NRF 2016: Why brick-and-mortar retail faces a shakeout
Expect turnarounds, bankruptcies, and store closings to dominate the headlines in 2016
Almost everyone that Retail Dive spoke with at the NRF’s Big Show agreed on one thing: The retail business is changing fast.
“We are right now in the middle of the biggest, most profound transformation in the history of retail,” Robin Lewis, CEO of the Robin Report and a former executive at VF Corp. and Women’s Wear Daily, told Retail Dive in an interview.
The biggest drivers of retail’s transformation are the emergence of Internet and mobile technology, the rise in millennial spending power, the impact of globalization, and the empowerment of the consumer.
“We’ve now gone to a business where your best customer can be standing in your best store and with three touches of their thumb to a piece of glass, they can buy from your biggest competitor,” Fred Argir, Chief Digital Officer for Barnes & Noble, told Retail Dive in an interview. “That’s changed everything.”
Brick-and-mortar retailers seem to have known this was coming for at least the last few years. But seeing something coming doesn’t mean you’re able to get out of the way. With the pace of change seemingly accelerating every day, many traditional brick-and-mortar retailers with large store footprints will now be facing a shakeout in 2016.
“[The transformation is] exciting on one hand because of the enormous opportunities to really fundamentally transform our businesses,” Lewis said. “But it’s also the worst of times because of the absolute necessity to do so. Those that don’t change are going to be gone.”
The looming brick-and-mortar shakeout
Today’s hypercompetitive retail environment is creating “share wars,” according to Lewis, in which the growth of e-commerce will inherently eat away at the traditional incumbents.
We started to see this play out during the holiday season, where the growth of e-commerce appears to have largely come at the expense of brick-and-mortar.
“[I]t’s reasonable to say that online [commerce] overall grew 15-20%,” Steve Barr, a partner and the US Retail and Consumer Sector leader at PricewaterhouseCoopers, told Retail Dive in an interview. “But the leading online-only retailers … grabbed a 40% share [of that growth].”
“If the leading retailers are grabbing a disproportionate share of the overall growth, then it’s coming at the expense of the store-based retailers and their online offerings,” he continued.
Retailers have historically measured growth in terms of the square footage of their store footprint, but with the rise of e-commerce – which, you guessed it, requires zero square feet of store space – that may no longer be the way to think about retail growth. The problem is that many retailers over-expanded in search of growth that was never really there – and now, the bill is coming due.
“The US is the most over-retailed country on the planet,” Healey Cypher, CEO of Oak Labs and the former leader of the Retail Innovation team at eBay, said during a speech at the conference. “We have 46 square feet of retail space for every man, woman, and child. The next closest is the UK with 9 square feet. That’s insane!”
“We have a totally over-stored, overstuffed economy,” Lewis said, citing the same figure. “You’ve got supply growing faster than demand. The only way competitors can grow is to steal a larger share of consumers’ wallet – a wallet that is stagnant at best, or shrinking at worst.”
The result is that retail has more supply than demand, and this is why a shakeout appears to be imminent, if it’s not here already.
“I think in 2016 we’re going to see more store closures, more bankruptcies and restructurings, and increased shareholder activism that will either lead to mergers and acquisitions or consolidation of banners through transactions,” Barr said. “It’s inevitable – and we’re already seeing that early in the calendar 2016 but clearly there is more to come.”
Many brick-and-mortar retailers with large footprints are finding themselves challenged by the short-term pressures of sales growth – and the long-term positioning of their businesses. But there may be light at the end of the tunnel, as the brick-and-mortar incumbents have one surprising advantage – their stores. After all, the Amazons of the world simply can’t duplicate the customer service experience that stores can provide.
“The great news is the retail store is not dead,” Barr said. “But the retail store that does not have a meaningful relationship with the consumer is dead.”
The future for brick-and-mortar
For a long time, the concept of brick-and-mortar retail seemed pretty simple: Get people in the store, get product out the door.
Now, it’s not so simple. Today, every retailer faces the challenge of serving a customer that’s more informed, connected, and empowered than ever before.
“Retail [has been around] arguably for thousands of years. The stores haven’t changed,” Fred Argir, Chief Digital Officer at Barnes & Noble, said at the conference. “However, the customers have.”
Consumers today are increasingly able and willing to shop online and from their mobile devices.
“When you think that every brand, every store, every mall in the world is sitting comfortably in millenials’ pockets, what that says is the new point of sale is not the store anymore,” Lewis said. “The old notion of ‘build it and they will come,’ and the store is in the center and the consumer wants the store, has been flipped on its head.”
“It’s the consumer in the center,” he added. “The store has to go to the consumer, wherever they are.”
Omnichannel has become the new normal for brick-and-mortar retailers, several experts agreed, but that’s easier said than done.
“I think they’re getting that wake-up call right now,” Barr said. “I believe holiday 2015 was a tipping point for the retailers when they realized that online and mobile was going to transform their industry permanently.”
