‘They’ve been trying to kill us for centuries. We’ve been through hypermarkets, supermarkets, the specialists and now pure plays.’
El Corte Ingles Chairman Dimas Gimeno, 201841
A fundamental rule in retail is being relevant to your customers. This is essential in the best of times but becomes all the more critical when the backdrop is an overstored retail landscape and a subdued consumer with shifting priorities. Being all things to all people is no longer an option. In fact, we’d argue that Amazon is probably the only retailer in the world today that can get away with being all things to all people thanks to its unrivalled assortment and accessibility – in both the financial and logistical senses. For everyone else, it’s essential to have both a crystal-clear vision of your target customer and a truly differentiated proposition in order to stand out from the crowd.
By their very nature, traditional department stores are simply less relevant today:
As we touched on earlier in the chapter, online retail is encroaching on the core premise of the department store: one-stop shopping. According to Cowen and Company, US department stores currently generate approximately 15–25 per cent of their sales online; however, many analysts believe that 35–40 per cent is the maximum penetration level for apparel sales online.42 So while there is an opportunity to grow department store sales online, this will indeed lead to a glut of empty space in stores. The good news is retailers can get creative about filling this excess space, as we’ll discuss later in the book.
It’s also important to remind ourselves that, at one time, shoppers turned to department stores for the knowledge and assistance that could be provided by store employees. It was also an opportunity to discover and get inspired by new products. Of course, that is less relevant today as mobile phones have become the shopper’s trusted advisor of choice and many people often browse online before coming into the stores. That said, we believe that department stores could do more to capitalize on personal shopping and the fitting room experience more broadly.
An increased focus on fashion may have once helped to differentiate from a growing superstore threat but today, despite their best efforts to invest in exclusive ranges and collaborate with other brands, department stores are left looking quite vulnerable. The so-called fast fashion chain Zara can take a coat from design stage to the sales floor in 25 days.45 Off-price retailers meanwhile offer prices up to 70 per cent lower than traditional department stores.46 The rise of these bricks and mortar disruptors means that department stores are no longer the cheapest, nor are they the most fashionable or the most convenient. And we all know that in retail the middle ground is a very dangerous place to position yourself.
The initial knee-jerk reaction to these new competitive threats was a period of seemingly perpetual discounting; however, this race to the bottom simply eroded margins, devalued brand perception and trained shoppers to only buy on promotion. Now department stores are opting for a more sustainable ‘if you can’t beat ’em, join ’em’ approach by ramping up their own off-price presence. In fact, at the time of writing in 2018 a growing number of traditional department store chains have more outlet and off-price stores than full-price shops.47 Despite the risk of cannibalizing existing stores, this format is far more relevant for today’s modern shopper.
Department stores are no stranger to reinvention, and we will discuss in more detail how they can co-exist with Amazon and other online retailers later in the book; however, for now there is no denying that there will be fewer of them in the future.
In a Journal of Retailing essay in 1955, economist and retail analyst Victor Lebow wrote:
Our enormously productive economy demands that we make consumption our way of life, that we convert the buying and use of goods into rituals, that we seek our spiritual satisfactions, our ego satisfactions, in consumption. The measure of social status, of social acceptance, of prestige, is now to be found in our consumptive patterns. The very meaning and significance of our lives today is expressed in consumptive terms… We need things consumed, burned up, worn out, replaced and discarded at an ever-increasing pace.
For the past century, American culture has been defined by consumerism. But that’s all changing. Millennials, defined as those born between 1980 and 1996, now outnumber Baby Boomers, those born between 1946 and 1964, making them the largest living generation in the US48 according to Pew Research. There are of course subsequent demographics like Generation Z to take into account and many more to follow. However, millennials are of particular interest, having reached peak spending age, but with values and spending habits that are vastly different to previous generations.
