“… Somebody has to do the job of curating or presenting those items that the local or the target audience wants to buy. That’s what a good retailer does. A good retailer also knows their customers.”

Transcript:

Mani: Hello, everyone. Welcome to the series of podcasts that Retail Singularity, an offshoot of Litmus7 Systems Consulting, is hosting on the future of the retail industry. We see retail changing very rapidly before our eyes and we want to be a part of the forces that are driving these changes. I am Mani Subramaniam, President, Retail Singularity. In this series of podcasts addressing the future of retail, I’ll be talking to leading retail influencers who understand the direction that retail is taking and to try and evaluate the impact of these changes.

Mani: Hello everyone and welcome to another edition of the podcast on the future of retail. This is Mani Subramaniam, President, Retail Singularity Hub. With me today is Paula Rosenblum from RSR. Paula Rosenblum is well known for her pragmatic approach to retail. She combines thought leadership with her practical experience in her writing, speaking, and advisory engagements. She was selected as one of the top 50 retail influencers by Vend. Prior to joining RSR, Paula built the research practice at RSAG, was vice president of Aberdeen Group’s retail research practice and a retail research director for AMR Research. Prior to that, Paula built over 20 years of experience as a retail technology executive, including several years as a CIO with Domain Home Fashions and iParty. Paula holds an MBA in management of High Technology from Northeastern University, and was nominated for the Beta Gamma Sigma honor society. She also holds a Bachelor of Arts from the State University of New York.

Mani: Hey Paula, good morning. What a pleasure it is to have you. I’m sure with your very rich experience and your perspective, we would all be benefited by your wisdom. I want to start by asking you some questions on the future of retail.

Paula: Okay, let’s do it, Mani.

Mani: Paula, am I the only one that is sensing that the world of retail is changing much faster now than it has been in the last 10, 20, 30 years or is my age showing?

Paula: No, I think what is true is that retail time, which we used to think of as really fast, is now slower than consumer time. Retailers are chasing that and so they’ve had to change faster than they used to, so you’re right. I mean the whole omni-channel phenomenon has really created change and has created requirements that were unanticipated even a decade ago, I think. I think it’s fair to say the rise of Amazon and price transparency has created changes. The death of the merchant prince and being replaced by influencers and or just feeling of the moment has changed, and then we flipped from the feeling of the moment to a desire for sustainability. So yeah, things are changing and they’re changing very quickly, definitely.

Mani: Okay, that’s a very interesting perspective you bring. As you know, we at Litmus7 Systems Consulting work with a number of leading global retailers. When I meet retail executives, one of the questions that I’m constantly asked is what should they be doing to not only change and survive, but also to thrive and take lead? What are the few pointers that we can give them?

Paula: I think the first thing to really internalize is that information is a very important asset. It’s not just the way we’re counting beans or keeping track of what’s sold. Information is now a key asset of the company, and those who do best are those who leverage that information, and that’s both transactional information and non-transactional information. Retail is really switching to a sense and respond industry, and those who thrive will learn how to use technology and more importantly, will be nimble. I think if I was going to summarize thriving in the next era of retail, it’s all about being nimble and quick.

Mani: Any specific examples of somebody who’s doing it well?

Paula: I suppose Nike is giving it a pretty good go. If I’m going to name a company who is willing to fail fast and try something else, it’s Nike. They spent a lot of money and they’re past failing, but nonetheless, I think they are a really good example. I think Home Depot has done a really good job. It remains to be seen how they do going forward, but I think they’ve done a really good job. Of course, everyone talks about Zara, the original fast fashion machine and they’re doing well. Some luxury retailers are actually leading in some very interesting ways. I believe that Keurig and Gucci both announced that they’re going to be carbon neutral by 2030, I think. That shows they recognize their customer is changing, and so they’ll be able to thrive with a new customer as we have the generational shift in luxury buying.

Mani: Great. Okay, thank you. Do you see a world where customers are more empowered nowadays than before? Where do you see that improvement coming from and what are some examples?

