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.

 

 

JC Penney swings for the fences (Part 1)

New CEO Ron Johnson’s first big move to re-invent JC Penney was to eliminate their intensely promotional high/low pricing strategy. The key elements are:

• Moving most products to “fair and square” every day pricing
• Establishing month-long themed value pricing for certain key items
• Simplifying and creating regular break dates for permanent markdowns.

To break-through the sea of sameness that envelops the slow growth moderate department stores space, Penney’s clearly needs to take bold action. And any student of retail knows that other needed changes to product assortments, in-store experience and digital strategy will take multiple years to fully implement. So what should we make of this “radical” new pricing initiative?

First, anyone who knows retail knows how foolish a high/low pricing strategy seems. The amount of money spent advertising events in weekly circulars and various broadcast media is enormous (and increasingly ineffective). The payroll and collateral costs of constantly changing in-store signing is a major line item. And “forcing” consumers to wait for a sale or have a coupon or get your store credit card to obtain the best price is seemingly a big customer dissatisfier.

So going to “fair and square” everyday pricing would seem to be a win for the consumer and a major improvement to any retailer’s earnings. Why not emulate Nordstrom and get both great Net Promoter scores and have an advertising to sales ratio that is the envy of the competition? It’s a slam dunk, right?

Well, not so fast Skippy.

First of all, unlike Nordstrom, every promotional retailer like Penney’s (and Sears and Macy’s and Bed, Bath & Beyond, etc.) has taught their customers–over many, many years–that their “regular” price is a sucker price. Reversing this perception will not happen quickly, no matter how creative your new ad campaign is and no matter how much money you throw at it in the first few months.

Second, every retailer has a customer segment that is intensely deal driven. This group refuses to buy unless they are convinced they have gotten the best possible price. And they believe they can ferret that out. They love the thrill of the hunt. Buying something without some special incentive is an anathema to them.

History shows–whether you are Sears, Macy’s or Saks–that when you pull back on promotions this segment’s business drops like a rock. If they are a tiny fraction (or an unprofitable piece) of your sales, it’s not a big issue. If, as I suspect is the case at JCP, they are a meaningful profit contributor, the short-term hit is significant and they will be hard to win back.

Third, like it or not, promotional marketing creates urgency to buy. Major events with limited time offers drive traffic. In-store messages that shout a great deal increase conversion. Over time hopefully Penney’s can teach their consumers that every day is a good day to check out their store and that there is no reason to shop around for a better deal. In the immediate term sales will suffer.

Lastly, and perhaps most importantly, the math on everyday pricing is tough. While it is true that most consumers buy at the lowest promotional price, it is also true that there are plenty of customers who pay full price (or receive a lesser discount). To achieve the same gross margin percentage would mean setting an everyday “fair and square” price that is above the lowest historical promotional price. But by doing that, you will be uncompetitive with your direct competitors.

An informal price check I did yesterday (at the mall closest to Penney’s corporate headquarters) revealed that Penney’s price on several key national brands was several dollars higher than Macy’s and Sears. For consumers that pay attention to such things, this will undermine JCP’s pricing integrity and cost them business. This also creates an opportunity for Penney’s competitors to attack them directly on the one major initial plank of their new strategy.

The other alternative is to set prices to be consistently competitive day in and day out. Doing so will drive Penney’s gross margin rates down, which will require a very significant increase in sales just to maintain the gross margin dollar productivity at last year’s levels–which weren’t at all impressive.

Penney’s has acknowledged that they expect to take a near-term sales hit as they implement their new pricing strategy. And everyone recognizes that pricing is just one piece of a multi-faceted, multi-year transformation.

My fear is that this pricing change is much more of a swing for the fences move then the new management team realizes and that the first few innings of this new game will be far more brutal than expected.

While unconfirmed, initial reports are that sales having taken a bigger hit than management anticipated, which could lead to inventory issues and a huge loss of momentum for the new leadership at Penney’s.

I applaud Ron Johnson’s willingness to go big and bold. However, I expect his credibility and tenacity will soon be tested.

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In Part 2 I explore what else Penney’s new strategy must entail.

 

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.

 

 

 

 

 

When the last 15 years happens to you

If you are in retail, the last 15 years or so have brought enormous change. Let me call out a few profound shifts:

• Winning business model bifurcation: Price and dominant assortments at one end (Wal-mart, Amazon); remarkable experience and assortment curation/product differentiation on the other (Nordstrom, Louis Vuitton). The result is death in the middle.
• Digital retail: What started as an electronic catalog is now not only a high growth channel approaching 10% of many categories’ sales–and much higher if the product can be delivered digitally–but an increasingly important medium for promotion, interaction, customer reviews, price checking, etc.
• The constantly connected–and inter-connected–consumer.  As more and more consumers are armed with powerful mobile devices the notion of anytime, anywhere, anyway retail has become a reality–and expectation. Social networking, product review sites and pricing apps are creating greater and greater information transparency. The brand is no longer in charge. The consumer is.
• The omni-channel blur. Most of your customers will engage with multiple touch points in their decision journeys. As mobile commerce grows–and it becomes easier for consumers to seamlessly move between various applications to gather product information, check prices, confirm inventory availability, get product reviews and the like–the notion of distinct channels breaks down. It’s a frictionless, compelling experience that matters, not making each of your channels better. New ways of consumer engagement, new ways of organizing your business, new ways of measuring and incentivizing become mandatory. Silos belong on farms.

While it is true that remarkable new business models sometimes emerge quickly and unexpectedly, most winning concepts that have gobbled up market share from industry incumbents did not come out of nowhere.

