The Robin Report - Issue 7 - July 2011 by The Robin Report

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u ! Col mer Insights umn - P. 24

Issue Ten 2011

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Dear Reader All around us, 360 degrees and 24/7, globally and in virtually every part of our lives, we hear, read and see the almost desperate need for not incremental, but fundamental, change. From politics to economics to society to the environment to ethics and morality, it’s a “backs against the wall” moment of realization that fundamental change cannot wait. continued page 2

MACY’S: THE BIGGEST AND LAST DEPARTMENT STORE STANDING? OR AN EMERGING NEW MODEL?

with Kevin Ryan

CEO of Gilt Groupe

By Robin Lewis

I was among the very first, if not the first, some thirty years ago, to declare the demise of the department stores. And, indeed, their share of market, particularly in apparel, has steadily declined during those years, lost to the apparel specialty chains. continued page 14

Luxury fashion flash sale phenomenon Gilt Groupe has only been in existence for four years, but already has annual sales of over $500 million and a valuation of a billion dollars. We spent an hour recently with CEO... continued page 3

I N S I D E t h is iss u e

• Dear Reader ...........................1 •M ACY’S: THE BIGGEST AND LAST DEPARTMENT STORE STANDING?..............................1 Robin Lewis

• Q&A with Kevin Ryan …........1 •R ingtoning in the Holidays ............................... 8 Cotton Incorporated

•B ed Bath & Beyond: The Best Retailer in America?............ 10 Warren Shoulberg

•W eathering Economic Climate Change.…..............12 Kurt Salmon

• you talked back!.….............19 • Sense Beyond the Census.................................20 By Paco Underhill

•B UBBLES AND KICKING THE CAN DOWN THE ROAD..........22 Robin Lewis

•C onfessions of an Aging Baby Boomer............………. 24 Jane Singer

•B eauty A.D.D. losing focus in the department Store............... 26 Dana Wood

• quotes to remember……... 28

Dear Reader

continued from page 1

And, even as we hear “chatter” about change and see some movement in a new direction, the big question remains: will we find the desire, will and tenacity to make the necessary “bite the bullet” changes, or will we once again look for band-aids? My article “Bubbles and Kicking the Can Down the Road” addresses the global economic issues that have our collective backs against the wall. I urge you to read it. The questions and scenarios raised are relevant to every area of our lives begging for major transformation. This transformation theme, albeit non-life-threatening, is also central to the article: “Macy’s: The Biggest and Last Department Store Standing? Or an Emerging New Model?” I know the article is going to once again provoke my critics and elicit howls of “….there goes Lewis again, beating up on the department stores and declaring them on the road to extinction….” I certainly have made such declarations and said it in many different ways and times over the past forty years (I hate to say). However, what I’ve really been saying all along, and have written in my co-authored book: The New Rules of Retail, is that the department store traditional business model is dead. Furthermore, I would like to go on record saying what is also in the book: that the traditional department stores that transform their traditional business models can actually be big winners over all other sectors. So, I never did say Macy’s was, or was becoming, extinct. In fact, as recently as 2005, in the earlier Robin Reports, I speculated that Terry Lundgren, on the verge of acquiring May Company, might seize the moment to propel his vision beyond just being the biggest and last department store in a dying channel, to transforming the old traditional business model into an exciting, relevant and branded (Macy’s)

destination for fun, entertainment, and a great shopping experience. And, indeed, as you read the article, you will understand my view that Mr. Lundgren and team have adopted transformative strategies that are beginning to play out in exciting ways. I believe at the end of the day, all of these strategies, once implemented across Macy’s entire enterprise, will represent a new business model that will replace that of the traditional department store. This model has the potential to trump all other retail models, including its once great nemesis, the retail specialty chains. So stuff that in your pipe and smoke it. The only dilemma: if the department store is transformed, what do we call the new model? Have a great read, and a successful Holiday selling season.

Robin Lewis has over forty years of strategic operating and consulting experience in the retail and related consumer products industries. He has held executive positions at DuPont, VF Corporation, Women’s Wear Daily (WWD), and Goldman Sachs,among others, and has consulted for Kohl’s Department Stores, and dozens of others. In addition to his role as Publisher and CEO of The Robin Report, he is a professor at the Graduate School of Professional Studies at The Fashion Institute of Technology.

Robin Lewis and Michael Dart, in their seminal study of modern US retailing, examine why and how the industry is quickly evolving — and what it will take to be successful in this new world. Critics and industry leaders agree: The New Rules of Retail is a must-read for anyone interested in the industry. Available at Amazon.com in hard cover or Kindle form, and at a bookstore near you, or on our website at www.TheRobinReport.com.

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with Kevin Ryan CEO of Gilt Groupe

continued from page 1

and Founder Kevin Ryan, who shared

some of his thoughts about e-commerce, future plans for Gilt, and the state of the luxury business.

Q. Kevin, the cat’s out of the bag: You’re now known as the “Billion Dollar Man of Silicon Alley.” Could you give us the flash version, so to speak, of what you’ve done, and the companies or businesses you’ve launched, bought and sold? A. My Internet career started in 1995 working for E.W. Scripps, when I launched the Dilbert website. By the beginning of 1996, I had built up an e-commerceenabled, advertising-supported website. I concluded then that the Internet would be unbelievably big. I went to the parent company and suggested they fund it and make it big, but they were cautious. So I said, well, I’m going to go out and start an Internet company. As part of my due diligence I ran across a company called Doubleclick (an online advertising firm) that was doing kind of what I wanted to do. They had 15 people, and were a couple of months old. The two guys who started it were both engineers, very technical and incredibly brilliant. I walked out of the meeting and thought, I don’t even know how to do this, the software development part. I was 32 and had never developed a software product. So I joined them, became President, then CEO. Four years later we had 2,000 employees, had gone public, and made a bunch of acquisitions. The Internet collapsed, we went down to 1,000 people through 7 rounds of layoffs. At the end of that process we had an enormously profitable company with 60% of the world’s market, and eventually sold it to Google for $3 billion in 2007. Dwight Merriman (CTO of Doubleclick) and I decided we wouldn’t invest in other people’s companies, we’d start our own based on our own ideas, have them all in one location.

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We started five companies, but thought very few would survive. We sold Panther (Panther Express, web content provider) and ShopWiki (Internet shopping search engine), which were doing okay, but not great. Turns out the rest of them survived, and we’re still in our original space. Dwight was particularly passionate about 10Gen, our database company, which is the preeminent database for startups. Saks, eBay, AOL, Craigslist, plus tens of thousands of others, are on it. Gilt was getting really big, and I was spending 60% of my time on it, it was really changing the industry, and it was really fun. So now Dwight runs 10Gen, I run Gilt, and Henry Blodgett runs the third company, Business Insider. Q. G iven your experience in technology, the hottest area in business today, why on earth would you come into the retailing business? A. I think there are huge opportunities. It’s e-commerce, and there’s a lot of technology to be brought to e-commerce. On the targeting and technology, it’s a fantastic consumer proposition. It’s an actually less competitive space than most other spaces. There are many areas where there are 50 competitors. A year ago, if I had asked you what was the biggest men’s online department store? There were none. It’s not a small area, and there is still a lot of opportunity. Q. Why was Gilt so instantaneously successful? A. A couple of things. Everything in life gets down to execution. Everyone thinks we were first, when in fact Ideeli launched a few months before we did. We grew much faster, and are now the same size as the other three flash businesses put together. It’s because of execution – hiring the great people quickly, raising money effectively, getting great brands, great technology – there’s no one thing. It’s all down to the product, broadly defined – the brands, checkout experience, brand of the company overall, the design of the site.

with Kevin Ryan

Q. Now there’s a lot of competition. In fact, the epiphany you had – the inspiration for Gilt, French company Vente Privee, is coming to this country. Are they going to go head-to-head with you? And what about Amazon’s MyHabit? A. In the daily deals space, there are 300 companies. However, in the women’s and men’s space, still the biggest part of our business, almost no new players have entered in the past four years. The same four players are there, but we don’t overlap on product very much. Our top 200 vendors almost never work with Rue La La. Regarding Vente Privee, most of what they’re selling we’ve already sold, so we’ll see if they bring something different. They haven’t had a lot of success outside France. Amazon brings a lot to the table. They have everyone’s credit card, great distribution, and they are a pretty accomplished Internet company. I find the MyHabit product better than Vente Privee. Q. How are you able to get the top 10-20 vendors that your nearest competitors are not? A. Early on, we had the relationships and the site – our site looked like a luxury site, which is when it got defined. And we were in NY – NY was actually fundamental. Credibility, relationships, we’re not just flying in, we’re at weddings, we’re having lunches, there are tons and tons of relationships. We’re out there all the time.

about $150-$200 million. Gourmet is drop-shipped, so there’s no inventory. Half of home is drop-shipped. As you get bigger, and to get the right size and color distribution, a higher part of the product has to be made for you. If you need 20,000 suits – no one has that quantity left over. Q. Is the pricing and margin equation for you under pressure because of that? A. Our gross margin today is higher than it’s ever been. We have more scale, we have better pricing – what we buy it at, purchasing power is better. It’s not just purely numbers. The brand component is really important. Why do people sell on Gilt? Not to make money. They could probably make more money selling it elsewhere. This is better for the brand. We’re promoting their brand. We have people coming to us and giving us merchandise. Millions of people who, for example, never heard of Zac Posen. We’re giving vendors a tremendous benefit – their product is in a beautiful environment, on models, it sells out, creates scarcity. Not like in an outlet mall. There’s control over the selling environment. That’s why margins are going up. When car companies come to us, they will offer us hundreds of thousands of dollars to put cars on the site, before we even sell anything. We don’t do car sales that often, but we have 750 thousand people coming to look

Q. You said that only 35% of your business is in the overstock business. Is that because excess inventory is drying up? A. No, our excess end-of-season inventory business is significantly bigger than it was two years ago, but as a share of our total business it’s gone down. It’s just that other parts of the business have expanded. We have vendors make product for us. Other parts of the business – Travel, City - have no inventory. That totals

" W hy do people sell on Gilt? Not to make money. They could probably make more money selling it elsewhere. This is better for the brand. We’re promoting their brand."

