CEO of First Insight
The WWD Apparel and Retail CEO Summit in New York last week was as high-energy as ever. This was my third Summit, and the speakers and sessions were dynamic, insightful and, as promised, “transformational." The theme this year was how retailers are transforming their businesses to meet the challenges and opportunities of the digital age.
I also had the opportunity to address the audience at lunch on the first day. I told the story of walking into my 10-year-old son’s room the previous weekend and seeing a card on his dresser. It said: “If you’re the smartest person in the room, you’re in the wrong room.” I told the audience: “Based on the speakers we have heard from so far, I am clearly in the right room.”
While all the sessions were compelling, a few stood out to me. The first was a presentation by Dr. Sydney Finkelstein from Dartmouth’s Tuck School of Business entitled Why People Don’t Learn. Finkelstein talked about how intuition based on experience can be an executive’s worst enemy in times of major change and flux.
“Many of us rely on our intuition based on our experience," Finkelstein said. “When we’re confronted with new situations that are really different, it is possible that our experience can hurt us rather than help us, and that goes completely against the grain of how most people think about experience.”
“All of us have a natural tendency to overgeneralize from small sample sizes,” he continued. “So if you’ve done something once and it worked well, we tend to believe that we can do the same thing again.”
Just a few hours earlier, Eric Wiseman, CEO of VF Corporation, told the audience that he had personally made a $20 million mistake in Japan. I wonder how many of us would have the confidence to explain to a room full of our peers that we made a big mistake and that it took someone else with a different experience set to fix it?
It is interesting that Finkelstein was talking to a room full of fashion executives, many of whom have relied on their experience and intuition in, among other things, designing and selecting new fashion products. I could not help but think that Sydney was opening their minds to using other approaches.
Terry J. Lundgren,
Chairman, CEO and
President of Macy’s Inc.
Terry Lundgren, CEO of Macy's, talked about Macy’s strategy for growth going forward.
When asked about pricing and promotions, Lundgren said: “You’ve got to start with the product the customer wants.”
“We forecast what customers are going to want six or eight months from now. They identify fashion trends. They have zeroed in on this Millennial customer, and they are right. This is hard, and that is our business — trying to understand what the customer is going to want next season, and it’s not necessarily what sold last season. In fact, it’s rarely what sold last season. That’s forever the challenge of our business.”
“You can have the most beautiful stores, but if you don’t have the right product, it doesn’t matter." A long-time merchant, Lundgren knows that consumers buy products they want, and where and how they buy them is secondary.
One of the new speakers this year was Nick Robertson, CEO of UK-based Asos.com, the world’s fastest-growing online retailer. Asos has over 20 million unique visits a day and is targeting consumers in their twenties. Over the next few years, Robertson sees the business growing to the point where it is evenly split between men and women. He’s targeting this age demographic since Asos knows young people are spending their money online. For this age group, in fact, they have found that 40% of their fashion budget is spent online. By the way, Asos is now approaching £1Billion in revenues without brick-and-mortar stores, selling both private brand and branded product.
CEO and cofounder
The most interesting part of Robertson’s presentation was his discussion of the rise of “fashion democracy." For the next generation, he said it will no longer be about what is presented to them on the “High Street."
“The High Street’s presence is being democratized. Twentysomethings have better things to do than go to the High Street. The world’s largest brand is in their pocket [via a mobile device].”
This is so true. My 21 year-old daughter does not know of a life without air conditioning, power windows on a car, the internet or a cell phone.
Robertson knows that with technology today, consumers will have an active voice in the products that are offered, and this is already influencing Asos’ assortments.
Overall the WWD Summit was an action-packed two days and has given all of us a lot to think about as we go back to running our businesses. I look forward to your comments and questions.
President and CEO
First Insight, Inc.
In the first two parts of this series, I discussed how the successful convergence of science and art could produce great things. From winning baseball teams to Hollywood blockbusters, industries that have previously shunned technology have seen the enormous value that science and analytics bring to the art of creating innovative ideas and solutions.
As a former retail merchant turned supply chain executive, I have witnessed first-hand the evolution of technology in retail and the positive impact it can have on product selection and forecasting. Walmart, for example, has demonstrated this as it has grown to become the world’s largest retailer through supply chain excellence and technology adoption.
As a retailer, you take risks every day and every season on new products. Your intuition has served you well to get to where you are, but you are one person. As your company grows, how do you scale this capability? And just as importantly, how do you SUSTAIN it? Isn’t that what Wall Street analysts ask every day?
What about those retailers and manufacturers which have not been as successful? What tools are available to help them get on track or help sharpen the competitive edge?
How can you improve your batting average or box office success?
