RETAIL THERAPY
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RETAIL THERAPY Why the retail industry is broken – and what can be done to fix it
MARK PILKINGTON
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BLOOMSBURY BUSINESS Bloomsbury Publishing Plc 50 Bedford Square, London, WC1B 3DP, UK 1385 Broadway, New York, NY 10018, USA BLOOMSBURY, BLOOMSBURY BUSINESS and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2019 Copyright © Mark Pilkington, 2019 Mark Pilkington has asserted his right under the Copyright, Designs and Patents Act, 1988, to be identified as Author of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. Bloomsbury Publishing Plc does not have any control over, or responsibility for, any third-party websites referred to or in this book. All internet addresses given in this book were correct at the time of going to press. The author and publisher regret any inconvenience caused if addresses have changed or sites have ceased to exist, but can accept no responsibility for any such changes. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Names: Pilkington, Mark, 1957 author. Title: Retail therapy : why the retail industry is broken – and what can be done to fix it / Mark Pilkington. Description: New York, NY : Bloomsbury Publishing Plc, [2018] | Includes bibliographical references and index. Identifiers: LCCN 2018037077 (print) | LCCN 2018044148 (ebook) | ISBN 9781472965134 (ePDF) | ISBN 9781472965127 (ePub) | ISBN 9781472965110 (eXML) | ISBN 9781472965103 (hardback) Subjects: LCSH: Retail trade–Management. | Electronic commerce. | Competition. Classification: LCC HF5429 (ebook) | LCC HF5429 .P545 2019 (print) | DDC 381/.1–dc23 LC record available at https://lccn.loc.gov/2018037077 ISBN: HB: 978-1-4729-6510-3 ePDF: 978-1-4729-6513-4 eBook: 978-1-4729-6512-7 Typeset by Deanta Global Publishing Services, Chennai, India Printed and bound in Great Britain To find out more about our authors and books visit www.bloomsbury.com and sign up for our newsletters.
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CONTENTS
Introduction – an overview of the crisis 1 PART ONE Retail apocalypse now! 7 1 2 3 4 5 6 7 8 9
A tale of two bankruptcies 9 The great stores meltdown 13 No longer a nation of shopkeepers 25 Dark Satanic Malls 29 My kingdom for a horse – the knock-on effect on branded suppliers 36 The next big short? 42 Killing more jobs than China 47 A global problem 54 The impact of public policy 68
PART TWO The causes of the crisis in retailing 75 10 The classical retailing model 77 11 The rise of e-commerce 84 12 The broader impact of the technological revolution 93 13 The generational revolution 98 14 The death of brands 108 15 Passing peak consumption 118 16 Conquering the final mile 125 17 The dawn of a virtual world 133 18 This is your fridge talking 137 19 Algorithm’n’blues 140 20 Veni, Vidi, 3D 145 21 See you later, incubator 149 22 Direct is best 156
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vi CONTENTS
23 Retail derailed 165 24 Bankers away! 175 25 Can the last one out switch off the lights? 187 PART THREE How to save retail 191 26 The importance of simplicity 193 27 Go with the flow 195 28 Cannibalize, cannibalize, cannibalize! 200 29 Lean and mean 203 30 Brand Theatre 208 31 The Third Space 212 32 Re-tech 216 33 Becoming the conversation 220 34 The price is right 224 35 Inclusive is the new exclusive 233 36 Virtuous reality 237 37 The hacker way 242 38 Reinventing shared shopping spaces 246 39 Advice to governments 254 40 Summary – the new rules for survival 265 Notes 269 Index 309
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Introduction – an overview of the crisis
The world of retailing, as we know it, is going under. Unlike a stock market crash, this isn’t a sudden crisis – mainly because that is not the way retailing works. But day after day the news just keeps getting worse and worse. Since 2015, we’ve seen the escalation of the most severe crisis ever to hit the global retailing industry. In the UK, many retailers have gone under, and hundreds more are struggling. Among the insolvencies are high-profile casualties such as House of Fraser, Mothercare, Toys“R”Us, BHS, Carpetright, Maplin, Jacques Vert, East, Jaeger, Austin Reed and HMV.1 In the United States, the situation is even worse, with over 300 retailers going into Chapter 11 or closing all their stores, in recent years, including major names like Sears, Kmart, Toys“R”Us, Henri Bendel, Sports Authority, Claire’s, Quiksilver, Aeropostale, Gymboree, Payless ShoeSource, BCBG, Wet Seal and The Limited.2 Over 8,000 major brand chain stores closed their doors in 2017 in the United States alone.3 To give some perspective to these numbers, the previous worst year – 2008 – only saw 6,000 closures in total, and this was at the height of the Great Recession. In the UK, nearly 2,000 stores closed in the same period. And these closures have not been limited to weak brands, as in the past; some of the brands affected include some of the most powerful in world, such as Polo Ralph Lauren4, Victoria’s Secret5 and Marks & Spencer.6 The problem is affecting all sectors, from fashion to banking, and at all price levels, from luxury through to discount. A number of premium brands and luxury houses have seen periods of flat or declining sales, particularly in the