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at the site, talking about the car, thinking about the car. Compare that to flipping through a magazine. It’s much more involving. We had 50,000 people on the wait list. Plus, the company got the people from the wait list to buy cars. Q. What individual business categories are you in, full-price and off-price, and where do you see it going in the next five years? A. The businesses are women’s, men’s, home, kids, local (City), travel (Jetsetter) and gourmet foods (Gilt Taste). Gourmet food is only full price. I’m not convinced that you can do food on sale all the time, we have one sale a day, but 95% is full price. Travel and home we have both full price and discount. Men’s are two separate sites. Men’s fashion brands like to keep it separate. Next year we’ll do $100 million of full-price business, compared to zero last year. That was the big bet. Consumers were asking for it. I’m in most of the categories that I want to be in. We may want to go into bridal in a bigger way. Pets is an area where we do some sales, but I still don’t think we want to open a whole pet business. Electronics is in home, but it’s a very low margin business, so I don’t see an attractive way to do that. To enter a new business, I want to make sure that in two years we’re going to be in a $50 million run rate. Park & Bond and Gilt Taste are growing fastest in percentage terms, because they’re new. Women’s is our biggest business. Home might catch it. Our share of the men’s market is higher.

it ourselves. You have to like the product. There’s a trust element there. People are passionate about Jetsetter. There are 700,000 people who’ve signed up for Jetsetter who weren’t even on Gilt, who maybe aren’t into fashion but love travel. It’s replacing their travel magazine. Q. A t one point you felt that one of your competitive advantages was that you focus exclusively on luxury high-end positioning, which is true across the board. Now that you’re into full price on certain things, rather than just flash sales, do you think you might be losing a little focus? A. That’s always a risk. There are always advantages to doing the most narrow and focused thing possible. You have to balance that against the fact that our target customer would rather get one email from Gilt, which has great coverage across the board, than 7 emails each day for different categories from different sites. Plus, customer acquisition costs go down, distribution costs are lower. You have to figure out if that outweighs the idea that we’re not focused.

Q. How much of business 5 years from now will be international, and where are you expanding? A. We have a full Gilt in Japan, with 75 employees, full categories – it’s like the U.S. but smaller. I’ve just launched international shipping, 10% of revenues several years from now. Jetsetter has just opened in London, but it’s an inherently international business, you don’t have shipping problems, you stay in the same hotel as people from Paris do when you travel to London, so 10% of that business is international before you even open a London office. Our competitive advantage there is the product, we don’t put a hotel on there until we see

Issue Ten 2011

with Kevin Ryan

" T here are 700,000 people who’ve signed up for Jetsetter who weren’t even on Gilt, who maybe aren’t into fashion but love travel."

Q. Whom do you most admire in business? A. Jeff Bezos. He has the most difficult business model and has the longest term vision of anyone. Much more impressive even that what Google has done. He has an enormous technology business that they’ve built up, separately, worth billions of business. There’s hardly a company in NY that doesn’t rely on their technology infrastructure.

Q. Can you tell us about the marrying of commerce and content, and what you’re doing in that area?

Q. What about an IPO? What if Amazon finds that My Habit fits within their business model, and they want to acquire Gilt?

A. We don’t consider ourself a content company; we’re an e-commerce company. We use content generally to help people make decisions in buying. We encroach in some areas that people think is editorial, but of the 950 employees we have today, only 15 are in editorial. It’s more important in some areas than others. In taste, a lot of it is the story. Knowing that this guy is the 3rd generation sausage guy from Ohio and they’ve won a lot of awards, well that’s important. Now I want to try that sausage. It also enhances the experience of shopping.

A. An IPO is a possibility - not in the next 9 months, but maybe in 2013. I think it’s always a possibility that a large player wants to acquire Gilt. Many times what Amazon has done in the past is to launch a competitor, test the market, and then wind up acquiring a player, like Zappos or Diapers. Do you know what the second most valuable e-commerce company in the US is? Gilt. What that really shows is that nobody’s been able to emerge past a $billion valuation because Amazon always ends up buying them. They’re very clever.

Q. What company would you like most to acquire?

Q. Is the luxury business healthy? Are those consumers trading down, getting more value conscious?

A. We’ve not been that acquisitive. What we’ve acquired has been the list, not the company. We’ll do more deals next year. We’re open to anyone in our verticals. The e-commerce lists, relationships, the expertise – let’s say we wanted to go into art. How do we get the expertise? We have one constraint which it nexus. If I have one employee in New Jersey, every consumer in NJ will pay sales tax. One person in CA? That’s $5 million in taxes our consumers will pay.

A. Yes, it's very healthy, and they're not trading down. Look at Louis Vuitton sales, BMW sales. They’re all doing great. Look in NY. There’s no recession among the wealthy people in NY. Try to get a reservation at Le Bernardin. You can’t.

Q. Are you planning to open brick and mortar stores? A. Pop-ups. The reason for that is press, other people will sponsor with us, there will be foot traffic without the long-term commitment of a lease. I would not exclude us entering the offline world – stores, magazines, books, TV shows. We’re looking at all those.

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Issue Ten 2011

Ringtoning in the Holidays: Smartphones & Social Media are Retail Game Changers After months of dour predictions, subpar economic forecasts, and stubbornly high unemployment, the retail industry is positively quaking going into holiday – but industry experts are predicting gains of about 3% at retail, which is cause for celebration in today’s tight economy. Given that consumer activity accounts for about 70% of U.S. economic activity, every percentage point counts. The National Retail Federation projected a retail revenue increase of 2.8% over 2011, in what is traditionally the biggest retail push of the year. It is no match for the 5% gains the industry became accustomed to before the recession, but with unemployment still high and consumer confidence still low, it is a solid gain. According to the Cotton Incorporated Lifestyle Monitor™ survey, consumers plan to spend, on average, about $498 on holiday gifts this year, and 64% say they will spend the same amount of money on holiday gifts this year compared to last year. A new and powerful surge at retail may well come from the power of smartphones and social media.

Consumer Facts from Cotton Incorporated Lifestyle Monitortm

“Social media really has the ability to influence consumers – whether they are comparison shopping or locating stores, for example,” says Kim Kitchings, Senior Director, Corporate Strategy and Program Metrics, Cotton Incorporated. “While we are seeing an increase in consumers who actually make purchases on their mobile devices, by and large this is still seen as an informational tool – but one that can really help consumers looking to stretch their budgets.”

of consumers said they will purchase toys, also down slightly from 44% last year.

Monitor data support this; more than eight out of ten (84%) consumers plan to use the Internet to shop for holiday gifts this year. Most (80%) of internet shoppers will use a traditional computer, but 11% will use a smartphone. That percentage is up from just 2% of consumers who planned to use a smartphone last year.

“Most consumers are creatures of habit,” Kitchings says. “They buy the same gifts every year in the same places.” Consumers might not change where they shop, Kitchings says, which is why social media has the potential to revolutionize how they shop.

What consumers plan to give, though, changes little from year to year. As was the case last year, gift cards will top the list; among those planning to buy holiday gifts, 68% will purchase gift cards, compared to 70% last year, while 49% will purchase clothes, down slightly from 52% last year. Forty-one percent

And given that shoppers are watching their budgets, it should come as no surprise that chain stores and mass merchants are the preferred channel for apparel holiday shopping this year. Sixty percent of consumers plan to shop at both, compared to the 38% who plan to shop online and the 37% who plan to shop at department stores.

U.S. brands and retailers have been on the frontlines of the Internet and social media, whether through mobile applications that give special discounts or locate stores, virtual stores in Second Life, or the ability to shop through YouTube. Retailers’ experiments on social networking sites like Facebook and Twitter are also a boon to shoppers, who now have a wealth of information at their fingertips and an unparalleled ability to comparison shop for the best deal. “Consumers had to drastically readjust in 2009, at the height of the recession, and they have to do so again, thanks to high or rising prices in apparel and other categories like food and gasoline,” Kitchings says. “As a result, they’re shopping smarter, using the Internet to comparison shop or find better deals, and also keeping an eye out for that extra something, like free wrapping or free shipping.” Practical items are also topping the apparel gift list this year; 44% of consumers say they will give t-shirts, and 34% saying they will give denim jeans.

