Disruption is Inevitable, Essential & Painful

America has too many stores, too much inventory, and too few shoppers.

Macy’s, JC Penney, Sears, J. Crew and other major retailers have already announced that they will be closing stores because in the new retail landscape they cannot justify the return on these expensive fixed assets – and because customers no longer choose to spend their money in old-model retail stores.

The market capitalization of American department stores dropped nearly $80 Billion since 1999, according to Census data.

The cost of disruption is more than store closings and diminished market caps, it's people and jobs. Macy's and JC Penney, alone, will be closing over 200 stores and eliminating over 12,000 jobs.

You can not shrink your way to success. However, you can buy yourself more runway.

Disruption hurts. More on the often neglected human cost of disruption (and an example of my insensitivity on this topic), here.

The race to the bottom

As reported in Fortune Magazine, "Can American Department Stores Survive," studies by First Insight, and others, show that consumers are willing to pay "only 76% of asking price across a number of product categories," and "45% of women had to see a discount of at least 41% to consider entering a store."

2016 was the retail industry’s most promotional year on record. The number purchases that included promotional discounts jumped 79% in November, and for the first two weeks of December, more than double that of the prior year. Those promotions were not enough to save the year, hundreds of stores, or thousands of jobs.

The fashion and retail industry experienced another extraordinarily challenging year.

It wasn’t the election, the weather, or the strength of the American dollar. Nor was it product assortment or brand relevance or fear of terrorism, although these contributed to the challenge.

Some of this challenge is in response to the industry coping with the increase in e-commerce, the slowdown in traffic at malls and a general apathy around fashion and apparel in a world filled with digital gadgets.

The Internet’s influence on consumer spending is exceeding all expectations and the rate of that influence is increasing. Ubiquitous price transparency has escalated and allows, even encourages, consumers to be more discount- and value-oriented than ever before. Unbiased product reviews are available at the click of a button. Today’s consumers are highly educated regarding products and pricing.

No longer can a brand, a vendor, or a retailer exploit the ignorance of their customers; now it’s the other way around. 

This disruption is not all digital.

Most commerce occurs, and will continue to occur, at physical points of sale. 50% of customers shop the aisles with a Smartphone in their hand. Mobile is now an extension of the in-store shopping experience. And, today products are physical, digital, virtual and even borrowed.

Not only have the path-to-purchase, products and the supply chain changed, the planning and timing of these purchases are evolving too. “Buy now, wear now” is enabled by next-day, or same-day, availability not only for seasonal merchandise, but also for counter-seasonal products. You can find a full assortment of seasonal brands and sizes online 365 days a year, no advanced planning required.

And, it’s getting faster - much faster.

The Wall Street Journal recently described the process of Zara bringing a new coat to market. Zara managers, designers, merchandisers, and marketing teams worked closely to develop a coat concept. Pattern makers then quickly prototyped a garment that aligned with the identified trends. It took them just five days to come up with a design. Then, local manufacturers made 8,000 coats in 13 days. Zara sent these to its logistics center in Spain, trucked them to the Barcelona airport, and within 24 hours they arrived at JFK and were sent to a store on Fifth Avenue.

Sketch to scale in less than one month. 

Further, consumers are spending more discretionary income on “experiences” and less on “things.” Restaurants, concerts, movies, and vacations have become “go to” gifts over sweaters, watches and handbags.

Today’s retailer competes not only with other physical and digital retailers, they compete with iTunes, Netflix, Shake Shack, trips to Cancun and Beyoncé concerts.

Historically, few legacy retailers have been able to successfully navigate through this kind of disruption. However, some retailers will prosper and others will emerge, fueled by changing business models, new product assortments, and new ways to fulfill consumers’ evolving needs.

Disruption in the retail industry is not new.

In fact, disruption has been the catalyst for retail growth and success, since the industry’s inception.

In 1900, when my great grandmother came to America, shopping took place at her very local general “dry goods” store and she spoke with the proprietor, who knew her, and her family’s needs, well.

Sears disrupted this standard with the 1909 Sears Christmas catalog, a 1200 page behemoth, which brought shopping into our home, and presented us with thousands of products we never knew were available.

As industrialization continued, the U.S. population began to migrate from rural areas to cities, and each metropolitan center had its own unique “department store.”

