The Greatest Show is shutting down! No, don't worry, NRF. We're not talking about your show, which kicked off last night in NY. The Ringling Bros. Circus, The Greatest Show on Earth, is folding its tents and laying off the animals it hasn't already fired. Still, Karen Webster thinks that physical retail has more in common with the circus business than meets the eye and that the demise of the once-beloved and crowded circus has some lessons for brick-and-mortar stores.
As tradition has it, the outgoing president of the United States, Barack Obama, will leave a note for the incoming president, Donald Trump, in the drawer of the president's desk in the Oval Office. That note, as we've seen from past presidents, proffers advice and inspiration for the new guy taking the political reins of the United States.
I was inspired to do something similar as all of you gather for NRF's annual retail extravaganza and offer a few words of advice and inspiration as you struggle to adjust to your own transition of power.
Away from physical to online sales.
I have to say that I find it mildly ironic that "The Greatest Show on Earth" - Ringling Bros. and Barnum & Bailey Circus - announced it was shutting down for good after 146 years, the evening before all of you gathered in New York for what you all call "Retail's Big Show."
I'll take your nervous laughter as a sign that you probably don't appreciate my profound sense of humor.
But stick with me.
Once upon a time, the circus was an experience that families eagerly anticipated coming to their town every single year. There was something exciting and mysterious about the whole gestalt of the circus that drew thousands and thousands of people to gather under its Big Top to watch its "death-defying acts." From the mile-long train car that carried several hundred circus performers from city to city that would ceremoniously roll into town to the iconic Elephant Parade that wound its way through the streets of those cities on the lead-up to its opening night, when the circus came to town, families, friends and curiosity seekers escaped the normal humdrum of their day-to-day grind to collectively "ooh" and "ahh" together.
It was an experience like no other.
That gestalt carried The Greatest Show on Earth for almost 150 years - through the Great Depression, the move from outdoor tents in more suburban and rural locations to more urban-centric indoor arenas, one of the greatest fires in U.S. history in Hartford in 1944 and the rise of television in the 1950s and 60s, which everyone said would render the Big Top obsolete as consumers turned into couch potatoes at home.
None of that even made a real dent.
But what did was, quite literally, its business model - one that could no longer sustain changing consumer preferences and Ringling Bros.' inability to react to the social pressures involving its star anchor tenant - the elephant.
I'll spare you the "elephant in the room" jokes since this is really no joking matter.
Why The Greatest Show On Earth Fizzled
Ringling's COO said that circus attendance has dropped dramatically over the last decade, coincident with the rising chorus of charges against them about animal cruelty. Among other things, parents, increasingly uncomfortable with taking their kids to the circus amidst those charges, stopped buying tickets.
Fewer ticket buyers made tickets more expensive to cover the cost of producing the circus - with good seats selling for as much as $100. Higher ticket prices meant fewer families able to afford sitting under the Big Top - at the same time, they had more options to consider for a night out on the town with the family. Fewer butts in seats meant fewer people with whom to "ooh" and "aah," making the in-person circus experience different and less thrilling, and even a bit uncomfortable. It's really no fun "oohing" and "aahing" in a half-empty arena.
Meanwhile, the cost of delivering the circus experience continued to climb - operating the train, caring for the animals, setting up the circus in each town, defending the animal cruelty lawsuits. And since the elephant was the brand of The Greatest Show on Earth, with its brand integrity challenged, options to license it were improbable.
So was reinventing itself, it seemed.
Other options for live entertainment and other circus competitors had beaten them to that punch by devising experiences less dependent on animal acts to scintillate the crowds. The Big Apple Circus, Cirque de Soleil - to name but a few - began drawing in the crowds seeking the thrill of a live acrobatic experience delivered under the Big Top. So, too, were the performers who found show promoters and venues that could deliver an audience (and a stable paycheck).
That prompted Ringling Bros. to announce in May 2015 that it would phase elephants out of its shows by 2018. Yes, it fired the elephants!
But by then, it was too little, too late - the circus train had left the station, so to speak, and Ringling Bros. behind.
