The Western retail industry seems to be going through something of an existential crisis. Every day, it is in the news, as brand after brand goes under.
In 2017, nearly 9,000 ‘big brand’ stores closed in the US, the highest ever. It was 40% higher than the previous record year, 2008, which was at the height of the great recession. There has also been a rush of bankruptcies – with 41 major brands falling into insolvency since the start of 2015; and these are not small brands – they include major names like Sears, K-Mart, Quiksilver, BCBG, American Apparel, Payless ShoeSource, Gymboree, Claire’s and Toys R Us. A large number of malls are struggling, and many have closed down. There is even a website called deadmalls.com, which is tracking this decline, and has over 450 malls on it.
And let’s remember that all of this chaos is happening in a growth economy – the US is in its ninth year of expansion, over 4% GDP growth is expected this year, and the stock market has been recently at record highs. Imagine what will happen to retail if there is a serious downturn!
And the problem is not limited to the US – Britain too is experiencing a severe retail crisis, made worse by Brexit. Again, the country has experienced record closures and the bankruptcies of major players like House of Fraser, Toys R Us, Mothercare, New Look, BHS and Early Learning Centre.
The crisis is spreading around the world. Areas with high e-commerce penetration like Northern Europe, Japan and China have been worst affected, but there is barely a region in the world where retailing is doing well, and the strong upward trend in internet shopping indicates that the problem is going to reach everywhere in the next few years.
This matters, because retailing is the largest private sector employer in the world. In the UK, it employs nearly seven million people, either in the stores themselves or in the suppliers who depend on it.
What is causing all this mayhem? There is a lot of talk about the role of ecommerce, but in fact there are a number of linked causes which are coming together to create the crisis.
But before we dive into these causes, let’s take a step back and look at the classical retailing model. Classical retailing is part of the supply chain created at the industrial revolution. Automated factories could produce huge volumes of standardised goods at low cost, but to distribute them all to the consumer you needed retail shops. The products were often produced far away, so you needed trust, which was created by the development of brands. Factories sold to brands, brands sold to retailers, and retailers sold to the consumer. Each added a mark-up which meant that goods were sold in the stores at seven-to-eight times the factory cost. Consumers paid this price, because it was only way they could get the goods. In practice their choice was limited to the stores near them, and they got most of their information from the brands’ marketing campaigns.
However, the last few years have seen a number of changes, which have started to undermine this traditional supply chain.
First and foremost we have seen the arrival of the internet, which provided an alternative way of distributing goods. Ecommerce has five key advantages over retail, the five ‘Cs’. Cost, Convenience, Choice, Control and Consumer relationships. Firstly cost – the cost of retail stores is generally 30-40% of retail sales, compared with e-commerce fulfilment costs of 8-12% so missing out this stage of the supply chain gives ecommerce companies a substantial cost advantage. Secondly, the convenience of being able to order from anywhere is difficult to match – in the US 67% of millennials prefer shopping online, and the biggest reason is quoted as ease of use. Thirdly, the choice of product presentable online dwarfs anything a physical store can offer – Best Buy – one of the largest ‘big box’ electronics retailers in the world carries 80 options of television – Amazon carries over 500,000! Fourthly, it is difficult to control what is going on in hundreds of locations simultaneously – goods are frequently out of stock, product information is often lacking and service levels are variable. Ecommerce by contrast is highly controllable – service levels are largely automated, product information is clearly laid out and stocks are held centrally in highly secure warehouses. Lastly customer relationships – having all the customer information in one place on their data bases gives ecommerce companies a huge advantage in terms of data analytics, personalisation and customer relationship management.
Armed with these five advantages, the etailers have chipped away at retail for the last eighteen years, until it has started to fall over. The global share of ecommerce reached 10% in 2017, which may not sound that much, but it is growing at a very fast rate. Whereas retailing globally has grown by 4% per annum from 2014 to 2017, ecommerce has grown at 72% per annum. In China it has reached nearly 25% of the total retail market, and there is no reason why other countries should not follow, albeit at different speeds.
And the bad news is that all the trends in technology are going to combine to further favour the ecommerce players – innovations like drone and robot deliveries and smart doorbells will reduce the cost of the ‘final mile’ of home deliveries. Mobile apps with automated payment systems will make ordering quicker and more convenient. Voice activated assistants like Alexa will increasingly manage our online ordering. Virtual reality – like this Magic Leap whale – will make it possible for ecommerce players to replicate more of the in-store experience online. Big data analytics will enable the tech-savvy e-players to develop ever more sophisticated algorithms. The Internet of Things will mean that more and more basics re-ordering will be done by smart fridges and the like, with no human intervention. And 3D digital printing will enable more online personalisation of products.
Apart from the rise of ecommerce, there is another way in which the internet has affect brands and retailers. We have seen that in the classical retail model, the brands controlled the flow of information about products, but now information spread has been democratised through the development of social media, peer-to-peer reviews and price comparison sites. Woe betide the brand or retailer whose product or service disappoints – negative messaging can go viral very fast and reputations that took a hundred years to build can be destroyed in an instant!