World War I, the roaring twenties, the great depression, prohibition, World War II altered the retail landscape as great economic, political and consumer disruptions redefined products, services and experiences.

Mid-century brought the Interstate Freeway Act and millions of automobiles, combined with post-World War II prosperity and continued urban growth, suburbs emerged. Malls and regional department store chains soon followed, and shopping became a nexus of social activity.

By the 1970’s and 80’s the landscape had changed so much that department stores had to go national, go different, or go away: as illustrated by Macy’s consolidation, Dayton Hudson morphing into Target Stores, and Montgomery Ward failing to evolve.

The 80’s and 90’s continued the expansion of Department Stores from regional to national… and the advent of personal computing followed by the creation of the “world wide web.” The stage was set for Amazon.com, in 1997, to bring shopping back to our homes, offering us millions of products we never knew were available. Ten years later, in 2007, the iPhone moved shopping to our very hands - anytime, anywhere.

Today our homes do much of the shopping for our families. Dash and other “Internet of Things” devices “sense” our usage and place “just in time” orders on our behalf. And Amazon’s Alexa listens to everything we say in our home, answers our questions, plays music, and adds items to our shopping cart. Once again, we are speaking with the proprietor, who knows us, and our family’s needs, well.

Disruption is not only inevitable, it is essential.

As Dee Hock said, “The problem is never how to get new, innovative thoughts into your mind, but how to get old ones out.”

Disruption is the spark for Retail Darwinism. Disruption, as with forest fires, removes overgrown obstacles and makes room for new growth.

The Human Cost of Retail Disruption

This description, of disruption as a stimulus for innovation and future growth, minimizes the very real and very human cost incurred by the rapid destruction of old models making way for the new. Tens of thousands of families are directly affected by this shift in the retail marketplace.

For each store that closes there is a ripple effect multiplying the economic and personal consequences. Each store that closes in mall effects the total mall traffic and adjacent stores. Fewer stores means less demand for product, which means fewer jobs for wholesalers, factories and suppliers. Each unemployed, or under-employed worker has less income to contribute to retail spending.

Painful though it will be, the only light at the end of tunnel for companies and employees, is reinvention. It is essential that new skills, new income models, and the ability to pivot to ongoing changes in the economic ecosystem be quickly and effectively developed.

Disruption is the mother of invention. Expect a hard labor and difficult delivery. Anticipate healthy offspring, too.

New growth is already visible in this new landscape, retail innovation thrives.

From successful digital pure plays, including Warby Parker and Bonobos, to Nike & adidas new physical “super” stores in Manhattan which champion an immersive retail experience in a way other stores cannot match - including in-store personalization, athletic consultation, and basketball courts – retail flourishes in new ways and is creating new jobs.

Amazon Go grocery stores, now available to employees in Seattle and soon to roll out to the public, identify customers by facial recognition. Cameras, sensors and software monitor everything customers touch, place in their basket, or return to a shelf, placing them in a “virtual” Amazon shopping basket. When finished shopping, the customer simply walks out, their account is charged, and done. Last fall Amazon completed their first commercial delivery to a customer, by drone. Drones also fly through Walmart warehouses, taking inventory and optimizing “pick and pack” fulfillment, while robots across the globe aid in manufacturing, logistics, and even walk down the fashion runway.

"We're Hiring" signs, ahead

On one level, this new technology eliminates jobs for retail workers. Yet, on another, new job creation is at play for associates who elevate the in-store experience at remaining stores, manufacturer, install and repair cameras, sensors, robots and hardware systems, programmers, drone operators. New business models require a retraining of our workforce, and workers need to be proactive and be first in line.

And, as disruptive as you may paint Amazon to be... the company will hire 100,000 full-time workers from now through mid-2018.

Significantly, research data by PwC illuminates a positive outlook for retail jobs:

The changing role of the store, soaring customer expectations, and the desire to support local businesses could put a real premium on retail employee talent.

In particular, the more sophisticated dimensions of customer service (personalized advice, special after-sales services, and demonstrated deep product knowledge) could be a point of differentiation for retailers, particularly for retailers with a significant physical store footprint. 

