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Loyalty Lifts Brands in a Recession

As recessionary clouds gather over the U.S. economy, retail CFOs are busy cutting capex, opex, and inventory. Facing the prospect of lower sales and higher borrowing costs, preserving cash seems the wisest option.

But there is an area where we believe you should consider spending more: your loyalty program and member marketing. If the overall marketing budget needs to be cut, then shift funds from customer acquisition into loyalty. Why? Consumers behave differently during a recession and they typically:

  • Gravitate to “budget” channels
  • Seek deep discounts
  • Spend less
  • Are less loyal

In other words, the performance marketing models you’ve built over the last dozen years no longer apply during a recession. New customers will be more expensive to get into the funnel, and they will be less valuable. Loyalty program members may also need some incentive to stay and spend during a recession, and focusing on them will likely be your most efficient way to preserve sales, keep them from chasing deals elsewhere, and maintain their long-term relationship with you.

Loyalty’s Benefits

According to Accenture, 90 percent of retailers have some form of loyalty or subscription program, which usually includes a combination of a rewards program, exclusive benefits, member-only access and experiences, and personalized offers and communications. Customers can gain even more value by opting for the brand’s credit card, which serves as a rewards and benefits accelerator.

The benefits for retailers are substantial: Loyalty customers shop more, spend more and stay longer. They’re more likely to engage – rating products and advocating for the brand, online and IRL. Moreover, in the current climate of iOS privacy protections and increased privacy legislation, these programs have become the richest source of permission-based consumer data collection, which can then be used to fine-tune program features and communications for maximum impact. Lastly, companies with high loyalty and/or dependable subscriptions get higher valuations on Wall Street.

Loyalty During a Recession

If you’re a startup or otherwise part of the 10 percent with no loyalty program, rolling out a new regime on the eve of (or during) a recession will be expensive. Most costs will be spent on new member acquisition, with the major benefits accruing only years hence. But for the other 90 percent, here are a few ways to ensure you get the most out of your loyalty members when the economy and consumer confidence dips.

  1. Affirm the strategic importance of reallocating resources into loyalty and get alignment across the leadership team around the cross-functional efforts required to execute an effective program, including Marketing, Finance, Stores, IT, Planning, and Merchandising.
  2. Revisit program rewards and benefits. Your customers will be most concerned about saving money and lowering risk, so consider tweaking the program’s value proposition. Changing the messaging from “points” to “$ cash back,” for example, is a simple and commonly used tactic. You may also want to do qualitative research among your existing members to understand what language they use to express their anxiety and what benefits would mean the most to them during an economic downturn. Then communicate with them based on these hot buttons.
  3. Remove friction, and streamline components. To increase sign-ups, use emails or phone numbers as the connection points to easily sign up for entry-level benefits. If you haven’t already done so, integrate all elements into one program by using a single loyalty bank with stair-stepped rewards and benefits for non-credit card and credit card loyalty. This will make it easier for members to track and see all rewards in one place.
  4. Raise the visibility and frequency of loyalty messaging. Leverage every opportunity across all channels to promote the loyalty program and the value loyalty members receive. But don’t stop there. Message non-loyalty customers on the rewards and benefits they missed with their last purchase.
  5. Don’t forget the stores. It’s easy and inexpensive to make all these program changes online. But during a recession, customers generally continue to shop in stores, if only for the purpose of finding the very deepest markdowns. Store staff must be well-trained, first and foremost to provide loyalty-worthy service. Maintain ongoing messaging to recruit new loyalty program members and promote its value.
  6. Test and learn. Remember, you have no valid performance model that’s been tested through a recession! Set up experimental tests measuring costs vs. impacts to understand what’s working and what’s not.

Preserve Your Most Valuable Asset

You’ll note that these six steps are not materially different from best practices (and hopefully your own practices) when times are good. The difference in a recession is that your loyal customers will more likely drop quintiles or exit the cohort entirely if you fail to stay top of mind and provide better value. Anticipate the future. Do the work now, and you’ll emerge stronger on the other side.

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The Empress’s New-ish Clothes

The value propositions of Rent the Runway, The RealReal and Stitch Fix are indisputable. As these concepts grew quickly through the 2010s, the digitally-driven rental, resale and subscription business models induced dopamine rushes in the fashionista set and strategic anxiety among fashion industry execs.

