"We're frankly scratching our heads."
That's Macy's (NYSE:M) CFO last week explaining - or perhaps not - the root cause of the company's rather dismal Q1 2016 earnings results. It's not exactly the sort of inspiring narrative that one might like to hear from a CFO, especially when framed in the context of five straight quarters of disappointing and precipitous declines and the retail giant's worst performance in eight years.
There were three reasons why she, and many of her retail CFO compadres - seemed at a loss for words last week when addressing the analysts.
First, overall, the government reported that retail sales were up - and by a lot. Consumers are still spending. The concerns that consumers were holding back were dispelled. Sales of clothes, home furnishings, sporting goods and more were all up. In fact, sales of sporting goods were up more than 7 percent this year over last, and home furnishings up nearly 5 percent. And anyone who doubts that consumers aren't spending on clothes need look no further than recent remarks from mall operators who say that trendy apparel purveyors H&M and Forever 21 are among their hottest mall anchor tenants.
That underscores another retail telltale: consumers aren't spending at the places that they used to.
Consumers don't really seem to be all that interested in shopping at traditional department stores the way they once did - all of them got slammed last week when they reported earnings, including upscale brands like Nordstrom (JWM) and Hudson Bay (which owns Saks). Overall, department store sales were down more than 3 percent. Foot traffic was down, the number of in-store transactions were down - at Macy's, that dip was 7 percent and far worse, they said, than last year, which was also down. Mall foot traffic, which is where most of these stores are located, is also down. That's a pretty big deal too, since malls drive more than 20 percent of retail spend in the U.S.
While it was easy to blame harsh winters and weather for last year's poor physical retail performance, the mild winter and temperate spring makes that seem today like a flimsy excuse wrapped in denial around a big helping of desperation.
Then, a bright spot - maybe.
Online sales are up overall and increasing rapidly, suggesting strongly that sales are shifting from physical stores to online channels. That's no big surprise, of course, and a shift that even the beleaguered department stores like Macy's and Nordstrom benefited from. Nordstrom reported that one-fifth of its sales now are via the online channel, and Macy's boasts that it's the sixth-largest online retailer, with double-digit increases in that channel year over year.
So, if online sales are increasing, and even at traditional retailers, why are they still in such a world of hurt?
It's all about the math.
The double-digit growth in online sales sounds great until you realize that the big increase is on top of a very small base of online sales - it takes a lotta lotta lotta lotta growth in online to offset the decline in offline for traditional retailers.
Moreover, those same online sales also come with a double edge.
Online purchases are often bought on sale or at a discount, have to be shipped to consumers at an added cost to the retailer, and 40 percent of the time, what's purchased is returned. That all adds up - but not all that positively. More sales in a channel where margins are lower and fewer sales in an in-store channel where consumers buy more things that they hadn't planned to buy and that probably aren't on sale isn't exactly an environment that gives investors a lot of confidence in the long term.
That's why I think it might be time for retail to embrace its very own Twelve-Step Program. It's time to both confront and address the issues that have compromised traditional retail's once-dominant position - in an effort to reinvent themselves while there's still time.
Retail's Twelve-Step Program To Commerce Redemption
Step One: Confront Retail's New Reality
The combination of mobile devices, apps and cloud computing have given consumers more of an ability to access an endless number of shopping locations anywhere they happen to be, anytime they feel the urge. They don't have to visit a store or the mall anymore between the hours of 10 AM and 9 PM to find out what's new and then buy it. The "Internet of Things" and voice-activated technologies are also enabling new commerce endpoints and ways to access them that no longer even require that a consumer have a mobile device at the ready.
This blurring of the online and offline worlds is both retail's new normal and its greatest opportunity for reinvention.
The Census has been reporting for the last decade that the predominance of shopping still takes place in stores. Its last published report says that 93 percent of it still does. As we've written, we think that's probably understating online sales, but the Census data are so botched up and badly reported that there's no way to know for sure.
But whether you believe that 93 percent or 73 percent of sales happen in a physical store, physical stores still hold a pretty important place in the consumer's shopping mix. It's how consumers use those stores and spend their money there that's changing - and pretty dramatically.
