Photo: RetailWire
Will sales promotions be the death of department stores?
Have sales promotions become a “cancer” for department stores? Allen Questrom, the former CEO of J.C. Penney, thinks they have and said so in an interview on the CNBC show “Squawk Box” yesterday.
Mr. Questrom, who was credited with turning Penney around in the early 2000’s, said department stores have fallen back on sales promotions whenever business begins to slow.
“Sale[s] cannot be the only driver, it has to be a part of it. But product, presentation, excitement in the stores, the salespeople in terms of servicing the customer” all need to be part of the value proposition for department stores to succeed, he said.
Mr. Questrom pointed to Zara and Uniqlo as two clothing chains that have learned how to drive business without relying primarily on sales to attract shoppers, primarily Millennials, to stores. Department stores need to understand that Millennials, unlike their Baby Boomer parents, search for “inspiration, not aspiration” when they shop, he said.
While fast-fashion chains pose a competitive threat to department stores, the same is true of off-price retailers such as Marshalls and T.J. Maxx as well as a host of e-tailers.
Research by The NPD Group, released in July, found that two-thirds of consumers who shop for clothes do so at off-price stores. While consumers 45+ make up more than half of shoppers in off-price locations, Millennials are increasingly attracted to these shops. People between the ages of 25 and 34 represent 16 percent of shoppers in off-price outlets and their numbers are growing. Many department stores have opened their own off-price stores in response, but those moves have not directly benefited their full-price businesses.
The desire for department stores to move away from sales is not new. Former J.C. Penney CEO Ron Johnson’s failed initiative is often held up as a cautionary tale for other retailers looking to abandon discounting. After joining the department store chain from Apple, Mr. Johnson made the decision to abandon sales promotions and emphasize everyday low price. The move nearly destroyed Penney and led to Mr. Johnson’s ouster after just 17 months as the company’s chief executive.
Discussion Questions
DISCUSSION QUESTIONS: Do you agree will Allen Questrom that department stores need to focus more on inspiration rather than aspiration if they want to attract more Millennials as customers? Can department stores do this without losing the Baby Boomers that are now supporting their businesses?
Poll
BrainTrust
Ori Marom
Founder and CEO, Segmentis
Lee Peterson
EVP Thought Leadership, Marketing, WD Partners
His first statement is the accurate one: “’Sale[s] cannot be the only driver, it has to be a part of it. But product, presentation, excitement in the stores, the salespeople in terms of servicing the customer’ all need to be part of the value proposition for department stores to succeed, he said.”
Stores fall back on discounts because discounts are simple and tend to meet short-term KPIs for the executives. It’s too bad because these other values build long-term success.
His comment on Millennials? To me it’s pretty off base. Too bad he said such clear, savvy things then got distracted by the same shiny Millennials talk we hear too often.
The problem with this news is that it’s old. For many years now we’ve been talking about retail discounting being core to the structural issues the industry faces. Instead of continuing to identify the problem and say customer experience must be job number one, it would be best for retailers to instead start asking the tough questions about their business, customers and competition to figure out how to change course. This is a fundamental analytics problem retailers must fix. Honestly, I think discounting is now expected by all consumers so it cannot be undone. Instead, retailers must figure out how to embed discounts into an overall strategy to improve the customer experience. Either this, or become explicitly entertainment or experiential businesses with retail embedded within them — maybe that is the strategy?
Let’s separate promotional department stores (like J.C. Penney and Kohl’s) from higher-end stores like Nordstrom with a limited promotional schedule, and let’s include Macy’s in the bucket of promotional stores whether they like it or not. Mr. Questrom is correct that overpromotion runs the risk of “commoditization” in a business that also needs more focus on customer service and trend-right merchandise content. But the painful lesson of J.C. Penney in 2012 can’t be ignored: Most customers’ value perceptions of department stores revolve around the fact that they run frequent sales. When J.C. Penney tried to follow the lead of “fast fashion” retailers with everyday low prices (like Zara or Forever 21), it fell on its face.
Haven’t sales already killed department stores? When even Nordstrom succumbs and decides it can’t run its business without (at least) seven promotional periods a year — this from a legendary merchant who used to pride itself on only two sales per year — it’s hard to go against the grain. It has literally been decades since department stores have had the discipline to manage business by merchandising, and even some marketing, rather than markdowns.