Yet RENT and REAL gush red ink – arterially. Even pre-pandemic. SFIX was nominally profitable until the pandemic and is now back to profitability in its most recent quarter, but the company’s multiple growth initiatives, I believe, will likely not add much more to the bottom line.

So, why don’t these fabulous concepts also make fabulous money?

The RealReal

Buy gently used upscale and designer fashion at a fraction of retail? What’s not to like? Consign your least joy-sparking items for a quick buck? Ditto. The RealReal, while experiencing a dip during the pandemic’s depths, continues to grow revenue and customers significantly over 2019 levels.

The company will never make serious money if any at all. Its accumulated deficit in retained earnings last quarter summed $659 million. The major problem is the high variable cost of receiving, processing, and inventorying individual items for resale. Think: Opening the consignor’s box, inspecting, authenticating, photographing, retouching, pricing, describing, posting, and warehousing each item. Then add on consignor acquisition cost, CAC, fulfillment and, in many cases, reprocessing the return. The contribution profit per order in 2019 was a record high $20 per order, while the fixed cost per order was $53. I estimate they’ll need to sell four times their 2020 revenue before they make a decent return to investors.

That won’t be easy. Fashion resale is a huge business offline, where the intake and selling processes are less labor and fulfillment intensive; and even then, judging by the lack of corporate chains in resale and the predominance of nonprofits, it’s not a big, per-store moneymaker. There’s also plenty of online competition: think Vestiare and ThredUp (a more mass model but also burning cash) and the platforms Poshmark and eBay, among other formats. You might be surprised where the largest number of authenticated Birkin bags are offered.  

Rent the Runway

My wife founded and ran a nonprofit. During her 10-year anniversary campaign (in the Before Covid Times), she pitched big money donors and attended many events. Her wardrobe solution was, of course, Rent the Runway. Given her exquisite taste, even her for-profit husband was thrilled at the selection and flexibility the service afforded – for a perfectly reasonable, subscription price.

Reasonable prices for customers, yes, but not for shareholders. Like REAL, RENT’s business model is operationally complex. Returns are built into the model. After wearing, each garment is shipped back, received, cleaned, and returned to inventory. And depreciated. Even in its last pre-pandemic fiscal year, investors would have been better off if, for every dollar a customer spent, the company simply rebated $1.50.

RENT has been in business for over 10 years, and still filed its S-1 as an “Emergent Growth Company” entailing a “high degree of risk” for future buyers of its common stock. Another sign that the business model is inherently problematic is RENT’s lack of peers. LeTote filed for Chapter 11 and seems a shell of its former self. CaaStle supplies a rental platform for other brands to use. Who did I miss? Who’s killing it in clothing rental?

Stitch Fix

SFIX has a different value proposition than REAL and RENT, and a business model architected to make money. The company’s clients subscribe to receive personal style advice and periodic outfit selections, in return for buying, at full ticket, items mostly in the better and contemporary price segments. Healthy gross margins, check. If a client returns everything and purchases nothing that period, they still pay a $20 styling fee.

The company further utilizes an array of 140 data scientists who match purchase behavior with customer demos and product characteristics to model and maximize conversion and AOV and minimize returns. Check, check and check. The company also uses the data to guide development and selling of higher-margin private brands. Finally, the business continues to grow its topline, even through the pandemic by expanding into new customer segments (plus, kids, men’s) and geographies (the U.K. so far).

SFIX returned to nominal profitability in its latest quarter, but implicit in its reporting of outsize growth in and emphasis on non-core growth strategies is that the core women’s business – its largest and likely most profitable segment — has matured, despite a ~$250 billion TAM. (What keeps an articial lid on their women’s business, it seems to me, is that their brand imaging is too literal and practical rather than aspirational and emotional.)

The Business Back Story

These three businesses are all 10+ years old. Why haven’t they yet figured out their profit models? I have a few thoughts.

All three of these concepts were/are venture financed. These tech entrepreneurs and financiers are willing to take on substantial risk to play the long game, solve for complex business models, invest until they completely dominate their sector, and figure that’s approximately where “scale” will begin to deliver an ROI.