Today, retail executives have access to tools that inject science into the art of design and merchandising. Most of these tools use historical data on existing products to attempt to build forecast models for new products - pricing, inventory optimization, etc. So the idea of using science in retail is not new, but the practice of using historical data to predict new products is, well… history.
First Insight is different. Our solution gathers real-time, forward-looking data on new products. We do this by engaging consumers online, capturing their point of view on a product’s value, applying predictive analytics and giving retailers a forward-looking view on how the market will respond to each new product.
Don’t believe it’s possible?
Let’s take a few minutes and explore a couple of real world examples: Vera Bradley and David’s Bridal.
In 2012, Vera Bradley was preparing to enter a new product category (Baby). Because it was an entirely new category, they did not know the prices the new products would bear in the market. Utilizing First insight enabled real-time feedback on which products to select and how to price them. Prices were increased on products recommended by the First Insight solution, and the result was an overall increase of 4% in sales above the original plan.
David's Bridal, the largest and fastest growing bridal retailer in the world, was looking for a way to shorten their time-to-market with new gowns.
The entire product introduction cycle was 8½ months and their forecast accuracy was below 50%. The biggest single time constraint was in-store testing, which took approximately 3 months to complete from design to sample delivery in stores.
Utilizing the First Insight solution, they reduced their in-store testing cycle from 3 months to one week. They also found one of their best-selling gowns of all time through the First Insight solution, which gave them the confidence to more than double the buy. Sales of the dress were 120% of what they originally expected.
You wouldn’t drive a car looking out the rear-view mirror, so why run your business looking only at historical data?
Putting it all together
Vera Bradley and David’s Bridal are just two examples of fashion companies that have coupled the art of design with the science of product selection and pricing. The science is not a replacement for the art of the merchant or designer - it is an enabler that gives support to their decisions. Trust your instincts and verify with data.
The result: more winning products at the right price points. And bigger bonuses for the merchants.
Baseball… Hollywood… and now Retail. The time is now for data-driven decision-making. Why not see if you can tip the odds in your favor?
The confluence of science and art has created some of the most significant achievements in architecture, music, sports, and even business. In part 1 of this series, I discussed the connection between science and art in the world of baseball. In part 2, I will explore the approach some major Hollywood studios are taking to incorporate data into the art of filmmaking.
Similar to baseball, Hollywood movie production companies risk billions of dollars each year on hundreds of movies across all genres. Very few are blockbusters; many are duds and lose money, and the rest fall somewhere in between. Combining a good script with an “A” list celebrity does not guarantee success. Yet for decades, this was the accepted formula for increasing the odds of producing a winning movie.
As with baseball, Hollywood is an industry steeped in tradition, and the pervasive thinking is that movie production is an art form. However, with sophisticated investors looking to balance risk and return, “big data” and analytics have found their way into the “back lot”.
So how are Hollywood studios embracing technology to be more profitable and successful? Data and analytics are now being used in two areas: script development and marketing for both movies and T.V. series.
Script writing has long been an artistic craft which many have attempted while only a few have succeeded. Thousands of scripts have made it to the big screen, and the outcomes of these movies are now known (i.e. blockbuster, dud, or break-even). Interestingly, each script can actually be broken down into hundreds of attributes. This is an analyst’s dream – a repository of millions of data points and a known set of outcomes. How does someone draw conclusions on potential success or failure of a movie script based on all of this data?
Enter Epagogix, a predictive analytics company that places valuations on plot points like car chases, love scenes, location and quirky sidekicks. These factors are scored according to a directory in the way a teacher scores a test. The scores are fed into a computer, predictive analytics are applied and a calculation of how much the movie will make is determined.
In addition, insight is gained on where changes could be made to increase the earning potential, such as changing the setting or scaling back a role.
The solution was used by a major Hollywood studio to forecast the revenue of 16 new TV shows that would be airing in approximately 3 months. Epagogix analyzed all 16 pre-season trailers to gain insight on their potential success. The shows aired and of the 16, the Epagogix solution nailed 14 of them with regards to viewership and ad revenue.
One Hollywood studio exec said about the solution, “You’re like card counters in Vegas. If you can help us miss just one turkey a year, that would be immense. “
Another area where analytics are being used in the film making business is in marketing.
The typical marketing budget for a feature film is half of the production budget. If the budget is $100 million, $50 million goes towards the marketing effort to fill the seats in the theater. But as is often the case, the production company simply doesn’t know who their audience is or what it could be. The model is antiquated and ineffective in most instances.
One company that is changing the way filmmakers market their art is FilmBreak. Essentially a virtual film studio, FilmBreak empowers filmmakers to actively build, engage, and monetize their online audience. Prior to release, filmmakers can quickly and easily promote their films through social media, build a fan base, and incentivize fans to support their films by offering access to exclusive content, live stream video chats and production updates, as an example.