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“Interestingly, we’re seeing consumers more likely to purchase denim at this time of year,” Kitchings says. “With increasing prices of clothing and still limited budgets, consumers have put off buying some of the core items they normally would like – a second or third pair of jeans during back-to-school, for example – which may be why we see a larger percentage of consumers planning to give denim as a gift this year. This is very smart behavior on the consumers’ part.” That practicality extends to the retailers too, who are doing all they can do to encourage consumers to shop. Walmart, Sears, and Kmart all have in-store layaway options this year, but what may move the needle for some consumers is a new company called eLayaway, which offers online layaway through a variety of affiliates, including Best Buy and Apple Store. “The extension of layaway will really help those consumers,” Kitchings says. “In this economy, every bit counts.” Monitor data support this: budget remains a top concern as more than eight out of

10 consumers (81%) are very or somewhat concerned about a reduction in their annual household income. Those earning less than $75,000 per year are, unsurprisingly, more likely than those earning more to be very or somewhat concerned about a reduction in income (84% vs. 73%).

in the store, because that’s where the experience is.”

With tight budgets and an eye on the bottom line, though, consumers may be all the more drawn to the in-store experience. “In difficult times, people seek a connection,” Kitchings says. “This may be where you see consumers using their smartphones, but they’re still

Emily Thompson is the Associate Director, Editorial at Cotton Inc., the research and marketing company representing upland cotton. For more information on the Lifestyle MonitorTM Survey, please contact her at ethompson@cottoninc.com

Ultimately, Kitchings says Holiday 2011 may boil down to a simple question for retailers: “Are you in the right space to reach your consumers?”

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For more insight from MasterCard, contact Andrew Mantis at andrew_mantis@mastercard.com or 914-249-1046. ©2011 MasterCard. MasterCard, the MasterCard Brand Mark, and MasterCard Advisors are trademarks of MasterCard International Incorporated.

Issue Ten 2011

Bed Bath & Beyond: The Best Retailer in America? By Warren Shoulberg

Is Bed Bath & Beyond the best retailer in America? Well, it depends on who you ask.

Ask a financial analyst and you’re likely to get a pretty positive response. Through the best and worst of retailing cycles, Bed Bath, with total 2010 sales of almost $8.8 billion and earnings of $790 million, has generally outperformed virtually every other retailer in virtually every other merchandise classification. Other than a dip in the 2007-2008 retailing meltdown, the store has had positive comp numbers since the day it went public in the mid-1990s. It consistently puts up better numbers quarter after quarter than anybody. But ask that same analyst what he sees going forward and, chances are, he will shake his head in ignorance. Bed Bath is notoriously close-mouthed when it comes to handing out information on its operations. For the past two decades, its annual meetings – held in a suburban New Jersey hotel that is conveniently located inconvenient to Wall Street types – have averaged 14 minutes in length…including coffee. Ask Bed Bath’s banker if it’s the best retailer, and he’ll most certainly say yes. The company has zero – that’s a zero followed by more zeroes – of debt. In fact, the company as a public entity has never had any debt, never borrowing a dime from anybody ever. Indeed, it routinely lists the interest from its cash-on-hand every 90 days on its financial statements. Is there any other retailer around that has been able to say that for this long? But ask the companies that supply Bed Bath & Beyond with its bed,

bath and beyond products and you may get a decidedly different story. The company has a reputation for being positively ruthless in its dealings with suppliers, negotiating hard and long upfront and not being bashful about collecting a few extra points on the backside of any program. There are countless anecdotal stories from vendors about chargebacks that would embarrass a department store. Yet most home furnishings suppliers will begrudgingly tell you they need Bed Bath, and would still rather sell them than not. Ask some mall real estate leasing agents and they will tell you they can’t wait to see Bed Bath’s site selection crew walk through their door. The company has a well-deserved reputation for being totally unconventional when it comes to picking store locations. It routinely takes space nobody else will touch, believing, rightfully so, that it is a destination store and that its customers will find it no matter where it is.

the Siegel Cooper department store building. It turned into the anchor for a brand new retail neighborhood in Manhattan, now one of the strongest shopping districts in the city and the store, at well over 100,000-square-feet, certainly must be the chain’s single largest grossing unit. Or how about an empty Sakowitz branch store in North Dallas? The impossible-to-get-to ground floor, inaccessible from the rest of the mall, at the Beverly Center on the West Side of Los Angeles? Or a B. Altman anchor store in an upscale suburban New Jersey mall? Bed Bath operates in all those locations. Successfully. If you build it, they will shop. But then ask a bunch of retailing experts about the company’s corporate strategy and they will raise serious questions. With almost 1,000 Bed Bath & Beyond units, the company is clearly starting to max out on its

The company has a reputation for being positively ruthless in its dealings with suppliers, negotiating hard and long upfront and not being bashful about collecting a few extra points on the backside of any program. Consider these unorthodox real estate choices: In the mid 1990s, when New York City’s former Ladies Mile district, along Sixth Avenue in the teens, was a barren wasteland of light manufacturing, empty storefronts and absolutely no street traffic, Bed Bath leased its largest store ever in what was once

US locations. It finally moved into Canada a few years back and operates a two-store joint venture in Mexico, but it’s pretty much nowhere when it comes to international. So, over the past decade it has bought three small retail operations and while it won’t say it publicly – because it doesn’t say ANYTHING publicly – it is pinning its future growth on those vehicles.

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There is Harmon Beauty, a 45-unit discount health and beauty aids chain that it is gradually rebranding Harmon Face Values, a clever if not particularly catchy name. (Why it didn’t choose a family surname like Beauty Basics & Beyond is…well, beyond me.) Next comes Christmas Tree Shops, an entirely misnamed operation of 70 stores that has a lot less to do with seasonal ornaments than with closeouts and deep discounts. It is being increasingly positioned as a Home Goods wannabe, which is fine, but the name is a major disconnect to shoppers not familiar with the store. The fourth leg of the Bed Bath table is the one closest to the mothership… in many ways. Buy Buy Baby is a superstore format, like its parent, using the category killer merchandising strategy. It was started by offspring of one of the founders of the parent company. And it sticks with the right naming protocol. In theory, it’s the logical lead dog in the growth race. But Buy Buy Baby, currently with about 55 stores, can’t possibly give the company the top and bottom line increases it needs to significantly move the needle. While Bed Bath can target some 200 million potential end users for its product mix, including close to 100 million households, Buy Buy Baby’s merchandise mix essentially is for those under age five. At four million births a year, that’s a 20-million potential customer base max at any given time. As Toys ’R’ Us found with its Babies ’R’ Us unit, the size of the market is just not big enough to support a mammoth, game-changing retail operation. Here’s what’s more curious. Can you name any retailer in America – any retailer in the world – that has tried to operate four virtually unrelated and independent parallel store businesses? Operations like Urban Outfitters and

Issue Ten 2011

Williams Sonoma have multiple nameplates, but they are pretty much in the same general merchandising space. But four entirely separate industries? The only even close parallel goes back to the 1980s when Kmart owned its namesake operation, Borders and Walden book stores, a home improvement chain called Builders Square, Office Max, Sports Authority and the PACE warehouse club unit. That didn’t work out so well, did it? Bed Bath management is quite superior, but four lines of business may be pushing it. Ask those same retail experts about some other parts of the Bed Bath M.O. and they would have mixed opinions. This is a company with thousands of store locations but no central distribution system to speak of. Each store orders independently and vendors ship directly to the individual stores. It’s the Holy Grail of retailing, the gist of what Macy’s is trying with My Macy’s and what the old JC Penney was so good at it. It shouldn’t work on this scale… but it does. This is also a company that does virtually no advertising. Other than a new store opening print ad, the company relies pretty much exclusively on coupons, sent in direct mail circulars and online. It is the very essence of direct-to-consumer marketing and while all its competitors spend fortunes on sophisticated campaigns and corporate image ads, Bed Bath runs pictures of pretty products. And they don’t even put them on sale, running an everydaylow-price strategy that, frankly, isn’t exactly giving anything away.

It shouldn’t work… but it does. Finally, you could ask the most important people in this equation whether they think Bed Bath & Beyond is the best store in the country: Shoppers. Most of them, I think, would give you a pretty positive response. They love the selection. They love the coupons. They love the locations. And they love the prices. They may quibble about a few things: A disastrous merchandising strategy in soft home over the past few years devastated the department and it doesn’t match up with the Beyond side of the store, much less the competition. And there are still a few brands unavailable in the store, one of the last cards Terry Lundgren can still play with his suppliers. But there’s a reason Bed Bath & Beyond is still here and Linens ’n Things, Home Place, Strouds, Lee Jay, Waccamaw, Pacific Linen, Linen Supermarket, Plejs and several other long-forgotten competitors are long gone: They are the best retailer in America. Then again, it depends on who you ask. Warren Shoulberg is editorial director for several Sandow Media home furnishings business publications and has been following Bed Bath & Beyond since 1988. He has some extra coupons if you need them.

Weathering Economic Climate Change: Retailing in the Age of Uncertainty By Michael Dart

The retailing landscape looks much as it did in the throes of the Great Recession. Unemployment remains persistently high, consumers lack confidence in the economy, and talk of a global economic crisis is everywhere. But move in closer and the picture is more complex and detailed than it was three years ago. Despite the barrage of bad news and feeble macroeconomic growth, consumers have returned to old habits—spending at unprecedented levels, in fact. Consider this: Consumer confidence, once closely linked to spending, hovers near 30-year lows. But as the chart below shows, actual spending has bounced back—hitting an all-time high of $9.5 trillion in September. Furthermore, a modest 4% gain in income and a 34% drop in the savings rate over the past year slightly outpaced inflationary pressures (e.g., increased housing, health care and fuel prices). Combined with a 2% drop in consumer debt (see next chart), these factors mean employed consumers have more money to spend.