It’s worked before. High fixed cost creates a barrier to entry; low variable costs create a steep and predictable glide to profit. But when variable costs are also high (and contribution margin low), as in the cases of RENT and REAL, the path is longer, and the expected error dilates. What happens if the market ends up being smaller than you thought, becomes very competitive, or the model is just inherently unprofitable at any scale? Well, maybe the public markets will be frothy enough to bail you out.

In SFIX’s case, I believe founder and former CEO, Katrina Lake, always had the company’s profit model guide its decisions. However, I think she and company shareholders may have overestimated the ultimate appeal, and peak SOM, of subscription clothing for all.

A wild card in these models is stock-based compensation, which applies to SFIX currently and may affect the others’ future P&Ls — if they should be so lucky. For the top-tier executives living in San Francisco (SFIX, REAL) and NYC (RENT), they accept relatively “modest” salaries and finance their Model S Plaids with stock grants and options. SFIX traded largely flat after its debut four years ago, mostly in the $30s, until this winter, when prices briefly rose over $100. Stock- based compensation this last fiscal year blew a $100 million hole in its P&L.

There’s always the pivot. In recent earnings calls, REAL mentioned that they are opening more stores – because they are more profitable; RENT now encourages you to buy its clothes; and SFIX is strongly promoting its new, “Freestyle” non-subscription platform. Less dopamine, but more real.

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The Covid Chronicles

Being declared nonessential during the Covid-19 pandemic lockdowns perfectly captures the literal truth about mall-based specialty retail.

In fact, specialty stores only exist in the first place because they are magic. They invite us into beautiful stage sets, create new aspirations and help cater to our most refined tastes. Les Wexner, the one-time owner of over a dozen specialty retail chains, frequently reminded his executives that they were in the “wants” business, not the “needs” business. His most scathing (and still printable) critique of his brands’ marketing or displays would be “this looks like JCPenney.” The more magic his stores created, the more margin. The…math…was…that…simple.

Over the past decade, we’ve witnessed a broad and steady decline in that magic, inflicted in part by the infectiousness of a handheld supercomputer that brings the world directly to us. During this pandemic, we worry whether a trip to the mall would be safe; but the journey had already become increasingly unnecessary and banal.

So, what’s next for the malls and their tenants?

The Covid Chronicles

There’s a group of retail executives in Columbus, Ohio who are still committed to perpetuating that magic. We call ourselves CBUS Retail, with the motto, “We love retail.” We are currently producing — supported by Klarna and other like-minded sponsors – a nine-episode, streamed video series entitled “Specialty Retail in Crisis: The Covid Chronicles.”  The series describes the massive disruption in this sector, paints a view of its future and suggests strategies for post-pandemic success. So far, we’ve interviewed 40 analysts, operators and founders from retail hubs across the country. Here is a synthesis of the series.

1. Pre-Covid

Of course, the mall economy was already troubled well before the pandemic, plagued by a persistent supply-demand imbalance, eroding margins and falling productivity. The dynamic duo, Michael Dart and Robin Lewis list several key reasons:

  • Oversupply
    • Persistent falling manufacturing costs.
    • Continued growth of non-mall options – discount, value, outlet and off-price; clubs and big boxes; everything digital.
  • Shrinking demand
    • The mall’s targeting of, and dependence on a shrinking middle class.
    • Consumers spending more on experiences and health & wellness, and less on physical products (aka “dematerialization”).

Other speakers highlighted two other distinct failures of the mall’s tenants:

  • A generation’s-long inability of department stores to increase mall traffic.
  • Specialty chains’ increasing lack of novelty, creativity and differentiation.

In short, too much product, too many stores, and not enough magic.

2. Direct Impacts of the Pandemic

If zombie malls with zombie stores filled with zombie product populated much of the retail landscape pre-pandemic, Covid-19 appears to be finally killing off many of these walking dead. Since March, retailers will have announced the closure of an estimated 25,000+ stores, and a net ~300 malls are projected to “repurpose” or succumb during the next three years. So far, over two dozen specialty and department store retailers have declared bankruptcies, with most emerging much slimmer, with new owners. We are told to expect more Chapter 7’s and 11’s this spring.

NPD’s Marshal Cohen describes “The Discretionary Divergence” in consumer spending.

