Neiman Marcus & Target: A glorious failure

“Ever tried. Ever failed. No matter. Try again. Fail again. Fail better.”

-  Samuel Beckett

If you pay attention to this sort of thing, you know that several months back Neiman Marcus and Target made a big splash when they announced a partnership to jointly market a limited collection of fashion items for the holidays. This announcement was followed by a lot of PR hoopla and a high-profile television and social media advertising campaign.

And guess what? It was a bust.

The product offering failed to generate the sales frenzy that past designer collaborations from Tar-zhay have, and the merchandise has been marked down 50 – 70%. The media are now out with their post-mortem bashings, many taking the “I knew it was a bad idea all along” route.

Having previously led strategy and corporate marketing at Neiman Marcus for several years, I’ve gotten plenty of questions about my take on the strategy and its execution (NOTE: full disclosure, I remain a Neiman’s investor). Frankly, I think much of the criticism misses the mark entirely.

Clearly, a lot of the execution was messed up. Prices were generally too high, designer brands were extended too broadly and some of the product was just plain goofy: a $50 Rag & Bone boys’ sweater? That was never a good idea.

Big picture, however, the concept was fundamentally good for both Target and Neiman’s. Target is well-known for enhancing its fashion cred with such partnerships; so for them, this was a no-brainer. If they made any money on it, all the better. But the real value is in brand enhancement.

For Neiman Marcus, the strategic value may be less obvious but, in essence, their foray into “mass-tige” is no different from Karl Lagerfeld or Jimmy Choo doing their special offerings at H&M. The goal is to generate buzz and expose their brands to a demographic that they need to cultivate for the long-term. Forging a longer-term and/or more broad partnership would be dumb. But experiments, such as what was tried here, can be shrewd moves indeed.

Which brings me to my last point. What gratifies me the most is that Neiman’s actually tried something bold and, arguably, counter-intuitive. Neiman Marcus’ last CEO–and my former boss–Burt Tansky was a brilliant merchant and remains a luxury and fashion industry icon–and rightly so. But he was hardly a risk-taker and fundamentally not wired to say ‘yes’ to strategic innovation. Kudos to Karen Katz and her team for being willing to push the envelope.

It’s so very easy to label something a failure after the fact and to castigate management for its ineptitude. The far easier path for leaders of course is to never try. You rarely get criticized for the things you didn’t do.

It’s a terrible strategy to eliminate the possibility of failure. Great companies and great leaders are not characterized by an absence of failure.

Without trying, there is no growth. Without failure, there is no learning. The key is to fail better.

So was the Neiman Marcus and Target partnership a failure? In the immediate-term, definitely. But the overall grade from where I sit is “Incomplete.”

If the lesson Neiman Marcus takes away from this project–and it is a project, not a strategy–is to pull back on innovation, to stop experimenting, than it will be a huge waste of time and resources. If it strengthens their resolve, if they apply their learning to improve the process of innovation, than it will be the most glorious of failures.

Out of Barneys’ rubble: What’s next for luxury fashion’s biggest boutique

Yesterday Barneys New York averted yet another trip to bankruptcy court through a major restructuring deal that converted most of their debt to equity (http://bloom.bg/IUyHir).

Unless you work at Istithmar–the PE firm that paid more than $940MM for Barneys in 2007 (oops!)–or owned Barneys debt, this is a big deal (pun intended). Barneys no longer has to divert the majority of its cash to service debt and now has greater capacity to improve existing operations and focus resources on growth.

So we’re good now, right? Not so fast.

To be sure, buying a marquee brand at fire sale prices sets up Barneys new class of equity owners for potentially high returns. And newish CEO Mark Lee has done a solid job of executing the basics and going after the proverbial low-hanging fruit. But we need to deal with a few facts.

We should not forget that Barneys recent improved performance comes at a time when virtually all luxury brands have performed well as the US market recovers from the devastating effects of the recession. As the market returns to 2007 levels–and we’re pretty much there–the reality is that the US luxury market is pretty mature.  Maintaining outsized revenue growth in the future is mostly going to need to come from market share gains and/or new stores.

The more looming reality is that Barneys is basically a 2 1/2 store chain. It’s no big secret that the New York and Beverly Hills stores drive the majority of profits while the Chicago flagship is a solid, but way less significant contributor. But expansions of flagship stores to markets like Scottsdale and Dallas have been disasters, and the Co-op stores have had decidedly mixed results.

