RetailTouchPoints: Today’s Retail Models: Everything is Broken, But Cross-Channel Formats Are Still Fixable
By John Gaffney, Senior Editor, RetailTouchPoints
We know a lot about the broken economy and the credit crunch and the money that has vanished with real estate profits and personal refinancing. These things are in some ways beyond the control of retailers. But we don’t know enough about a tougher problem that I think has driven the high profile retail failures of the past year: broken business models.
Look at some of those high-profile problems. Store closings, according to the International Council of Shopping Centers, will top 6,000 this year, the most since 2004. I think that number is light. When you drill down a bit, the usual suspects of the economy don’t hold all the answers. Sharper Image has always been a chain that basically sells things that people don’t need, such as ionic breeze purifiers. And it sure worked before competition on the Internet became so fierce and the high-end customer it served became analyzed and assigned an algorithm. Was a 16 percent dive in per store sales surprising? The business model cracked as much as the economy.
Look at Macy’s. A large department store that caters to the middle class was a solid enough niche before the Internet flattened the world. The Internet has allowed traditionally upscale brands like Saks and Lord & Taylor to also play to the middle class online, while giving nothing up in-store. That is partially responsible for driving Macy’s consolidation and 2 percent dip in per store sales for the fourth quarter. I don’t think real estate or credit had much to do with it.
So, I have been humbled. But, I have some ideas for fixing what’s broken. In fact, I have three:
- Exaggerate the business proposition: Look at the retailers that are well-positioned despite economic slowdown issues. Cabela’s always had a strong Internet and catalog position. Now its stores are huge, exaggerated versions of outdoor retailing. I would never step foot in a Cabela’s, and you know what? That’s OK. Exaggerating your business proposition means you know who you’re shutting out, and being comfortable with it. Examples: Nordstrom’s, Target, Neiman Marcus.
- Embrace the human touchpoint: I think that in-store success will be driven by technology that allows store clerks and live online agents to act smart. Clienteling, guided selling, call it what you want, but the retail employee that acts like he knows the customer is as valuable for the long-term health of the company as any executive.
- Be honest about the current state: I have a ton of respect for Borders because its management was so honest about its lack of success online and its need to reconsider store size and location. If it’s broken, call it broken. Offline retail is tough to fix. But the cool thing about the Internet (even now) is that it can always be changed. In fact, there’s a good argument that the Internet is a retailer’s offspeed pitch. Maybe it should be changed more often.
There’s no silver bullet. Retailers need to see the current slowdown and bankruptcies beyond the cyclical problem. Business model change has been in the air for years. Now it has come home to roost.
Discussion Questions: Do you agree that weaker business conditions are exposing flawed business models primarily resulting from the arrival of the Internet? What do you think are some common themes behind the bankruptcies and store closings taking place?
Change is the natural order. All business models are eventually flawed. Whatever you are doing today will not be enough to succeed tomorrow.
First, let’s fine tune the question. You asked “Do you agree that weaker business conditions are exposing flawed business models primarily resulting from the arrival of the Internet?” The Internet–in the form of the ARPAnet–has been around since 1969. If you define the start of the Internet when TCP/IP entered the picture, that still gets you to 1983. That’s 25 years ago.
I am going to guess you didn’t mean the Internet but meant the Web, which still puts us back to 1991. You probably truly meant when the Web began to become popular with retailers, which is more like 1995 and 1996. Amazon launched in July 1995 so that’s probably as good a date to start with as any.
As to the substance of your question, no, I don’t agree. The weaker business environment isn’t exposing flawed models as a result of the Web. They’re exposing flawed business models period. Look at Amazon’s recent earnings if you have any doubts.
Multichannel is the problem today. That distinct silo approach is almost guaranteed to fail. Retailers need to move to cross-channel and ultimately to merged channel strategies. Once the avenue to get to the store (be it mobile, Web, in-store, call center or even a 3-D avatar in SL) becomes irrelevant, retailers are going to start to do better.