Shows the categories diverging in spending

3. The Silver Lining

As the pandemic continues to wreck stores, profits, jobs and livelihoods, not to mention lives, our speakers see plenty of future upside for the sector. First, much of the structural oversupply will be gutted from the marketplace. BMO Capital Markets analyst Simeon Siegel argues that the current crisis allows public retailers to strategically downsize without incurring shareholder ire. Most agree that digital commerce is racing through puberty during the pandemic and now stands at least as tall as its offline parent. All in all, there’s a scramble to re-form and reform retail: The future of specialty retail is up for grabs.

4. The Future

A More Diversified and Dynamic Landscape, With Faster Lifecycles and Lower Peaks

With malls and legacy retailers hobbled, the barriers to entry for emerging retailers have never been lower. Traditional wholesalers and DTC brands are finding more mall vacancies with lower rents and more flexible terms, according to Steve Morris, Asset Strategy Group’s CEO. Ottawa-based Shopify provides inexpensive Retail-as-a-Service to over a million ecommerce merchants, who can also co-list their products on other shopping and social platforms including Amazon, eBay, Facebook and Instagram.

Forrester’s Sucharita Kodali foresees an intense battle over the next decade between legacy analog brands now adopting digital first mindsets vs. digital natives seeking heightened customer connection and growth through operating stores.

Whoever wins, the spoils will likely be smaller than before. Analog-first brands that took a generation or more to build tend to top out at $2-3 billion in the U.S. at retail, according to Siegel, with only NIKE swooshing beyond. The current generation of venture-fueled concepts – monied, impatient, and viral-when-successful – will peak faster, but at a level limited to consumers’ goldfish-sized attention spans.

Given the increasingly complex and integrated nature of the equation, analog + digital = sale, J.Crew’s Billy May believes we should focus mostly on market and customer profitability, not channel.

Oliver Chen of Cowen argues that community is the unlock for sustaining consumer loyalty in an attention-deficit world. Aerie and Glossier use social media especially well to foster engagement, according to Chen. Pre-pandemic, Revolve, a brand positioned to party, hosted big, fab, in-person parties instead of investing in brick and mortar.

A Re-Engineered Retail Value Chain

During the pandemic, the design and merchandising teams at the tween girls’ retailer Justice took the whole product development process virtual — from inspiration to concept to line — removing months from their calendar. The compressed timelines prioritized merchant conviction and improvisation ahead of test-read-react. Truly energized by the speed, efficiency and empowerment in the new process, VPs Kat Depizzo and Julia Hanna  are convinced these changes will largely be permanent.

More frequent and smaller buys closer to floorset/listing is a recurring theme. Lower markdowns will make up for slightly higher unit costs. Supply chains will be leaner, faster and more distributed, avoiding single points of failure. Inventory transparency is doubly important as omnichannel options proliferate. Good forecasts are the ultimate lubricant in a lean, forward-positioned supply chain. From a tech perspective, Karl Haller demonstrates how IBM projects demand to the store level.

In stores, all agree that we’ll move towards contactless customer service and payments post-pandemic. Kodali states, “a customer should never have to wait in line to talk to a person.” WD Partners’ Lee Peterson reports that Alibaba is way ahead on these and other innovations in his talk “Innovation, Alibaba Style.” There was widespread agreement that Chinese companies and consumers provide a good benchmark for what’s ahead.

A New Role for Physical Stores

Cathaleen Chen wrote a Business of Fashion article in August, both profound and so obvious (as in why-in-my-decades-in-this-business-hadn’t-I-thought-of-it kind of obvious). There are four roles for physical stores: brand, service, immersive experience and community. Think slow on this.

A future strategy for a market-based store “portfolio” makes sense. Some stores offer full brand presentation, high-touch service and interactive community building; at the other end of the spectrum, are dark stores that only fulfill pick-ups and deliveries.

Less Algorithm, More Imagination

Author of “Aesthetic Intelligence,” Pauline Brown, states that in business there should be a tension between analysis and aesthetics. But that the only way to beat the robots is through the uniquely human ability to create beauty, infuse joy, and surprise and delight customers.

Aaron Walters, CEO of Altar’d State, asserts that the larger a business gets, the more it needs to either simplify the model or empower its employees. He advocates bringing the “special” back to specialty retailing.

Former Google executive and arts student, Abigail Holtz, observes that ecommerce has not evolved for 20 years and now seems emotionless and flat, not effortless and fun; and stores have their own shortcomings. She created online shopping site The Lobby to merge the best of both channels, where they curate emerging brands “doing something special” and make shopping fun with an original, authentic and very human-centered interface.