Yes, Barneys expanded to markets like Las Vegas at precisely the worst time and yes, there have been execution follies along the way. But the bigger issue is that Barneys, as currently envisioned, is basically a big boutique. Unlike Neiman Marcus and Saks, which play in a full-range of affluent customer price points and target multiple lifestyles, Barney’s is tightly focused on a more specific customer from both a fashion point of view and price range.  In huge fashion markets like New York and LA, they can thrive. In smaller markets, faced with long-standing department store and boutique competition, it’s much, much harder.

Barneys has tried to correct for this by building smaller stores. While the stores are beautiful and contain a lot of great product, they mostly end up looking like a smaller boutique concept trying to fill up too big a space. So far, in markets like Dallas and Scottsdale, customers seem to agree.

For Barneys to profitably and meaningfully move beyond more than a handful of cities they are going to have to address a wider market while still maintaining a strong sense of their unique DNA and brand image. Faced with strong omni-channel competition like Saks, Neiman Marcus and Nordstrom–not to mention a whole host of e-commerce only players and local boutiques–that is no easy task.

 

 

The obvious obviousness of omni-channel

Sitting in sessions at last month’s NRF annual conference I might have thought a drinking game had launched where you would down a shot every time someone said “omni-channel” or uttered the phrase “seamless integration.”

Speaker after speaker–as well as subsequent press coverage–rattled off buzz-phrases, statistics and factoids regarding multi-channel consumer behavior as if this were some big new discovery or insight.

All this proved was one inescapable fact. There are two types of retailers in this world: those that have been paying attention and those that haven’t.

If you’ve been paying attention all of this has been obvious for years. If not, you are suddenly awakening to the cold harsh reality that you are behind. Perhaps way behind.

Any brand that has taken the time to understand consumer behavior already knows that consumers think brand first, and channel second. Any retailer that analyzes their customer data understands how digital commerce influences brick and mortar sales–and vice versa. Any company that has been willing to look, appreciates the large degree of cross-channel behavior that has been evident (and growing) for years.

It’s been more than 5 years since retailers like JC Penney, Sears and Neiman Marcus stated publicly that customers that purchase in 2 or more channels outspend single channel customers by a factor of 3 to 4X. In 2006–nearly six years ago!–my team did an analysis that showed that more than 50% of Neiman Marcus’ total sales (and a higher percent of profit) came from customers that purchased in multiple channels within a 12 month period.

The proliferation of robust mobile devices–smart phones and tablets–add more touch-points, new functionality and serve to further blur the lines between channels, while creating the need for more frictionless integration.

There is a big difference between a new reality emerging and your becoming aware of a reality that is already there.  And it’s dangerous to be confused about that.

Obviously.

 

It’s time to let go of that hammer

You probably know the saying: “If all you have is a hammer, everything looks like a nail.”

This explains a lot of behavior we see with the leadership at struggling retailers.

If you came up through the merchant ranks, chances are you obsess about product–rather than the consumer–and fall woefully behind in creating a compelling omni-channel shopping experience. Today, you are desperately playing catch-up.

If the only way you know to drive revenue is through relentless price promotions, you now sit lamenting the lack of customer loyalty and your shrinking margins.

If you made your money through financial re-engineering and scorched earth expense reductions, you assume your latest investment will cost cut its way to prosperity, rather than realize that your overwhelming issue is top-line growth (I’m looking at you Eddie Lampert!).

If you drove same-store sales through price increases rather than customer and transaction growth–as the US luxury retail industry did for many years–post-recession you find yourself with too narrow a customer base to sustain profitable growth. You now are working overtime to win back customers you priced out of your brand.

All of these problems were caused by a monolithic view of strategy and a failure to gain deep insight into customer behavior. Most were preventable.

Of course, the past is history and the future is a mystery.

But there is no mystery in the failed wisdom of clinging to the past and continually wielding the hammer that got you into trouble in the first place.

Let go.

Move on.

Get some new tools.

 

 

 

The end of e-commerce

We’ve gotten pretty used to talking about e-commerce and brick & mortar retail as if they were two entirely separate things operating in parallel universes. In fact, industry commentators often treat the “on-line shopper” as some sort of new species.

Yet more and more the notion of e-commerce as a channel unto itself is collapsing. A distinction without a difference.

Yes, some on-line only businesses like Amazon will continue to thrive, and no doubt we will continue to see purely digital retailers launched. Some will carve out profitable niches.

But with few exceptions, the real action–and the biggest source of future growth–lies with omni-channel retailers, that is, those brands with a compelling presence in brick & mortar and on the web (and mobile, and social, etc.).