FilmBreak helps filmmakers figure out who their audience is and learn about their taste profiles. The data they collect helps them optimize their marketing effort so their marketing dollars can go further.
Similar to baseball, rather than using data to take away from the creative magic of screenwriters which has been trusted for decades, the goal is to make the production more merit-driven based on verified information, not on somebody’s opinion or connections.
So far we have explored the practical applications of combining science and art outside of the retail industry. In my final post in this series, I will discuss how the right mix of science and art is changing the way retailers design and select new fashion products, mitigating the risks of new product introductions.
Part 1 - Moneyball
Left-brain vs. right brain. Logic vs. emotion. Science vs. art. For centuries, we have assigned people and their thought processes into one category or another. But does is it really need to be one or the other?
There are many examples throughout history of how artistic talents have been married with specific scientific skills to solve complex problems and create wonderful things: the great pyramids, the works of da Vinci, the Roman Coliseum, Machu Picchu and the Pantheon are just a few. The most successful people, cultures and business have found the right mix of the two.
In modern times there are equally impressive examples of the marriage of science and art. In this three part series I will explore this dynamic across several industries, concluding of course with my favorite – Retail. By the end I hope you will agree with me that the most money can be made when applying science to artistic endeavors.
My fellow merchants – Please stick with me as I present this topic and set the stage for the next generation of science and art in retail. It will be well worth the read.
First let’s start with baseball.
Suppose you ask a friend how much change they have in their pocket and they respond, “eight coins.” Would you think you had learned much about the exact amount in their pocket?
Compare this to determining a player’s batting average where you divide the number of base hits by the total number at bats. Does this tell you much about what actually happens on the field? In other words, it doesn’t tell you how the baseball team scores runs, gets outs and wins games.
In both examples, the measurements do not answer the real question being asked. In these questions lie the foundation of sabermetric thought.
Popularized through the book Moneyball and later in the movie starring Brad Pitt as Billy Beane, the term “sabermetrics” is derived from the acronym SABR, which stands for Society for American Baseball Research.
Baseball is, and always has been, a numbers game. Since its birth in 1845, baseball and numbers have been inseparable. Baseball has also tried very hard to maintain its “old school” mentality when it comes to changing rules or processes for the betterment of the game. For example, we still have umpires making judgment calls on balls and strikes when a computer could easily make accurate calls instantaneously.
Each year, teams invest millions of dollars in players –both new draft picks and free agents –at the risk of one or many of them not performing up to the level needed to win. For the first 150 years of baseball, scouts would look at the traditional statistics – batting averages, RBIs, stolen bases and ERAs – used to determine the potential for each player and a corresponding dollar amount they were worth.
So it came as no surprise that when the sabermetrics concept started to gain traction in the world of baseball, the traditionalists were not impressed. For many, there is no reason to view the game through such a complicated lens. They felt the game should be experienced and analyzed as it always has been, and reducing the game to a binary code would detract from the true essence of baseball.
But a funny thing happened on the way to the ballpark.
The merging of science and art is often born out of the need to solve a problem. For the Oakland A’s in the late 1990s and early 2000s, the problem was money. Under new leadership, the team salary was slashed to a level that gave the A’s the third lowest payroll at approximately $40 million. In contrast, the Yankees were at the top at $126 million. With no salary cap, how does a team at the bottom of the payroll ladder compete against a team at the top?
Enter Billy Beane and sabermetrics.
Beane, a former player and now VP and General Manager of the Oakland A’s, studied and adopted the concepts behind sabermetrics in an effort to find value in players that would have otherwise been passed up. Beane applied predictive models to non-traditional stats like on-base percentage to determine the player’s value.
Beane looked under the rug and found value in players who were passed up based on traditional statistics. The result? They reached the playoffs in four consecutive seasons from 2000-2003. In 2002 they became the first team in over 100 years to win 20 consecutive games. Given that the A’s did not significantly increase their payroll during this period, I‘d say this was a very successful, non-traditional use of statistics to solve a challenging problem.
The model used by the A’s has now been adopted throughout baseball. However, even though analytics were brought into the process to validate the scouting, the scout is still trusted for his role in identifying candidate new players who could be a fit for the team and its culture – which is more of an art. It is this blend of art and science that has been adopted throughout baseball.
The end result is efficiency - identifying more “diamonds in the rough” and fewer busts. At First Insight, we apply a very similar process to finding winning products for the retail industry. The designer and merchant are experts in the art of setting trends and identifying candidate new products. First Insight adds the science of predictive modeling to determine which items will be the winners and how to price them.