That means retailers need to confront the biggest threat to their business - the ability to find anything at any price online - and use the variety of technologies that now exist to reinvent the relationship they still have with their customers across all shopping channels.
A relationship that started out face-to-face in a store, but that retailers have allowed the Internet and mobile to erode and not enhance.
Step Two: Acknowledge Your Higher Power - The Consumer
The consumer has always ruled retail. But with the retail world as their oyster and literally in the palms of their hands, consumers call the shots now more than they ever did. Today, turning those shoppers into committed buyers begins with understanding how consumers use different shopping channels to shop, what they feel comfortable buying online and why and what compels them to visit a physical store in a world dominated by endless online options.
If that isn't daunting enough, retailers also must further examine the role that technology plays in supporting the consumer buying decision, even when they are standing in a physical store. And capitalize upon the role that being local can play in influencing purchasing potential and having inventory available to satisfy an immediate consumer need.
Step Three: Confront The Real Enemy
Kohl's (NYSE:KSS) CFO was quoted last week as saying that consumers with access to the Internet have the ability to shop around for the best prices, and that puts pressure on traditional store margins and shifts in-store purchases to cheaper online alternatives.
He's absolutely correct.
But that's not the fault of the Internet - the Internet simply makes those tactics transparent and actionable. Traditional retail's real enemy is a loss of focus on what drives a consumer to go to the store, buy once and then return to buy again. That doesn't have to be the cheapest price - but it always has to be the best value from a brand that the consumer trusts. Different groups of consumers today define value in very different ways, and that's pretty important to understand in an environment in which everything that's buyable is only a Google or Amazon search away.
But that reveals the crux of physical retail's biggest demon: at the moment, the selection in most physical stores is pretty unremarkable and very undifferentiated. The same brands at the same prices can be found pretty much everywhere, so why should any consumer bother going into a physical store if they know they can get it cheaper, and in two days, if they buy it online?
Step Four: Banish The Enablers
Retail's great enabler is the endless cycle of discounts it offers consumers.
Buy one, get one free. Thirty percent off with the "extra-extra" coupon code. Fifteen percent off today only with promo code "15off." Retailers have set the consumer up to expect that everything is on sale and all of the time. Miss one sale - not to worry. There'll be one just as good - if not better - next week, or even today, for the same thing somewhere else online.
Macy's CFO was right when she said that retail never gives a consumer any real sense of urgency to buy anything, especially anything that's not on sale.
But endless discounting doesn't create a loyal customer - just ask the merchants who hopped on the daily deal bandwagon seven or eight years ago, only to see an endless stream of one-time customers they served at a loss. Discounts breed loyalty to the discount, not the brand delivering the goods. That's especially true when the biggest department store on earth called the Web is accessible via a device that consumers carry around in their pocket, and Amazon is only one click away, too.
In an effort to keep customers buying, traditional retail has lost sight of what does create loyalty - great merchandising, great service and a consistent and reliable experience that builds trust.
Step Five: Turn The Pain Into A Gain
One of physical retail's biggest pain points right now is the cost of maintaining its physical footprint. Analysts report that over the last two decades, the number of stores operated by the largest retailers increased by a little more than 20 percent, while sales per square foot dropped 5 percent. While the really big guys are exploring ways to right-size their physical foot print and are closing stores, creative thinkers can use the opportunity to turn physical space into an asset that might improve the return on their investment in capital, while giving rise to new business models.
And perhaps even give retailers new reasons to consider forging new and even once unthinkable partnerships that deliver new ways to monetize their physical footprint.
Ron Johnson was run out of J.C. Penney (NYSE:JCP) when he introduced the notion of pop-up stores from third parties and places for consumers to hang out in the stores while they were looking around. His playbook was the Apple store (NASDAQ:AAPL), where people go to buy even though they can just as easily buy any Apple product they want online. But consumers visit the Apple store because they get value out of being there - knowledgeable sales people who can eliminate the risk of buying the wrong thing, and a team of helpful "geniuses" who can then later help if there's a problem.