When the media quotes the rapid growth of e-commerce, don’t forget that much of that growth is fueled by the digital operations of traditional brick and mortar players such as Macy’s, Best Buy and Neiman Marcus.

The reasons for this are simple. Consumers think brand first, channel second. Consumers use multiple touch points on their purchase decision journey. More and more, consumers value the unique convenience of on-line shopping, but often will appreciate the unique benefits of a physical store.

Forward thinking omni-channel retailers like Nordstrom have stopped breaking out the sales of their e-commerce division and their brick and mortar stores because they accept the idea that the distinction is increasingly meaningless. More importantly, they act on this insight and have worked hard (and invested mightily) to eliminate shopping friction and make their brand available anytime, anywhere, anyway.

So forget e-commerce and brick & mortar. Stop with the separate P&L’s, non-sensical incentives and channel-centric customer analysis.

Put the customer at the center of everything you do, and build from there. Rinse and repeat.

 

 

 

 

 

The people who want to hear from you asset

Go to your customer database. Right now. I’ll wait.

Now ask yourself the following questions:

How many of those people really want to hear from you?

How many actually pay attention to what you are saying?

Better still, how many eagerly anticipate getting your communication–Sunday circular, direct mail, e-mail, phone call, whatever–because they know it will contain something meaningful and relevant?

While it’s not on the balance sheet, one of the most important assets for just about any company is “the people who want to hear from you asset.” And many brands manage it poorly. As Seth pointed out in the classic Permission Marketing, permission is a privilege that needs to be carefully cultivated.

Just because e-mail is cheap, doesn’t mean you should spam me with largely irrelevant offers. But enough about Groupon.

Just because you are organized by channel, doesn’t mean your marketing shouldn’t speak to me with one integrated voice.

Just because I have shown a propensity to respond to prior offers, doesn’t mean you should up the quantity of communication to test my tolerance for pain.

At Neiman Marcus–because no one was paying attention to it–our highest opt-out rates were among our most valuable customers. We were squandering our people who wanted to hear from us asset.

Typically, it is expensive to earn marketing permission from customers with high lifetime value. Once lost, it is even more expensive to win it back.

My guess is you might want to start paying more attention to the people you want to keep paying attention.

 

 

 

Your next best customer

Who is your next best customer?

There are two ways to interpret that question. Both are important. Both demand clear answers.

“Next best” can mean secondary, as in nearly, but not quite, your best. “Next best” can also mean who will be the best in the future.

Many companies fail to develop a growth strategy that successfully addresses and integrates multiple customer segments. The common mistake is to assume that what you do for your primary customer segment will “drag along” the next best segment. That’s rarely the case. Hyper-emphasis on your best customers usually leaves room for the competition to pick off those who feel neglected.

At Neiman Marcus, we did a great job growing our business with our top-tier customers–mainly by raising prices–while failing to hone and execute our strategy for the next tier of (quite profitable) customers. When the recession struck, we were hit unusually hard, particularly with this “next best” group.

The other mistake companies’ make is not focusing enough resources–or starting early enough–to cultivate the profitable customer relationships of the future. Of course it is difficult to know how to invest in customers who will not have an ROI for many years. But it’s even harder to try to wrestle those customers away from the competition once habits are formed and loyalties have solidified.

There are few categories where the consumers who will drive the majority of profits ten years from now, look much like those who drive current profitability. If you aren’t already working on a strategy to engage these future consumers, you might want to get started. Today.

And when in doubt, always remember: treat different customers differently.

 

The curious case of the downward migrator

When I joined Neiman Marcus as the head of strategy & multi-channel marketing, one of the first things I read was a McKinsey study outlining actions they thought we should take to strengthen our customer base. Among the many recommendations was the idea that we should focus on what they called “downward migrators.”

I came to learn that what they meant by a “downward migrator” were those valuable customers who were decreasing their engagement with us (through lower spending, fewer transactions or longer duration between purchases). The business case centered on the idea that since we had already invested in acquiring and cultivating these relationships, it might be relatively easy (and high ROI) to turn this trajectory around.

From my experience working on customer growth strategy as part of the senior team at a couple of big retailers–and now as a consultant–this is an often neglected and significant area of opportunity.

The first step is to pay attention. If you don’t measure it, obviously you don’t know if you have a potential issue or not.

The second step is to understand the drivers. Reasons for downward migration fall into two basic situations: those you can do something about (product, pricing, customer experience, irrelevant marketing, etc.) and those you can’t (the customer moved out of the trade area, their economic situation or needs have changed). Don’t chase your tail worrying about something that is not actionable.