In my next post, I will look at how Hollywood has adopted a similar approach – applying science to the artful craft of movie making.
For the quarter ending July 2013, Thomson Reuters put the average comp sales gain among reporting retailers at 1.9%, which is relatively flat compared to Q2 2012. Here are Q2 comps reported from several retailers:
- Macy’s – Down 0.8%
- Walmart – Down 0.3%
- Urban Outfitters – Up 9%
Top performers for the quarter included home improvement stores which are benefitting from a stronger housing market. Leading the way were Home Depot, up 6.9% and Lowe’s, up 5.3%.
Department stores saw smaller gains with an average comp increase of 2.6% across the category, with Nordstrom on top at 6.7%.
And although purely an online play, Amazon continues its upward momentum. Online sales still make up a small percentage of overall sales, but the upward trend in e-commerce is having a stronger impact on revenue for those retailers which have put their full weight behind e-commerce vs. those which have not committed to an omni-channel strategy.
That said, why are some companies increasing comp store sales and others are not?
First, let’s consider the metric of Comp Store Sales.
Why Comp Store Sales?
Year-over-year comp store sales is the de facto measurement used to track retail growth as it eliminates incremental new store sales and accounts for seasonality.
But to increase comp store sales, at least one of two key factors must increase: store traffic and/or the conversion rate of shoppers.
As I read through the spate of disappointing earnings, particularly among teen retailers, one element was consistently cited as a contributing factor to poor earnings and comp store sales: store traffic. Yet, according to ShopperTrak, shopper traffic in retail stores and malls was up 6.9% in May 2013 vs. May 2012, flat in June 2013 vs. June 2012 and down 2.3% in July 2013 vs. July 2012. Although traffic is starting to trend downward, it is not as precipitous as the downward comp sales trend reflected in recent earnings calls.
If in fact mall and store traffic is declining, what can retailers do to increase comp store sales?
The answer is simple. Convert more of the customers that are coming into the store into paying customers. After all, not all retailers announced declining comps for Q2, so some are clearly converting at a higher rate and are gaining share.
Although conversions are critical, according to Retail Customer Experience, only 35% of retailers track conversion rates in their brick-and-mortar stores. Calculating conversion rate is simple: Divide sales transactions by the number of people that came into the store. If you count 200 people coming into the store and 100 transactions, your conversion rate would be 50%.
Poor conversion rates can be attributed to a number of factors including inadequate staffing and long lines at the checkout counters. However, the two primary contributing factors to low conversion rates are out-of-stocks and poor merchandising. If you don’t have enough of the winning products, or never had the right products to begin with, your conversion rate will always suffer.
Turning traffic into conversions
Understanding why people don’t buy is difficult to ascertain. However, it is clear that many customers are leaving without buying because the store simply didn’t have the products they valued.
Adjusting inventories to reduce out-of-stocks and filling the floor with the right products is no longer a guessing game. It can be done in near real-time to impact existing products and to make future buying and merchandising decisions.
First Insight can help you understand how to run your business in anticipation of what the market is going to do…not to react to what’s already happened.
When you think like your customers by listening to them, more of the traffic will convert from browsers to buyers.
During the recession that swept the globe from 2008-2009, the word “growth” was barely uttered for most retailers. Many struggled to stay above water, and unfortunately some did not make it all. During this time, two things changed: the economy and the consumer. At the same time the economy was faltering, the consumer was becoming more and more technology savvy, leveraging the digital world to research products and find which stores had exactly what they wanted at the lowest price.
With the economy slowly turning around, growth is back at the forefront after years of taking a back seat to other strategies.
At the Piper Jaffray Annual Consumer Conference two weeks ago, Glenn K. Murphy, Chairman and CEO of Gap Inc. stated that the company “drove our business on market share in the Nineties through real estate and the introduction of new brands. You don’t gain market share anymore through a real estate strategy.” Growth over the next decade will come from new products and new categories.
Whether it’s a new brand targeted at existing customers or entering a new category altogether, diversifying a portfolio of products can be a daunting challenge, especially when a retailer has no sales history in the category. Several questions need to be asked and answered in order to create the right growth strategy through product line expansion:
- What is the size of the market we want to go after?
- What are the characteristics of the consumers who will buy the product?
- Which product attributes will resonate the most with those consumers?
- How well will our brand extend into the new product category?
- How does my pricing stack up in order to be competitive and profitable?
At the same conference, Joe Parsons, EVP, Treasurer, COO and CFO at Michael Kors commented on their move to diversify from their core handbag offering into other categories such as leather goods. “We’re actually very excited about the accessible luxury business, which we believe is growing both in North America and globally. So we think our positioning is excellent there.”