It will be interesting to see whether the NRF’s expectations of +3.6 percent holiday revenues translate into any real growth in income for department stores. My expectation is that they won’t and that ultimately Mr. Questrom will be proven correct.
The concept of “sales” is anachronistic. On the Internet the product is always on “sale” somewhere.
The death of physical retail has nothing to do with sales. It has everything to do with competing where stores have no chance of winning.
Marginal cost-based pricing (that ignores fixed costs) has been recognized by economists for about 150 years as a great threat to competitors in undifferentiated industries. The French economist Francois Bertrand (1822–1900) pointed out that multiple sellers who compete on price only will all inevitably fail.
The American economist Edward Hastings Chamberlin (1899–1967) explained why sellers like Macy’s and J.C. Penney who mainly compete on price do not fail despite Bertrand’s prediction. They have a form of monopolistic power that has do with geographical location and customer loyalty. Chamberlin called this “monopolistic-competition.”
Now, the mobile phone has eliminated any form of local market power. “Sales” or not, the marginal pricing game is over. It is time for game change or death.
As I wrote in one of my most-shared posts, Millennials, He Wrote: How Retailers Are Paying The Price For Ignoring Baby Boomer Customers most department stores have thrown Boomers under the bus and have expected us to respond to endless coupons and trim-fit shirts with abandon. He’s right but it will take a team of people to get the experience human-to-human first, not tablet-to-Apple Pay first. You have to earn our business — we’re not rats to the Velveeta cheese of discounts. We’re hungry for something better.
As it turns out, our recent data tells us that retailers are being run BY Generation X, FOR Generation X. So Millennials are turning out to be something like the weather — everyone talks about them, but there isn’t much anyone (besides the fast fashion guys) is doing about them.
Go figure.
Good point, and that’s part of the reason why the fast fashion guys are winning. Generation X is a fairly narrow slice of the pie compared to Boomers and Generation Y. Go where the money is.
He is right — sales promotions need to be part of the mix but not the only way that department stores attract and retain customers. That being said, because a business model works for one retailer that does mean it will work for another. Nordstrom could certainly offer more sales promotions, but then would it still be Nordstrom?
The dilemma all department stores face is that while they would like to wean themselves from the heavy use of promotions they run the risk of losing their customer base as long as their competitors continue to emphasize sales promotions. Can it be done? The answer is yes, but to do so would require repositioning themselves in the marketplace. That is not a short-term process (ask J.C. Penney) and would likely mean their stock would take a hit in the short run.
This discussion continues to circulate, as if anything is going to change for the better. There is an old saying in marketing that asks the question, “What happens when you don’t promote?” the answer is nothing. That still holds true today, and yes there are exceptions for some very, very strong stores. Price is much more of a factor today than ever before and strong sales promotions are still very much needed to bring people into brick-and-mortar stores, as the online threat is looming over all of our heads.
I have also said here many times that yes, sharp promotions are important, but the ability to upsell while the customer is inside the store is the real key to profitability and many stores are horrible at this. I travel a lot and there are very few outstanding, engaging employees inside malls, restaurants and retail stores like supermarkets. Maybe 10 percent are amazing, the next 15 percent are very good and after that you have people who couldn’t sell you a snow cone in 100 degree heat.
It takes great training on both selling and customer service to get a customer to part with their money for something that is not half price, and this is not going to change. Online has its own issues, but we at street-level have to go the extra mile to grow our business, and it is very easy to resort to the old heavy discounting — consumers expect it in stores and online.
I am facing extinction if I do not find ways to bring people in to my store, as Walmart and Aldi own our county, so I will continue to bring the heat on deals and make sure my employees get the extra sales through engagement and product knowledge. The discounts will continue for as far as the eye can see and there will be more closures of all types of retail, as online continues to grow at a rapid pace. Wishing it to go away solves nothing; addressing how to make your business a destination point is the key to staying relevant.
Questrom is right, but where has he been with this thinking? I hope he advised the J.C. Penney board to keep Ron Johnson instead of losing patience and getting rid of the leader that was saying this exact same thing four years ago! Now, I’m not sure at this juncture if their leadership is capable of “inspiration.” Hindsight is 20-20, Allen.
