RETAILING – THE WORST OF TIMES AND THE BEST OF TIMES

Some of the smartest institutional investors in the world, including behemoth Berkshire Hathaway, have washed their hands of retail. The daily store closings and near weekly retail bankruptcies have become as predictable as my dog needing a walk. And yet I remain firmly convinced that for retail entrepreneurs and small business owners there has never been a better time to be in retail; and I’m not smoking anything!

Let me be very clear, for anyone who follows me or any of the other retail mavens and bloggers out there, you know retailing is going through, arguably, the most consequential changes in 100 years. Suffice it to say that many retailers have succumbed, and many more will fall.

Commoditization

The internet has become the most efficient manner to sell almost anything, but particularly commodities. That’s the stuff we purchase and consume repeatedly. This would have occurred EVEN if Amazon had not become the force that it has; but it has exacerbated the challenges for big boxes selling those commodities. We can expect an ongoing bloodbath between Walmart, Target and Amazon and others, as they continue to tighten ever thinning margins, improve supply chains and continue to recalibrate their last mile strategy.

For another institution of the twentieth century, the department store, the skies are also very cloudy. To quote Warren Buffet, “the department store is online now”. It’s also fair to say that over the course of the last half century the DNA of that institution has morphed into something less recognizable and less relevant than their founders conceived. There is only so much you can dilute the ‘secret sauce’ before it completely loses its taste. Their meager attempts at recalibrating were hamstrung by overly confident directors, increased debt, faceless consolidation, unrelenting discounting, and Wall Street expectations. They were further undermined by operational efficiencies imposed at the expense of their (once) valued customers and an indifference to changing market forces, demographics, and consumer spending habits. 

Interdepen-Dance

Further, one cannot separate the department stores’ woes from that of the major malls that they anchor. Their successes and failures are inextricably connected. As we have watched the sales fall at department stores, we have witnessed a similar drop in “foot-fall” (love that term) in the malls. We know that the US is over retailed with nearly twice the square footage as the next most retailed country. And according to a recent Credit Suisse research report, more than 8,600 brick-and-mortar stores are expected to close their doors in 2017. 

Retail analyst Jan Rogers Kniffen told CNBC in May of last year that he predicted 400 of the 1,100 enclosed malls in the U.S. will close in the coming years, and only 250 of the remaining will thrive. This runs roughly parallel to the number of ‘A-class malls’ that currently exist; and surmises the fallout will be distributed among the B, C, and D properties. Todd Henderson of Deutsch Asset Management was quoted in recent interview saying, “There are A-class ‘trophy malls’, and then there are the rest”.

New Point of Sale

Future cultural anthropologists will analyze the correlation between the disruption in our buying patterns and the fact that we are all walking around with the ‘new point of sale’ neatly tucked away in our purse, backpack, or back pocket. Just as instore sales have diminished, online has been experiencing double digit annual growth, almost since its onset. Forrester predicts that by 2020 U.S. online sales will exceed a half trillion dollars.

So why am I an enthusiastic supporter of indie retailing given the industry carnage? Because I believe that much of the current retail woes are caused by too much of the wrong stuff, in the wrong places, at the wrong time. Additionally, there are now and will continue to be unmet wants and needs, across diverse market segments. Looking at the most successful upstart concepts of recent years (Bonoboos, Birchbox, Warby Parker, Shinola Detroit, Casper, Kendra Scott, etc.) they have several things in common. Many are digitally native, vertically integrated companies who control their own destiny’s and understand the real nature of omnichannel, as a holistic means of operating. Most of these companies are highly focused niche brands who exist to serve a targeted market; rather than being all things to all people, which is where so many retailers have failed. Additionally, they have entered the realm of retail real estate with a solid on-line footing and an avid following.

There are several conditions in place that further help to support my optimism regarding indie-retailers and small business start-ups. These include 1) Low barrier to entry and a level playing field; 2) Consumer’s desire to support local businesses; 3) Readily available space and access to funds; and 4) Low cost and high impact of new media.

Low Barrier to Entry

The Internet has put many more people in business than it has taken jobs away. We know that Amazon, E-bay and Etsy have all become launch pads for third party retailers who would have been greatly challenged without them. Many if not most of these players have complementary websites and some even have physical storefronts, temporary or permanent. The very best of these players have worked to develop legions of social media ‘brand advocates’ who engage with and support the brands as well as post glorious, often personalized imagery on line for all to share. These kinds of individual expressions often result in a level of brand awareness that would have cost untold-millions of dollars to generate back in old ad days.

Going Local

Back when my retail design firm was helping entrepreneurs take steps to up their game; we knew what was necessary to make them ‘look national’ to generate a following and establish their brands. Today with the backlash against all that is big and ubiquitous, even the national brands are trying to look local, and community connected. It is much easier for a ‘home grown’ business to look, well, home grown. One of the greatest brand values that a company can foster today is authenticity; and you can’t fake that.

Many new retailers are approaching real estate quite differently. Some have tested concepts with highly effective pop-ups, both as freestanding spaces as well as co-tenancies within existing retailers. Also, the days of intransigent mall landlords who won’t give a start-up the time of day are mostly over. The most progressive among them have even initiated programs designed to identify and assist start-ups. In its inception in the 90’s, Mall of America launched a retail ‘incubator program’ intended to identify and support just such retail start-ups; the program, which I talk about in my book, proved to be highly successful. Mall management will need to consider making similar investments to compensate for the loss of many specialty chains. 

Filling a Niche

As I alluded to at the beginning of the article, price transparency and distribution efficiency, aided by the internet, have contributed to the commoditization and downfall of many of today’s retailers. Too many of the once distinguished players felt forced to compete on price; usually by stripping away all that differentiated them from their completion (think lower left on the price/value matrix). The huge window of opportunity for indie retailers and start-ups is to become a ‘prospector’ in search of a category, product, or service that they can “own”. That defining brand must embody a keen sense of value, authenticity, and personalization, and its ‘story’ must evoke a strong emotional connection to its audience (think upper right on the price/value matrix). 

Fertile Ground

The search for experience over mere consumption has been the subtext of many recent articles on retail survival, including some I’ve penned. That said, a brand or concept that truly celebrates the culture, nuance, and immersive participation into a specific product or service can redefine or reinvent an entire category. Whether it be food, beverage, sports & recreation, collecting, make-tailing, heritage & ancestry, or the sharing economy; there are enthusiastic audiences who will find discretionary dollars to spend on their passions, in almost any economy. It’s the entrepreneurs and indie retailers job to connect and engage with those enthusiasts in a manner that a big box or pure-play online retailer simply can’t. Advantage, indie retailer!