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North American market, including Prada, Tommy Hilfiger, Coach, Armani, Burberry, Ferragamo, Michael Kors, Tiffany, Ralph Lauren, Diesel, Tod’s, Canali, Lanvin, Mulberry and Roberto Cavalli.7 At the other end of the spectrum, discounters – which have enjoyed many years of uninterrupted growth – have also faced a slowdown in sales growth. And in the middle market, brands like J Crew, Mothercare and Gap have all come under increasing pressure.8 Overall, about 90 per cent of US retailers have experienced sales declines. But nothing is as frightening as what is happening to the department stores. Companies like Debenhams and House of Fraser in the UK, and Sears, JC Penney and Macy’s in the United States, have seen their businesses badly affected in the last few years. They are closing thousands of stores between them, and there is a real question mark as to whether the organizations themselves will survive.9 Warren Buffet, the famous investor, appeared to make this official when, in early 2017, he said: ‘I think that retailing is just too tough for me; just generally’, and ‘The department store is online now’.10 It is not just the retailers who are suffering. As their businesses decline, the brand suppliers who depend on them are also experiencing significant problems. Highly successful companies like Procter & Gamble, Under Armour and Mattel have seen declining sales as their retail customers cut back, especially in the US markets.11
Where did it all go wrong? All round the world, there are signs of a retail sector in crisis, and the problem is not limited to the UK and the United States. Retailers are struggling and going bankrupt across Europe, Russia, South America, the Middle East and the Far East. And unlike in 2008, it is not the economy that is causing the problem. It is true that 2008 was a very difficult time for retailers, but it was also
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INTRODUCTION – AN OVERVIEW OF THE CRISIS 3
understandable – it was in the middle of the worst economic downturn since the Second World War. The current storm, on the other hand, has blown up out of the clear skies of a growth economy that has been enhanced by low unemployment and booming stock markets. What on earth is going on? Well, it appears that the slow death of retail, which has been predicted and discussed for so long, is finally happening. People often say, ‘But is this really new? After all, retail seems to have been struggling for a long time.’ Well, yes, individual retailers have struggled; but this is different – this has the potential to affect almost everyone. Because retailing is a high fixed-cost business, with heavy investments in store construction, long rental leases and significant stocks of goods, it only takes a few years of sales decline before the whole thing tips over like the Titanic filling with water.
Why retail is so important? Why should you care? Well, you may be a shopper, concerned about the disappearance of your favourite brands from your local shopping district or mall. You may be someone who works in retailing, or in one of the suppliers who depend on the retail sector. Or you may be an investor, worried about what all this means for the future of the economy.
Employment Whoever you are, the truth is that retailing affects all of us. Shops, and the suppliers that they support, are one of the biggest parts of the global economy. Retailing globally had sales of US$23 trillion in 2015, and represents 31 per cent of global GDP, employing literally billions of people.12 In the UK alone, it employs 3.5 million people directly and it is estimated that another 3.5 million people depend on it as suppliers and other counterparties.13
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In the United States it employs fifteen million people directly and another fifteen million jobs depend on it, including suppliers.14 This is far bigger than, for example, manufacturing or mining, despite them attracting more political attention. Retailing and its suppliers employ fully 25 per cent of the working population, so what affects retailing will ultimately affect the entire economy. As retail declines, it will cause a major rise in unemployment. For example, from mid-2016 to mid-2017, department stores in the United States laid off more than 100,000 people, which is more than all the coal miners and steel workers in the whole of the country.15 And the retail decline is only just beginning to gather speed. In the next few years, that momentum will increase and it will begin to threaten the whole economy. If you look at the types of jobs that retail provides, these are often a godsend for the more vulnerable groups in society. It is almost the only type of job that does not require much in the way of qualifications, and those jobs are disproportionately weighted towards women, ethnic minorities and school leavers. These jobs provide work and incomes to people in every community, large and small, across the world. With manufacturing in decline, it has become almost the only type of job that is available in poorer areas, and those retail-related salaries are often the only things supporting fragile families.