Turning “We Believe” and “We Think” in to “We Know”
Increased market share in today’s retail environment needs to come from product diversity, exclusivity, innovation and actionable data to support these decisions. This includes incorporating 21st century technology that gives retailers a forward-looking view based on input from the most important driver of growth: the consumer. Used correctly, the right technology can take much of the guesswork out of a new category growth strategy.
This is precisely what Vera Bradley did over the last 18 months. The result was a 4% increase in sales above their original plan – in a brand new category - based on product and pricing recommendations from the data First Insight provided.
Vera Bradley – In the Bag
Known for their patterned handbags, quilted cotton luggage and carrying cases, Vera Bradley was looking for growth in a new category without jeopardizing their current product offering and, more importantly, their core customers. They designed and developed a great new line of products, Vera Bradley Baby, and wanted to know how these products should be positioned in the market to ensure a successful foray in to a new category.
They could have gone the traditional route of in-store testing but recognized that the cost and time involved would be prohibitive in getting the data they needed to select and price the new products correctly. Also, the accuracy of in-store testing is often very low. (see “Mitigating the Risks of New Product Introductions: An Assessment of Alternative Merchandise Testing Methods”)
Instead, they engaged directly with consumers using First Insight, to understand the market’s receptivity to Vera Bradley’s entry into the baby category, and to learn the prices the market would bear for each product. Stephanie Scheele, Senior Director of Marketing Services and Consumer Insights had this to say about the First Insight platform at the recent IRCE conference: “[First Insight’s] cloud-based tool has allowed Vera Bradley to create deeper customer relationships, maintain brand awareness and build loyalty by continuing to deliver the products and prices that their customers want.”
Read the full story on how Vera Bradley set new product and price points with First Insight predictive analytics.
NRF Stores published an article in December 2012 entitled “Tying it All Together," in which they summed up expectations for retailers in 2013 in one word: Convergence.
Depending on your industry, convergence can mean many things. For retailers, convergence relates to tying together the web, big data, analytics, mobile, social and all things digital. The ultimate goal for this level of convergence is to place and secure the consumer at the center of the retailer’s universe.
However, there is a downside to the proliferation of information that consumers have at their fingertips through convergence: Pricing. Further to the NRF Stores article, “All this power and knowledge has negatively impacted pricing, making it essential for retailers to pull out all the stops when shoppers engage with their brand.”
With the exponential growth of e-commerce, Amazon, eBay and the like, many retailers find themselves in a “race to the bottom” when it comes to pricing. Aided by new cloud-based technologies that troll the web for comparable prices on similar products, retailers now compete in real-time to offer the lowest price. The result is lower prices and lower margins, which is counter-productive for a retailer or brand that wants to be perceived as adding real value to the consumer experience.
Wisdom of Crowds in the Cloud
There is a different type of convergence - crowdsourcing - that, when implemented correctly, can redefine the consumer’s role in the retailer’s mind. Crowdsourcing is the convergence of the collective wisdom of a group of people to achieve a better decision than would be made by a single individual acting alone. The ultimate result in retail is a reversal of the race to the bottom, and a new race to greater profitability.
The consumer is already in the cloud. They are accessible, willing to engage and have a desire to be part of the process, not an afterthought. Crowdsourcing in the retail industry is nothing new. Social shopping sites such as Threadless.com and ShopMyLabel.com let users create and stock their own boutiques and act as both the buyer and the stylist.
But when it comes to the titans in retail, crowdsourcing takes on a whole new meaning.
The Right Way to Crowdsource
Crowdsourcing can apply to a wide range of activities including fundraising, voting, complex problem solving and even finding a missing person. Regardless of the use, crowdsourcing is about getting your particular project in front of the right people at the right time.
In James Surowiecki’s book, “The Wisdom Of Crowds,” the author spells out four conditions that characterize wise crowds:
- Diversity of opinion - Listening to consumers who don’t buy your product is just as important as listening to those that do.
- Independence - A wise crowd contains people that have opinions unfettered by the opinions around them.
- Decentralization – People are able to specialize and draw on local knowledge
- Aggregation – Having a mechanism for turning private judgments into a collective decision
There are three elements that are critical to a successful crowdsourcing project in the retail industry: timing, scalability and listening.
Asking consumers what they think about a product after it is on the floor is too little, too late. If the crowd likes a product, that’s great. But had you known up front that it would resonate with consumers, you could have increased the buy to meet the demand. Conversely, negative sentiment could lead to over-stocks and the need for significant discounts, eroding margins. The time to ask the crowd about a new product is before it actually becomes a new product. And you need the answers fast – in days, not weeks or months.