The third step is to develop specific plans to address your gaps.

The fourth step is to get into action, being sure you have ways to measure your progress.

A lot of time and energy goes into acquiring new customers. Not enough goes into following the journey (and profitability) of those customers once they are engaged.

If you aren’t careful, before you know it, those customers have migrated themselves right out the door.

And winning them back from the competition is typically no easy feat.

 

Competing with yourself

One of the biggest mistakes companies make strategically is failing to compete with themselves.

The only reason Sears is no longer the leader in the retail home improvement industry–and now on a slow slide into oblivion–was their unwillingness to build or buy an off-the-mall response to Home Depot when they had the chance. Having personally participated in 2 separate strategic studies in the early and mid 1990′s, I can tell you that the big hang up in making the plunge was leadership’s fear of sales diversion from the “core” mall-based department stores.

Whoops.

So it was refreshing yesterday to see Nordstrom’s acquisition of HauteLook, one of the leading flash-sales sites.

The luxury/fashion off-price market has exploded in the past 3 years with upstarts like HauteLook, GiltGroupe, RueLaLa, et al creating a $1 billion+ (and growing) sub-segment through daily online sales. And it’s clear that a lot of that business has come at the expense of traditional players like Nordstrom, Neiman Marcus and Saks.

It remains to be seen whether the price Nordstrom paid was sensible. And time will tell how well they will be able to leverage their capabilities and customer database to accelerate HauteLook’s growth and profitability. But one thing is clear. The other industry incumbents have been slow to react–or have responded with utterly unremarkable tactics–and have let many start-up companies steal market share and attract new customers in a space they could have easily dominated.

Retailers are pretty good at firing people when they don’t make their seasonal sales plan or manage their budgets well. When they let hundreds of millions of dollars of potential shareholder value slip through their hands by failing to act on business that is rightfully theirs, you rarely hear a peep.

That needs to change.

And you need to be willing to compete with yourself. Last time I checked you don’t any credit for your competition’s sales.

 

Luxury’s back!!! Uh, not so fast.

With last quarter’s improved earnings–and a string of positive same-store sales reports–many have declared that the luxury market is once again booming.

While there is no question that business is on fire in developing luxury markets like China, the results in mature markets suggest a business that IS dramatically improved–and on a much more positive trajectory–but recovered? I beg to differ.

Better is not the same as good.  Let’s look at a few examples.

Neiman Marcus (full disclosure: my former employer and I still own an equity stake) is the clear leader in full-line luxury retail and today reported a December sales increase of 4.7%  In their most recently released quarterly earnings, Neiman’s reported a 7% same-store sales increase and a 33% increase in operating earnings compared to last year.

Today Saks reported a 11.8% increase in December sale-store sales.  In their last quarterly report, they showed a year over year sales increase of 4% and a doubling of their operating income.

This is all sounds pretty good until you compare these results to the same period just before the recession started.  Compared to the comparable quarter in 2007, Neiman’s sales are 18% below where they were–and this is after opening several new stores and having a rapidly growing e-commerce business.  More dramatically their quarterly earnings are still only half of what they were at their 2007 peak.

Same basic story at Saks: their sales are still down some 17% compared to 2007 (though they have closed a few full-line stores) and pre-tax operating earnings are down 30%.

Nordstrom–the best in class “accessible luxury” player–was affected less during the recession and has bounced back more strongly.  Their overall sales are pulling ahead of 2007, buoyed by new store openings, a leading omni-channel capability and a more broadly accessible offering.  While they have clearly gained market share, their earning are still about a third less than they were three years ago.

I have little doubt that virtually every player catering to the high end will report significantly improved earnings this next reporting period. And I’m delighted to see this positive trend.  But very few will have truly recovered.

A complete recovery will require more than just return of the ultra-high net worth customers and a bounce off the bottom.  It’s going to take a broader consumer recovery.  It’s going to take a better in-store customer experience.  It’s going to take building in more tangible value to the merchandise offering.  It’s going to take making the brand more accessible, while preserving the core customer.  It’s going to take a more compelling omni-channel strategy.  Fundamentally, it’s going to mean that all these players become more customer-centric rather than product-centric.

It can happen–it needs to happen–but it won’t fully happen anytime soon.

I had some surgery a couple of years ago and for some time I was hobbling around, feeling a fair amount of pain.  I realized–as did those around me–that each day I was feeling a little bit better.  And that was good.  But while I was still limping, nobody was deluded that I had completely recovered.

When it comes to the luxury recovery, let’s not kids ourselves either.