au New tom ! co otiv lu e page mn 20
Issue Two 2012
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with Jim Fielding P r e s i d e n t o f D i s n e y St o r e s
Fitting in with this month’s feature story "The Jobsian Era is Upon Us: The Art and Science of Retailing Converge" as well as my co-authored book The New Rules of Retail, we have a great example of art converging with science in the newly converted Disney Stores, where a great shopping experience actually could not happen without the new technologies available. continued page 3
Dear Reader
The Art & Science of Retailing Converge By Robin Lewis
Steve Jobs did not create either the art or science of retailing, but he quintessentially defined its convergence. Therefore, I think it’s appropriate to attach his name to this era we are just now entering. continued page 14
It is no small irony that the same technologies that have disrupted and threaten to steal enormous share of market from brick and mortar retailers are now being used by these retailers not only to expand their business into e-commerce, but to potentially gain competitive advantage over the pure e-players by using these... continued page 2
I N S I D E t h is iss u e
continued from page 1
• Dear Reader ...........................1
tools to create awesome realworld shopping experiences.
• the jobsian era is upon us...1
And sure enough, if those realworld experiences are compelling, they could very well steal more share from the pure e-commerce sites simply by being on two distribution platforms. Look at Apple, and witness the overwhelming real world experience Steve Jobs created. If you don’t know the productivity numbers by now, averaging $5600 a square foot, you’ve been living on Mars.
Robin Lewis
• Q&A with Jim Fielding …........1 • How Green Is My Product Line? ....................... 6 Cotton Incorporated
• Home Away From Home? ...Not so Much ...................10 Warren Shoulberg
• T he Teen Retail space: Ripe for Deals?......................12 Kurt Salmon
• Why Shoppers Won’t Do Supermarket’s Work ...........18 David Merrefield
• Detroit’s Disconnect problem & How To Fix It..... 20 Russ Schearher
• India's dilemma ................... 22 Paco Underhill
• quotes to remember ......... .24
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 mustread for anyone interested in the industry. Available at Amazon.com in hard cover or Kindle form, and at a book-store near you, or on our website at www.TheRobinReport.com.
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Dear Reader
So, the old dinosaur brick and mortar guys have the opportunity to compete with pure players on their own field, and can “one up” them by creating an experience consumers can’t get online. And, herein lies an enormous challenge for the pure plays. They too must learn, as Jobs knew, that they must operate in the real world. Even global juggernaut Amazon is planning its first physical space in Portland. And, Steve Jobs arguably started what I’m calling in our feature story the “Jobsian Era.” Indeed, it is upon us. We are on the leading edge of an era in which we will witness the convergence of the art and science of retailing, in which the winners will gain preemptive distribution, operating on all distribution platforms, both physical and online, and in which they will be providing overwhelming, “mind-connecting” (neurological), experiences in all distribution points (as outlined in our book: The New Rules of Retail). Wake up, pure-plays! The brick and mortar guys are now playing in your space, but also ahead of you in the real world. What an irony.
Also in this issue, and consistent with the convergence of art and science, is our Q&A with Disney Stores President Jim Fielding, who is in the middle of transforming that shopping experience into the “best 30 minutes of a child’s day.” Other articles include: Kurt Salmon’s view on the tremendous investment opportunity to be had in the teen retail sector, Cotton Incorporated’s Lifestyle Monitor™ insight on how to measure the success of sustainability programs, Warren Shoulberg on how retailers in the home space, with the exception of a particular superstar from Sweden, have completely ignored the tremendous global opportunity, and David Merrefield’s take on why supermarkets have had little luck getting consumers to use self-checkout. Finally, we would be remiss to not bid adieu to our columnist Dana Wood, who has just been named Beauty Director of Brides magazine. Our loss is Conde Nast’s gain. Congratulations, Dana - we will miss you! As always, have a great read, and let us hear from you.
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.
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with Jim Fielding, P r e s i d e n t
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o f D i s n e y St o r e s
Furthermore, it could be called a “Jobsian” experience because its concept was given inspiration by none other than Steve Jobs, who was serving as a Disney board member at the time. However, the vision was created by Jim Fielding, President of Disney Stores. Jim is essentially flipping traditional retailing on its head. And, we were fortunate to engage Jim for a Q&A to learn of his vision and how its implementation is progressing. First, a quick snapshot of The Disney Store history. Launched in 1987, it shot up to over 600 stores in the 90s. Then the result of consumers’ overdosing on animated-character “stuff” found the chain suffering losses of about $100 million a year by 2002. So, Disney decided to sell the U.S. and Canadian stores to a wholly owned subsidiary of The Children’s Place in 2004 (they kept the stores in Europe, and the Japanese stores were owned by The Oriental Land Company). In 2008, Disney buys the North American chain back, less some under-performing stores, and enter from stage right, Jim Fielding, appointed President of the returning Disney Stores business. In April of 2010, The Oriental Land Company also sold its 40 plus stores back to Disney. Currently, Disney has 208 stores in North America, 103 in Europe and 46 in Japan. Q. …but Jim, in your mind, no way was this to be the return of “same-old, same-old” retailing. Yes, your early career prior to Disney, gave you plenty of traditional retailing skills through management stints at Land’s End, J. Peterman, The Gap and Dayton Hudson. However, now as head of the Disney Stores, you are totally re-booting the stores into mini-theme parks of interactive entertainment. You were also quoted: “The world does not need another place to sell Disney merchandise — this only works if it’s an experience.”