As Morgan Stanley observed in 2016:
Educational spending may come to define the Millennials the way owning a house and two-car garage was emblematic of the Boomers. On average, Millennials under 25 use twice as much of their total spending on education as their parents did. Higher costs have meant more student debt, which has put a damper on spending.49
In fact, from 2005 to 2012, the average amount of student debt for Americans under 30 has almost doubled from $13,340 to $24,897, according to Morgan Stanley. Educated but saddled with debt, Millennials are increasingly opting for minimal yet meaningful, socially conscious lifestyles. This is resulting in a generational shift in buying habits and will have huge implications for the retail sector for decades to come.
Battle for share of wallet will intensify not only as digitally native Millennials reign as the dominant consumer group, but also as we continue to see a cross-generational shift away from buying material things and towards experiences such as travel, entertainment and dining out. In a speech at the Shoptalk conference in 2017, Sarah Quinlan, SVP at Mastercard, noted how the #1 Christmas gift in the US in 2016 was a plane ticket – and #2 was a hotel voucher.50 Meanwhile, Ikea believes that we’ve reached ‘peak stuff’51 and Boots CEO (ex-Dixons Carphone boss) Seb James thinks that ‘shoppers are now only grazing on ownership.’ Later in the book, we’ll discuss how retailers can adapt their stores to cater to the rise in both the sharing and experience economies.
While there is no denying that asset-light Millennials place a high value on experiences – with social media in particular fuelling the FOMO (Fear of Missing Out) factor – the shift towards experiential spending is not just a Millennial thing. Mastercard’s Sarah Quinlan summed it up nicely in a 2017 corporate interview:
Before, if you acquired more and more goods, you could measure your social status. Now… we really like our family and friends again and want to spend time with them. Thus, we’ve seen a rise in spending on travel, on hotels, on airlines, on trains, on concert tickets and the like. And that’s what people prize – it’s going out for a meal with family and friends versus buying goods.52
In 2015, for the first time on record, Americans spent more money in restaurants and bars than in supermarkets,53 according to the US Census Bureau. Spending in the discretionary categories of ‘food away from home’ and ‘entertainment’ continued to rise in 2016, up 5 per cent and 3 per cent respectively, after increasing by 8 per cent and 4 per cent the previous year.
It’s no surprise then that retailers are frantically reinventing their bricks and mortar locations to position themselves as less transactional and more experiential, a topic we’ll explore in greater detail later in the book. ‘It’s not enough simply to have the stuff,’ says Debenhams Chairman Sir Ian Cheshire, ‘you’ve got to wrap it in a set of experiences.’54
It’s also important to point out that consumers are having to dig deeper when it comes to necessities such as healthcare and insurance as well as pensions. According to Deloitte, healthcare as a percentage of total personal consumer expenditure rose from 15.3 per cent in 2005 to 21.6 per cent in 2016.55
The bottom line is that with less money being spent on material goods, retailers will naturally have to adapt their store portfolios to reflect the seemingly permanent changes in expenditure patterns.
In summary? An apocalypse for some, but transformation for most.
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12 Andrews, Travis M (2017) Nordstrom’s wild new concept: a clothing store with no clothes, Washington Post, 12 September. Available from: https://www.washingtonpost.com/news/morning-mix/wp/2017/09/12/nordstroms-wild-new-concept-a-clothing-store-with-no-clothes/?noredirect=on&utm_term=.bed99d644159 [Last accessed 29/6/18].
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15 Sullivan, Ted (2008) Borders: Interview with CEO George Jones, Seeking Alpha, 7 October. Available from: https://seekingalpha.com/article/98837-borders-interview-with-ceo-george-jones [Last accessed 28/6/2018].
16 Stone, Brad (2013) The Everything Store: Jeff Bezos and the age of Amazon, Bantam Press, London.
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18 Fung Global Retail & Technology (2016) Deep dive: the mall is not dead: part 1. Available from: https://www.fungglobalretailtech.com/wp-content/uploads/2016/11/Mall-Is-Not-Dead-Part-1-November-15-2016.pdf [Last accessed 29/3/2018].
19 19 Cowen and Company (2017) Retail’s disruption yields opportunities – store wars! Available from: https://distressions.com/wp-content/uploads/2017/04/Retail_s_Disruption_Yields_Opportunities_-_Ahead_of_the_Curve_Series__Video_-_Cowen_and_Company.pdf [Last accessed 29/3/2018].
