We have all seen the advertisements like the below from Macy’s, and I know I cannot be the only one who wants to scream at the TV when I read it. “One Day Sale” with a “Preview Day” the day before it. If there is a ‘Preview Day’ of the same sale, then it is not a 1 day sale!
All that this advertising demonstrates is that the American department store, and most of the American retail landscape, has literally lost all levers to drive their business other than price. See for example the chart below from J.C. Penney:
What JCP shows is that while the retail price has risen by over 40% since 2002 – the average selling price after discounts, is actually down modestly. What the retailers are doing is raising prices, so they can mark them down with even larger discounts.
The problem is that the product is unchanged. If I take a crappy $10 t-shirt and raise the price from $20 retail to $30 retail, and sell it for $15 after a coupon. Regardless of whether it is sold for 25% off or 50% off, it is still the same crappy t-shirt.
Here’s the conundrum – the consumer has gotten so used to buying at 50% off or more, if the price isn’t marked down, she has no way of knowing whether or not she got a good deal. More over, in a middle class that has not seen an effective pay rise in 30 years, our prototypical shopper needs to be able to demonstrate savings as a way of proving value to the family.
The question, and hence our title, is does it have to be this way?
Ron Johnson, the ill-fated CEO of J.C. Penney did not think so. He thought that great merchandise at a good price would sell. The problem is, he tried to create this environment on what looks to be a permanently tarnished brand.
Below, I would like to walk through some thoughts about why department stores do not have to suck structurally. In fact, I would argue that there are many things occurring in the consumer world, that would be supportive of department stores.
First, let’s look back at a little history. Throughout time, department stores have used novelty as a way to drive customer traffic. Department stores were often the first major places to install air conditioning, have a lunch counter, have Santa at Christmas, etc.
I’d highly commend the following lecture from the McCombs School of Business at the University of Texas called Ringing Registers – A History of America Retail.
The retail business model is contingent on two primary cost factors – space and labor. Retailers must arrange their product assortments with items that turnover (sell through quickly) and carry enough of a profit margin to pay the staff and cover the rent.
Department stores are unique in my view in that they function as almost ‘bulk buyers’ of space in malls and other retail centers. For example, J.C. Penney has many owned company stores that have incredibly costs per square foots, single digits in some cases.
What matters if department store has a modest cost advantage in the space requirement, is how can you create a product assortment the drives traffic and turnover?
Department stores have done this for the last 20 years or so by sourcing product directly (which bypasses the supplier margin) which allows them to sell the goods at crazy, advertised mark downs. The net result are ‘value-brands’ like Arizona at JCP or Alfani at Macy’s.
The problem with this model is that you are carrying the cost of operating in a mall, the design/sourcing talent, and selling staff. This model is inherently more expensive vs. a TJ Maxx for example which has cheap store locations and essentially minimal staff.
The way out of this quagmire is through a sea-change that is occurring in the consumer world.
The graphic below if my favorite representation of the current consumer landscape.
As you can see, in the branded food world, there are 10 or few companies that own almost the entirety of the ‘central core’ of a grocery store. The reality, is that for most consumer product categories, there is a similar dynamic at play. Large players have either swallowed whole new upstarts, or pushed them out of distribution.
There is a foundational shift that is occurring in the branded consumer products world currently. After years and years of consolidation, we are seeing a new round of entrants for the first time in decades.
Through innovative new platforms like Kickstarter, etc. – it is easier than ever to launch a branded consumer product. In many cases, companies are able to pre-sell their first round of inventory – removing much of the day 1 working capital costs required to build inventory. This is occurring across categories, from beer to denim.
As a consumer, these new entrants are reintroducing brand differentiation to many categories for the first time in decades.
For the big consolidated players, this creates headwinds as the new entrances peel off small parts of market share. Because of their low, predominately fixed cost base, tiny pieces of market-share more than satisfy their profit requirements. As increased fragmentation occurs to the smaller players, each new entrant is able to differentiate itself on new value criteria that were not possible at scale.
So for example in the denim world, you have a number of new entrants that are just focusing on Cone Mills selvedge denim – a specific manner of weaving done by Cone Mills – a textile factory outside of Greensboro, NC. Others are focusing on production of only Japanese limited edition fabrics. Still others make only in the US, etc. etc.
The challenge facing these new companies is distribution. If they have all the fixed costs of producing the product, they need to get in front of customers and sold quickly. Obviously they can get distribution through the web / e-commerce. But the pain point online is product discovery. How do you find out about XYZ great new product or brand? At this point, there has not been a great product discovery platform debuted. Pinterest, potentially could be, but that remains to be determined.
There is an opportunity for department stores here. With their bulk purchasing of space, they have the real estate flexibility to offer new brands a physical store front. Many new companies simply don’t have enough different items to fill a standard mall spot. But within a department store, they can easily carve out footage as small as a couple hundred square feet.
These new entrants solve a problem for the department store as well -Macy’s, Penney’s, etc. need novelty and differentiation to drive traffic. Small brands have the novelty and specialization, but need the foot traffic to really grow.
A preview of this potential business model, you can see in a novel way at places like White’s Mercantile in Nashville. This is a reinvention of the general mercantile store, but with unique products. From our history of retail, we know that the general merchandise store ultimately paved the way for department stores and other larger concepts.
Time will tell if a larger retailer, and / or a new retailer, is able to merge these two concepts together at scale.