product value and convenience nor anything unique from a product, experience, or service standpoint. They sell fairly average “safe” products to the great masses of the population. A little bit of everything for everybody, nothing that special—or remarkable—for anybody.
Even worse, they are often deeply invested in real estate that may have been the right decision ten or twenty years ago, but today their portfolio is typically littered with many poorly performing locations. These stores are usually too big for the digital age and their design and layouts are anything but contemporary and attractive. The tired, outdated visual design of the average Macy’s or Dillard’s stands in stark contrast to the looks of fashion brands like H&M, Zara, or Supreme or newer beauty brands like Bluemercury or Glossier. The amount of money that needs to be invested to update and reposition a weak brand’s physical assets is more than a little bit daunting.
Making matters worse, basic execution—housekeeping, staffing, keeping inventory in stock, and so on—is also lacking at many challenged retailers. Devoid of anything remarkable, their sales productivity and profitability are poor. Rather than trying to innovate, the most common reaction to dealing with lagging store performance is to engage in a series of cost-cutting moves—which tend to make an already untenable situation go from bad to awful.
Retail’s Museums of Disappointment
I recently visited a once-vibrant regional mall in an affluent suburb of a major Texas city. While the center features an up-to-date Nordstrom and a handful of compelling specialty stores, it also boasts an uninspiring Dillard’s, one of the most poorly merchandised and maintained JCPenney stores I’ve ever seen, and a now-empty Sears store. Among the specialty stores are dozens of tired old concepts and an old-time food court featuring the usual suspects. The overall experience was incredibly depressing. The good news is it’s really easy to get a parking space, and if you want a free sample of teriyaki chicken you will not leave disappointed.
Sadly, this scene is repeated over and over, in city after city, country after country. Shopping centers, anchor tenants, and specialty stores that once served as shining examples of all that was good in retail now sit, largely empty or rundown, relics of a glorious past. Many small-town Main Streets look very much the same.
Demographic forces are beyond the control of any given retailer, big or small. No mega-corporation or mom-and-pop is responsible for stagnant wage growth or the policies that distort income and wealth inequality. Nor can most retail organizations possibly anticipate or respond to every technological change. Not every retailer is in a position to make wholesale changes or totally reinvent their business. But plenty of brands, big and small, have evolved considerably—and plenty still can. What’s required is an unwavering commitment to change, a willingness to take risks, and a robust plan to guide the journey.
The Increasingly Useless Middleman
Traditional retail, at its core, relies largely on being a middleman. The typical multi-brand retailer sits between the manufacturing community and its target consumers, performing valuable intermediary tasks like selecting the right products for the markets it serves, carrying local inventory, owning and creating attractive environments to sell the product, and so on. Alas, it’s precisely this other part of the middle that is now being squeezed.
The majority of great retailers in history achieved their success by building great stores, assembling a compelling mix of merchandise, presenting it in interesting ways, and providing service that meets or exceeds the customer’s expectations. A Saks Fifth Avenue or a Harrods, even if they carry a healthy percentage of their own private brands, still sells a wide assortment of other vendors’ stuff. But this aspect of their strategic advantage is increasingly being eroded.
Even before the significant growth of e-commerce, many manufacturers came to realize the value of selling directly to the consumer. Many did this because they wanted to control the distribution of excess merchandise and reach a more cash-strapped customer. Thus the era of the factory outlet store, and the malls that host them, was born. The first waves of these stores were not particularly glamorous, and most major outlet centers were located far from urban centers. Over time, outlet malls located themselves closer to (or within) major metropolitan areas and upscaled their designs, amenities, and tenant rosters. For some manufacturers, their own factory and outlet stores became major contributors to their overall corporate bottom lines.
Opportunities for their full-price business were pursued as well. Iconic luxury brand owners have long had flagship stores on the great boulevards of Paris, Shanghai, and New York. But in a bid to grow and showcase their brands even more powerfully, these (mostly higher-end) brands have accelerated the opening of their own stores around the world. Today, brands like Louis Vuitton and Gucci each have more than 500 stores globally, with more on the way. These same companies, along with quite a few others that once shunned e-commerce, are now (at long last) investing heavily in all things digital. Less elite brands, from Michael Kors to The North Face, have all dramatically expanded their “owned” stores and online shopping presence while still maintaining their traditional wholesale businesses.
Manufacturers and owners of well-known brands have seized the reins of control in other ways as well. The power of the internet, married with shifting consumer preferences, now allows these vendors to have a direct one-on-one relationship with the end consumer. This shift is dramatic on many levels. First, manufacturer brands can now glean greater and greater consumer insights without having to rely solely on expensive primary research studies or the hope that their retail distribution partners will share their data. Second, this allows these companies to become direct marketers in ways they never could before. They can now build sizable customer databases through in-store clienteling and online direct-to-customer sales. For the most part, until fairly recently, a manufacturer’s ultimate consumer was largely anonymous and its wholesale retail partners owned the relationship. Now these brands can reach consumers directly—and generally cost-effectively—bypassing the once all-powerful intermediaries.
The underlying business model and economic shifts are seismic as well. Brick-and-mortar retail is, for the most part, a fixed-cost business. Retailers are saddled with lease, inventory, and a number of other operating-related costs that change very little or not at all once a store is open, irrespective of actual volume. As many traditional retailers struggle in the face of competition from online-only players, more powerful national and local competition, as well as their own suppliers, a small loss in volume can have strongly negative impacts on store economics. This is a key factor in the decision to close so many stores. As manufacturer brands lose volume with their traditional wholesale partners, they are pushed to make up for it through other channels. This, along with the potentially superior economics of going direct to consumer (either via e-commerce or through their own stores), is pushing more and more brands to open and invest behind their own direct sales channels.
Nike is a great example of a company that has doubled down on going direct to consumer. Starting (in public at least) in 2017 and dubbed the “consumer direct offense,” Nike is greatly bolstering digital spending, upping its product innovation, localization, and personalization efforts, pulling investment dollars away from “mediocre” partners in favor of “differentiated” ones, and expanding new retail concepts like the House of Innovation, all in a bid to reach $16 billion in sales by fiscal 2020. So far results have been strong, with year-over-year direct-to-consumer growth in the low teens since inception and an e-commerce business that is on fire.
Traditional wholesale will not go away completely, but it will remain highly challenged. The pressure for the middlemen to demonstrate more value is becoming ever more intense. Here, too, good enough no longer is.
Dead Brands Walking
Before much longer the middle may be hollowed out completely. Until then retail’s great bifurcation is likely to continue unabated. Too much