Magic.

NOTE: This is just a small sample of the smart commentary in the series. Please visit https://cbusretail.org/covid-chronicles-season-one/ to stream for free and join our live Community Roundtable https://cbusretail.org/member-events/ on January 6 to discuss the series content with several of the speakers.

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Five Forces Shaping Retail’s Post-Pandemic Future

This is a precarious time for all retailers, but particularly those deemed non-essential: Inventories are piled up and on-orders slashed; relationships with suppliers, landlords and employees are fraught; cash is scarce and the timelines for stores opening and customers responding are murky. Many, if not most, are focused only on short-term survival.

Multiple Scenarios

As we plan for the post-pandemic future, we’d do best to plan for multiple possible scenarios. For over a decade now, we assumed steady consumer spending growth, some jockeying among competitors and steady momentum continuing towards digital. Today, there are so many more variables at play and a much wider range of outcomes to consider, contingencies to plan for and opportunities to exploit.

For management teams engaged or soon-to-be engaged in scenario planning, you should consider five broad forces shaping the future of our industry: Acceleration, Distortion, Depression, Natural Selection and Government.

1. Acceleration

The march to ecommerce has become a sprint, which is perhaps the most obvious outcome of the coronavirus crisis. Remember several years ago when website developers adopted the mantra of mobile first? It’s clear now the paradigm for much of retail, today and for the foreseeable future, will be digital first. For an increasing number of retailers, the primary role of brick and mortar will be to facilitate digital transactions and promote brand loyalty through the experiences of showrooming, ordering, fulfilling, pick-up and return.

The impact of digital first on stores is crystal clear. Even before the pandemic, a large part of the mall-based, non-essential retail economy was past maturity and in decline. This crisis will kill off the weak, including full-scale retail brands, retail locations and shopping centers.

Digital first applies to retail operations as well. Design is moving to 3D, sometimes linked in real-time to sourcing and pricing. These 3D images can also be tested with consumers, in multiple phases, to help optimize assortment and help manage an individual product’s lifecycle, from product development, buying and planning through to allocation and clearance. Finally, this crisis has cratered today’s supply chains, but will definitely spur retailers to develop processes that are more technologically integrated and responsive in real time, connecting hyper-local, dynamic demand forecasts to decisions far upstream, even to the selection of raw materials.

2. Distortion

There will clearly be differentiated impacts by sector. Retailers and their locations supported by travel, tourism, entertainment, sports venues and gyms are suffering the worst. Others are benefiting: the obvious, Amazon, plus nesting-driven retailers and food retailers. When the commercial world opens its doors again, retailers and brands that offer safety and familiarity may have an advantage over lesser-known brands that trade on innovation and novelty. Marketplace distortion is nothing new, but it looks more dramatic now in separating the winners from the losers after the crisis has abated.

There is also a consumer behavior distortion we are experiencing from shelter in place. We are dressing down, cooking, DIYing and drinking in place. No one knows if these trends will continue after lockdown or whether we might herd towards the exact opposite when “normal” returns. The opportunity is to bank on consumers’ needs to celebrate emergence back into their lives, marketing in mindful, sensitive ways to reconnect with customers who want to reclaim a sense of personal agency and freedom.

3. Depression

A sustained and deep economic downturn is possible, if not probable. Recent reports suggest a realistic “return to normal” may take two years or more. Plus, any retailer who has suffered a bad season knows it takes a good 18 months to regain momentum. And it’s still unclear when that clock will start ticking.

Even if this crisis is relatively short, retailers’ cash will be rationed, resulting in reduced investments in inventory, infrastructure and innovation.

A prolonged downturn will also scar consumer psyches. The generation that lived through the Depression lived, spent and saved far differently after it ended. We’ve all heard the phrase, “Depression mentality.” It’s important for retailers who target Gen X through Gen Z to understand and connect with the changed attitudes and behaviors of these consumers if we do enter a significant economic depression. They have been hammered twice now – just as they started looking for or beginning their first job then came the Great Recession. Now, 10 years later, we have COVID-19.

4. Natural Selection

Some commentators compare this global crisis to a mass extinction – a consequence of a catastrophic global event. For retail, this means the big and the liquid will survive while the weak and indebted die off. Amazon and Walmart are winning because as they increase scale for their concepts, it results in more selection, lower costs, better service and higher switching costs. They have the cash, leadership and determination to keep the flywheel spinning.