Scalability in crowdsourcing is two-fold. First, you must be able to tap a wide range of opinions across multiple demographics. (See condition #1 above) According to Surowiecki, “Today’s complex problem solving requires multiple perspectives. The days of Leonardo da Vinci are over.” Secondly, it’s one thing to crowdsource five new t-shirt designs to see which ones consumers like for a small boutique. It’s an entirely different story when you have hundreds of designs and only room for a few dozen on the floor across a national or global set of stores.
When you conduct market research – such as a focus group, survey or conjoint analysis, all responses are weighted equally. If I happen to be sent a survey on wedding gowns, I can assure you that I know little to nothing about the attributes and pricing of said gowns, yet my response would be weighted the same as someone who does understand the category. Listening means paying attention to the right people – the people that are predictive of what will actually happen when the new products are rolled out.
In the end, perhaps the biggest reward for a consumer is to feel as if they are part of the process, not an afterthought. The cloud gives retailers the access they need to reach the consumer. The crowd is willing and able to provide the feedback you need on new products. And, the right technology, in the cloud, gives retailers the ability to listen closely to the right consumer. The result: The right product at the right price at the right time.
Ingredients such as inclement weather, worries over the effects of sequestration, and the continued slow pace of the U.S. economic recovery combined to form a recipe for tepid comparable store sales over the last 3 quarters. But these weren’t the only factors that led to these underwhelming results.
How did department stores, specialty/vertically integrated retailers and mass merchants fare during this timeframe? Let’s take a closer look.
Department stores have always been the multi-taskers of retailing, offering a wide array of products – from housewares and jewelry to apparel and beauty – within a spacious environment. Hit hard by the recession, department stores have rebounded nicely over the last year as they continue to adapt and expand merchandise assortments, while making the stores themselves more of a destination.
For the quarter ending in October 2012, on average, comp store sales for department stores were down 2.2%. However, you may have heard about a company called JC Penney that ran into some “challenges” last year. Those challenges resulted in a negative 26.1% comp store sales figure for the quarter. If you take jcp’s number out of the equation, the average swings to a positive 5.1 %.
For the quarter ending January 2013, excluding jcp, the average comp sales increase for department stores was 6.6%, buoyed by double-digit quarterly comp increases from:
- Kohl’s - 13.3%
- Macy’s - 11.7%
- Nordstrom - 11.4%
- Stage Stores - 10.8%
Obviously all eyes will continue to be focused on jcp and the effect returning CEO Mike Ullman will have on the struggling department store. Will he be able to bring this once great U.S. institution back from the brink, or is it too little, too late?
Specialty/Vertically Integrated Retailers
Encompassing teen retailers, fast fashion companies, athletics and men’s formal wear, this category is highly competitive, particularly in the teen category.
For the quarters ending October 2012 and January 2013, the category average comp increases were 5.1% and 1.9% respectively. Here are some of the winners from the quarter ending January 2013:
- American Eagle – Up 4%
- Anthropologie – Up 7%
- Chico’s – Up 7%
- Urban Outfitters – Up 11%
- White House/Black Market – Up 6.3%
Fast Fashion Fatigue? Not so fast.
Several companies in this category are considered “fast fashion.” In recent months, H&M, a worldwide fast fashion behemoth, spoke about the tremendous upside in the U.S. market. But there is one company that is quietly growing like crazy and is becoming a major threat to the rest of the industry: Forever 21.
Forever 21 does not report comp store sales, but their growth and presence in the market is hard to miss. Discussing their growth, analysts at Bank of America stated, “Forever 21 is becoming too big for the specialty retailers to ignore. At this size, rapid growth could have ripple effects on the other retailers as Forever 21 takes more share.” Forever 21 is faster and cheaper than its competitors and has expanded its customer base to all members of the family – not just teens.
For the quarters ending October 2012 and January 2013, the category average for mass merchants was up a paltry 0.9% and 0.7% respectively. Companies like Sam’s Club, Walmart and Target all posted low single digit comp store sales. The drag in this segment came from Kmart, which was down 4.8% and 3.7% over the same two quarters.
Walmart and Sam’s Club have long competed for shoppers. They both maintain a one-stop, stock-up appeal, with overlapping geographic reach and building which frequently share the same parking lot. Although competition between these formats is not new, it is intensifying as they seek to capture a greater share of a diminishing stock-up trip.
Unfortunately, Walmart and Sam’s Club also share an overlapping target audience. For more than a year, Walmart has placed a renewed emphasis on price-sensitive higher-income shoppers, who are likely to cross-shop between Walmart and clubs. According to ShopperScape®, 59% of past-four week Costco shoppers also shopped at Walmart in the same timeframe. In addition, Target is the #2 cross-shop destination for more affluent Walmart shoppers, with 53% of higher-income Walmart shoppers also shopping at Target in the past four weeks, according to ShopperScape®. It appears Walmart is using both its Supercenter and Club formats to combat Target and Costco’s bulk-pack, stock-up appeals.