The American consumer appears to be on a precipice, precariously balanced between very modest personal gains and the increasing drag of high long-term unemployment and a staggering deficit. Many are calling this the “new normal,” a position of perpetual uncertainty and ongoing anxiety. THE NEW NORMAL : A CONSUMER DIVIDED In fact, the new normal is that the American consumer can no longer be summed up as a single shopper. The new normal is the trifurcation of our economy among the long-term unemployed and underemployed, the lower- and middleclass at risk of slipping into poverty, and high-income earners. Unemployed and underemployed. Obviously, the post-recession era has been particularly difficult for the unemployed and underemployed, who are living week to week and barely making ends meet. With little or no access to reasonable credit, this cash-strapped population flocks to retailers sensitive to their need for frugality. And successful dollar stores appear to be just that,

Best Practices from Kurt Salmon

with some selling individually wrapped rolls of toilet paper, off-brand cereals at less than half the cost of grocers’ private-label brands or even small apparel items for about a buck. At-risk middle-class. Formerly the hallmark U.S. shopper — the solidly middle-class consumer, who flexed so effortlessly from the aspirational luxury of Nordstrom to the fun, frugal fashions of Target — is fading. In that place are middle-class consumers who are employed and, for the most part, comfortable but weary from ongoing uncertainty and the very real possibility of slipping into underemployment. While deeply anxious about the economy — only 21% say they’re confident in the economy, 1% fewer than the lowestincome Americans — these consumers are also still extremely brand conscious. In general, they are still committed to their favorite brands, but want a price point that gives them access to the experiences and products they have grown to love without compromising their need to be incredibly selective with their spending. High-income earners. While only 28% of high-income earners say they feel confident in the economy, they’re back to pre-recession spending habits. While a bit skittish immediately following the Great Recession, these consumers have bounced back to new spending heights, powering noteworthy gains in traditional luxury categories. These consumers want the opulence of their beloved brands, without compromise, and they have the means to afford it. Despite their differing economic situations, there is one commonality all three segments share: Brands still matter. Because overabundance and ubiquity continue to be the norm, all consumer groups have access to seemingly limitless assortments of nearly any item at almost any time.

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Competing on price or a specific product attribute alone isn’t enough. Whether they have $5 or $500 to spend, all three consumer groups have the luxury of spending their hardearned dollars at a variety of retailers. Beyond just amassing more stuff, these consumers want connection. Retailers and brands that can forge these connections — through a combination of product and experience — will be better positioned to win their target consumers’ hearts and dollars. WINNING TACTICS As such, we see three winning tactics to help retailers navigate through ongoing economic uncertainty and an evolving marketplace. Create a value orientation. No matter the target, retailers and brands must provide consumers with an accessible entry point to their products and experience. The key is to drive real and perceived value without compromising the brand. Consider Apple. The retailer has been extremely successful at making its products available across the price spectrum without compromising its brand. Whether it’s a $49 iPod shuffle or a $249 iPod Classic, the consumer knows she is purchasing a high-quality product — and compelling experience — consistent with Apple’s reputation. Shareholder pressure for short-term gains will continue to drive the temptation to pawn brand attributes for a short-term cash-out. But resist. Competing on deep discounts and promotions, devaluing product and experience to pinch pennies, gutting ancillary support to the purchasing cycle — now more than ever these tactics have the potential to destroy your brand in the not-so-long run. Invest in experience. Differentiating your brand from competitors is more important than ever, and creating a compelling experience is one essential way to make your brand stand out. A great customer experience offering is no longer optional, especially as other retailers step up their games. In fact, 83% of top retail

Issue Ten 2011

executives recently surveyed by Kurt Salmon say improving the customer experience is a top investment priority for 2012. Further, all consumer segments demand experience; targeting lower-income consumers doesn’t exclude a brand from this new mandate. For example, for lower-income targets, experience may be all about convenience. Kohl’s, for instance, successfully stole share from traditional department stores anchored to malls by opening more convenient, smaller-format stores closer to suburban residential hubs. As margin pressure increases, many retailers will be tempted to skimp in this area. But as the economy regains strength, those who have invested in experience during this period will emerge with a competitive advantage. Invest in preemptive distribution. Again, during periods of uncertainty, leaders will continue to invest in key areas. Given the accelerating trend toward preemptive distribution, top brands and retailers are moving beyond multichannel distribution — i.e., separate inventories for each channel — toward omnichannel distribution, one inventory and product flow across all channels. Note these prime examples. eBay recently opened a window display on Park Avenue in New York. The display features selected products plus QR codes that consumers can scan with

their phones to purchase a product or access more information. Procter & Gamble just set up virtual stores in several European subway stations, so busy commuters can scan QR codes to purchase items like razors and dish soap that will then be shipped to their homes. And in some Asian countries, consumers can now do all their grocery shopping while waiting for the train. Selecting items using QR codes on large plasma screens set up at stations, these time-strapped shoppers select all their grocery items and then check out and arrange for home deliveries. As the retail environment changes, winning will take an evolving set of characteristics. Not so long ago, Walmart was winning on price alone; now Amazon is winning not only on price, but on assortment, convenience and preemptive distribution. In 2012 and beyond, retailers that are able to offer not only price and convenience, but also a compelling customer experience, will have the long-term competitive advantage. Michael Dart is a senior partner at Kurt Salmon and leads the firm’s private equity and strategy practice. He also co-authored, with Robin Lewis, The New Rules of Retail. He is frequently quoted in the Wall Street Journal, Financial Times, global and national media, and trade journals. Consulting magazine recognized Michael as one of its Top 25 Consultants of 2010.

MACY’S: THE BIGGEST AND LAST DEPARTMENT STORE STANDING? OR AN EMERGING NEW MODEL? continued from Page 1

for a strategic transformation, some of which is beginning to emerge. However, if his vision is achieved, should we continue to call it a department store? I believe what we’re talking about is a Macy’s branded and enclosed mini-mall, full of a lot of go-to events, cafes, restaurants, and small, branded and lifestyle specialty shops, both owned and leased. So, Macy’s, the brand, becomes the destination, an experience so compelling that consumers will leave the Internet or any other store that just sells stuff. Assuming I’m right, what do we call this new business model?

Don’t Miss the Forest Looking at the Trees And, it’s Back to the Future Sticking with my prediction in an article I wrote in

One can be dazzled by the flurry of new tactics being

January 2005, I likened Terry Lundgren, then CEO

announced by Macy’s on an almost weekly basis. How-

of Federated Department Stores (now Macy’s) to Gary

ever, we need to step back and view all of them together,

Cooper in the classic film, High Noon. At the time, Feder-

forming a larger “forest” so to speak, as a strategic

ated was “gunning” to acquire May Company, and my

evolution that, if successful (and if followed by the other

analogy to Mr. Cooper had to do with the possibility

traditional department stores), will in fact make my pre-

that Mr. Lundgren might be the last man standing in

diction come true: the demise of department stores as we

the department store sector.

have traditionally defined them for the last half century. However, they will have evolved to a 21st Century version

I also said at the time that Lundgren could seize the

of their original model launched in the mid-to-late 1800s.

moment to propel his vision beyond just being the biggest and last department store in a dying channel

Founded in 1858, Macy’s was dubbed one of the original

to transforming the old traditional model into an

“palaces of consumption” along with Lord & Taylor,

exciting, relevant and branded destination for fun and

A.T. Stewart , and Arnold Constable in New York, Jordan

entertainment and, in The New Rules of Retail lexicon,

Marsh in Boston, Field, Leiter & Co, (later Marshall Field

from my co-authored book, a neurologically connecting

& Co.) in Chicago, and many others across the country.

and addictive shopping experience. These giant stores, also called “cathedrals” due to their

Well, here we are five years and a deep recession later,

architectural grandeur, were precursors to the modern

and what I’m hearing, reading and seeing is that Lund-

shopping malls. They housed just about any product

gren & Co. did seize the moment to lay out a grand plan

a consumer needed or might want, in addition to

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restaurants, tea rooms, child care, beauty parlors, public

But, I also think they have miles to go, particularly

phones (remember those?), soda fountains, sponsored

in their secondary and tertiary markets. The recently

entertainment, kids’ events, fashion shows, and, more.

announced $400 million renovation to the flagship will obviously be a huge leap forward. And, one of the

Is some of this beginning to sound like déjà vu?

renovation’s goals is to elevate the Macy’s experience “back to the future,” as described below.

Now I want you to pause, think and clearly understand the greatest irony of all. During this period, roughly 60% “palaces.” These original department stores offered such

The Experience Alone is Not Enough

an overwhelming and compelling experience that those

While those stores full of great experiences led to

rural families would tear themselves away from the Sears

the attribution of the line: “if you build it, they will

catalogue, the Internet equivalent of the time, to travel

come,” and they did, it is not enough today. Just as the

for hours to these beautiful and exciting stores and to

Sears catalogue brought the store to consumers in the

spend the entire day enjoying and probably spending

late 1800s, so too, must Macy’s and all other retailers

more, just for the experience.

take their stores to consumers today via the Internet

of the population resided in rural areas, far from these

and mobile devices. So, what is Macy’s declaring to achieve, and what must their other department store brethren do to tear consum-

We call this “new rules” strategy “preemptive distribu-

ers away from the Internet and their mobile devices?

tion”: operating on a fully integrated, seamless matrix

Do I hear “…. create an overwhelming and compelling

of all distribution platforms with the objective of con-

experience?” I think so.

necting with consumers first, faster and more often than the hundreds of other equally compelling competitors, and to do so where,

Macy’s, the brand, becomes the destination, an experience so compelling that consumers will leave the Internet or any other store that just sells stuff.

when, how and as often as the consumer desires. Macy’s refers to the integration of their in-store and online distribution platforms as their “omnichannel. ” They’ve invested enormous capital and manpower into it, advancing aggressively to a seamless process that provides the consumer unlimited access, wherever and whenever they choose.