20 Townsend, Matt et al (2017) America’s ‘retail apocalypse’ is really just beginning, Bloomberg, 8 November. Available from: https://www.bloomberg.com/graphics/2017-retail-debt/ [Last accessed 29/3/2018].
21 Thompson, Derek (2017) What in the world is causing the retail meltdown of 2017? The Atlantic, 10 April. Available from: https://www.theatlantic.com/business/archive/2017/04/retail-meltdown-of-2017/522384/ [Last accessed 29/3/2018].
22 Next PLC 2017 annual report (2018) Available from: http://www.nextplc.co.uk/~/media/Files/N/Next-PLC-V2/documents/reports-and-presentations/2018/Final%20website%20PDF.pdf [Last accessed 28/6/2018].
23 Felsted, Andrea and Shelly Banjo (2016) Apparel Armageddon across the Atlantic, Bloomberg, 31 May. Available from: https://www.bloomberg.com/gadfly/articles/2016-05-31/women-curtailing-clothes-shopping-hit-uk-us-retailers-iov824k1 [Last accessed 28/6/2018].
24 Goldfingle, Gemma (2018) Charles Tyrwhitt founder Nick Wheeler laments the fact that no-one buys ties anymore: ‘It’s the only bloody product that has a decent margin’, #TDC18 [Twitter] 30 January. Available from: https://twitter.com/gemmagoldfingle/status/958279318068760578 [Last accessed 29/3/2018].
25 Anonymous (2017) This whole ‘malls are dying’ thing is getting old, mall CEOs say, Investors.com, 12 April. Available from: https://www.investors.com/news/this-whole-malls-are-dying-thing-is-getting-old-mall-ceos-say/ [Last accessed 29/3/2018].
26 Ibid.
27 Thompson, Derek (2017) What in the world is causing the retail meltdown of 2017? The Atlantic, 10 April. Available from: https://www.theatlantic.com/business/archive/2017/04/retail-meltdown-of-2017/522384/ [Last accessed 29/3/2018].
28 Fung Global Retail & Technology (2016) ‘Deep Dive: The Mall Is Not Dead: Part 1’ [Online] https://www.fungglobalretailtech.com/wp-content/uploads/2016/11/Mall-Is-Not-Dead-Part-1-November-15-2016.pdf [Last accessed 29.3.18]
29 Isidore, Chris (2017) Malls are doomed: 25% will be gone in 5 years, CNN, 2 June. Available from: http://money.cnn.com/2017/06/02/news/economy/doomed-malls/index.html [Last accessed 29/3/2018].
30 30 Walmart 1997 Annual Report. Available from: http://stock.walmart.com/investors/financial-information/annual-reports-and-proxies/default.aspx [Last accessed 28/6/2018].
31 Berg, Natalie and Bryan Roberts (2012) Walmart: Key insights and practical lessons from the world’s largest retailer, Kogan Page, London.
32 Walmart 10-Ks, author research.
33 Office for National Statistics (2018) Retail sales, Great Britain: February 2018. Available from: https://www.ons.gov.uk/businessindustryandtrade/retailindustry/bulletins/retailsales/february2018#whats-the-story-in-online-sales [Last accessed 29/3/2018].
34 U.S. Census Bureau News (2018) Quarterly retail e-commerce sales 4th quarter 2017. Available from: https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf [Last accessed 29/3/2018].
35 McKevitt, Fraser (2017) Lidl becomes the UK’s seventh largest supermarket, Kantar. Available from: https://uk.kantar.com/consumer/shoppers/2017/september-kantar-worldpanel-uk-grocery-share/
36 Ruddick, Graham (2014) Supermarkets are 20 years out of date, says Waitrose boss, Telegraph, 22 October. Available from: http://www.telegraph.co.uk/finance/newsbysector/epic/tsco/11178281/Supermarkets-are-20-years-out-of-date-says-Waitrose-boss.html [Last accessed 29/3/2018].