“Certainly, all the leading retailers have been aware of omnichannel,” he added. “But prior to now, it’s really been lip service. And now, it’s either reinvent or run the risk of being left behind. I think that’s just where we are.”
Another major challenge for brick-and-mortar retailers is that consumers today are more prone to spend on experiences than material things, such as vacations and fine dining. This is especially true of the millennial demographic, which is quickly growing in spending power while the baby boomers – for a long time, the largest customer segment in retail – go into retirement.
“The only way the physical stores are going to get the consumers to come there and leave the comfort of their homes and the easy ease of [mobile devices] is to provide an unbelievably awesome experience,” Lewis said.
One example is Zara, the flagship fast-fashion chain store of the world’s largest retailer. While traditional stores get a new line in every four months or so, Zara gets a new line every two weeks, according to Lewis. (It's worth noting that Zara's vertically-integrated supply chain is what enables it change inventory this fast in the first place, and most retailers don't have the same advantage.)
“Consumers can’t wait to go to their store to see the new lines that come in,” he said. “Zara’s visitation rate is 17 times a year vs. 4 for traditional retailers because [customers] don’t want to miss the nuance of that. That is a form of experience.”
Another example is Burberry, the luxury fashion brand and retailer. Burberry has embedded technology into every part of their value chain, including the front end, according to Lewis.
“You walk into their flagship store in London and they got forty-foot-high LED screens streaming live fashion shows,” he said. “[I]f you see a product you like, you can take your smartphone, scan the barcode, and it will trigger a video. [The customer] can sit there and the designer can talk to [them] about what inspired [the product]. They’ve got 500 screens and 100 speakers all synchronized to not only disseminate information to the consumer, but also to interact with them.”
These kinds of unique experiences can set stores apart and make consumers willing to go out to them, instead of simply shopping through their mobile phone.
The value-based retailers, the fast-fashion retailers, and the high-end retailers all have very clear identities – and the consumer knows exactly why they go to shop there, Barr said. The worst place for a retailer to be is in the middle – neither in the value space nor in high-end – without an identity.
“It’s those retailers in the middle that aren’t playing in the value space but don’t have an extraordinary in-store experience or innovative brands that are going to get lost in the mix here,” Barr said.
The road ahead: Repositioning for 2016 and beyond
As with any incumbent in any industry, it’s never easy to go from a tried-and-true business model that shareholders have bought into and transition to a wholly new way of doing business that may not make money at first.
So while retailers may understand the need to reposition their companies in the long term, they are struggling to do so in the face of shareholder pressure to show sales growth every quarter.
There is a problem of short-term thinking in the retail industry, according to Lewis.
“The biggest issue … we have going on in this industry [is] a race to the bottom,” he said. “The path of least resistance for these stores to steal share for growth – short-term growth – is discounting.”
“The reason they need to get that growth is because they’re being pressured by Wall St. and their shareholders. This is short-termism and it is blatant,” he added. “They’re making stupid, short-term tactical decisions that are going to be negative for long-term strategies.”
Although it may be pervasive, there are a few ways to solve the problem, according to Barr.
“The short-term pressures are exactly the reason why I think we’re going to see increased transactions,” Barr said. “The opportunity for retailers to go private is to give them the space they need to reinvent their brands, redo their store formats, and emerge a much stronger retailer.”
This isn’t new to retail. It’s been done before – and successfully, too. Struggling home-furnishings retailer Restoration Hardware was taken private in 2008 for $177 million. The private equity investor gave them the space, time, and money they needed to refocus on the long term positioning of their company, instead of pushing for short-term results. The company reinvented itself. Today, Restoration Hardware has a market cap of about $2.6 billion (at one point recently, it approached $4 billion).
“If you can have a compelling experience and relationship with the consumer, there’s an opportunity to be healthy, whether you are store-based, online, or omnichannel,” Barr said. “You just have to connect with the consumer.”
There isn’t a standardized answer as to how retailers can reposition themselves for the long term, but they need to be nimble enough to reposition themselves, Barr suggested. In other words, the way for retailers to reinvent themselves is to become agile enough so that they can continue to reinvent themselves over and over again, reacting and pivoting based on what’s happening in the market and the pace of change.
“The very high-performing fast-fashion companies can change their product offering very rapidly, they can or obtain the product at very low cost with great speed,” Barr said. “Those retailers that haven’t had to operate in that model – it really is adapt or die.”
When asked about how retail can adapt to innovation and disruption, Barnes & Noble’s Chief Digital Officer Fred Argir told Retail Dive that “there’s no one answer.”
“If anything, that’s the answer: There’s a thousand answers. There’s 100 ways to be right,” he said. “[You have to figure] out what aligns and not [have] the fear to look around the corner to see if there’s opportunity there to engage the customer in a slightly different way.”
“Where do you start? You start with the customer,” Argir said earlier in the day during his presentation on the future of brick-and-mortar stores. “Listen to your customer, get in stores, roll your sleeves up, understand how [they] want to shop.”