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 real estate is still chasing too few dollars. Many over-leveraged, under-capitalized retailers still offer weak value propositions and may soon face a real reckoning. The macroeconomic pressures driving trading-down behavior won’t end anytime soon, while the rich continue to get richer. The disruptive forces that are pushing down prices and, particularly in cases like next-day and same-day delivery, driving up the cost of business will squeeze margins to the point of no return for many poorly positioned retailers. The power the consumer holds will not allow many just-good-enough retailers to sustain market share, much less ever achieve adequate financial returns.
It’s a good time to be a bankruptcy lawyer or liquidation firm because, unfortunately, more brands will go over the precipice. We see this slow death playing out every day. These troubled brands continue to run their one-size-fits-all ad campaigns and their “Super Saturday” sales. Their promotional signs call out longingly in hues of chartreuse and yellow. They stack merchandise high and hope to watch it fly. Their email campaigns consist mostly of batch, blast, and hope. They apparently continue to cling to the hope that a slightly better version of mediocre will turn out to be a winning strategy.
These brands act like they are still in business. They think that some customers still really care whether they stay or they go.
I see dead brands. And they don’t even know they’re dead.
CHAPTER 5
The Amazon Effect
“Your margin is my opportunity.”
—JEFF BEZOS
Because of Amazon’s size, growth, and disruptive impact, folks tend to get a few facts wrong about the company. First, Amazon is not the world’s biggest retailer—at least not yet. That position is still held by Walmart. Second, while Amazon’s online sales dwarf other competitors, it still has only about a 4 percent share of total US retail, with more than half of that derived from independent merchants selling through their platform, not their own direct sales to consumers. Amazon’s market share internationally is much smaller in most markets. In many cases it is growing rather quickly, yet it has formidable rivals such as China’s Alibaba and JD.com, India’s Flipkart, and Argentina’s Mercado Libre.
The main thing most people get wrong about Amazon is the belief that it makes a lot of money. Certain parts of Amazon have started to do well—most notably Amazon Web Services, which provides a cloud-based computing platform for a slew of industries, as well as its rapidly growing, cash-generating advertising business. However, the retail division has barely broken even for most of its history and didn’t start to regularly earn a profit in retail until just a few years ago. Even now their margins are often below industry averages, though sales growth remains robust.
Figure 5.1 Amazon’s Revenue versus Profit
Source: Vox; data from Amazon13
Moreover, when its continuing rise of fulfillment and shipping costs—which have been trending toward nearly 27 percent of sales—is taken into account, it’s hard to see how retail will become strongly profitable anytime soon.
Figure 5.2 The Growing Weight of Amazon’s Logistics Costs
Source: Statista14
There is no sense that Amazon—or Wall Street—is terribly concerned. Amazon has created an incomparable flywheel by offering unparalleled selection, fast and cheap delivery, and generally sharp product pricing. This has been great for consumers and investors, but particularly brutal (or impossible) for many competitors to profitably combat.
So Amazon finds itself in an enviable position on many fronts—and the main one is that investors continue to value growth over profitability. This allows Amazon to experiment with new concepts aggressively and invest in building long-term infrastructure, especially in product delivery.
Stop Blaming Amazon for All of Retail’s Woes
As stores close by the thousands, once-prosperous chains go bankrupt, and scores of malls are bulldozed or massively repurposed, it’s become common to lay the blame on the rise of e-commerce generally and on Amazon in particular. Given the rapid growth of online shopping and the fact that Amazon now controls some 40 percent of the e-commerce market, it’s easy to jump to that conclusion. Yet this argument has two huge problems.
First, as we have seen, some of the most disrupted sectors were in decline well before Amazon was a blip on the radar screen. The moderate department-store segment is a case in point. Amazon and other online-only players have only begun to have a material impact on these companies in the last few years.
Second, absolutely nothing prevented any of these retailers that have lost share to online retailers from developing their own similar e-commerce capabilities. In fact, a brand with really great digital capabilities combined with kick-ass brick-and-mortar assets that are well integrated should have important advantages in competing with