Re-achieving the status of “palaces of consumption” or “cathedrals” as they were called in those early years

The third “new rule,” without which the first two are

could very well propel this channel back to its dominant

rendered useless, is the fact that neither a great neurologi-

model and competitively advantageous position. Who

cally connecting experience nor preemptive distribution

knows, they may even steal back the apparel share of

can be achieved without dominant control of the

market they’ve lost over the years.

value chain. Obviously, the manufacturing, logistics,

Issue Ten 2011

MACY’S: THE BIGGEST AND LAST DEPARTMENT STORE STANDING? OR AN EMERGING NEW MODEL?

distribution, inventory, marketing, presentation and

consumers, essentially one of the coolest places to be

selling involved in the complex department store busi-

in London. Oh, and by the way, while people are at

ness model require enormous collaboration between all

Selfridges, enjoying a Bollywood film event, or dining

participants in the value chain, including the thousands

in their restaurant, or attending any other of a steady

of vendors that supply it. However, for Macy’s to be

stream of events, they could also shop through the store

able to provide the consumer experience promised by

and buy all kinds of desirable brands and products.

the brand and to be accessible to consumers instantaneously, whenever, wherever, however and as often

To recreate Selfridges as a go-to experience, Radice

as they demand, Macy’s must have dominant control

removed the departmental infrastructure, both organiza-

over the entire value chain of its complex business.

tionally and structurally, and replaced it with a lifestyle buying/merchandising group and a totally reconfigured

The Brand, the Experience, the Exclusivity, the Access

store layout organized around lifestlyes vs. departments.

It all starts with management’s priority commitment

a great experience. The Selfridges example is not to

to the Macy’s brand, clearly defining its positioning,

suggest that Macy’s should adopt that brand re-creation

including what it is going to stand for to its consumers,

template. Their structure and organization is much

an experience so compelling and differentiated that

larger, and way too complex to radically transform,

they will make Macy’s their first go-to destination,

so they probably couldn’t even do it if they wanted to.

He believed the department store model was not only irrelevant, but an impediment to providing consumers

in-store or online. However, and particularly since the May acquisition, A best practices example of this kind of brand position-

Macy’s has focused on strengthening and leveraging

ing and commitment in the traditional department store

the power of the Macy’s brand. Capitalizing on the high

sector was Selfridges in London in the mid-1990s. Then-

national and international consumer awareness levels

CEO Vittorio Radice declared that Selfridges was not

owing to its history as one of the original “palaces,”

going to be a department store that sold stuff or other

its role in the film Miracle on 34th Street, the Thanks-

people’s brands, but was going to be the dominant go-to

giving Day Parade and the Fourth of July Fireworks,

brand. He said, “place is more important than product.”

Mr. Lundgren and team have pursued several strategic initiatives to elevate the consumer experience, and

Radice recreated Selfridges, positioning it as an exciting,

will continue to do so.

entertaining, fun and totally compelling destination for

For Macy’s to be able to provide the consumer experience promised by the brand and to be accessible to consumers instantaneously, whenever, wherever, however and as often as they demand, Macy’s must have dominant control over the entire value chain of its complex business. 16

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The “My Macy’s” slogan, for example, implicitly

in turn provides them reduced cycle times and more

promises special “for me,” exclusivity “I can find

frequent line creation. They own two profit margins with

nowhere else,” that caters to “my local preferences.”

their private brands (as well as the charge-backs), and

And, they are supporting this promise by restructuring

control the all-important merchandising presentation

the organization, consolidating to seven divisions and

and shopping experience.

spreading merchandising decision-making out to sixtynine localized markets. They are also growing their

Macy’s has also been focusing on making their stores

private brand arsenal, currently 20% of total sales.

an exciting go-to experience destination. Fashion shows,

The company says that half the product they sell

culinary events, book readings, flower shows, and

is only available at Macy's.

celebrity appearances, many of them from their roster of exclusive or capsule brands such as Martha Stewart,

In addition to the differentiation and exclusivity provided

Karl Lagerfeld, Sean John, Tommy Hilfiger, Donald

by private and exclusive brands, the strategy also affords

Trump, Michael Kors and others, strengthen the

Macy’s greater control over their value chain, which

brand-building efforts.

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MACY’S: THE BIGGEST AND LAST DEPARTMENT STORE STANDING? OR AN EMERGING NEW MODEL?

restore the historical integrity of this landmark building…blending Macy’s architectural legacy with advanced technology and contemporary design is what makes this project so special.” There are plans to restore the exterior of the building, to uncover windows, and preserve much of the original infrastructure, including one of the original wooden escalators. Remodeled areas will include the world’s largest shoe shop, replete with a coffee/wine and chocolate bar, several café type dining areas, and a new restaurant. A new “mstylelab” on the lower level will be outfitted with leading edge retail technologies and services for junior and young men customers. And, the De Gustibus Cooking School with a demonstration kitchen and other elements of The Cellar will be brought up to the home area. While these experiences are not physically accessible online, they help Macy’s connect mentally with their

Lundgren commented that the expansion and restoration

customers, attracting them into the stores. Thus, Macy’s

will also create “a modern, customer-centric shopping

“omnichannel” is fully integrated and transparent, pro-

experience” to reflect “how a new generation of custom-

viding quicker and easier access to consumers (preemptive

ers prefers to shop.” And, his next statement was the one

distribution) and providing quicker and easier access

that really caught my attention. He said, “In many cases,

for consumers.

product will be organized by lifestyle to help customers create looks and build wardrobes across categories.”

The Palace of All Palaces

The significance of that last statement might go unno-

Returning to my “back to the future” narrative, Macy’s

ticed by many. Lundgren’s commitment to this lifestyle

has announced a $400 million renovation of its New

aspect of the shopping experience could well be the first

York Herald Square flagship: the world’s largest store

“shot across the bow” of the branded apparel specialty

and one of the first “palaces of consumption.” Indeed,

chains, most of whom have used this same strategy

this vast reinterpretation of the original palace into the

to gain apparel share from department stores.

future is a further step in the evolution of department stores into an emerging new model.

I have long speculated that if the big stores could begin to organize their products and services around lifestyle

Roughly 100,000 square feet will be added, to total

it could actually provide them a huge competitive advan-

1.2 million sq. ft. of selling space, making the world’s

tage, because they already trump the specialists with the

largest store even larger. CEO Terry Lundgren told

breadth of their selection. Once again, this speaks to

WWD that they were being careful to “preserve and

an easier, more convenient shopping experience without

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You Talked Back! Issue Nine

prompted the following reader responses :

AN 1 ye NIv ar issuersA e! ry Issue Nine 2011

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ort.com $10

with Mike Ullman

CEO of JC Penney

Looking Back, LookINg AheAd:

having to traverse the maze of departments and floors. Finally, I could not sign off without offering up what

To say that major changes are afoot at JC Penney would be an understate ment. In June, the company announced that Ron Johnson, head of retail at Apple, would take over the helm of the $20 billion retailer when CEO Mike Ullman retires at year-end.

become the destination, with a mini-mall full of experi-

Dear Robin, Great stuff as usual. You nailed it. All the successful ones had merchant/ ops partnerships. Mickey had strong partners as did Charron. Jones suffered after losing Nemerov as Boneparth didn’t then have strong merchant partner and may have believed best strategy meetings were ones he held with himself. The other failing you hit on is hiring wrong people in various functions. Interestingly Tom Wyatt who has been running Old Navy for some time and delivered better numbers than his predecessor or the other divisions was neither a retailer nor a merchant by background. Grew up selling intimates at VF. One thing people not involved in recruiting sometimes overlook is that one becomes a candidate by being interested in the job or by being made interested. There continues to be a dearth of top specialty store merchants so even though such a highprofile job, many didn’t want the Gap job. Pressler was a great interview. Consumer product people speak all this customer/consumer insight, marketing stuff and snow people. They feel and sometimes convince the people hiring them that focus groups and probably other consumer marketing techniques that I don’t know about will give them the right product. People hiring them buy it just as they buy the newest “black box” that shows them what ad dollars work and what ones don’t. They believe because they want to believe there is a formula that will simplify their business and make it more orderly. When he walked out of his first meeting with the Fishers, they were sold.

ences so compelling that consumers will leave the Internet

Anonymous Industry Consultant

continued page 3

A CAse For eUThANAsIA ?

The gAp on Life SuppoR T

By Robin Lewis

could be the severest blow to the specialists. I’m waiting for the department stores to roll out their private or exclusive brands as branded specialty chains. While Macy’s did so with their Aeropostale brand several years ago without great success, I believe it was simply ahead of its time. Look at Aeropostale now.