And, yes, if the retailer’s products/services and customer service are bad, the transparency that comes with merged channel won’t be their friend. In a free market, it shouldn’t be.
I think the author overstates the premise that the Internet is responsible for (or contributing to) the current malaise in retail. The stores who are falling victim to the economic slowdown have themselves to blame in terms of a variety of causes: Overreaching on expansion; faulty financing that makes them especially vulnerable to the credit crunch; and, most importantly, second-rate brand positioning and concept execution. The retailers who will ride out the current situation are better positioned as multi-channel retailers than the retailers who will fall by the wayside.
There is no question that the retail world is in a bit of trouble, but that does not hold true across the board. There are some retailers who continue to have very strong quarters. Every time I walk into an Apple store I am amazed not at the traffic walking into the store, but by the people who are walking out of the store with $1500 computers in hand. Retailers who are doing it right, are not only surviving, they are thriving.
What does this tell us? The business models are definitely flawed. Many retailers open their doors across the street from a competitive retailer, with the same merchandise on the shelves, and hope and pray that their products will drive consumers to their stores. This is a flawed business model, and we are definitely seeing the effects. Look at the troubled chains…Borders, Circuit City, Linens & Things, Ann Taylor, Talbots, and the list goes on. Any retailer can do well if the economy is great, and consumers are willing to spend money with abandon. But when it becomes difficult, and highly competitive, only the innovative retailers will survive.
Jack Trout titled a book a few years ago “Differentiate or Die”. Retailers would be well served by reading this book.
Last I checked, retailers were going out of business before the boom of the internet. In a capitalist economic system there will always be competition. Businesses that adapt and innovate survive and thrive. Businesses that do not will be acquired or closed.
The internet is just another innovation. Far more internet-based businesses have gone out of business than have succeeded. Internet-based businesses are subject to the same capitalistic pressures.
Many of the same principles of brick and mortar businesses apply on the Internet: good product selection, ease of transaction and great customer service, to name a few. The internet did add a new wrinkle: interaction between a company’s physical stores and cyberspace.
As we move towards the future, there are probably retail platforms that we never dreamed possible about to impact business. Smart retailers will find a way to embrace them in their business models, while never forgetting the basics.
No, the Internet is not responsible for exposing flawed brick and mortar business models. The sad fact has been that with the exception of the past 12 months, there is almost no brand differentiation for retail websites. Brick and mortar have a much more significant and easily identified positioning statement than the websites of multi-channel retailers have.
What the Internet has done is to reduce the competitive value of “availability” and “perceived low price.” Until recently, the most prevalent use of the Net by shoppers has been research on availability and price. The net impact is rather than guessing on where the product might be, and how probably has the best price, now the consumer actually knows.
The author, despite the originally flawed premise, has made several well thought through suggestions. Exaggerating the business model is not always a great idea, but in an era where differentiation is critical and destination shopping is a requirement for comp store performance, marketing to your core is a high ROI proposition. The examples noted, and one of those brought up in commentary (Apple) are clear cases where being “who you are”–loudly–pays off. That assumes that the consumer has already voted on that value proposition (being more loudly Pier One wouldn’t have helped) and likes it.
Right now, online volume is the one bright spot across the entire industry. There is, however, a warning note on the horizon. Some of the more mature multi-channel plays are beginning to see slower online growth, as are some of the mature pure plays. The fact is that online shopping is in dire need of the same attention to competitive differentiation as any other channel of retail is. Too many sites look the same. While the author uses the example of luxury retailers playing to the middle, this is actually an example of poor implementation. Unless we are careful, we are going to find out that flawed business models aren’t protected on the Net anymore than they are in the physical world.
No doubt the internet and “flattening” of the world economy exists and is changing the world of retail. Our new graduates are high tech kids that will continue to buy on line. Even older people are more technically savvy and enjoying the experience of shopping at home. Then you have the parents who are shuffling kids to games and working 50 hours a week who enjoy the convenience.