The parallels to physical retail you have to admit are pretty similar.
Retail's Big Show
It's a dead certainty that over the course of 2017's Retail's Big Show, like so many in the last five or so years, you'll hear talking head after talking head and solution provider after solution provider touting how they can help you deal with your own elephant in the room: Amazon (NASDAQ:AMZN).
But for many of you, like Ringling, it may be too little, too late. At a minimum, they'll likely hype solutions that don't solve for the real problem that physical retail is facing.
Starting with the fact that consumers aren't going to the store to buy stuff anymore. Retail sales really are shifting online at a very rapid clip.
All of this gets rationalized by the "well, 93 percent of retail still happens in physical stores" credo that, if anything, is akin to playing music while the Titanic sinks. It's a distraction that makes everyone feel better but ignores the reality that the ship is going down and taking everyone who's on it with it.
That credo is based on two things: Census data that's simply inaccurate - and has been for a very long time - and a misperception about how much impact Amazon is having on their physical retail businesses.
The Census Data Boo-Boo
It was about this time last year when my colleagues found the Big Census Data Error, and I wrote a piece that blew the lid off of the mistake.
After denying that it was wrong, the Census Bureau did an about-face and decided to take a closer look at its model - one which we estimate has under- and miscounted retail sales for a decade.
When you think about it, it has to. Otherwise, physical brick-and-mortar stores, like The Limited, American Apparel (OTCPK:APPCQ), Abercrombie (NYSE:ANF), Sears (NASDAQ:SHLD), Wal-Mart (NYSE:WMT), Macy's (NYSE:M), Kohl's (NYSE:KSS), Walgreens (NASDAQ:WBA), Chico's (NYSE:CHS), Finish Line (NASDAQ:FINL), Sports Authority, Modell's, Aéropostale (NYSE:ARO), and the list goes on, wouldn't be closing hundreds of stores, if not closing up entirely. This at the same time that it's been reported that huge slugs of the 10-year store leases that are coming up for renewal in 2018 won't be renewed.
Meaning, even more stores will close.
It would, therefore, take the notion of fuzzy math to a whole new level to think that 93 percent of sales still happen in a physical store at the same time large swaths of retailers are simply disappearing - or will - because those retailers say consumers aren't visiting their storefronts any longer.
Then, there's the hiding behind Amazon's so-called "small" retail sales footprint.
I listened to someone on a national news broadcast last week describe Amazon's "small" $100 billion annual sales number (that was 2015 - we'll find out shortly what that is for 2016). That ignores something quite material to how Amazon sales are calculated. Statista reported (from Amazon's filings) that 50 percent of its paid units are via its marketplace sellers. The revenue that Amazon reports is its commission from the sales of those units, and not the value of the merchandise that is sold. The value of the merchandise sold is how an apples-to-apples retail sales comparison would be calculated.
So, let's say, hypothetically, that 15 percent of Amazon's $100 billion sales number is driven by the 50 percent of the units sold via marketplace sellers. That $15 billion could represent another $70 billion in gross merchandise value, which would make the value of Amazon's retail sales something more in the neighborhood of $170 billion.
And growing like a weed.
Wal-Mart's annual sales you'll note are $482 billion.
That's, of course, on top of the fact that Amazon is now, by some reports, around 50 percent of all online sales. It's been reported that it drove 31 percent of holiday online sales, too. Judging by my own highly scientific Beacon Hill trash day survey the week before Christmas (I counted the number of Amazon boxes out for trash pickup on my walk to work) for my neighborhood, it seemed more like 70 percent, seven out of every 10 Beacon Hill trash piles had at least one empty Amazon box in it.
So, the next time someone lays that "93 percent of retail sales happens in the physical store" line or tells you that Amazon is still a tiny piece of retail sales, you might want to show them the door.
The Eyes Don't Lie
But you don't have to be have a Ph.D. in math or economics to see that this data is just plain wrong. Just connect some of the data point dots that are swirling around the space.
First Data's Holiday 2016 SpendTrend report found that only 79 percent of holiday shopping happened in a physical store this year. But you say that's still a big number compared to the 21 percent of sales that happened online (up from 15.4 percent in 2015). But at this rate of online growth, in three years, holiday in-store sales might be lucky to keep their head above the 50 percent mark.