The Macy’s Mini-Mall So, Macy’s has been implementing a strategic evolution, with its various stages having varying degrees of success. However, all of their initiatives are directionally spot on for evolving Macy’s “back to the (palace of) the future.” Will “department store” continue to be an apt definition? At the end of the evolution won’t Macy’s resemble more of an enclosed mini-mall, full of go-to events, cafes, restaurants and small, branded and lifestyle owned and leased specialty shops? And, Macy’s, the brand, will

I don’t care how much cash the Gap is sitting on generate on a or how much they daily Sears keeps pumpingbasis. Just as blood (cash), through its veins, been for a long Gap is, and has time, staying alive “life support.” on Essentially, the (the retail business) body nearest and dearest is dying, but the relatives (shareholders and the Board) obviously do not want to pull the proverbial “plug.” They all stand around dying patient, the hoping of miracle recovery, for some kind (metaphorically speaking, but bear with me). continued page 16

or any other store that just sells stuff. One thing I am sure of is that even though many of Macy’s initiatives will result in similarities to its origins as kind of a grand palace, the future is now for the department store sector. And, Macy’s is certainly providing a roadmap for transforming the department store model into a more relevant 21st Century model yet to be named. And, at the end of the day, they can call it whatever they want, as long as consumers connect with it the moment they hear it.

I'd like to share an experience I had with The Gap in-store culture of the 90s, right after my home in Beverly Hills, CA. tragically burned down. Thank God no one was hurt. My children, however, had no pajamas to sleep in, and no clothes to wear to school the next day. That evening, after getting everyone settled into a motel, I walked up the street to the Gap on Beverly Drive and saw that the store was closed but that several staff were inside organizing for the next business day. I knocked on the glass doors and one of them came and opened it for me. I told them my story and they let me come in and do all the shopping I needed to get my kids clothed and comfortable for the next several weeks. I was there until midnight. That said a lot to me about the company. I remained a loyal customer for years. Renee Strauss

Renee Strauss for The Bride I Beverly Hills, CA

How about….well….Macy’s? Want to weigh in with your opinion? Email us at Robin@TheRobinReport.com.

Issue Ten 2011

Sense Beyond the Census By Paco Underhill

When my maternal grandfather, a Sephardic orphan, arrived in the New World in the late nineteenth century, he landed in a place where if you weren’t born here, your skin wasn’t pink, and English wasn’t your native language, then you were universally poor. That is no longer true. Our global retailing and marketing engines are just waking up to a new world where the complexion of money has changed. That change is not just about ethnicity, but also about the blurring and assimilation between other social divides like gender and age. We are a nation of immigrants, whether across the Bering Straits or the Atlantic and Pacific Oceans. In the history of the New World, a tribe’s status has often been linked to longevity on their land or ability to push aside the former occupants. The south-migrating Athabascans pushed out the Anasazis only to themselves be moved in on by Hispanic migration from the south and European migration from the east. The play of migration and status has been acted out in human history in both blood and assimilation. The melting pot of America has been no different, as each established generation has turned its collective nose up at the recent arrivals. Historically, one of the accelerants to enterprise is the competition between old and new money, expressed generation after generation in a kind of higherlevel one-upsmanship. Yet we as a nation had a revolution and civil war based on the premise that it matters more who you are, rather than who your grandmother was. Modern-day America is the only place in the world

where we can enjoy the realities of social mobility, both up, and as this recession has demonstrated, down. The 2010 census reinforces what most of us have known for more than two decades. The ethnic composition of North America is again in transformation as the Asian and Latino segments continue to grow. The interesting question becomes not just about the groups themselves, but our willingness to identify with one or the “other.” Assimilation and confusion run hand in hand. On my census form I check the box for “other”. Conceived in Spain, born at Yale and handed to an Asian wet nurse in Indonesia at three months, I am grateful Donald Trump has not questioned my birth certificate. We are intrigued by how ethnicity and assimilation are playing out in-store. I have a video clip of three women standing at the MAC cosmetic counter at Selfridges, the London Department Store. The first woman was the young third wife of a Somali Warlord; the second, the daughter of a Kazakhstani oil executive; the third was what the Brits call “The New Generation of Sloan Rangers,” referring to the twenty-something offspring of traditional British royalty that get coverage in the tabloids for their late-night misbehaviors. Only this woman was the daughter of a British Lord of Pakistani extraction. All of these young women had money; none had the peaches-andcream complexion of old European money. The same store can have very different demographic profiles in two different parts of the world. We took pictures and videotape to our meeting in Rome with the senior management and store planners of an Italian luxury brand with locations in South Florida and Southern California. They did not believe that their Latin customers in Miami and their Nuevo rich customers on Rodeo Drive brought their kids into the jewelry store. It was unthinkable on the Via Veneto in Rome or Via Montenapoleone in Milan. It took images rather than charts to convince them. The distance between the client and the realities of the store aisle can be even more fundamental. On another occasion,

We as a nation had a revolution and civil war based on the premise that it matters more who you are, rather than who your grandmother was. 20

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our client, a global giant in skin care, was adamant. “Our customer is female between the ages of thirteen and thirty five." Yet our profile of their shoppers in the aisle standing in front of their products was distinctly different. First, almost no teenagers; a teenage girl can get mom to buy her acne cream, preserving her own allowance for things mom won’t spring for. In some markets, forty percent of skin care shoppers were males, and this wasn’t a gay/straight thing, but the recognition that in the minds of most progressive men, skin care is a health rather than a beauty issue. It isn’t just about the country of origin, but also about age. New Balance, the athletic shoe company, opened a new store on the corner of 20th Street and Fifth Avenue in New York City in the middle of the hip, young Flatiron District. Though the brand’s national marketing campaign features retired athletes, there is not a single lifestyle image of anyone over thirty years old in the store. And what about Older Americans? Aging boomers and older control more money; they are living longer, are more active and discerning than ever and yet are ignored by everyone but the makers of Geritol and Metamucil and maybe Chico’s. Yet from the modern Fashion and Cosmetics worlds, you’d think American women are like Christie Brinkley, and have been cryogenically frozen at age 42.

in planned communities each sell for roughly the same amount of money; thus you live surrounded by economic versions of yourself. You can move through your day and in many American communities rarely see anyone that doesn’t look like you, and if they aren’t part of your race or economic class they are likely the ones working at the grocery store, who are never acknowledged anyway. William Whyte’s thesis was that the more money you make, the narrower your circle of real exposure is.

The evolution of the global consumer has been well documented; what is less clear is how business is making the necessary adjustments. As William Whyte, the American Urbanist comments in his last book, City Re-discovering the Center, the intellectual and cultural cost to a corporation of moving from a city center to a suburban or ex-urban campus is considerable. Work in a city, and you will see a cross section of the population. You will have chance encounters on the commuter train, as you walk the street, and at the restaurant where you have lunch. Want to schedule five outside meetings in a day? You can do it. Yes, you pay more rent. Yes, the commute is often more complicated. Yes, you add stresses, but you also get vitality and cross-fertilization. It’s much harder to ignore diversity or ethnicity when you are exposed to it daily.

Years ago we worked with Cadillac, targeting dealerships with a history of sales to the Afro-American and Latino communities. The question was how could Cadillac give a better in-store experience to its minority customers? Our work was the start of the process of accepting the diverse interest in the brand. It wasn’t long afterwards that GM began to use event marketing – showcasing Escalades at Hip Hop Gatherings and night clubs, for example – to reach its target audience. Before embarking on such elaborate strategies, though, we told them they needed to get the basics right, like clean showrooms and bathrooms, and to follow protocols that were respectful of peoples’ time and attention. After all, we are all just humans.

On the other end of the spectrum, work on a suburban campus, and you drive to work and drive home. Lunch is at the company cafeteria. If you want to see someone outside your immediate circle, much less your company, you have to make an appointment and it rarely happens in less than a two-hour block of time given that some form of commute has to be built into the equation. That isolation isn’t just about work. Our suburbs have always been self-segregating. A Toll Brothers development may have faux English Tudor and French Country houses, but homes

Issue Ten 2011

Making sense of the customer can be done over a weekend. Making sense of the world and the people around us takes a little more time. Paco Underhill is the CEO of Envirosell (www.envirosell.com ) a behavioral research and consultancy firm focused on commercial environments. His columns and editorials have appeared in The New York Times, Money Magazine,The Washington Post and The Wall Street Journal, among others. Underhill is the only foreigner to hold a position on the Board of Advisors at Hakuhodo—Japan’s second largest advertising agency. His latest book published in July of 2010 is entitled What Women Want. It is not a sex manual.

BUBBLES AND KICKING By Robin Lewis

Essentially, GDP growth out of the previous recessions averaged 6% per year, while real GDP growth coming out of the current recession is a muddling 2-3%. Another way to look at this slog we are in: of the four deepest post WWII recessions, three years after they began, real GDP was 7.6% higher than pre-recession GDP. Now, here we are, almost four years since the beginning of this recession and GDP is up only 0.1%.

Just this once, I’ve decided to look on the brighter side…..but only briefly. Bubbles can be very positive and fun. And, I’m not talking about an old girl friend. The bubbles (lower case b) I’m talking about are those serendipitous pockets of growth that our economy jumped on to soar out of the last two recessions in a V-shaped recovery, in contrast with the so-called L-shaped recovery we are now in. (Actually, it seems more like a flat line, not a true recovery, but a new normal - as good as it’s going to get for as far out as we can see. But I digress.)