37 John Lewis Partnership (2017) The Waitrose Food & Drink Report 2017–2018. Available at: http://www.johnlewispartnership.co.uk/content/dam/cws/pdfs/Resources/the-waitrose-food-and-drink-report-2017.pdf [Last accessed 29/3/2018].
38 Ibid.
39 Fung Global Retail & Technology (2017) Deep dive: the mall is not dead: part 2. Available at: https://www.fungglobalretailtech.com/wp-content/uploads/2017/09/The-Mall-Is-Not-Dead-Part-2%E2%80%94-The-Mall-Is-in-Need-of-Transformation-September-6-2017.pdf [Last accessed 29/3/2018].
40 Garfield, Leanna (2017) 17 photos show the meteoric rise and fall of Macy’s, JCPenney, and Sears, Business Insider, 3 September. Available from: http://uk.businessinsider.com/department-store-sears-macys-jcpenney-closures-history-2017-8 [Last accessed 29/3/2018].
41 Hardy, Emily (2018) Alvarez says (unsurprisingly) that ‘department stores are great & have a great future’. ‘They’ve been trying to kill us for centuries. We’ve been through hypermarkets, supermarkets, the specialists & now pure plays. It’s just about finding what makes you different.’ [Twitter] 19/4. Available from: https://twitter.com/Emily_L_Hardy/status/986958259801198592 [Last accessed 28/6/18].
42 42 Cowen and Company (2017) Retail’s disruption yields opportunities – store wars! Available from: https://distressions.com/wp-content/uploads/2017/04/Retail_s_Disruption_Yields_Opportunities_-_Ahead_of_the_Curve_Series__Video_-_Cowen_and_Company.pdf [Last accessed 29/3/2018].
43 Wahba, Phil (2017) Can America’s department stores survive? Fortune, 21 February. Available from: http://fortune.com/2017/02/21/department-stores-future-macys-sears/ [Last accessed 29/3/2018].
44 Ibid.
45 Bain, Marc (2017) A new generation of even faster fashion is leaving H&M and Zara in the dust, Quartz, 6 April. Available from: https://qz.com/951055/a-new-generation-of-even-faster-fashion-is-leaving-hm-and-zara-in-the-dust/ [Last accessed 29/3/2018].
46 Klepacki, Laura (2017) Why off-price retail is rising as department stores are sinking, Retail Dive, 1 February. Available from: https://www.retaildive.com/news/why-off-price-retail-is-rising-as-department-stores-are-sinking/434454/ [Last accessed 29/3/2018].
47 McKinsey (2016) ‘The State of Fashion 2017’ [Online] https://www.mckinsey.com/~/media/mckinsey/industries/retail/our%20insights/the%20state%20of%20fashion/the-state-of-fashion-mck-bof-2017-report.ashx [Last accessed 29/3/18].
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49 Morgan Stanley (2016) Generations change how spending is trending, 26 August. Available from: https://www.morganstanley.com/ideas/millennial-boomer-spending [Last accessed 11/9/2019].
50 Sarah Quinlan from Mastercard, speech at Shoptalk Copenhagen Oct 2017 based on Christmas 2016.
51 Farrell, Sean (2016) We’ve hit peak home furnishings, says Ikea boss, Guardian, 18 January. Available from: https://www.theguardian.com/business/2016/jan/18/weve-hit-peak-home-furnishings-says-ikea-boss-consumerism [Last accessed 29/3/2018].
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54 Cahill, Helen (2017) Debenhams boss shuns selling stuff, City A.M., 4 April. Available from: http://www.cityam.com/262339/debenhams-boss-shuns-selling-stuff [Last accessed 29/3/2018].
55 Barua, Akrur and Daniel Bachman (2017) The consumer rush to ‘experience’: Truth or fallacy? Deloitte, 17 August. Available from: https://dupress.deloitte.com/dup-us-en/economy/behind-the-numbers/are-consumers-spending-more-on-experience.html#endnote-sup-5 [Last accessed 29/3/2018].