Paula: I mean they’re incredibly empowered now in terms of what they do with their wallets. What worries me is that there are these continued attempts to substitute self-service, or I don’t know what the phrase is, outsourced service for true customer service, and retailers do that frankly at their peril. If you’re a monopoly or you’re close to a monopoly like let’s say, Comcast, you can get away with subpar customer service because the customer doesn’t have a lot of choices, although a lot of them are cutting the cord. But the re are so many retailers, there are so many different choices that it’s really imperative that retailers stay close to what the customer wants, that they focus on customer service both before and after the sale.

Mani: Okay. One of the confusing aspects of reading data from today’s retail is that retail stores seem to be shutting down, but retail sales are quite sturdy and doing quite well, somewhere between 3.5% to 4.5% percent growth. How do we reconcile this and how do we explain this?

Paula: Well, to be honest with you, this whole retail apocalypse paradigm is nonsense. There’s a life cycle that retailers tend to have. Let’s take just as an example, PacSun. Okay, PacSun surfer gear got really popular. PacSun expanded in response. Surfer gear stopped being popular except among surfers and PacSun had to shrink. They took a big hit because ultimately, they’d over expanded for their core market. That’s the nature of retail, retailers rise, retailers fall. I am not sure. I depends on whose data you’re looking at. Whether the number of store closings exceeds the number of store openings this year, it’s really not clear to me. I know Coresight says one thing, IHL says another. What I do know is that the United States in particular has been over stored for years.

Paula: If you take a company like Gap, which has been shrinking its store base, they had way too many stores. I mean they just let themselves go wild and now they’re coming back down to what I’ll call a natural size. So the way I reconcile it is that certainly 10% of the businesses moved online. Depending on the vertical, anywhere between 5 and 20% of sales are online. For mass merchants, I think it’s less than 5, for a high end apparel, it’s 20. So I don’t see that retail is shrinking at all.

Paula: I think that reducing the number of stores is not a terrible thing. What is problematic is that just like in the rest of society, we’re seeing a bit of a bifurcation. I wish I knew a simpler word, but you take places like Miami where the number of malls is still exploding, in New York where the number of stores is still growing, particularly flagship stores. But then you take places like Allentown, Pennsylvania and they’re becoming mall deserts, right, and the middle of the country. So we have a societal problem that’s being reflected in retail, that’s for sure, but net sales are still up because people shop. They like to shop. That’s what they do.

Mani: Right. Okay. So with a reduction in the store availability or store space availability, will the metrics used by retailers to measure themselves change in any way? For example, will comp sales still continue or will gross margin [crosstalk 00:09:56] to continue?

Paula: I think so. I think that there will be others and everyone always talks about others. But push comes to shove, there are three questions, are your sales overall in chan- if you expand comparable sales beyond stores to channels that existed in prior years. So in other words, if you’ve been on the web for two years, that becomes a comparable channel. So if your sales and your existing business continue to rise, whether be it per square foot or per website, continues to rise and your gross margin is healthy, and you’re dropping money to the bottom line, you have earnings, that’s what at the end of the day, I think an investor wants to see.

Paula: That’s what a shareholder wants to see. Customer satisfaction is of course important. It’s challenging to measure it, but nonetheless that probably is one they should use more. Sentiment analysis seems to wax and wane around whether it’s a metric that’s important or not. There are also some supply chain metrics, but I won’t get into them today. I think that we’re bringing in too much merchandise all at the same time, but that’s not a new story. That’s been around forever.

Mani: Wow, okay, so there are quite a few changes that we need to use. Litmus7, as you know, is a predominantly technology services company and we’re suddenly have seen the rise in the deployment of technology by retailers suddenly. Where do you think this is going to play out in the retail of the future?

Paula: Well, we tend to look at technology in context. So we know that all businesses face challenges and we know from out of those challenges, they perceive opportunities. Technology is used to take advantage of the opportunities they perceive, so the role of technology becomes more and more important. I think that we can do a way better job online in terms of how we present, how we create a customer experience that’s personal without being intrusive. I think that we can do a lot with AI and machine learning in terms of merchandise forecasting. I think it’s really important. So I think that all of our data tells us that those who over perform in those call sales, who we call retail winners are using … are Leveraging technology to make their business opportunities work.

Mani: Right. Okay, that’s interesting, so we have some pointers on where we should be focusing.