SO, THE GOOD NEWS, BAD NEWS THING

Wouldn’t a new bubble be great? Maybe we could find one that, like our housing bubble, could help the rest of the world as well. And, how terrific it would be if we could make “forever blowing bubbles” an infinite way of life around the globe.

On the other hand, our government, with the use of public money (i.e. our money), has the wherewithal to manage a deleveraging that would avoid an apocalyptic crash (depression). And, of course, a lot of the deleveraging involves rescuing financial institutions, even though they were responsible for much of the housing bubble. Of course, there was also the rescue of General Motors, AIG and others, to say nothing of the trillions of dollars we’re printing and borrowing against to create a “Keynesian” shower of money across the land, to “create” demand and jobs or some such thing.

However, there is just one problem with this idea. The creation of a new bubble is preceded by the popping of an existing one, and a nasty economic collapse.

As an aside, it would be somewhat comforting if we knew they were proactively using intelligent levers to do all this. Unfortunately, we learned that much

It would be a wonderful thing if we had something like the technology and internet bubble that floated us out of the 90s recession, or the housing bubble that catapulted us out of the Turn of the Century recession. In the diagram at right, courtesy of Goldman Sachs, we see the “real potential GDP” line that shows how quickly a bubble might help us grow out of a recession based on those past experiences.

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THE CAN DOWN THE ROAD of the rescue happened by default, sheer panic, not knowing what to do, and throwing solutions against a wall to see if any would stick. Certainly the trillions spent have not significantly moved any needles other than the national debt numbers. Not a pretty picture. And now it looks like Europe, which jumped onto our housing bubble, is trying to take a page out of our “Keynesian” playbook to avoid a deep recession brought on by debt payment defaults by many of its countries, and the failures of many of its banks. And, the jury is still way out on whether their similarly reactive and questionably cobbled together levers are enough to stabilize the financial, economic and growing social turmoil in the politically unconnected countries of the Eurozone. So, I guess at least avoiding depression by accepting a period of deep recession, while we either search for and find a new bubble or accept the new normal we are in, is as good as it’s going to get for a while.

KICKING THE CAN However, the danger of bubble-hopping, or even of merely muddling along, as we are now doing, is that it defers any meaningful, long term structural or “bite the bullet” changes that need to be made. Worse yet, as we see playing out currently, is the fact that we have zero political leadership, zero capability to collaborate globally, zero insight into what the next bubble will be and, finally, essentially zero tenacity to wade in and get the hard things done.

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DO YOU WONDER? Does all of this make you wonder if the structure and process of our current government, not to mention our current model of “free-market” capitalism, are seriously flawed? How many times and in how many ways do we need to hear, read or see how sclerotic the government is and how wildly on another planet our financial industry is, before we realize how deep in the proverbial “doo-doo” we are. The Economist wrote: “You know something is going to happen in a horror film when someone decides to take a late night stroll in a forest. The equivalent in finance is a bank boss insisting that his institution is completely solid.” I would add that it’s also like when a politician promises something. How do you know he’s lying? His lips are moving. And why the lies? Because the politician’s number one concern is getting re-elected. Period.

I’m not suggesting we need another depression to get us to make the hard game-changing decisions. I am suggesting, however, that we pretend our backs are really against the wall, right now, and that we stop being satisfied with an anemic economy while waiting for the next way out. Like Godot, it might never come. However, without strong, intelligent, assertive and visionary leadership, kicking the can down the road will continue to be our strategy for survival. Unfortunately, the great big assumption here is that there will always be a road to kick the can down. See? I told you I’d look on the brighter side.

And, just as bubbles blow us up until the economy pops, think about how our flawed system manages deleveraging rather than allowing a cataclysmic crash. Imagine General Motors going “poof,” or AIG and other financial firms and big corporations collapsing. We say, thank God, it would have been another depression. But, I ask you, has it not historically been the case in life, that when our backs are against the wall, we toughen up to survive and to find out the reasons why our backs are against the wall? And then, upon identifying those reasons, fix and/or make the really big, fundamental changes so our backs will not be against that wall any time soon?

Confessions of an Aging Baby Boomer By Jane Singer

I’m a leading edge Baby Boomer, born at a time when life was simple and filled with optimism and possibilities. Now, that time is past and the world around us has changed. And, of course, we are getting older. We do not think of the next life stage as ‘old.’ Aging, yes. Old, no! But we will continue to be an important consumer segment in the coming decades, and will not “go gentle into that good night.” I belong to the largest and most important economic cohort in U.S. history. I’ve accounted for the greatest share of U.S. consumption and earnings

I am better off than those younger than I, the Trailing Edge boomers born between 1956 and 1964, and the Gen Xers, born between 1965 and 1984, who are now in their 30s and 40s, who will have to pay the price for the revision of the social contract which will now, by necessity, be inevitable. Still, I do not yet feel ready to make compromises. And, although I feel that I will have to compromise in the future, I do not feel like the future is now. When asked how he felt about his place in Rock and Roll now that he is entering his 70s, Keith Richards said

What is a great mystery to me as both a professional marketer and a consumer, is why marketers are not doing everything they can to reach me more effectively. since 1980. My era of economic dominance is projected to last until 2019. I’ve benefited from more education than any previous generation. As a woman, my increased education and participation in the labor force along with the rise in technology and globalization led to a strong positive economic environment throughout much of my life. I’ve been a big spender, accounting for 78% of GDP from 1995 to 2005. The relative prosperity which characterized most of my life, along with the complete dominance of my cohort in every life stage, served to increase my innate generational optimism and feelings of entitlement. I grew up believing I both earned and deserved “the good life.”

recently in an NPR interview that he plans to live to 120 and continue to make records, play music, and do great shows. Boomer icons Paul McCartney and Paul Simon, both 69, Bob Dylan, 70, and Elton John, 64, all continue to pursue their art and to imprint our culture significantly and in new ways even as another generation of Lady Gagas, Taylor Swifts and Justin Biebers, young enough to be their children or even grandchildren, perform beside them. The message here, other than that of effective promotion by both aging and young rock stars: we are still and will continue to be a relevant and influential part of the culture. And, like the aging rock stars who are still actively performing, boomers are not going to simply retire at 65, the age that one of us is turning every 10

seconds. We will work longer both because we want to and because we have to. A recent AARP study indicated that 40% of working boomers never expect to retire. Work is a fulfilling part of our lives which keeps us active, vital and connected. And, frankly we need the money. We lost trillions in the collapse of the housing bubble. As a generation, we did not save very much, and counted the appreciation of our homes as wealth. The financial crises have devoured our 401ks. Not surprisingly, like most boomers, I still feel young. I am active and fit. I don’t consider myself beyond midlife even though actuarially I am. (Unlike Keith Richards, I’m not expecting to live another 60 years!) People tell me I look at least a decade younger than I do, and, research confirms this: consumers relate to a younger version of themselves at every age. While I don’t necessarily love what I see in the mirror every day, I am doing everything I can to remain healthy, vibrant and relevant. I’m in the lucky half of my cohort who does not already suffer from long term chronic health problems – and have not curtailed my purchases of products and services. What is a great mystery to me as both a professional marketer and a consumer, is why marketers are not doing everything they can to reach me more effectively. I see the effect of good brand marketing all around me. I also see products and services whose brands don’t even know I exist. Is this because I am too old to be in their target demographic? Is it because they can’t relate to me, don’t understand me or know how to talk to me? Trust me, playing I Heard

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it Through the Grapevine or Jumpin Jack Flash in an ad is not enough to get me to buy your product. Over the next decade, experts and analysts agree, several key product categories will benefit from our demand. Among these are: consumer electronics and technology; apparel, accessories and footwear; health and beauty aids; healthcare and pharmaceuticals; and financial services. In these categories it is estimated that half or more of total sales will come from continued boomer spending. With the exception of those specialty and fashion-driven brands and retailers who focus exclusively on teens and twenty-somethings – and you know who you are – pretty much all of the major retailers have an opportunity to do a better job with my generation. Neiman Marcus, Saks, Nordstrom, Macy’s, Penney, Kohl’s and Walmart will all continue to derive a significant percent of their sales from aging baby boomers. But, because they view themselves as being in the fashion business , they tend to be focused on youth, youth culture and “young families.” These retailers might note that while young families do buy lots of basics for their multiple needs, we boomers buy

Issue Ten 2011

significantly for our smaller households, for our children’s households, and for our grandchildren, on whom we overspend and indulge like crazy. There is no doubt that those of us who are fashion aware will stay fashion aware into our 60s and beyond. As long as we can, and as long as there is product we want and an environment that welcomes us and serves us, we will buy. We represent a continuing opportunity for you. Give us style and product that is exceptional in design, quality and image. If we liked it when we were 30 and 40, we will still like it and even pay a premium for it if it fits our needs. Designers like Michael Kors, Donna Karen, Giorgio Armani and Ralph Lauren – most leading edge Baby Boomers themselves - seem to grasp this instinctively. So does JC Penney, with their acquisition of the boomer staple Liz Claiborne brand. Even those of us who are less fashion forward and/or less affluent buy clothing, shoes and accessories. Recognize this. If you meet our needs effectively for the next several years we can become your competitive advantage. So, to all you fashion and consumer product retailers and manufacturers:

Don’t ignore us. Don’t think that because we are older we want to look dowdy. Or that we don’t care about how we look or care about new products and technology and culture. If you are going to market your products to us, first, know us. If you are not one of us, learn about us. We may be your parents and grandparents, but these are not our only roles. Learn to see us as we see ourselves, as accomplished, vibrant people with many interests, abilities, and talents. Learn by listening to us. Don’t talk down to us. Talk to us in a voice that is relevant and meaningful and respectful. Know that we are still a majority or near majority, wielding lots of economic power over the next several years. Even when we no longer dominate the economy we will still account for significant spending across consumer categories, and we will still need and want stuff. It is your job to make us want your stuff. Jane Singer is a consumer product marketing consultant specializing in branding and marketing strategy. She has held senior executive positions at BBDO, Bozell Worldwide, Grey Advertising, and Marc USA, and has worked with clients including Kmart, Neiman-Marcus, Rite Aid Drug Stores, Office Depot, The Sports Authority, Visa, Liz Claiborne, VF Corporation, and Gold Toe Socks, among others.