Property and real estate Retailing also plays a major part in the property market. Shops lease spaces in malls and on shopping streets, and the property itself is often owned by Real Estate Investment Trusts (REITs), which obtain their income from the rents paid by the retailers. As retailing declines, the malls and shopping streets are also being hit. All across the United States, for example, malls are starting to fall apart, especially in poorer communities. It is estimated that over 400 malls (out of a total of 1,200) will have to close in the next few years.16 Even prime shopping areas like the so-called ‘Golden Triangle’ in Manhattan’s Upper East Side, or selected streets in London’s West End, are
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INTRODUCTION – AN OVERVIEW OF THE CRISIS 5
starting to experience serious levels of vacancies for the first time ever. In total, over US$2 trillion of assets are invested in retail in the United States alone, and, in every market, retail makes up a significant proportion of the financial markets.17 A retail collapse threatens to deflate these assets in an extreme manner, and it is not too much to say that it could be a prime cause of the next global economic crisis.
What lies ahead? What are governments doing about the crisis? Are they helping to support this industry which gives sustenance to so many communities across the world? Far from it – in fact, in some ways, they seem bent on hastening its decline. Whether it be the impact of Brexit, the national living wage, the high business rates and the apprenticeship levy in the UK, or the restrictions on immigration, the import tariffs and the fact that many internet companies have been permitted to avoid state sales tax in the United States, governments seem almost to be working against the retail industry, in complete ignorance of its vital role in society. In fact, retail gets very little attention, politically speaking: retail workers are not strongly unionized and they lack the photoopportunity appeal of hard-hatted white male miners and steel workers. So what can we do to stop the retail collapse, and the economic crisis that it is precipitating? Fortunately, solutions do exist. There are things that governments, brands and retailers can do to avoid the worst of the crisis. Unfortunately, there seems to be a lack of understanding of the underlying problems – many retailers around the world are burying their heads in the sand, and national governments seem to be almost unaware of the problem at all. The biggest issue is that even so-called retail industry experts are failing to really understand the problem. The causes of the retail apocalypse are multiple and complex. People blame it on e-commerce, and it is true that this is a key
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factor in the story. Yet there are many other causes, including the information revolution, generational changes, the role of private equity (PE) in increasing retail debt levels, and self-inflicted wounds from the retailers themselves. Until all these causes are fully understood, there is little chance that either the retailers, the brands that supply them, or the governments who are charged with looking the health of our economies will be able to prevent the looming crisis that threatens us all.
Using this book This is what this book will try to address. It will take a long hard look at the crisis and its causes, and will then attempt to outline and discuss some meaningful and practical solutions. Part One takes a closer look at the nature of the retail crisis – read this part in particular if you want much more information about the underlying problems themselves. If it has not yet reached your part of the world yet, rest assured that it will. My recommendation would be to try to stay ahead of the curve by understanding how and why these events have had such an impact on established markets in the West. Part Two looks into the causes of the problem, and the trends that are likely to make things even worse. This is important if you want to look behind the headlines and have a deeper understand of how current developments are likely to affect the retail sector in the near future. Part Three looks at what can be done to save retailing as we know it. Given the issues that we’ve already discussed, this topic lies at the very heart of the book. Despite the doom and gloom, there are ways in which retailers can fight back and attract customers back into both their physical and online stores. Now please read on … .
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PART ONE
RETAIL APOCALYPSE NOW!