Fourthly we have the generational revolution. The baby boomer generation is retiring, and being replaced by Millennials and Generation Z. This is affecting retailers and brands in a number of ways. Most importantly, these generations are poorer than their equivalents were twenty years ago. Baby Boomers grew up in a growth economy, with access to cheap property and stable jobs with generous pensions. In contrast, millennials and Gen Z grew up with the Great Recession, and have had to live with the ‘gig economy’ and lean pensions, if any. The huge asset boom has put things like property completely beyond their reach. As a result they are delaying a lot of things like getting married and having families. This impacts their ability to buy lots of goods, if only because they lack space to store them, which is why they are tending to focus on experiences rather than products.
Linked to this and to the changes in information flow already discussed, we are seeing a revolution in branding. These new generations are dropping establishment brands in favour of new hip Direct-to-Consumer brands, who are offering better value and more inclusive brand messaging. They are spreading the news about these brands virally to their friends over social media, and people are trusting these messages more than the old-fashioned advertising of the classical brands. This is a huge threat to established brands.
The final cause of the apocalypse is internal problems with in the retail industry. Firstly there has been a lot of complacency among the retailers themselves. The ecommerce threat is hardly new – it has been around in the US for the past 20 years, so retailers have had plenty of time to react. The problem is that retailers have continued to focus most of their attention on their shops, treating ecommerce as an incremental business channel, as opposed to a potentially superior means of distribution. Thus they have failed to invest enough resources to gain a significant share of the fast-growing new channel. Most importantly, they failed to change their cultures away from the old centralised model based on metric like sales per square foot to the new entrepreneurial data-driven approach. As a result they were left flat-footed by the fast moving tech entrepreneurs.
As a result, their market share of the fast-growing ecommerce channel has remained paltry – by 2017 Amazon had amassed a whopping 41% of the US online market, compared with the top seven retailers with 11% between them!
This was exacerbated by changes in ownership of the retail industry. In the early years of the century, private equity companies invested in the industry, to such an extent that fully 50% of all the listed retailers in the US got bought out by PE. The PE companies did what they usually do, and loaded up on debt to support a massive expansion in store numbers. As a result the period 2009 – 2015 saw the fastest growth in store numbers of any time in history, such that America became the most over-shopped country in the world. As a result, when the industry hit the e-commerce wall in 2015, it did so at full speed. Most of the high profile bankruptcies in the US have been PE-backed.
So these then have been the causes of the retail apocalypse. But, more importantly, what are the solutions. The following are the key general actions that need to be taken by retailers as soon as possible, if they want to survive.
The first thing is to analyse what a store is really for. Stores have always had two roles:
- Fulfilment: To physically stock and distribute goods from factories to consumers
- Marketing: To sell to customers, providing great brand environments and customer service.
If we compare how stores perform against e-commerce in each of these roles, we will see some interesting distinctions.
In terms of the first role – fulfilment – shops actually suffer from a number of disadvantages versus e-commerce. With retailing you have to duplicate the stock over all the stores. This has a number of problems – it is expensive in terms of rents and other store costs; the stock itself is obviously very costly; over 50% of staff time is spent on stock management; best-sellers go out of stock in top stores, costing the retailer 15% of their sales each year and stock theft costs an average of 2% of sales.
By contrast, internet businesses avoid all the store costs, by storing their stock in low cost distribution centres. They can carry lower stocks for any given level of turnover, and are able to stay in stock more of the time, because their inventory is pooled rather than being dispersed. Finally, their inventory is also more secure, and they lose almost nothing in sinkage.
So in terms of fulfilment – the physical act of getting goods from factories to consumers – e-commerce is more efficient than retailing.
However, in terms of the second role – that of marketing to customers – stores, at their best, still have an advantage. They can provide immersive three dimensional brand experiences – think Sephora, Nike or Apple; they can provide very high levels of customer service, from highly qualified staff and they can create a sense of community – for example Lululemon, with its in-store yoga classes or Rapha Cycling with its ‘club houses’.
The problem is that most retailers do not actually do the marketing bit very well. As stated, most of their space is used as a ‘glorified warehouse’ full of back-up stock, and most of the staff time is spent on menial tasks like stock and cash management and till processing. Because you need a lot of space and people to store and process all this stock, you end up having little money to pay people well. Retailing is a low wage, back-breakingly hard job, so no wonder labour turnover is very high at 60-80%. This means that the skill and experience level of the average staff member is very low.
In summary, retailers actually spend a lot more of their time and resources on their fulfilment role than they do on their marketing role. This is a dead end, because e-commerce is better at fulfilment, and by wasting the potential marketing advantage of their stores, retailers are handing victory to the e-commerce players.
So the key thing for retailers to do is to accept that in the future their stores can no longer be predominantly about physically stocking and fulfilling products. They need to focus these valuable and expensive assets on what they do best, which is marketing. This means they have to hand off their goods fulfilment role to the retailer’s own e-commerce operation.