So Jim, describe this vision of yours, where it came from, what triggered it and describe the newly re-booted stores: the “best 30 minutes of a child’s day.” A. When we began thinking about a new store design, and what it means to provide “the best 30 minutes of a child’s day” we wanted to filter everything through that lens. We view the store and experiences from a kid’s point of view. Disney Store designers from North America and Europe came together to create a Disney experience in a retail environment that was unique and special. Q. So far, what’s the most popular part of the experience? A. Our guests truly enjoy all aspects of our magical in-store experience. Each part of the newly-designed Disney Store experience caters to the many different guests that come through our stores. The interactive Magic Mirror is a favorite for all the little princesses that come to the Disney Princess Castle area of the store. The Disney Store Theater is popular for guests of all ages because they can hand select Disney content to view, from music videos, to movie trailers, to clips from their favorite Disney Channel shows. Q. I know you’ve won some awards. What are they? A. The newly-designed Disney Store award list is growing every year but some notable awards include: Edison Best New Product Awards- Bronze Award for New Retail Frontiers, Chain Store Age 2010 Retail Awards- Best Attraction Retailer,
" The world does not need another place to sell Disney merchandise — this only works if it’s an experience.” Issue Two 2012
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with Jim Fielding, P r e s i d e n t
o f D i s n e y St o r e s
" We want our guests to come in and spend time in our store, to create memories with their families, to enjoy a truly Disney environment right at their local shopping center.”
Planet Retail’s Most Innovative Awards for 2010: “Most Innovative Format in the World” and Retail Week Award: Best Retail Design. We also won International Retailer of the Year, Global Retail & Leisure International Awards (RLI), Winner for Best Store Design. Q. T ell our readers a little more about the involvement of Steve Jobs and Apple. Were there any specific contributions? I understand he urged you guys to “dream big.” A. Mostly he gave us inspiration for our new store concept. His encouragement and input were taken into consideration when our team put together the building blocks of our newly-designed stores. The big take-away was building a full-scale working model of the new store, which we built in a warehouse near our headquarters. It gave us time to work through every aspect of the store design, try new technology, and really get a feel of how our guests would experience the store.
Q. I understand some were questioning investing in this kind of major transformation, particularly in the middle of a recession? You were quoted as saying: “It’s time to take risks. When consumers are ready to spend again, we will be ready.” Tell us about the push back. A. Everyone agreed that the new stores had to be innovative and “game-changing,” but of course major change can be risky, but it was a risk Disney Store was willing to take, to create a uniquely Disney retail experience for our guests. We want our guests to come in and spend time in our store, to create memories with their families, to enjoy a truly Disney environment right at their local shopping center. Q. Also, describe the test store, what it measured, how long you were in test mode and what finally triggered the go-ahead. A. We used our mock store for nearly a year as a drawing board to create and test our interactive experiences before we brought them to life at Disney Store locations. We worked on everything from perfecting the position of the Pixie Dust path, to testing different versions of the Magic Mirror, to running different types of Disney content on hi-resolution screens for the Disney Store theater. The mock store is where we could animate our vision and watch as the “best 30 minutes of a child’s day” came together. Q. How many stores have you converted, what’s the cost and timeline for completing all 263 (is that number correct?) And, are you planning the same changes to the European and Japanese stores? A. So far we have 55 newly-designed stores open around the world. In total we have about 350 stores across North America, Europe and Japan, and over the next 5 years we will convert all stores into the new design.
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Q. Have your revenues noticeably risen in the converted stores? Has traffic increased? And, are consumers spending more time interacting with the entertainment? A. Guests have embraced our newly-design store concept, and we have seen double digit traffic increases since the new store launch in 2010. We have also noticed increased dwell time as guests enjoy the interactive experiences and rituals at our newly-designed locations. Q. I s the online store integrated or does it operate under a different “silo?” Is there any attempt to create the in-store experiences online? A. Disney Store is truly an “omni-channel retailer,” meaning our in-store, online and mobile Disney Store experience is streamlined. We offer guests the same deals, values and specials online as we do in our brick and mortar stores. Our e-commerce
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business is very strong. We are always finding new ways to make our online guest experience at DisneyStore.com, a more magical experience for guests, just as we do in our brick and mortar locations. Q. So, with your obvious “right brain” creative vision, what’s going to follow the “best 30 minutes of a child’s day?” A. “The best 30 minutes of a child’s day” is truly the best 30 minutes of a family’s day because families create memories together every day at Disney Stores across the globe. The Disney Store experience is truly magical, and we believe that we can create memorable, innovative, interactive experiences for guests of all ages.