Paula: Absolutely.

Mani: Paula, when I started in retail about 30 years ago, the merchandiser was the king of retail.

Paula: Correct.

Mani: He or she was often seen as somebody who goes around the world, sees exotic merchandise, brings it in, decides which stores are going to have it and which customers are going to have it, and they used to more or less drive retail. So from that world of push retailing is retailing not changing to pull retailing where customers demand what they want and get what they want, or is something else happening?

Paula: Yeah, I mean we were fond of saying, we have been fond of saying it’s no longer about what you want to sell, it’s about what customers want to buy. There was a line that got drawn in the sand when Mickey Drexler over at J.Crew retired, because that’s when people started talking about the death of the merchant prince. The merchant prince was he who pushed the product out there. Fast fashion became the antithesis of the merchant prince, because fast fashion said, “This is what consumers want. I’m going to get it in, get it out and be done with it.” There are some real indications, some of which is Forever 21’s bankruptcy, H&M’s inventory problem. That speed, that level of blip certainly in fashion is winding down, and we’re finding something really interesting. I’ve been just reading about this, that consumers would prefer to buy second hand better product than buy first hand really cheap product and the price being the same, which I think is really interesting.

Paula: That may be where the next swing goes because the pendulum, nothing … The fun thing about retail for me, and I’ve been around this industry like you for pretty long time, the fun thing about it is that it’s dynamic. It changes all the time. This push thing has been sort of winding down actually since the late 70s or the mid-70s as people started dressing the way they wanted to. Some haircuts go in and out of fashion and mustaches go in and out of fashion. But pretty much consumers have been saying for a long time, “This is me. I don’t care what they are doing, this is what I want to do.” I think that’s going to continue to happen. What’s interesting is I don’t know who … I don’t know if retailers self-created this price sensitivity or if it was a pre-existing condition that consumers had. In any case, it now definitely and really exists, and so pricing is going to have to remain table stakes.

Paula: I mean if I compare prices at Amazon with prices at traditional retailers, I find they’re pretty much in sync now. If they’re different, they’re different by a pretty small number. So what you do is you take price off the table and then you start to compete. You have to become efficient, which drives a lot of technology purchases as well, and so I see that. A lot of attempts to optimize non-selling function so that you can kind of squeeze more gross margin at a lower price, but I think it’s going to continue this way. I do think no market’s incented. I think fast fashion has hit a ceiling. I think Amazon’s growth is starting to level out. I think consumers are going to … in some cases, depending on their socioeconomic status, are going to want stated assortments very specific to their lifestyle and their needs. Other consumers are still going to want to do one stop shopping. It’s not an accident that Target and Walmart are doing so well. There’s a convenience for their shopper that we can’t deny.

Mani: Okay, thank you. That’s an good perspective to have. Many of us in Litmus7 started our online journey with working for grocers. Earliest was ASDA dot com subsidiary of Walmart, and we thought that grocery would grow. Grocery is, of late, began to grow, but it has been slow to take off. What formats do you think will take off and why is grocery lagging behind?

Paula: Well, as a general rule, grocery tends to be a technology laggard anyway, but there’s a reason for it and I’m not going to be disrespectful to them. Their model is very, very different than most other retail segments. They operate on incredibly low gross margin and incredibly fast turn. So they don’t really have the money in every individual item to slow things down by touching it more, putting it in a vehicle, driving it to somebody’s house, or even order online, have packaged it up for you and then have it waiting for you and have somebody there to put it in your car. The challenge has been, and this is true since way back in the late 1990s when Streamline first came out and Peapod, which is that it wasn’t a question of is there a market? It’s a question of how the heck do we make money at this?

Paula: I think that is still an open question. It’s a very, very real issue. The hope is that they buy online and pick up in store and they buy more. There’s some data that says that the basket size for a sale done online is bigger than the basket size of someone that shops in store. Now, what I don’t know if this is a result of pantry packing or if this is truly people buying more, and so I think it’s going to take some time to figure this out. It’s very clear that Walmart and Target are going full bore into this. Publix is using Instacart for it. That’s where I live down in Florida, Publix is the grocer of choice. They use Instacart. The prices you pay are higher, and for people like me, it’s close enough. It’s okay with me.