A look ahead
Three department stores released earnings for the latest quarter. Although not as strong as the previous quarter, most indicators in this segment are positive:
- Macy’s – Up 3.8%
- Ross Stores – Up 7%
- Kohl’s – Down 1.9%
Although comp store sales were down at Kohl’s, gross margin was up, mirroring Macy’s numbers. "After a slow start, sales improved considerably in April as the weather finally improved in our most weather-sensitive regions," Kohl's Chief Executive Kevin Mansell said in a statement.
Offering the right mix of name brand and private label products, department stores have incorporated e-commerce, mobile shopping and social engagement into a compelling store environment, and consumers are responding.
As with the department stores, comp store sales results for the most recent quarter in the specialty/vertically-integrated segment were not quite as strong as the previous quarter, although generally positive:
- Limited Brands – Up 3%
- The Buckle – Up 1.2%
- American Apparel – Up 5%
International expansion has become a core growth strategy for many companies in this space. Gap has increased its national presence in some 40 countries over the last 6 years. The company will begin franchising with its Old Navy brand in the newly-entered Asian markets. In addition, Gap is going to target China initially to franchise up to 75 stores by the end of this year.
Similarly, in an effort to enhance its profit numbers, American Eagle Outfitters is planning on expanding in Eastern Europe, Northern Africa, and various parts of Asia.
With economic conditions in Europe and Asia mirroring the U.S., international expansion could prove to be far more challenging than companies anticipate.
Recent quarter comp store sales numbers in the mass merchant space may be the most interesting to review:
- Costco – Up 6%
- Walmart – Down 1.4%
- Target – 0%
With Walmart and Costco flat to down, is Costco taking market share from them? Or perhaps Dollar General and Family Dollar, both with positive comps for the last three quarters, are benefiting from the economic pinch the Walmart and Target customer are feeling.
It’s clear that the election, sequestration, fickle weather and the stagnant economy all played a part in making comp store sales “weak.” But in the case of the segments mentioned here, missteps in management and healthy competition played a significant part in the “less than desirable” results.
Today, Amazon announced their entry into the monobrand e-tailing business with an online store dedicated to Derek Lam’s 10 Crosby contemporary line.
You may recall that on May 7th, 2012, Amazon’s Jeff Bezos proclaimed, “It’s Day 1 in the category,” in reference to Amazon’s foray into the fashion world. Since that time, a good bit has been written about the impact this would have on the fashion industry. The big question on everyone’s mind was: Would Amazon be as disruptive to the fashion world as it has been to books, DVD’s, music and other products?
Amazon executives are well versed on the company’s mantra of eliminating costs and waste in order to offer consumers lower prices. But when it comes to fashion, that mantra has been tested. In October, Cathy Beaudoin, President, Amazon Fashion stated on ft.com: “Price is not really a differentiator for us . . . We maintain the pricing integrity that our brands have established and we don’t break from that.”
At Amazon, it’s all about Amazon. In an article on WWD regarding the Derek Lam line, Beaudion stated: “When we think of what’s next, we think of ourselves. We want to raise our own bar for presentation and innovation around the shopping experience, and partnerships like this one that elevate the whole experience give her content that she might not have [received] otherwise, and immerse and shop the brand in a way that she can’t today.”
Amazon and Beaudoin are in discussions with bigger names including Ralph Lauren, Burberry, and Gucci and Prada from Italy. German fashion group Hugo Boss says Amazon’s power cannot be ignored, but adds that many Hugo Boss products on Amazon have not been approved for sale on the site. Amazon, which gets 40 percent of its revenue from 3rd party sales, continues to deal with complaints from Hugo Boss and Guess over the practice of unauthorized sales.
Another challenge Amazon will face, similar to brick and mortar stores, is the acceptance of retailer/designer collaborations (e-tailer in this case). The success or failure of these collaborations is dependent on three critical, interdependent elements: the designer, the retailer and most importantly the customer. In an article on Forbes.com entitled Retailer/Designer Collaborations – The Missing Link, Greg Petro, CEO of First Insight stated, “The solution is for retailers and brands to understand whether their target consumers will buy the proposed collections through the proposed channel. This involves a deep understanding of consumer value at an individual brand and product level, by retailer. The good news is that consumers want to be involved, and modern technology tools make this possible."
Amazon will not be immune to the factors that can make or break a successful collaboration between retailers and designers.