Retailers with strong brand equity including Nike, Louis Vuitton and Apple will survive. And those with superior value propositions including Ulta, Warby Parker, Amazon and Costco will emerge even stronger and more dominant. Yet size is no protection from mass extinction. Macy’s, Sears and JC Penney have proven to be too set in their ways to adapt to a changing environment. Toys R Us is gone. Other iconic brands are struggling, including Gap, Victoria’s Secret, J Crew. This crisis will kill the dinosaurs, even some of the biggest.

Survival during a catastrophic global event historically favors those with diverse portfolios and practices, plus the quickly adaptable. Diversifying sourcing in countries outside China will take on even greater urgency after this crisis. Retail chains that are targeting ever more diverse customers and creating different store and pop-up formats for different types of locations have a better shot at long-term success. In fact, the mall economy’s reliance on a monoculture of national fashion specialty retail chains made it especially vulnerable when customer demographics and shopping behavior changed. Successful retailers target customer micro-segments, adapting personalized marketing with adaptable operations, including micro-warehouses and customized merchandising.

Small may in fact thrive post-pandemic. Digital native brands that are flush with cash and lower fixed costs will have the financial ability to ride out the crisis. Small neighborhood businesses may benefit from customer loyalty and valued as places we know and trust, even if many reopen with new owners.

5. Government

Government continues to play a huge and necessary role in this crisis. Some of its post-pandemic impact will depend on which political party wins in November. Progressives hope the lessons from this crisis will generate political support for a higher minimum wage, universal healthcare and a more generous safety net. Many voters across the political spectrum have gained renewed confidence in their state and local governments through their able handling of the crisis. But let’s not forget that post-crisis, governments at all levels will cumulatively have added many trillions in debt and depleted their rainy-day funds. As a result, retailers may have to plan for being hit with some combination of higher taxes, higher borrowing costs and higher employee costs.

What Next?

This first step of the scenario planning process (i.e., identifying the forces likely to drive change) employs deductive reasoning: we start with general principles (e.g., Acceleration) and test them to gauge their power. This set of five may work well to describe the specialty retail sector generally, but may not fit your situation precisely; feel free to come up with your own list. Then build the various scenarios you feel are most likely and create plans for each. To describe each scenario, you’ll want to develop specific narratives around what’s likely to happen to customer segments, competitors, shopping centers, the macroeconomy, etc.

The five forces I’ve described above do map to some pretty bleak scenarios. The silver lining is they each create their own set of strategic opportunities: The culling of weak retailers will open up some pretty sizeable market spaces; a depression will lower asset prices, creating good investment/acquisition opportunities; and the closing of legacy department and specialty chains will allow legacy wholesalers and emerging digital native brands to scoop up less expensive leases with less risky terms. Using this framework, you’ll be best prepared and ready to seize these opportunities when, hopefully, they arrive.

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Target’s New Business Model is Still a Work in Progress

No retail segment is more competitive than the mass segment, where retailers sell many of the same SKUs and must therefore compete based on differentiated consumer perceptions of value, access, convenience and customer experience. In 2016, the Target Corporation — facing scorching competition from Amazon and Walmart and saddled with negative comps — decided to check “all the above,” including product selection. In early 2017 the company launched a major, multi-year set of initiatives to remodel stores, improve store operations, expand omnichannel capabilities, increase the number of small-format and campus stores, and introduce dozens of new owned brands. A year ago, the company decided to accelerate these investments, and given their more recent operating results, they seem to be paying off.

It’s a difficult trick. A superior customer experience in a store often adds expense. Offering the complete suite of omnichannel options (including same-day to home or curbside pick-up) also adds expense. With these added costs, how will Target also excel in delivering value? Will this business model foot?

The New Customer Experience: A Great Start but Missing Basic Elements

The digital look and feel of the brand strongly reflect the company’s new direction. My www.target.com landing page featured three new brands in all their inclusive splendor, the day’s most pressing shopping occasions, and new omni-enabled ways to “get your Target Run done.” A very different approach than Amazon or Walmart. It seems to be working, and Target’s e-commerce, facilitated by its many omnichannel options, was up 36 percent in 2018.

