, coffee shops, and restaurants that have transformed their offerings into higher experiences than just a movie or just a meal. In the same way, retail could capitalize on people’s growing feelings of home claustrophobia, isolation, and alienation and transform its offering into a higher experience.
Physical shopping, reimagined, could allure customers with the intoxicating cocktail of attractive merchandise, product expertise, and the infectious passion of sales professionals. This experience could invite customers to employ all their senses in the exploration of enticing merchandise, bargain-hunting in an environment where they can blend, mix, and match products in ways they could not do online. However, to succeed in this transformation, physical retailers need to stop seeing themselves as warehouses and delivery points. They need to radically transform their talent and leadership philosophies as well as the way they perceive the purpose of their existence.
Human Connection and Inspirational Choices
Retail needs to hire a different caliber of talent and develop new leadership capacities in its management teams. It needs to invest much more in knowledgeable, committed, and passionate customer-facing personnel who also have a good sense of aesthetics, design, and style. They should be excellent connectors and be driven by their sense of urgency and caring.
The core business of retail (other than the Amazons of the world) should not be about logistics, but about uplifting the human spirit with real connection and inspirational choices. Storage and logistics should be outsourced either to specialized external companies or to companies jointly owned by many, even competing retailers to create synergistic efficiencies. These companies, focused solely on logistics, should offer execution to the standards set by Amazon. Customers will not settle for less.
While the investment in this caliber of sales staff is significant, there will be savings for stores from being able to occupy much smaller—rather than fewer—footprints. Inventory will be minimized. Once a customer chooses an item from a sample, it would be ordered with an in-store app and delivered the same or the next day.
Humans: The Competitive Edge
No business today can function without world-class technology, and this includes retail. But technology alone will not distinguish physical retail from its online competition. Retailers should differentiate themselves from competitors, both online and physical, by their people, not their technology. They should focus much more strategically on their customer-interfacing people.
Home Depot attributes its success to its investment in people. It invests heavily in its associates’ knowledge, well-being, and prosperity. As they declare, “We consider our associates our biggest competitive advantage, and it's our privilege to take care of them. We financially reward associates who dedicate themselves to our customers and embody The Home Depot values.”
Strategic focus needs to be directed to all of a company’s people, not only its salespeople. TJX focuses on empowering its buyers rather than the people at the sales interface. The Wall Street Journal reports, “Central to TJX’s success are its merchants. The company employs more than 1,000 buyers who buy apparel and other goods from more than 18,000 suppliers around the world. Each buyer controls millions of dollars and has authority to cut deals on the spot, unlike most department stores, which can take weeks to review and approve orders.” The company believes that if buyers use skill and intuition to buy the right merchandise at the right discounted prices and get it into stores quickly, customers will respond. And they do.
The Post-Digital Future of Shopping
The future belongs to retail organizations that blend the discipline and muscle of corporate scale with the passion and agility of boutiques. Mastering this polarity of scale versus passion is the only way physical retail stores will thrive.
Amazon will undoubtedly take a stab at reinventing the retail model. But, whereas Amazon will use technology and robotics, traditional retail should take a different approach. While utilizing the best technology, retail should bet on talented and educated people who will buy with intuition, inform with expertise, and sell with inspiration and passion. There will always be a dominant place for Amazon, brilliant as it is in almost all it does. But many customers, starved of connection and passion, will stream back to those retailers who respond to human needs deeper than just the transactional exchange of goods for money.
Retailers who connect with their customers, inspire them, and educate them, will lead the post-digital future of shopping.