So the stores should focus on marketing to customers, understand their needs and make the sale. However at the closing point of the sale, the customer should be encouraged to sign up to the company’s e-commerce channel – by registering on their web site – and take delivery direct to their home. To persuade the customer to do this, the retailer would need to offer some advantage – for example a price advantage and, of course, free, speedy delivery.
Once customers are comfortable with this process, the retailer needs to shrink their store footprints, creating what are known as ‘Lean Stores’, by reducing the amount of stock in the store, keeping a selection of best sellers and only using them for demonstration purposes. Other items can be shown via the website. In these stores, the proportion of space devoted to ‘Brand Theatre’ – whether through impactful digital displays, experiential areas and customer seating and service – should be increased. The retailer should also see their stores as ‘Third Spaces’ – effectively club houses – for their brand community – thus shared activities like fashion shows, live events, celebrity influencer visits, coffee areas etc should be part of the thinking. Freed of their low level stock processing role, and other basic roles like till processing (which should be automated), the staff should concentrate on acting as personal shoppers to customers, taking time to understand their needs and offer expert advice. With fewer staff needed (smaller spaces, less stock processing etc) and lower rents (less space) more resources should be available to pay staff better, and thus attract and retain high quality ‘personal shopper’ type people.
By having all the customer data captured in their web channel the retailer will have the same advantages that the e-commerce players have – namely the ability to understand and predict customer behaviour. It will also enable them to re-market to these customers cheaply through their web channel.
It is worth emphasising that, if retailers do not do this, someone else is going to use the advantages of the web against them – and will lure away their customers. So if this is going to happen anyway, wouldn’t it be better for the retailer to ‘cannibalise’ their store business themselves? The high cost of online customer acquisition has been a major stumbling block to retailers building sizable e-commerce operations of their own, so this is potentially a very low cost alterative recruitment method.
Technology will also play a key part in reimagining the role of stores, and can be used in three main areas: firstly to reduce cost through automation of basic functions like tills; secondly to enhance customer experience through things like interactive displays and thirdly to enhance understanding of customer location, demographics and behaviour.
Turning to marketing, retailers and brands cannot continue to rely on traditional marketing campaigns. The old centralised media system has fragmented, with most consumers spending more time on social media than reading magazines or watching television. The problem is that introducing conventional advertising onto social media doesn’t work very well. People use social media to socialise with their friends, and they do not respond particularly well to brands interrupting their conversational flow. To really obtain cut-through in this new environment, brands need to ‘become the conversation’, and in achieving this the critical factor is innovation in products and services – the new disruptive Direct-to-Consumer brands have built their awareness online very rapidly by offering vastly superior products and services which have attracted enthusiasts; these brand evangelists have in turn spread the word virally to their friends. Consumer attention can no longer be bought; it has to be earned.
Retailers and brands also need to change their model from a ‘push system’ to a ‘pull system’ – the old model of centrally controlled, perfect brands is passing away. Modern successful brands act more like curators of communities united in their passion for a particular product. They are less controlling, allowing their customers and team members into the magic circle as product consultants, testers and co-marketing agents. Brands should also accept their customers as they are, rather than try to impose artificially perfect images on them. Perfection is boring to younger consumers – authenticity and honesty are in.
Brands today also need to have a higher purpose – just selling stuff doesn’t do it any more – really successful new brands put this at the heart of their mission – whether it is Warby Parker giving glasses to poor communities or Everlane building housing and hospitals for their factory workers.
Finally, retailers need to address their cultures. Historically, retail culture was highly centralised and top-down. The e-commerce companies, by contrast, adopted the egalitarian culture of Silicon Valley, and trusted their young technologists to create innovative solutions, giving them a huge speed advantage over the slow-moving retailers. The most innovative retailers are realising this, and bringing in senior resource from the technology sector – for example, Walmart bought Jet.com, led by ex-Amazon data genius, Mark Lore, and put him in charge of all their ecommerce interests, which has led to a swift rebound in their results.
To summarize – the crisis in Western retailing is real, and it is spreading round the world. It has multiple causes which are more complex and more fundamental than is often realised. However survival is possible, by following the actions described above. The retail industry is a key sector in terms of jobs and investment. It is to be fervently hoped that it can evolve fast to stay relevant in a rapidly changing world.
About the Author
Mark Pilkington is an experienced retailer and consultant, now based in the UK. After graduating from INSEAD, he joined Courtaulds, eventually becoming CEO of Gossard. While there, he coordinated the initial launch of the Wonderbra, with the associated media storm across Europe and North America. He has worked subsequently on joint ventures with M&S (splendour.com), and has consulted extensively in the Middle East in the lingerie and cosmetics areas. His current role is in consultancy for major retail groups on strategic developments in a rapidly-changing sector, with clients in Europe, the US, the Middle East and Asia.
He is the author of Retail Therapy: Why the retail industry is broken – and what can be done to fix it (Bloomsbury, 2019).