In his four part series on Forbes.com last year, “Can Amazon Take on Fashion?”, Greg Petro discussed in detail the challenges Amazon would face when entering the fashion world. In addition, opportunities and solutions were presented for retailers and brands to create exclusive assortments in order to avoid commoditization and instead present a truly unique product.
Time will tell if Amazon will reap big rewards with its fashion foray. But confidence in their success is not an issue. Closing the article on WWD, Beaudoin concluded, “It’s a 10 Crosby destination on Amazon. It’s a little boutique that’s integrated into our store like a shop within a shop. It’s a model for how we want to partner with brands going forward. It’s our maiden voyage with this brand, and we’re all really [pleased] about it. It’s feeling really good.”
Last Sunday, I realized I needed to buy a few things for an upcoming trip. As I left my home, I began to think about what I would need on the road. Traveling towards the shopping district near my home, the question of what I needed to buy turned to where I was going to buy it. It was decision time: Retailer A was on one side of the street and Retailer B was on the other. I already knew that both stores would have many of the same, basic products I needed for my trip - at similar prices. The manufacturers of these products would get a sale either way. But which retailer would win my business?
I would expect that many of you experience this situation often. To me, the fact that a basic product is priced slightly lower at one retailer isn’t enough to make me choose them over another store. On that morning, I chose Retailer B over Retailer A for two reasons: Retailer B carries a selection of products I can’t get at Retailer A, and Retailer B has great customer service.
Much attention has been paid recently to the practice of price matching. Would the fact that Retailer A was willing to match Retailer B’s prices have made a difference that morning?
The idea of price matching is alluring for buyers. On the surface, the belief is that a price-matching retailer looks out for its shoppers and is dedicated to ensuring customers get the best possible deals. This certainly has the opportunity to boost consumer confidence and brand loyalty.
But when you get beneath the surface, you see the complexities of price matching policies. The fine print on Target’s price matching policy is an excellent example of a tricky balancing act: customers must do their research and show proof, request a price match at Target Guest Services (not at the sales register), and avoid the lengthy list of exclusions. Though policies at price matching retailers tend to vary by store and by season, customers who think they have a right to a price match can often be left out in the cold.
‘Strategic’ Price Matching: Good in Theory, Bad in Practice?
Department stores and retailers have recognized that, with commoditized products, a certain level of price matching is a necessity. Promotions touting 30-day price guarantees, “guaranteed lowest prices” and “meet or beat” promotions are nothing new, and they won’t be going away anytime soon.
But some retailers have moved past using price matching on an exception basis and are elevating the practice to a “strategic” level. This became particularly prevalent this past holiday season.
With retailers taking a proactive approach to communicating and promoting expanded matching policies, along with mobile price comparison apps, the battle over bottom-dollar pricing is raging. One of the more ambitious players in the price matching game is Citi Price Rewind, which claims to have automated the price matching process for registered Citi customers.
Typically, retailers scale back their price matching programs after the holidays, but this year was different. In a bold move, Target announced at the beginning of January that it would extend its holiday pricing matching year round. Not to be outdone, Best Buy announced that it would extend its holiday price matching program until March 2nd. But that was just the start. Best Buy announced on February 18th that it would make price matching a permanent program on March 3rd. The chain will now match advertised prices for brick-and-mortar rivals as well as 19 major online competitors like Amazon. And in a first, Best Buy stated that one of the main reasons for the year round price matching program is to combat “showrooming.”
The reality of price matching, however, is that it is not a guarantee of sales or success. Even if price matching nets more sales of certain products, it still directly impacts margins — and bottom lines. And there will be a need to make up for those lost margins by driving sales of other products.
Get Strategic About Pricing
Perhaps the most important consideration in price matching is this: If price is your organization’s sole focus, you will be running a “race to the bottom.” Some companies do live in the bargain basement space; but that’s obviously not the case with most of the retailers mentioned here. For most companies, there’s nothing strategic about being the low-price leader. In reality, too much price matching could leave them in a very tough situation from which they may not be able to recover.
Nikki Baird, Managing Partner of RSR, recently told me, “Retailers must return to a value-based proposition to consumers. This means there is a lot more importance on the initial price, because any retailer making a value argument about its prices is going to lose a lot of credibility with consumers if it then has to run promotions or mark down items because it didn't hit consumers’ initial expectations.”
The focus needs to shift to the idea of “right pricing” and building a responsive strategy that is more about consumers than competitors. A successful approach is based on the needs and wants of your potential buyers, not merely a reaction to your competitors’ weekly flyers or online ads.
At the end of the day, it’s critical for retailers to understand their customers and develop proactive pricing strategies that map into customer demand. Retailers also need to build brands, assortments, and service models which enable them to differentiate on elements other than price.