What we are now witnessing in the retail industry is a forest fire. Will it be a controlled fire or one that could become a towering inferno is yet to be seen?
According to the US-Forest Service, controlled fires are used on public lands in order to improve overall forest health. Just like in a real forest, as we added more and more options/stores and not enough differentiation of experience, the entire ecosystem became overcrowded and unhealthy. When this happens, if some of the vegetation is not cleared away, the forest is primed for an event that could cause significant short term damage but will ensure the long term health of the environment as a whole.
Here are a few statistics to ponder:
- According to a late 2015 article in Forbes: "there currently is close to 25 square feet of retail space per capita (roughly 50 square feet, if small shopping centers and independent retailers are added). In contrast, Europe has about 2.5 square feet per capita".
- In the same article Forbes states, "since 1995, the number of shopping centers in the U.S. has grown by more than 23% and GLA (total gross leasable area) by almost 30%, while the population has grown by less than 14%".
- In an August 2016 report on CBS news online, Macy’s CEO Terry Lundgren noted that the U.S. has a “ridiculous” amount of retail space compared to other countries.
- The chart below is from an April, 2016 article in the Washington Post.
In my research there were some differences in the space per capita calculations, but there was general consensus that the US has too much retail space. Then you add the ability to buy online and you add more fuel to an already combustible situation. The definition of a fire sale has changed.
What caused this fire? Most people will say Amazon and E-Commerce. Some will say the great recession of 2008. Others will say the unrealistic expectations that we ever needed this much retail space. Whatever the reason, it is burning now and getting hotter every day.
Could this be a good thing? Of course not for those companies, employees, vendors and loyal customers to the stores that might not make it. But as an industry, maybe this is what is needed. Over the next 3 years or so, I believe this current retail fire will come to an end. We are seeing headlines in the paper everyday of someone getting caught in this blaze. I also believe that up to 20% of the current retailers (that includes brick and mortar and online retailers) could be consumed by the advancing flames.
You might be surprised to see I mentioned online players as well as brick and mortar. This whole internet thing is great for the customers, but can you really make money with free shipping, free returns and no additional markup due to price competition everywhere you look. Below are a couple of recent headlines,
- “Wayfair sales soar, but profits remain elusive”
- “Two years ago, Nordstrom bought Trunk Club for $350 million. Now it says it’s worth $150 million. Current expectations for future growth and profitability are lower than initial estimates.”
- "Amazon’s Shipping Cost Are Soaring, Should Investors Be Worried? Shipping expenses at the e-commerce giant jumped more than 40% last year".
- "One Kings Lane: From almost $1 billion to not material”.
As for our brick and mortar friends, below are some very concerning statistics from a recently published study by JDA/Price Waterhouse Cooper,
- “More than half of retailers haven’t started implementing, are struggling to define or don’t even have plans to develop a “digital transformation strategy”
- “Compared to 2014, there’s been a drop in retailers’ ability to manage omnichannel execution that can meet the demands of shoppers who now expect a “seamless blend” between a retailer’s physical and online store.
- “In fact, only 10% of CEOs say they are able to make a profit while fulfilling omnichannel demand because of delivery and other supply chain complexities, down from 16% in 2014”
One final set of statistics. In a recent Retail Dive article the chart on the left has some encouraging signs for brick and mortar retailers. As the chart shows, regardless of age group, consumers’ still see advantages to the in store experience. For example, the ability to touch and feel and try out items is the primary motivation even among the younger more technologically driven generations.
So, what is a retailer supposed to do to survive the current situation?
- Get your head out of the sand. If you think you can do nothing and ignore this fire and survive, think again. How many retailers thought the same thing when Wal-Mart was eating everybody’s lunch? Some thought, just ignore them and they’ll go away. Those retailers don’t exist anymore.
- Build a real strategic plan. This “real strategic plan” is not a theoretically based financial spreadsheet plan. What I mean is a true plan that shows the company; what to do, when to do it (sequence and timing) and how to execute the implementation of key initiatives. When more than half of retailers in a recent survey haven’t started implementing a digital transformation strategy, you wonder if they even have had the discussions on what they should be doing. How many retailers today have a strategic plan that starts with “Beat Last Year”?
- Blend the old with the new. Technology is the game changer, but so is old school merchandising and customer experience. Retailers have never been known to be on the bleeding edge of technology. Many believed in one principle, “It is all about the goods”. Today and definitely into the future you have to blend that principle with one major addition. Technology! The technology environment is changing so fast, you need to set a course that invests in a real digital/brick and mortar strategy. In a recent Retail Dive article they stated, “There needs to be a greater and more aggressive investment by retailers in IoT, automation, mobile, analytics and other solutions to be relied on everywhere from the first engagement with the customer, to the supply chain and all the way to the checkout line”.
- Lose the “if you build it they will come” attitude. Location, location, location was all you needed 15 years ago. Now you need to be much, much more. Again, technology, disciplined focus and enhanced processes can help extend your reach outside the physical environment.
- Realize that Brick and Mortar can be an asset. You know the statistics. Store traffic is down and online sales are growing. There is another reality; shipping direct to customers is expensive. Is that going to change in the future? With the customer still wanting to touch and feel and get it and go now, the question is how to blend stores and online into one seamless experience.
- Be great at every touchpoint with the consumer. From investigating a purchase, making the purchase, using the item or any after purchase customer service, the consumer want and expects you to be great at it all. This can be done!
- Have the guts to say no. Stay Focused. Many times executives can’t say no to projects. They start so many and never finish. They change directions so many times is seems like you end up where you started. You have to have the courage to say, “No not now”. Do what you have to survive this fire, before it consumes you. Stay focused on only those initiatives.
In a natural forest fire, the strongest trees do survive. But another amazing event happens. Even in the charred remains after the fire, new growth happens.
The same will happen in retail. The survivors can become stronger and better positioned to take advantage of the opportunity, but the new growth will help redefine the next generation of retail experiences. Some may think they can just sit back and watch this chaos around them and survive. They might have a shot, but it is more likely that they will become part of the smoldering ashes.
Who will survive and what will the new growth look like 5 years from now? Time will tell.