But physical stores that lease space to third parties with differentiated offers enable curated pop-up shops that introduce consumers to new brands and experiences, or host demos and product launches, are reasonable examples of how physical retail can leverage its local asset to give consumers new reasons to make the trip to the store. Back in the day, the big department stores had beauty salons and restaurants. Now, mall operators say, one the biggest drivers of foot traffic to malls is consumers taking advantage of services like hair salons and restaurants.
Step Six: Don't Blame Amazon (NASDAQ:AMZN)
"The Amazon effect" is how one media outlet explained the drubbing that the traditional retail industry is taking now and has taken for a while. It's true that while traditional retail is singing the blues, Amazon is crushing it with its sales up 28 percent and a growing share of products that consumers always bought somewhere else - like apparel. Analysts estimate that the company's share of apparel sales is approaching 7 percent and will likely grow to 20 percent in less than four years.
The future of retail, they suggest, looks more like one in which Amazon dominates.
The company has built its business around the consumer - what she wants to buy and how she wants to buy it. Amazon offers a massive number of products at reasonable prices that are delivered fast, thanks to the company's massive investment in logistics and optimizing its supply chain. Increasingly, Amazon is where consumers start their journey to buy the things that present little risk to them of buying online. They trust Amazon will get to them in two days or less.
Those things are things that consumers regard as "commodities", where the convenience of buying it online and getting it in fast offers both low risk and high value: electronics, books, running shoes first bought and fitted at the sporting goods store and reordered online, the fancy-schmancy shampoo that's easier to buy online than at the hair salon once every 8 weeks, bulky grocery staples like paper towels and laundry detergent and diapers that are a pain to put in the car or the trunk of an Uber, the eight-pound bag of dog food that requires an extra trip to the vet. It's not the price that's necessarily driving the buy, it's the removal of the hassle factor of having to schlep to the store.
But Amazon has taken that business from physical retail, because the local sporting goods store or hair salon or vet hasn't thought about offering anything similar. Payments technologies can now more than easily enable that local sporting goods store to set up a recurring order for those runners who want those new shoes every 3 or 4 months, and easily arrange delivery. The hair salon and vet could do the same with their high-margin products like shampoo and conditioner and pet food.
But they haven't. Maybe because they think about their online channel as their online channel - if they even have an online commerce presence - and what's going on in their store as something separate. And maybe because they don't know where to turn for guidance on how to bring those two channels together for their own benefit.
Step Seven: Make Omnichannel Real
As consumers with their mobile devices move more freely between online and offline shopping channels, the big guys know that being omniready is critical. But the progress that's been made seems a bit at odds with that reality.
We've been measuring the degree to which physical merchants have embraced the omnichannel reality for more than 18 months. The good news is that merchants understand and recognize the importance of serving the consumer across all of the channels they shop.
The good news from our latest study of how omniready retailers are is that there's been tremendous improvement in the last year. A year ago, using a score of 0-100, 72% of large retailers we examined flunked, with scores of less than 70. Today, only 33% flunk, which is an amazing improvement.
Still, we'd give only 21% of the major retailers a solid B, and not a single one got an A. Also troubling, we found, is that most of the improvement took place through December. We haven't seen much improvement in the last few months.
Step Eight: Create Certainty
We've done a number of studies to better understand how consumers decide where to start their shopping journey online. What we've learned after talking to more than 4,000 of them is that having the lowest price isn't even in the top 5, despite retail's obsession with delivering an endless stream of deals and discounts.
What matters most is whether the consumer trusts the merchant they're buying from - trust that they'll have what the consumer wants to buy in stock, that the product they want to buy will be at an acceptable level of quality, that it will be delivered on time, arrive in good condition - and that it's offered at a fair price point. Not the cheapest price, but a fair one.
That trust creates certainty. That certainty reduces the risk of buying from that merchant. And that certainty and trust creates a far more loyal customer than any discount or promo code ever could.
Step Nine: Eliminate Online Checkout Friction
Nearly two decades after Amazon opened the world's eyes to the simplicity of buying things online, retailers continue to make it too hard for consumers to close the deal and leave with a purchase.