Paula: But that then, if you’re looking at that, that the only way you can make money is to charge higher prices, that creates an additional what … example of this bifurcation of society where people with lower incomes will opt to go to the store because they don’t want to pay the higher prices. People with higher incomes and less time or just higher incomes period, because I think lower income people probably have even less time, will opt for home delivery or just let me pick it up on my way home. So grocers, they tend to be slower, but in fairness to them, they don’t have … it’s not clear that this can be done profitably. It still isn’t clear that it can be done profitably.

Mani: Okay. Another interesting phenomena is that manufacturers and brands are reaching out directly to consumers. Nike and P&G are good examples of this. Is that a growing phenomena and how will it shape up?

Paula: It is a growing phenomenon that’s been a growing phenomenon and for some years now, but don’t forget the flip side of that as retailers increasing the percentage of private label they sell. So what you have is really what I’ll call frenemies, right? Where we’re friends and I buy from you, but the truth is I would prefer to get consumers to buy my private label. This is true across all retail segments from grocery to the stores that have done a good job of highlighting the private label all the way obviously to the department store where they also do their private label. The truth is even the smallest retailers are able to do a private label thing because there are jobbers and contractors who are willing to put an exclusive label in it for you. So do I see it evolving? I see it growing to a point.

Paula: One thing we really need to remember, and I remind people of it all the time .. I did it. I reminded people of it a lot in the mid-2000s, mid-aughts when Walmart was smashing it clear across the landscape, is that no market is infinite. It just isn’t, and so there is a limit to the number of consumers who are willing to shop in any one particular way for any one particular style. So is it a threat to retail as we know it as much as private label is a threat to brands as much as we know it? It will evolve into this frenemy relationship where you can expect some retailers to be half private label. Other retailers like Gap for example, they’re 100% private label, right? L.L.Bean is about probably 60% private label.

Paula: So it’s going to continue this way. Retailers would much prefer that they sell more private label, brands would much prefer that they bypass the middle man, but the bottom line is none of them really make anything. They’re all just brand managers. So retail is going to remain what it is, I think, and once you … If you like, look at it this way, if you know that you like a particular brand, why would you drive … Let’s talk clothes. It’s easier. Why would you drive to Macy’s and pick up something from Ralph Lauren when you know Ralph Lauren products is something you like and you can get it direct online? It’s just easier. So on the flip side, if it’s less expensive to buy a private label product, a consumer might want to do that.

Mani: Okay, which leads me to the final question of the day, have retailers in threat of being seen as inefficient middlemen who merely put some friction between manufacturers and consumers. If that is true, what’s likely to evolve out of that?

Paula: Well, I think they started as the curators of what their customers liked, right? So you’ve got this array of manufacturers, you’ve got millions of consumers around the world, billions of consumers around the world, and somebody has to do the job of curating or presenting those items that the local or the target audience wants to buy. That’s what a good retailer does. A good retailer also knows their customers. Manufacturers, they know their products. I’m not convinced that they know their customers as well as they know their products. They’re very fixated on their products, and rightfully so because their products, their brand is everything.

Paula: A retailer’s brand is all about showing, demonstrating that they can stock and have in stock and ready for sale those things that consumers want to buy. That’s kind of a huge difference, so I think that’s the way it’s going to stay. Those who like a particular brand will buy them direct from the manufacturer as long as the price is the same or less. That’s its own interesting subject because contractually, I’m not sure they’re always allowed to sell for less. They may have to sell for either more or the same. It depends on how their contracts were with their retailer clients. But no, I don’t see retailers as inefficient middlemen. I see retailers as the curators of what customers want.

Mani: Okay, thank you very much. Paula, as always, your thought leadership and your title as a great retail influencer has come into play. I can talk for hours with you on detail and I know that.

Paula: Well, I’m happy to talk to you. If you’ve got any other questions, I’m happy to give another one a shot.

Mani: Sure. We’ll end this session right now, and thank you very much.

Paula: My pleasure. Thanks, Mani. Have a great day.

Mani: Thank you.Paula: Bye bye.

Paula: Bye bye.