Beauty A.D.D.

Losing Focus in the Department Store By Dana Wood

On a Monday evening this past September, I had a bit of time to kill before a press event celebrating the launch of Dr. Fredric Brandt’s new radio show on Sirius XM. And because

I do somehow manage to focus, why tempt me with purses and earrings, or possibly send me to a higher floor to check out the rest of the Lagerfeld goodies? In theory, I am the ideal

Sensing a window of opportunity, I went looking for even more support for my “cosmetics department A.D.D. theory.” I’m beauty-obsessed (both personally and professionally), I decided to scoot into Macy’s Herald Square for a quick lap around the beauty department before heading uptown to pay my respects to “The Baron of Botox.” Who knows, I thought, maybe I’ll treat myself to a little something. But within seconds of hitting the main floor, I felt overwhelmed, my head swiveling back and forth à la Linda Blair in The Exorcist, between the Marc Jacobs handbags, the tantalizing costume jewelry, the miracle crèmes and the perfumes. Upping the A.D.D. ante? Karl Lagerfeld opining from a video monitor plunked in the middle of the aisle separating the bags from the beauty. In the endless loop, the German design god riffed on his much buzzed-about eponymous collection for Macy’s, a few items of which were also on display, mere feet from the $25 prestige mascara. I get it – the first floor of most department stores is all about excitement. But at what point does all that hoopla tip over into my becoming so wired that I can’t simmer down long enough to whip out my credit card? And if

department store beauty consumer. I’m in the sweet spot of the Boomer cohort, which means I’ve got some solid aging-skin concerns, and that despite the dismal economy, my household income is such that I don’t have to sweat the (more than) occasional cosmetics splurge. So why did this admitted beauty junkie drag herself away from Kaiser Karl and, despite the numerous de-wrinklers on offer, flee — empty-handed — one of the most beloved department stores in the world? According to shopping-behavior guru Candace Corlett, president of WSL Strategic Retail, I’m an anomaly. She and her team recently fielded a study in which female participants rated a number of different types of beauty departments, and, “…across the board, department stores come up at the top of the list.” And while I might feel frenetic when confronted with all that choice, evidently other shoppers my age not only enjoy a staggering array of makeup and skincare options, they won’t have it any other way. “What we

know is that older women very much demand a wider selection of products,” says Corlett. “Even if they say, ‘There’s too much to choose from, I don’t know what to buy,’ the worst thing a retailer can do is to translate that into giving them less selection.” Another personal pet peeve of mine, excessive and excessively early holiday promotion, is not also not shared by the masses. When I tell Corlett how put off I was when I saw full-tilt Christmas decorations in a department store on October 1, she again pointed out I am not in the norm. “As baffling as it is anecdotally,” she says, “our numbers indicate that shoppers are primed and pumped and ready to start their holiday shopping in October.” At least Corlett sees my point about the siren call of handbags, jewels and other merchandise shamelessly vying for my beauty dollar. “The first floor always houses the most tempting things – the easiest items to just swipe your card and go,” she notes. “I don’t think retailers think in terms of share of wallet. They think about which brands should be showcased up front or toward the back. But they don’t think about it the way a shopper thinks about it, which is. ‘I have a $150. That’s half of the purchase of a new bag, or a great night crème.’ It’s like they’ve put all the most tempting products together so they can compete against each other.” Sensing a window of opportunity, I went looking for even more support for my “cosmetics department A.D.D. theory.” I figured that if I felt more comfortable – and credit card-happy – in venues that were more beautyspecific, surely other women must be too. Right?

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Yes and no, says Karen Doskow, Industry Manager, Consumer Products for Kline & Co., which recently unveiled its “Beauty Retailing United States 2010” study. Is there a drift away from department stores? Without question, she says. Are those same consumers automatically migrating to Sephora, or smaller beauty specialty retailers like Space NK or Blue Mercury? Not lock, stock and barrel. Although specialty store beauty sales are indeed up, the real growth is in what Doskow deems “alternate channels.” Chief among those is the Internet, which has experienced annual sales growth of 26% for the past five years. Doskow is so bullish on e-commerce, in fact, that she considers “home” to be the beauty addict’s new favorite place to shop. “People are home more, because of the economy, and they’re telecommuting,” says Doskow. “But I also think there’s a fun factor involved. We’re very savvy consumers now, and we know that we can probably find that doctor’s brand somewhere on the Internet, like Dermstore.com, which actually has hired aestheticians as customer-service people. So without even leaving our home we can go and get those products.” Parked on the couch in one’s living room is also a way to partake in home shopping channels such as HSN and QVC, both of which are on the uptick. And then there are the infomercials – another bright spot, says Doskow, citing ProActiv’s $310 million sales in 2010, along with great numbers posted by other infomercial powerhouses such as Meaningful Beauty and Wen by Chaz Dean. But let’s say you still want your retail fix. For whatever reasons, you’re jonesing to walk through a glass door and sniff, touch and feel. Will you head to the mall or the big-box retailer? According to Doskow, you’re highly likely to do both.

Issue Ten 2011

“Consumers are frugal, they’re savvy, they’re shopping across channels and they’re trading down,” she says. “With skincare, for example, a consumer today may go to her spa or her doctor’s office for a specialty treatment product, like a SkinCeuticals serum for $95. While two or three years ago, she may have also bought a cleanser and a moisturizer from the same brand, today she might go to Sephora and buy a cleanser and a moisturizer of a lesser price. Or the consumers who were shopping at Sephora for all their facial treatment needs might now go to Walgreen’s and buy Olay Regenerist.” So what’s a department store retailer to do, now that we’re either welded to our sofas, credit card in hand, or zipping all over town cobbling together a beauty regimen that won’t break the bank? Assuming they can’t compete on price – certainly not with the Walmarts of the world – department stores would be smart to make sure their websites are not merely serviceable, but a fulltilt beauty destination. Sink some money into that, by hiring editorial types to craft informative, enticing copy and round-the-clock aestheticians and makeup artists to advise on product selection.

To Corlett’s earlier point about choice, don’t prune inventories excessively. Instead, just make sure to have plenty of signage – and real, live salespeople – to guide customers through the ingredient and product-function maze. As long as they’re not overly aggressive (and most aren’t these days, says Corlett), cosmetics advisers continue to play an integral role – even given how beauty-literate the average department store customer is. No consumer can know everything about today’s high-tech formulas. And for women like me, who love pricey designer handbags and great costume jewelry almost as much as miracle crèmes and makeup, I might humbly suggest moving the beauty as far away from those other impulse items as possible – if only for a trial run. Let me focus – and spend some of that money burning a hole in my pocket. Dana Wood has served as Beauty Director for both W and Cookie magazines, has written for numerous national publications including Glamour, InStyle, Harper’sBazaar and Self, and spent several years in the Luxury Products division of L’Oreal as Assistant Vice President, Strategic Development. Her first book, Momover: The New Mom’s Guide to Getting It Back Together, was published in 2010 by Adams Media.

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Quotes to remember AN APT DESCRIPTION OF THE 2008 ECONOMIC MELTDOWN:

STEVE JOBS WAS THE QUINTESSENTIAL EXAMPLE OF THIS POINT:

“Ordinary people overwhelmed by extraordinary events.” - Source Unknown

“It's easy to have a complicated idea. It's very hard to have a simple idea.” - Carver Meade to his Cal Tech students.

THE PROBLEM: IT CONTINUES

HOW MANY SIMPLE BUT GAME-CHANGING IDEAS DID JOBS HAVE? COUNTLESS.

BUT, WE CAN TAKE HEED FROM WINSTON CHURCHILL. HE SAID: “When you’re going through hell, keep going.” DOES THAT MAKE YOU FEEL ANY BETTER? THIS HAS BEEN SAID IN A LOT OF WAYS, ALL OF THEM GOOD: “The biggest mistake is trying not to make a mistake.” - Claudio Del Vecchio, CEO, Brooks Brothers

FOR MY GOLFING BUDDIES: GUYS, HERE ARE THE FIRST FOUR CHAPTERS OF MY NEW BOOK: Chapter 1 - How to properly line up your fourth putt. Chapter 2 - How to hit a Nike from the rough when you hit a Titleist from the tee. Chapter 3 - How to avoid the water when you lie 8 in a bunker. Chapter 4 - How to get more distance off the Shank.

Contributing Columnists David Merrefield Warren Shoulberg Jane Singer Paco Underhill Dana Wood

CEO, Editorial Director Robin Lewis COO, Editor Judith A. Russell Art Directors Jodi Kostelnik Steffi Sauer IllustratoRS Jodi Kostelnik, Joey Parlett and Steffi Sauer

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