When we examined the 650 sites that represent 70 percent of online sales (excluding Amazon), only 4 of those sites got a passing grade. Our Checkout Conversion Index (email registration required) reveals a retail sector that's isn't focused enough on what consumers, particularly those on mobile devices, must have to get in and out of a site quickly with what they came to the site to buy.
Whether it's a lack of transparency about promo codes, or shipping costs and time, or introducing the requirement to provide email details before checkout, the inability to offer subscription or recurring billing options, or the lack of support for one-click acceptance marks like PayPal, Visa Checkout or MasterPass, merchants are losing as much as 40 percent of their sales to those who eliminate that friction.
This friction problem isn't only relegated to what's bought online and shipped to the consumer's home. As the in-store retail environment is reimagined and checkout are initiated online - even while a consumer is standing in a store - the ability to eliminate checkout friction will determine who gets the sale and keeps the customer, or not.
Step Ten: Get Contextual
Fulfilling the omnichannel vision isn't just about adapting retail systems between the retailer's website, their app (if they have one) and the physical store. It's about understanding the consumer well enough to serve them in the variety of online venues where they expect to find that retailer, or where it's beneficial for the retailer to be discovered. Getting contextual can drive the kind of high-margin impulse purchases that makes online sales as appealing as those that happen in-store. Data and location-based technologies can give contextual commerce a boost.
That context is increasingly found in online formats. The portfolio of places that consumers can now look for things to buy isn't even just Google and Amazon any longer, but ecosystems like Facebook and Instagram, contextual aggregators like Pinterest and Houzz and style curators like Net-A-Porter and Moda Operandi. And Amazon.
Blogs, articles, magazines and messaging apps also provide new opportunities for products or services to be presented in a context that stimulates and influences the buy. It's not only important for retailers to have their brands and their products represented, but to enable friction-free payment and fulfillment when consumers are inspired to buy.
Step Eleven: Give Consumers A (Payments) Choice
Consumer choice isn't only about what they want to buy. It's about what they want to use to pay when they are ready to checkout. As commerce increasingly moves cross-border, that means offering consumers the method of payment most familiar to them.
It's also about making it easy for those methods of payment to be "smarter" about what other forms of currency might be available for consumers to redeem as part of a transaction: automatically applying sales and promo codes, loyalty or VIP tracking numbers, and/or available gift cards balances, store credits, points or retailer-branded currency.
Today, most retailers force the consumers to do that work for them - to manually track, enter and/or prompt the physical store sales associate to apply the appropriate information at checkout - even though the technology exists to eliminate that burden from the consumer.
Step Twelve: Think Like The Customer
Retailers still think about and organize around separate shopping channels. They report sales by channel, and many still organize inventory that way. Online promo codes or discounts may not be offered in-store, and vice versa.
But to the consumer, it's all just one big shopping channel - they just access them differently. Consumers aren't sympathetic to the inventory challenges that retailers face in moving things from store to store, nor why retailers can't deliver the things they want for free in two days or less. Sure, the expectation that the consumer has today of their retail relationships are higher today than they've ever been (thanks to the bar that Amazon has set), but it isn't as if traditional retailers are powerless to watch their customers and their margins disappear.
Traditional retail has an asset that any online retailer, including Amazon, doesn't: the ability to develop a face-to-face relationship with a customer. Amazon has had to work exceptionally hard to create consumer trust, and it has done that by having millions of products available at good prices delivered quickly.
But imagine the "surprise and delight" that a traditional retailer could create for their loyal customers if products ordered online weren't delivered in two days to their home, but made available the next day and an Uber or Lyft was dispatched to pick up that customer and take her to the store to retrieve her purchase. And a helpful sales associate was waiting for her to help her get her things, and buy more.
That, of course, won't work with every store or every product. But traditional retail still has feet coming into their storefronts and the ability to blend their digital assets and their local presence to create a differentiated experience for the consumer. And experience that removes the frictions today that comes with buying in any single channel - online or in-store - and simultaneously reinvents the retail experience and the consumer's relationship with that retailer.
Or traditional retail can continue to cede ground to those who can.