I channeled James Carville to title this piece. Back in 1992 he earned notoriety by keeping his candidate's campaign focused on one issue with the mantra, "It's the Economy, stupid!" The stories I've seen in the general business press about the recent spate of poor earnings posted by some leading retailers miss the mark. It's the digital transformation, stupid!
The number of major participants consumers will support in any particular category is shrinking. Deloitte reports that over the last five years the top 25 retailers in the U.S. lost nearly percent of market share, $64B. They're not trading share among themselves but losing it to a long-tail of e-commerce and omni-channel specialty retailers. Why? Digital transformation.
Barriers to scale are falling while barriers to creating a defendable experience are in flux. There's plenty of promising innovation in customer experience underway. But even once a company defines itself with great experience it's already at risk from the new consumer mantra, "My best experience anywhere is my minimal expectation everywhere." Why? Digital transformation.
It's not so much that consumers are more fickle than in the past. Consumer's "switch costs" to hop from one retailer to another has never been lower. A lot more consumers need a lot less improvement in experience to switch than in the past. There are fewer and fewer and fewer occasions to say "It's just not worth it." The Darwinian retail race of survival is accelerating. A little bit of "fickleness" goes a lot longer nowadays. Why? Digital Transformation.
Another big trend is that consumers already of age in 2008 learned new habits and an ethos of frugality in the Great Recession. They've held on to them as we said they would. A more worrisome trend forming now is that millennials who've come of age since the Great Recession did so with economic uncertainty and insecure forming their initial consumer behaviors. Compounding that, they are more into experience than ownership. Why? It's the economy, stupid!
Several of the retailers reporting disappointing results--Kohl's, Macy's, and Nordstrom for example have been stalwarts and shining light examples of omni-channel investment and business strategy. They're not losing share because consumers prefer online shopping, as some accounts would have it. These retailers run some of the best e-commerce business around. It's more to do with merchandise and marketing, and the latter isn't mentioned much by the press. They're dragging along too much legacy financial capital, technology, operations, and HCM practices. Why? Digital Transformation.
Ok, you get the point.
Let's look at long-tail specialty retail to start. The more mature wave of these competitors are category specialists, e.g., The Container Store and Sephora, with superior private label products and great customer service. On the latter they've doing what The Home Depot started three decades ago by employing tradesmen as store associates. Accomplished home cooks have served customers at Williams Sonoma for nearly as long. Now cosmetics champions solve skin care issues first and foremost ahead of selling merchandise at Blue Mercury. 75% of its customers come in looking for a solution, not a product.
Mature category specialists achieved enough scale to have material (financially significant) impact years ago. There have been step changes. Maybe Sephora marked one of those and did it in a new store footprint. In terms of size it carved out a "Goldilocks" store experience footprint between a behemoth department stores, mass merchant, and specialty big boxes on the one hand and in-line mall specialty shops (those slotted in between anchor stores) on the other. They're honing an optimal mix of space, location, inventory, and customer service. They make great use of omni-channel customer empowerment technology across all of these disciplines.
While innovative in those regards and differentiated with private label products and knowledgeable associates they still appeal to a fairly broad demographic mostly demarcated by income. Visit a Sephora shop or The Container Store and you'll see a wide range of demographics. Both have hyper-enriched an existing category with deeper assortments--micro-differentiated products. For example, compare the number of plastic storage boxes in the latter to the number Target carries. It's mind numbing. But in both cases it's not unwieldy SKU proliferation but precision niche product differentiation plus great planning, allocation, distribution, and inventory management.
Now there's a new wave of specialty stores gaining traction, micro-category stores in categories where they've not been seen and appealing to niche customer demographics. It's the same model exploited by specialty apparel shops like Chico's and Pink for a while and more recently by True Religion in denim. But these new models are creating new models in shaving and furniture. In the former think The Art of Shaving, not CVS and in the latter think Lovesac, not Pottery Barn. A lot of these are upscale, if not most of them. In that regard they riding the upper end of the "muddle in the middle and success at the ends" trend we've noted for years.
They're building or planning to build national fleets with fewer stores than the incumbents they're beating. Blue Mercury is a great example with disciplined micro-managed real estate strategies in selected markets. That's vastly different from the real estate strategy taken by The Gap and its sister Gap Inc. stores. Again, it's a goldilocks strategy.
These chains are succeeding with store openings despite the aggregate overstored situation of U.S. retail. I suspect that their national store fleet build-out plans at full saturation are a fraction of what earlier national specialty chains envisioned and built.
Mass merchants in the past especially Target succeeded with high density national fleets with more big box stores than they planned at first. For example, Target almost doubled its initial store count plan in Chicago—Sears' home market.
The new flock of national specialty stores with a "less is more" real estate strategy have to guard against the avarice of rapid growth offered by the false prophet of store expansion. Resisting this urge is all the more difficult today with falling barriers to scale.
This new wave is distinct in another way too. They have a very sophisticated understanding of their target market's lifestyles, emotions, and personalities and they have the means to parlay this into their marketing and store experience strategies. In high end men's apparel Alton Lane stores have pool tables and serve Bloody Mary's on Saturday mornings. Their understanding and execution are a marked step-change to something like The Limited's understanding of its customer as "sophisticated", and that's something it only recently realized.
Another new merchandise/customer segment strategy is emerging--broad assortments each tailored to a narrow demographic. Example, dealmoon.com is a broad line retailer focused on first generation Chinese immigrants in the U.S.
A few companies are riding the sharing economy trend, with the one-off event rental and subscription rental models gaining the most success to date. Rent the Runway is the longest serving example I know of here. It's maturing for sure, broadening its appeal beyond its first market--sorority women at southern colleges, but I don't know if it's profitable yet. Disciplined backend operations support inventory turns and more rentals per garment than planned (turns being constrained by fashion cycles and garment wear and tear).
Subscription commerce is another new model emerging across a wide range of categories, from household consumables to women's apparel and accessories (Le Tote).