If retailers want to keep people coming into their stores, they need to make it a place people want to go. The outdoor malls are popular because shopping is mixed with entertainment. The reference to Borders is another good example. You can get a cup of coffee and a muffin and enjoy a good book in a nice setting. The experience is what people are looking for today. They get speed and convenience from the internet.
Of course the successful retail model has changed: 7 out of the top 10 retailers last year were multi-channel. They combine and integrate in-store, online and catalog components to complement each other and to grow traffic, sales, profits, market share, share of customer — in all channels.
80% of retail winners (those that outperform peers in comparable store sales growth) operate in multiple channels versus only 50% of retailers who perform worse than average. It is amazing to me that so many retailers still do not realize the necessity of making the most of multiple channels.
Driven by the continued immersion of the internet into our daily lives, Americans have dramatically changed the way they research purchases, shop and buy. And research continues to show online activity drives offline sales. Yet of the retailers with web sites, 40% still don’t have any integration between store and online operations. It is not enough to offer customers multiple channels; they expect to be able to move seamlessly between and among them.
As I have telling my retail clients and audiences for years, multi-channel (I should say merged channel) integration is the strategy being pursued by retail winners of today and tomorrow.
Retail business models flawed? I’d say once-sound models have been rendered less effective and less relevant because of huge shifts in the underlying markets. The arrival of Web commerce into the mix of retail methods is one of several profound influences of this change, along with chain consolidation, channel blurring, and the pervasive use of category management, to name a few.
John G.’s best point above references the “flattening” effects of the Web. If consumers can get it anywhere, they want it everywhere–that goes for price, service offering, product, and experience. Fair or not, this raises the bar for retailers of all stripe–conventional and multi-channel–and makes differentiation more of a challenge.
We should never be surprised by a turn of the wheel in the retail marketplace. Its history is filled with players who rose to dominance, led for a while, and then faded as the relevance of their models were displaced by new competitors and conditions. The present era is no different. A softer economy merely exposes the underlying weaknesses of those who had hung on longer than their models might merit. There are no sacred cash cows.
The slowdown has exposed flawed business model, but like several of the others here, I believe that online is only a small part of the picture. In my mind, what’s primarily broken is what’s happening in far too many stores.
In the race to build scale and volume, too many retailers have cut so many corners that any unique selling proposition they might have had is no longer unique, or even compelling. Somewhere along the way too many retailing fundamentals have been lost. The retailers that are thriving have unique, appealing, high-quality assortments, focused and energized sales associates, an in-store experience that makes customers want to come back again and again, and a value proposition that rises above mere price alone.
I was going to respond with a lengthy note but I read Evan’s comments and I second them. The only thing I would ad is that the models cannot be changed until management is changed. Note I said “is changed,” not “does change.”
Today’s market is new and it requires new thinking and vision and leadership all of which are hard to come by in today’s managers. We need fewer managers and more visionaries in retail or else managers will keep on doing the same old management and accounting games to make things appear differently on their spreadsheets while the ship is sinking.
Rocks are easier to see at low tide. Baby boomers, along with thinking about selling homes for nearing retirement may also have reached the ‘stuff saturation’ point. There’s no room left and they’ve seen it all. The web provides much of stuff’s satisfaction without the clutter, and at a fraction of the price. And then, for the remaining few who really need stuff, it’s available for sale, rent, buy, sell (Ebay)…right there. Shopping has just become boring. There is nothing new to discover there.
The Sharper Image got itself in trouble because (1) it was a catalog company whose stores excessively cannibalized that audience and (2) it depended on too few best-selling items (air purifiers) to carry the whole business. Macy’s recent troubles have nothing to do with the internet or its upscale competitors. The May Company merger, like most mergers, hasn’t been easy, and in particular, there’s been a lot of self-cannibalization. And although the author admires Borders, that company’s management recently put the company up for sale.
Retailers doing well lately include McDonald’s, hardly known for great personal service, and Costco, though known for enlightened staff compensation and benefits, mainly attracts customers because of great value, not unusually excellent customer service.