And this is in an environment in which the economy is strong and people are spending money - heaven help them when the economy turns, which it always does.
Like The Greatest Show on Earth, one of retail's big problems is the anchor tenant of what was once the bastion of physical store shopping: the department store in the mall.
Department store sales got clobbered this year; down 4.8 percent, First Data said, right alongside women's ready-to-wear retailers, which declined 3.7 percent. While it didn't connect these dots in its report, I will: No feet inside the mall to visit department stores also meant no feet walking past these stores either.
Once people stop going to department stores to shop (or the speciality stores in the malls), those stores will stop carrying the merchandise that they once did since manufacturers won't value them for distribution anymore. And that will just perpetuate the foot traffic footfall, so to speak.
It's been reported that designers, like Michael Kors (NYSE:KORS), Coach (COH), and high-end brands, like Prada (OTCPK:PRDSY) and Gucci, are beginning to invest more in their own storefronts where they can curate and control the shopping experience, as well as the pricing practices that help to preserve their margins, arguing that they simply have too much to lose in the current environment. If the only way that department stores can get feet inside is to ply the consumers with sales and coupons and they play along, they sacrifice margin. If they don't, they sacrifice sales to the designers who discount while continuing to cover the increasing cost of overhead to attract fewer feet inside.
They lose, the department stores lose, the consumer loses.
And let's not forget the social impact of not having lots of feet inside of a retail store. Like the circus-goers who don't like to "ooh" and "aah" in a half-empty arena, it's weird shopping in a store that has more sales associates than shoppers. It's uncomfortable and not all that much fun.
Gadgets And Gizmos
There's also no doubt about it; at this year's Retail's Big Show, there will be aisles and aisles of gadgets and gizmos aimed at helping you navigate your world of hurt. Many of them are intended to give you more intelligence about what your consumers are doing inside of your physical storefronts.
Wouldn't that be a nice problem to have?
The first order of business must be to figure out whether you even have a shot at hearing the pitter-patter of little feet in your storefronts and, if you do, what's needed to help you double down on getting them there. Until then, it seems a little cart before the horse to invest in technology to help you get smarter about customers you don't have.
Instead, maybe now's the time to take a good look at your business and your business model and put everything on the table.
How you source and maintain inventory.
And speaking of experiences, look with a critical eye at what that means for your business. Keep in mind that some of the best ways to keep customers loyal have nothing to do with a deal and everything to do with how you eliminate a friction that gets in the way of a great shopping experience.
Speaking of frictions, examine carefully what frictions exist in your segment for you and for your customers that you think technology can help you solve. Is it an app (probably not your own)? Or the ability to be present contextually where consumers are hanging out doing other stuff (likely)? Or the ability to skip a line by not asking people to stand in one - ever (also likely)? Ask yourself what a physical storefront really needs to do and whether you need one at all - or one as big.
At the same time, thinking about how payments and mobile wallets can accelerate your goal of blurring the on- and off-line worlds in a way that delivers a compelling advantage for you and your customers. Online, regardless of how that transpires for you and your customers, is a reality you can no longer ignore.
Like The Greatest Show on Earth, it wasn't that long ago that consumers flocked to your storefronts, eager for the experiences that awaited them inside. They knew your brand and trusted it and believed in the value you offered. Many of you thought that would never change and that the impact of online and the value of that digital-only upstart in Seattle that you once dismissed as a niche player wouldn't hurt you much. And now, only a few, short years later, given their momentum and their business model, those tables are being turned.
Over the next few days, I'd encourage you to be wowed by the technology that you see, but make sure that it's grounded in the reality of the problems you have to solve. Be inspired by the people you hear and their stories of how they've used new tools and methods to solve their problems. But whatever you do, make sure that your decisions on what to buy and what to deploy reflect the reality of today's retail environment and the imperative of reinventing it for the benefit of your customers and your retail future.
And remember, unlike Ringling Bros., you can't fire the elephant.
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