Part of the solution will be to improve the knowledge that retailers have about their customers and target their promotions accordingly, preferably through the customer’s media of choice. Ideally, this should be achieved without needing to resort to a traditional retailer-based loyalty card program, which has had its day in the sun. Department store retailers should consider appropriate tools to not only help them better understand their customers, but also to enable these customers to be sent relevant, personalized communications which will entice them to return to the store.
I am with Doug. Sales cannot be the only driver — you can still get a deal with the right assortment and the shopper FEELING great. The deal is that in one store they got a whole new outfit and are done shopping. The sales or promotion idea is to promote the excitement. Macy’s is hard at work on this approach with store-within-a-store re-designs. This off-price and discounted stuff will peter out in a few years and the shopping experience will be number one again. Department stores need to re-tune the store-within-a-store play and ignore some of the Millennial-obsessed approaches. Millennials do not run retail and soon the Boomers will be retiring and looking for places to shop that require less driving — like a department store. We will see more in-store places to sit and relax and more cool small shops within the departments. Department stores are still a great EXPERIENCE that will improve as service people are re-trained and start enjoying their jobs. Home Depot re-trained and service has greatly improved. Department stores are next.
Allen needs to get off the same old story and get his great creative mind rolling on helping his old world.
Ah the eternal question. I thought Ron Johnson answered it. And once more, the answer was proven by the 154 million shoppers on Black Friday. No it won’t kill retail. However an irrelevant shopping experience featuring a lousy assortment at absurd prices with indifferent associates will kill a store/website/catalog/call center.
The role of off-price promotion is to drive traffic. As Black Friday proved, it remains the only content considered high value. Wage stagnation and job loss are real problems and while it might not be a nationwide issue, it remains a part of U.S. families. Yes, those living near economic centers are better off, and those living outside those bubbles are not.
Inspiration vs. aspiration. This is not limited to Millennials. The Presidential election proved what messages mattered and what didn’t to all voters aka shoppers. Whether your candidate won or not, it was obvious that authenticity and transparency mattered. Simple powerful messages of change mattered.
Millennial buying behavior, rooted in a digital life, has shifted from Boomers, but their shopping goals haven’t really changed. And there is plenty of data to show Millennial spending is restricted by the balance of income and debt.
So, once again, off-price messages are extremely relevant. All retailers have run a promo calendar forever. What all retailers need to address is assortment, price and customer intimacy. Then execute flawlessly across all shopper touchpoints. Together that is the retail experience. The tragedy this holiday is that there is so little new. TVs, gaming, electronic toys and an “all-on sale” are neither inspirational nor aspirational.
Yes, “retail ain’t for sissies!”
Allen Questrom is absolutely correct. If a department store, and J.C. Penney is a great example, cannot survive or grow without deep discounts and sales, it highlights the brand’s inability to connect with the customer.
There are many examples of retailers who do not rely on sales and discounts to grow. Certainly they use strategic sales as an advertising tool, but they have been able to grow without that reliance. I think about Wegmans, Nordstrom and Apple as great examples.
But department stores in general have rendered themselves obsolete by not embracing the changes in consumer behavior that began many years ago. Amazon, Zappos and other e-commerce companies are the new department stores who built loyalty by embracing the consumer. Sure they offer sales and discounts but if they stopped they would not rank like J.C. Penney did under Johnson.
I think Allen said it perfectly …”product, presentation, excitement in the stores.” These aspects of retail are the differentiators … where different skill levels emerge. There is not much skill involved in selling at 50% off when the competition is at 40%. There is no skill in putting “all, everything, entire assortments” on sale, even if it is Black this or Cyber that. Sales are table stakes at this point. JCP (and Macy’s) have proved that. Price driven promotions are an opiate for both retailers and consumers. But retailers and brands that have some level of emotional/experiential connection with the consumer will prevail in the end.
I’m certainly not going to disagree with Mr. Questrom — I doubt many here will. But I have to wonder if the department store CAN be saved — that is if we define it as a large store that sells primarily clothing/accessories and housewares to a broad selection of age and income groups (though of course different stores have always catered to different strata, so it was never quite so clear-cut). What if society has become so fractured, on both age and income lines, that the concept of “middle class” — the very thing the traditional department was built upon — disappears? Then what?