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1 A tale of two bankruptcies
Toys“R”Us – A leader in the UK/US toy market On 28 February 2018, Toys“R”Us UK went into administration, following the move by its US parent which filed under Chapter 11 in September 2017. With these decisions, 900 stores were scheduled for closure, and as many as 40,000 employees were to lose their jobs. The store group which had been so integral to the lives of several generations of children would open its doors no longer. The shares of major toy suppliers like Mattel and Hasbro dropped sharply. It was a depressing end for a once-proud company, its employees and suppliers. Toys“R”Us had been in operation for seventy years since it was founded by Charles Lazarus in 1948. Its big-box, out-of-town stores were a success, making it the largest toy retailer in the world by the 1990s. Problems started to appear in 2005, after the company was acquired by a consortium of venture capitalists, including Bain Capital Partners, KKR & Co and Vornado Realty Trust, in a US$6.6 billion leveraged buy out. According to multiple sources, including Bloomberg, The Washington Post, Reuters and Fortune, the new owners proceeded to do what a lot of venture capitalists do, and loaded the Toys“R”Us balance sheet with a massive US$5.2 billion of debt, which alone required US$400 million of interest payments every year. At the same time, they took out US$470 million in advisory fees, interest and other payments.
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On top of this financial burden, the growth of internet companies like Amazon began to take large amounts of business away from Toys“R”Us, and the company struggled to build its own e-commerce business. Sales declined, and the company fell into losses from 2014 onwards; great efforts were made to turn it around, but in the end such activity was simply delaying the inevitable. Despite its US$11 billion of sales and its 15 per cent share of the US toy market, Toys“R”Us met its end in 2018. The effect of the Toys“R”Us debacle on workers, communities and suppliers – in both the United States and the UK – has been immediate and severe. The 33,000 US employees remain at risk of not getting any severance payments (other than for the minimum sixty-day notice period), despite executives receiving US$8 million in bonuses a week before filing for bankruptcy. Wayne, New Jersey, where the company was headquartered, is also likely to suffer, as the toy firm was the region’s third largest taxpayer. And suppliers have been left with heavy unpaid bills. ‘We have a US$14–$15 million payment due that hasn’t been paid,’ Isaac Larian, chief executive of Bratz dolls maker MGA Entertainment, said. ‘If I was a guessing man, I wouldn’t think I’d get all of it back.’ The closure has caused panic among smaller toy suppliers, many of whom are now at risk themselves.1
British Home Stores – A major British department store On Monday 25 April 2016, British Home Stores (more commonly referred to as BHS) called in the receivers, ending eighty-eight years as a leading UK department store. Founded in 1928, by a group of American entrepreneurs who sought to emulate the success of Woolworths by selling everything for a shilling or less, BHS was a mainstay of the British High Street for decades, with nearly 200 department stores at its height. In the late 1980s and 1990s, it began
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A TALE OF TWO BANKRUPTCIES 11
to lose ground to retail rivals, but its real fate was sealed when, in 2000, it was bought by controversial business magnate, Philip Green, for £200 million. According to many credible sources, including a Parliamentary Select Committee report, Green’s family and other shareholders then proceeded to take over £586 million out of the business – in dividends, rent and interest – and allowed a £225 million deficit to open up in the company’s pension scheme. By 2015, the company had been wrung dry, and Green, under pressure from the UK Pensions Regulator to top up the pensions scheme, opted instead to sell BHS on to Dominic Chappell – a bankrupt ex-racing driver, with no experience of retailing – for the princely sum of £1. Chappell and his company, Retail Acquisitions, then took a large amount of money out of the company in the form of loans, fees, salaries, interest and dividends, before BHS finally gave up the ghost a year later. Not only did 11,000 employees lose their jobs, but 20,000 BHS pensioners saw their pensions threatened, and thousands of suppliers were left with £1.3 billion of unpaid bills. ‘No one is to blame’, said Dominic Chappell. Philip Green denied all responsibility, saying: ‘If you buy my house and it falls down, is it my fault?’ The Parliamentary Committee report concluded that the ‘systematic plunder’ of BHS represented the ‘unacceptable face of capitalism’. By the time of the bankruptcy, the potential pension deficit had swollen to £571 million. It should be noted that Philip Green has, under extreme political and media pressure, now agreed to pay back £373 million to the Pension Regulator.2
Summary These two tragic stores illustrate a number of the themes that will dominate this book: the rise of e-commerce, the failure of retail management, the role of private financiers, the wrecked careers of the employees and the communities who are left to pick up the tab at the end.
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You might say: ‘Well, it’s certainly tragic, but isn’t this just capitalism at work? Surely this is normal.’ Unfortunately, what we are witnessing is not ‘normal’. It is not just individual retailers who are suffering – many industry commentators believe that we are witnessing the death throes of an entire industry.
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