Based on recent store visits I made in Columbus, Ohio, the in-store customer experience was a big change and represents a new business model. The new, remodeled, and re-fixtured stores, all with new marketing and visual merchandising, are a big improvement over the “old” Target packages. The company is essentially applying the techniques used for decades in better department, specialty and upscale grocery stores. Several departments are introduced with low tables and stands for displays, folded product or forms; varied fixture heights and types allow for good visibility and provide visual interest. Many of the aisles are now shorter in height and length and not all are parallel. Moreover, the displays and décor often showed enough sass to make you smile. I had never noticed the music before in Target, but the tracks had me “boppin” in the aisles. The total effect is that the store is more attractive, more fun, and easier to shop. The discrete sections, when merchandised well, suck you in to spend more time and money. Store traffic and comps were up 5 percent over the past year.

While the new format has raised the aesthetic bar, not all aspects of execution reached it. Several displays of folded product were askew or unkempt, and several bays read conspicuously empty or low on inventory. The swim trunks on one young mannequin rested around the boy’s ankles. There scurried no hawk-eyed associate nearby to fix any of these issues, even on a busy Saturday. Luxury-inspired displays will always feel less upscale, too, when bathed in Target’s fluorescent bulb temperatures. The company has selectively mounted halogen spots in the high ceilings, but the warmth added from those is often not sufficient.

Target says they are improving backroom operations to allow associates to spend more time on the floor for “customer-facing” activities. Let’s hope its end-state business model will allocate enough resources to fix the merchandising and inventory issues.

A potentially bigger miss, in my opinion, is the stores’ failure to change its associate engagement with customers. In a bright, happy, engaging store, we shoppers expect bright, happy, engaging associates providing great service. One consistently gets energy from Costco, Container Store, and Crate & Barrel employees. At Target, my engagement with the associates was unchanged from the many years I’ve been shopping there. And is still uninspiring.

Finally, there were still longer-than-necessary lines at checkout, queued next to several unmanned lanes – with the longest line at self-checkout. I actually like to shop in stores but am always anxious when I’m not sure if I’m in the quickest line. Why not train a camera with some AI to direct me to the shortest wait? Or, more old school, open up a lane or two so there is less of an annoying wait.

The Key to the New Business Model Lies in the Merchandise Strategy

In Target’s more recent public reporting and analyst coverage, all referenced the growth and success of its new omnichannel efforts and its impact on sales and store traffic. But how profitable can having associates pick, pack, and stage-for-pickup or deliver really be?

In fact, the unlock in this business model is in the merchandise strategy. I walk through the store and see upgraded product and presentations in apparel, intimates, baby, toys, home, and beauty — all designed to evoke emotion. And let’s not forget wine. The wine used to be stacked on regular grocery shelves. Now it’s merchandised like an upscale wine shop. Momma is going to notice and she’s going to smile. The math is: more emotion equals less commodity equals more spend and more margin. The company’s curation of private brands is also an integral component. The product may not add incrementally to sales if they replace a major national brand, but they definitely add margin, probably a net of 10 percentage points worth (after subtracting cost of design and development and co-op advertising dollars from the vendors).

In short, even with its recent innovations, Target still needs to spend more dollars on visual merchandising, checkout, and upgrading associate engagement. The company needs to fund this and further differentiate itself by de-commoditizing key departments. If they succeed, mass will never be the same.

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Five Strategies to Strengthen Stores

We all know it: the Web commodifies the customer shopping experience. Nevertheless, the sheer convenience and unlimited access provided by online shopping continues to draw a greater portion of her spend. So how can mall specialty retailers draw her back into stores, where they’ve deployed the vast majority of their assets? Mōd proposes the following five strategies:

Continue reading “Five Strategies to Strengthen Stores”

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Retail Strategy in the Digital Age

After twenty years focused on retail strategy, I took a two-year hiatus in an attempt to make my Internet riches with a software start-up. When I returned to consulting in late 2012 (alas, sans riches), I returned to a significantly changed retail landscape. The Internet was certainly important in 2010, but not nearly as integral. Well into the late ‘00s, stores always mattered more. Today, few retail decisions are made without consideration of digital. And for most retailers, digital is their fastest growing and most profitable channel, for both marketing and transactions.

Digital has altered both supply and demand Continue reading “Retail Strategy in the Digital Age”