It’s easy to see how these diverging trends have directly affected the winners and losers in retail. Constrained spending power and price sensitivity among the lower 80 percent is driving spending strongly toward stores that offer more value. Many consumers that once preferred more expensive options are now, for all intents and purposes, forced to trade down to less expensive ones. This is a major contributor to the outsized growth being experienced by off-price retailers, warehouse clubs, discount mass merchants, or value-oriented grocers like Aldi and Lidl.
Conversely, affluent consumers are driving growth and profits in the premium echelon of stores, some of which is clearly being taken from more moderately priced retailers. The growth of specialty beauty players like Ulta and Sephora is a prime example, as is the continued strength in the luxury sector. This trading-up phenomenon contributes to the troubles among the boring, undifferentiated middle.
The chart below illustrates how both revenue growth has been strong among retailers at either end of the spectrum, yet has failed to keep pace with inflation among those in the middle.
Figure 4.2 Revenue Growth of Different Types of Retailers, 2015–2017 (Deloitte)
Source: Deloitte12
The Fault in Our Stores
Long-term trends, demographic, technological, and otherwise, have clearly exacerbated the issues for those retailers that find themselves stuck in the middle. But we shouldn’t lose sight of the fact that many troubled retailers are suffering from wounds that were largely self-inflicted over a period of many, many years.
Far too much of retail is still filled with tired old ideas and an abject failure to pursue innovation. Many of the retailers filing for bankruptcy or closing large numbers of stores have barely changed in over a decade. The same old mistakes, particularly an over-reliance on deep discounting, are repeated over and over again. Tour most regional malls or drive through a typical suburban shopping area, and you’ll find all the usual suspects and a veritable epidemic of boring, a maelstrom of mediocre.
During my career—and particularly during the past few years as a keynote speaker and consultant—I have traveled around the world and been exposed to a wide variety of different markets and retail concepts. One finding that is consistent, whether I am in New York, Los Angeles, Beijing, Sydney, Tokyo, Mumbai, or Dubai, is that an awful lot of retail looks and feels pretty similar. Virtually identical storefronts and websites. Look-alike promotional signs. One-size-fits-all marketing campaigns. Merchandise presented in an uninspiring way on a sea of racks and tables. Lackluster customer service, if there is any service to speak of at all. And as for product offerings, they’re often all the familiar name brands with wide distribution, plus quite a few obvious knockoffs.
Department stores in particular have been swimming in a sea of sameness for decades. Now they are drowning.
The retailers that are struggling typically have both strategic and executional issues. From a business design standpoint they often sit in the middle of the price spectrum, offering neither great 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