The new landscape overwhelmingly includes smart devices and friction-elimination tactics to inform purchase decisions in new ways.

Some interesting new service models are evolving. Deliv supplies same-day delivery service for retailers and merchants, while Curbside.com provides drive-thru pickup and return for any store within a mall. Increasingly, mobile devices are our “go-to” source for product, brand and retailer experiences. And, MCG: Market Connect Group offers vendors and retailers third-party in-store services experts “for hire,” to engage consumers at point of sale.

As retailers decrease the number of their own store personnel, including those in stores that remain open, third-party providers of retail services, including those listed above, are hiring. For example, MCG has over 3,000 W-2 positions. (Disclosure: MCG is a Randa Accessories affiliate.)

Savvy retailers will weave the online world into real-time enhanced shopping experiences providing information on features, wearing occasions, size and color assortment and delivery options. The growing connectivity of the “Internet of Things” will only accelerate and magnify the effect technology has upon shopping and speed-to-market.

Today, there are more connected devices than there are human beings.

New landscape retailers will offer in-store experiences that leverage technology and human resources to invisibly fulfill a customer’s desires, immediately and without friction.

Expect big data, 3-D printing and artificial intelligence to enable personalization and mass customization on an increased scale and with improved customer engagement. Add social media, smart phones, beacons, and other localized technology, and personalization will become omnipresent, prescient, and possibly an invasion of privacy. Technology will also provide for better fit measurements, augmented and virtual reality to model clothing, and Artificial Intelligence to design and select it.

It will continue to take human intelligence, ingenuity and sweat to create, distribute and optimize this new technology. And, interestingly, this technology has at its core the goal of taking us back to a time when retailing was personal, intimate and human-to-human.

Tomorrow’s brick and click retailer winners will leverage physical stores and in-store experiences as their most powerful asset; a way to connect with consumers in person. When stores are relevant to consumers they connect shoppers, products, brands, and staff in a very real, human and intimate fashion, one that is increasingly important in a world where people have more digital connections and fewer “real life” interactions.

Interacting with real people in real stores may even be an antidote to the epidemic of American loneliness.

Everything old is new again.

As in the past, tomorrow’s retailers, and retail workers, must offer great products, extraordinary value, remarkable and personalized experience, frictionless 24-hour shopping, immediate availability and outstanding customer service. Survival requires one or more of these attributes; industry leaders will deliver them all, industry workers must reinvent themselves, too.

(c) David J. Katz, 2017 - New York City

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* A note on "disruption"

The term "disruption" was coined by Professor Clay Christensen of the Harvard Business School in 1995. Over the past 20 years disruption theory has become a victim of its own success. "The theory’s core concepts have been widely misunderstood and its basic tenets frequently misapplied. The term is frequently used to describe any situation or innovation from which an industry is shaken up and previously successful incumbents stumble. But that’s much too broad a usage."

As defined by Professor Christensen, "Disruptive Strategy" asserts that new technology is not intrinsically disruptive; it depends on how it is deployed into the market relative to the business models for existing products or services.

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If you liked this article you might enjoy my other posts, below:

• What I Should Have Said, But Didn't
• Everything That Can Be Invented Has Been Invented
• Future of Fashion: Robots Rule The Runway
• A Customer Complaint, 4,000 Years Old, Lives On.
• To Successfully Seduce (Recruit) Anyone, Do This.
• 14 Robots Teach Themselves To Walk Into A Bar
• Man Killed by Robot. Get Used to It
• Other Posts

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David J. Katz is chief marketing officer at Randa Accessories, an industry-leading multinational consumer products company, and the world's largest men's accessories business. 

His specialty is collaborating with suppliers, brands and retailers to innovate successful outcomes in evolving markets. 

Named in 2017 as a leading fashion industry "Change Agent" by Women's Wear Daily and a "Menswear Mover" by MR Magazine, he has been featured in The New York Times, The Wall Street Journal, New York Magazine, MR Magazine, and Women's Wear Daily. He is a public speaker, co-author of the best-selling book "Design For Response: Creative Direct Marketing That Works" [Rockport Publishers], and has written many published articles. 

David is a graduate of Tufts University and the Harvard Business School.

He is a student of neurobiology, consumer behavior and "stimulus and response." The name Pavlov rings a bell.