In Retail...Cash Flow is Perishable

Over the last decade, one only needs to review the list of store closings, declining sales per square foot, and market capitalization of Amazon and Alibaba in comparison to a larger basket of retailers to understand that the retail industry is in the midst of a seismic disruption. 

This is a case of the metaphoric frog in a pot of heating water. While the painful effects of this transformation are suddenly quite acute, the reality is: the seeds for this disruption were planted long ago.

The industry’s disruption has many sources – demographic shifts, changes in consumer attitudes and behavior, as well as new and non-traditional competition are all factors. One key contributor is the technology that started to shift retail away from the store. Over time non-store retailing evolved starting with catalogs and call centers, then TV/Home Shopping and followed by the emergence of Ecommerce in the 1990s. But the parallel advancements of broadband Internet, cell phones becoming smartphones, and storage technology—which really is important--have enabled new ways of interacting with customers. These are in stark contrast to the old days where a customer generally made their way to a store and if what they wanted was in stock, every item, size, and flavor of a retailer’s offering or assortment was available for purchase.

That pesky technology did more than just enable new ways of interacting with customers, though. As curious companies and individual entrepreneurs across industries started to dabble and explore, they created innovation after innovation. So much that across many industries, the nature of how companies provide value, interact with customers and employees, as well as operate their entire businesses has been forever transformed. Try explaining to a 4-year-old why we can fast-forward through some commercials and not others or why only some screens are swipeable. Collectively these advancements have continued to raise consumer expectations because for most consumers, their last great experience is their new expectation. Talk about a constantly rising bar.

A more pessimistic view would say that the time for “old” retail is done, a new era where old-line brands should throw in the towel and shutter the shops. For individual companies this may be a future possibility. Every population is a bell curve and certainly there are companies on the left-hand side whose outlook is not bright. For the industry in general, I am more optimistic, at least for those companies who understand that the future is now.

Pre-iTunes, I once had a client who was in the music distribution business. One night at dinner with the CEO, we were discussing the impact of music downloads. I was trying to encourage him to consider that his team should address the risk of his physical product going very digital. He first paused, and then said what I knew was the death of their publicly traded company. “Steve, we have looked at this in every way possible, and we do not ever see music downloads being more than 15-20% of the market”. I was stunned and not sure how to respond.

Why do I share this story? This music distribution client shortly realized that the situation was far more serious and urgent. Unfortunately, they had not only squandered time or “runway” but also squandered free cash flow—the very funding mechanism that could have helped them undergo an enterprise transformation. 

I have seen several similar situations and had these conversations multiple times over the last decade. I always ponder how can I be more effective at convincing accomplished and success executives to be more paranoid, more decisive, and to act with more urgency.

So here I go again. This change is real and it’s not going away. Ubiquitous connectivity, the explosion of devices –including all IoT devices—coupled with the prolific creation of tons of unstructured data represents an enormous opportunity for innovation around the customer’s retail experience.

Retail stores can either be an advantage or an albatross. From an advantage standpoint, stores are physical places where people can try out or try on products, engage with associates who are retailers’ best brand ambassadors, and shop together with their friends. Shoppers keep telling us over and over that they want to experience the totality of a retailer’s “brand promise.”. Our just-released study of 15,000+ Generation Z consumers aged 13-21 from 16 countries indicated they far prefer to shop in stores. I would argue that brands with stores need to see and act as if stores are an advantage with the key word being “act”.

So why are same-store sales declining in many cases while online sales continue to grow? Let me offer a counter point-of-view to the crowd that clamors about consumers only wanting to shop online. There are a lot of capabilities online that until recently were not readily available or economically viable in the store including the delivery of rich content, know-ahead inventory availability, personalized recommendations, ratings and reviews to name just a few.  I often argue that in retail, stores matter. But we have done little to change the in-store experience in the past 50 years. We have done little to make stores matter. Even today’s advances in stores are one-off flagships or concept stores that do not transform the shopping journey for the majority of a brand’s customers.

In our industry, those retailers on the right-hand side of the bell curve need to get going because it’s harder than it used to be. Different customers have different needs, and expectations differ from store type to store type and brand to brand. Unlike the waves of change in the 1980s, 1990s, and 2000s, there is no industry-wide solution, nor “the” single roadmap for everyone to follow. Even if one retailer showrooms patio furniture and sees the desired performance improvement, that does not mean another retailer can achieve similar performance. In fact, the opposite is often proven true

Instead, we need to adopt some of the practices of the very companies that are disrupting us. We need to become rapid experimenters and then urgent implementers of ideas that work. As one CEO who came to retail from the media industry shared with me, “we as an industry do not have a culture of R&D, or a willingness to experiment and fail. Few of us have R&D as a line item in our P&L.” Compare that to industry disruptors such as Amazon, who in their most recent annual report commented “One area where I think we are especially distinctive is failure. I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment.”

Retailers need to adopt design-thinking methods to rapidly ideate, prototype and then iterate products based on early customers feedback first and then finding the solution second. Learning to accept fast failure in exchange for being customer focused is of huge importance--it trains the entire organization to think more agile and serve the customers better. This is not easy given organizational boundaries, cultures that do not accept mistakes (i.e. rapid failures), workforces not used to the pace of the start-up world, and the need to funnel free cash flow to such efforts. But with the right leadership, it can be done.

Retail CEOs need to tell their boards of directors and shareholders that instead of opening new stores, increasing dividends, or making another acquisition, they are going to use free cash flow to re-invent the customer experience--starting with the role(s) of the bricks-and-mortar stores. While this might mean reducing store counts and square footage, it will enable a significant investment in re-imagining the in-store experience and building out what is likely to be the retailer’s store of the future. These stores will be enabled by technology complete with empowered store associates who once again can focus on serving customers vs. stocking shelves and operating cash wraps. This might seem drastic, but when I look at the market capitalization of many retailers over the last 10 years, the situation calls for drastic and immediate action. I just hope it is not too late.

I am deeply passionate about helping our industry not only survive, but thrive in this seismic disruption. I want to help others avoid the stark reality faced by my music client. You can reach me via e-mail [email protected], follow me on Twitter @splaughlin, or contact me by phone/ SMS +1-303-845-0754. And stay tuned for more thoughts on this topic. In a future piece, I will share more detailed thoughts on Re-Inventing the Store.