Pick a path—is off-price, online or local right for you?
In a recent CNBC segment Jan Kniffen, CEO of J. Rogers Kniffen Worldwide Enterprises, commented on the current state of retail, highlighting the ongoing challenges many retailers face in this evolving economy. He states rather bluntly, “If it’s not off-price, online or local, it’s losing share.” And while that’s certainly the case, all is not hopeless. Considering some of the recent trends and consumer behaviors driving the change in the retail landscape, his comment holds water, but should emphasize the word OR in big, bold, caps. CMOs know retailers can survive despite seemingly difficult odds. But with the right approach, they might even thrive.
Rumors of retail’s demise
We all know the dark, overly simplified retail storyline of recent times: stores going out of business, the demise of malls and, of course, Amazon’s presence. Can anyone talk about retail today without discussing Amazon? Experts anticipate the rate of store closures in retail will eclipse last year by 20 to 30 percent, with some analysts believing another 10,000 and 12,000 stores will close in 2018.
The situation is essentially the same for shopping malls in America. Over the past several years, mall properties have become retail graveyards where more than half of all spaces are boarded-up storefronts, or have turned over to other retailers struggling to survive.
Why did this happen? What’s changed in the consumer mindset that makes the mall less appealing? Consumers still get in their car, drive to a location, get out and walk into a store. Why are they choosing to do this at strip centers or lifestyle centers, but not malls? This is an interesting conundrum to the retail strategist. Some say it’s due to convenience. But wouldn’t common sense tell us it’s more convenient to hit 25 stores in one trip than a lone destination, or only a handful of retailers? Others might chalk up the trend to mega off-mall stores like Target or Walmart, where you can get everything in one stop—groceries, underwear, shampoo, etc. Many malls are changing their stripes to become entertainment hubs where shopping takes a back seat to dining, games and fun zones. In the past couple of years, malls have been repurposing closed anchors to be anything from movie theaters to indoor go-cart tracks where consumers spend their discretionary income not on shopping activities, but on entertainment and family experiences.
In reality, this was the original draw for malls. Back in the 1980s and ‘90s, the mall was an experience where the entire family could come and take their own paths to walk around shopping at each of their favorite stores, and maybe grab a bite to eat in the food court. However, as spending patterns change, consumers appear to seek family experiences that don’t include buying material stuff. This is a trend that’s been evolving for years, and probably won’t go away anytime soon.
The off-price race is on
Even if you don’t know the term “off-price,” you know the players: TJMaxx, Ross Stores, HomeGoods and Big Lots have all been growing at tremendous rates over the past five or so years. Traditional department stores like Macy’s, Kohl’s and Nordstrom have recently expanded their presence in the off-price game. Macy’s introduced their Macy’s Backstage concept, and more recently announced they were doubling the footprint. They’ll add 20 stores in the first quarter of 2018, with a plan to open 100 additional outlets in the coming years. Macy’s is trying to take advantage of the ultra-hot off-price sector that is stealing significant market share from the traditional department stores.
So what’s attracting the consumer to off-price, and typically off-mall locations like TJMaxx, Nordstrom Rack, and Kohl’s new off-price concept store, Off-Aisle? It could be “the thrill of the hunt,” since much of the merchandise in off-price stores is purchased directly from manufacturers’ and retailers’ overstock. The product selection varies between storefronts and even geographic location, so in order to secure the best deals you need to visit the store regularly and hunt for the amazing deals that are there to be found.
This notion transforms the shopping experience from a goal-oriented errand to treasure hunt. While the product in the off-price stores is rarely factory seconds, a consumer needs to have a watchful eye to ensure they’re getting the best product for their money. In the past several years the off-price market has taken advantage of the struggling department stores and reaped the benefits of cancelled orders, and an abundance of inventory flowing into the off-price channel. It appears that for the foreseeable future, the off-price and channel will continue to thrive.
It ain’t just a river in Brazil
The giant responsible for wreaking so much of the havoc is, of course, Amazon, the behemoth that’s part retailer, part marketplace and 100% disruptive to the industry. It plagues the minds of every CEO, CMO and board member in retail, and the question most often asked is, “How do I compete against Amazon?”
That’s counterproductive, though. The better question to ask is, “How can I differentiate from Amazon?” There’s inherent risk in going head-to-head with Amazon, a different animal who deals in tremendous volume and is above all else a logistics company. Most retailers won’t be able to match their convenience, shipping offer/timing and breadth of product. But there are ways to engage either with Amazon, or create a unique shopping experience that Amazon just can’t replicate (at least at the present time). Amazon has over 90 million Prime subscribers in the United States, up from 63 million in 2016. The only thing that might slow this growth is the limited number of households in the US.
Localization is a retail industry macro trend getting a lot of attention. In the past, standardization was the normal way of business, where all product selections and all locations were nearly identical, creating somewhat of a vanilla shopping and marketing experience. A recent Harvard Business Review article stated:
“Standardization can do the most strategic damage by forcing products and practices into molds. The resulting homogenization of business tends to undermine innovation, all the way up the supply chain. Managers become so focused on meeting tight operational targets—and stamping out exceptions—that they begin to consciously avoid the experimentation that leads to attractive new products, services, and processes. In the end, standardization erodes strategic differentiation and leads inexorably toward commoditization—and the lower growth and profitability that accompany it.”
Localization can take on many forms for different retailers. Some might look at product assortment to determine the right mix of product by local trade area. Others focus on local engagements with charities—Dick’s Sporting Goods has put forth an effort to be the sponsor of Little League ballfields across the country. And retailers also look to make in-store experiences that mirror local shoppers, creating customer-centric engagements that make them comfortable while shopping. As technology continues to develop and more companies take advantage of data to understand their consumer, the idea of localization will continue to expand and the standardization of retail will eventually disappear.
There’s no refuting Jan Kniffen’s comment on acting to avoid losing share. What he calls out needs to be part of any retail strategy discussion. But as the industry continues to evolve, this statement will resonate more clearly with those old-schoolers resisting change. This means it’s important to commit as soon as possible to the direction that’s best for your business. Off-price works for some, online is table-stakes for most… Localization is just common sense at this juncture, though. Standardized stores don’t fit everyone everywhere. Tailor your retail presence to the needs of your consumers by zip code to remain relevant and spur growth. Use data to uncover what they want and need, and you could go from simply surviving to thriving long-term.