Amazon launched in 1995. The off-the mall and specialty formats that have made life difficult for the Sears’ and JC Penney’s of the world have been important competitors since the late 1990′s. Anybody paying any attention to customer data during the last 10 years has known that the so-called “multi-channel” customer outspends a single channel customer by a factor of 3-4 times.

With the benefit of 20/20 hindsight it’s clear that many Boards and many retail executives were asleep at the wheel. They failed to gain sufficient awareness of the competition and seek truly actionable customer insight. They failed to accept what was happening. And of course they failed to act. And now it’s too late.

So here’s the new reality. While many of the companies I mentioned–and countless more I’m sure you can offer up–had some 15 years to see what was happening and make the necessary changes, chances are you will have less time. A lot less time.

So I guess the question is: what are you going to do to make sure the next 5 years don’t happen to you?

 

Let’s get digital…digital

The first wave of digital retail was either about brands with a history in catalog merchandising putting up a basic e-commerce site (Williams-Sonoma, Lands’ End) or pure-plays picking off products categories that early adopters could readily embrace (Amazon). The market dealt harshly with models that could not execute a basic direct-to-consumer formula, targeted a product category that wasn’t ready for digital prime time (RIP pets.com) or a combination of both.

As consumers became more comfortable with buying on-line–and retailers got better at deploying new technologies–other categories made sense for pure-plays (Blue Nile, Zappos) and traditional retailers ramped up their multiple channel strategies. For most, this second wave was largely a silo-ed approach with the e-commerce and the bricks and mortar divisions pursuing related, but mainly independent, strategies.

In the most recent third wave, a few retailers (I’m looking at you Nordstrom) understood that most of their customers were interacting with their brand across multiple channels and touch-points. They accepted that brand trumps channel, that digital was transforming their business forever. They declared that silos belong on farms and began investing in a more integrated, customer-centric experience, leading with digital more often than not.

In the next wave, the blended channel is the only channel. The distinctions between devices, channels, touch-points and media begin to blur. Differences with little distinction. Or differences that lead to extinction if your core value proposition can be delivered better, cheaper, faster digitally.

Clearly not every product category is going completely digital. Groceries looks pretty safe. Cars too.

But failure to understand how digital transforms the customer discovery, engagement, purchasing, retention and advocacy process is a prescription for your brand’s demise.

So let’s get digital. Let me hear your actions talk.

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.

 

Discount Nation and the sucker price

When was the last time you went to Macy’s or Bed, Bath & Beyond or any furniture store and paid full-price?  Did you actually pay for shipping on any e-commerce purchases during the holiday?

At most retailers, regular price is the sucker price. You only pay it out of desperation or ignorance.

Walk through any mall and you are inundated with sales signs, with coupons and with triple rewards points.  Buy one sports coat at regular price and get a second one at half-off?  Yes, please.

One retailer–I’m looking at you Gap–even put their whole store on sales for several hours during the run up to Christmas.

It makes perfect sense that product gets marked down as the season draws to a close.  It makes sense that your best customers get rewarded for concentrating their share of wallet with you. And faced with an intensely competitive market, one must certainly be mindful of maintaining market share.

But at what price comes the glory of same-store sales growth?

For years we have been teaching consumers that there is no integrity in our pricing. We have become a “discount nation”, bribing the promiscuous shopper to choose us over the competition while needlessly giving away margin to potentially loyal and profitable customers.

I don’t believe for a second that we are going to see an end to rampant discounting and blanket promotions any time soon. After all, it was just a few weeks ago that Target announced a new credit card that offers a straight 5% off all purchases.

I do believe that companies that deliver truly compelling value propositions and experiences based on a deep understanding of customers needs, wants and long-term profitability will win over the long-term.   I do believe that the best brands–think Apple, Nordstrom and Coach–know how to drive their business at regular price.

Those brands do the work of customer-centricity.

Those other brands?  We know what you are.  All we are doing is negotiating.

 

 

Reset! Engaging Customers in the New Normal

If you missed the webinar that Jon Giegengack and I conducted earlier this week entitled Engaging Consumers and Growing Market Share in the “New Normal,” the recording of the session and presentation deck are now both available.

Webinar recording:

https://cmbinfoevents.webex.com/cmbinfoevents/lsr.php?AT=pb&SP=EC&rID=2764867&rKey=b264f15e93796eb1

Webinar deck:

http://www.cmbinfo.com/cmb-cms/wp-content/uploads/2010/10/The-New-Consumer-Report_2010.pdf

Taking Pitches

In baseball we often see a batter “take a pitch.”  In other words, before the ball is thrown the batter decides he’s not going to swing regardless of how good the pitch is.  Sometimes this is a tactic to tire his competition–the pitcher–out.  Sometimes it’s an attempt to draw a walk because that’s the best the batter can hope for under the circumstances.  Sometimes it’s a strategy to wait things out, figuring a better opportunity will present itself later.

Lots of businesses take pitches.

When Sears allows discounters and category killers to erode their core customer base and chip away at their dominant market share, they are taking pitches.

When Blockbuster fails to mount a compelling response to NetFlix and Redbox, they are taking pitches.

When Neiman Marcus, Saks and Nordstrom allow flash-sales sites like Gilt and RueLaLa to build brands with significant market value, they are taking pitches.

When dozens of companies deny the future of social networking and location-based marketing, they are taking pitches.

Of course there are times when it makes sense to wait things out–to study and analyze before placing a big bet.    Customer-centric companies know who their most important customers and prospects are, and when the metrics on those customers deteriorate, they dig in to understand the drivers and take action.

You don’t always need to swing for the fences, but it’s hard to win without a few hits.