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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 Two 2012
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How Green Is My Product Line? Measuring Sustainability Success By Emily Thompson
What is more vital to the survival of an apparel manufacturer or retailer today: commitment to environmental consciousness or keeping production costs low? Five years ago, the answer would have been strongly in favor of being green. Today, amid global debt crises and the rising costs of raw goods, labor and fuel, the emphasis has for many shifted towards the economic from the environmental. Perhaps a better question is: Can an apparel manufacturer or retailer be green while remaining in the black? The answer is “yes,” when a thoughtful, long-term vision fuels the actions. Prior to 2010, U.S. consumers had enjoyed 15 years of deflationary apparel pricing. Big box retailers attracted an increasingly diverse consumer base, fueled by low prices for apparel staples and the addition of specialty lines by popular, high-end designers and celebrities. Marketers in the highly competitive apparel category seized upon being “green” as a saleable point of brand differentiation. Low-priced and high street brands began trumpeting new and niche ‘sustainable’ fibers within their mix. The challenges arose, however, when these sustainable fibers proved unsustainable in cost, processing or both. Bamboo, for example, was embraced as a stellar textile fiber because it grew quickly and did not require pesticides for protection. However, the process to convert the bamboo from a plant to a rayon fiber was discovered to be quite chemical intensive.
a one-dimensional, anti-chemical agenda, many see a reduction of water, energy and chemical consumption in mainstream textiles as a way of reducing footprints and coping in a challenging financial environment," Patterson says. Global textile solution provider Clariant, for example, has been working for the past two years with Cotton Incorporated on the launch of Foam Eco Care finishing for cotton fabrics, a breakthrough in advanced resin-based foam finish application. The new foam application is a high performance, sustainable, and innovative technology for wrinkle-free finishing, and results in improved energy usage as well as improved abrasion resistance and fabric strength, and reduced chemical usage without compromising durable press ratings. Companies may be working on their "green" plans, but recession-fearing Americans are not overly concerned. Data reveal that although 40% of consumers are willing to pay more for natural fibers like cotton, just 35% will pay more for apparel that is sustainable organic cotton (33%), environmentally friendly (31%), recycled (24%) or compostable (20%), according to the Cotton Incorporated 2011 Environment Survey.
Consumer Facts from Cotton Incorporated Lifestyle Monitor
tm
Overall, consumers are more influenced by 100% cotton claims than claims of environmental friendliness, the Environment Survey finds. Seven out of 10 consumers say 100% cotton would influence their clothing purchase decisions, followed by natural (54%), sustainable (52%), environmentally friendly (47%), organic (43%), recycled (42%), green (42%) or fair trade (42%). But that has not stopped many in the apparel industry from surging ahead with their ‘green’ agendas. Cotton Incorporated recently completed a comprehensive life cycle inventory and life cycle analysis of cotton products. The endeavor is part of the Cotton Foundation VISION 21 Project and included the participation of the National Cotton Council, Cotton Council International, and Cotton Incorporated. “A Life Cycle Inventory is a collection of data sets that quantify several categories – including water, energy, air emissions and other environmental releases that occur throughout the life cycle of a product, process or activity,” said Janet Reed, Associate Director, Environmental Research at Cotton Incorporated. “A Life Cycle Assessment, on the other hand, is a process that evaluates potential environmental burdens associated with the life cycle
Phil Patterson, chairman and co-founder, along with John Mowbray and Richard Blackburn, of RITE (Reducing the Impact of Textiles on the Environment) Group, says while enthusiasm is waning for more expensive products such as organic cotton and recycled polyester, the sustainability debate is becoming more sophisticated. "Rather than going for headlinegrabbing niche fibers or pursuing 6
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of a product, process or activity, using the data sets contained in the Life Cycle Inventory.” The two-year study, managed by PE International, a leading sustainability consultancy, and adhering to ISO-14040 standard, is designed to establish current and accurate benchmarks of potential environmental impacts across the global cotton supply chain. The LCA can aid in environmental decision-making by identifying key impact areas and quantifying decreased impact over time, benefiting both research directives and cotton textile supply chain decisions. The study takes a holistic and thorough view of the life cycle of two cotton textile products: a knit golf shirt and woven cotton trousers. The life cycle inventory is a quantification of relevant energy and material inputs and environmental release data associated with the production of the fiber, i.e. cradleto-gate, and manufacturing, i.e. gateto-gate. The associated life cycle assessment models the environmental impact from the field through to consumer care, i.e. cradle-to-grave. Data for the cradle to gate segment were collected from the three largest cotton producing countries – China, India, and the United States – and reported as a global average. Similarly, textile processing data were culled from surveys among representative mills in the four largest textile processing areas – Turkey, India, China, and Latin America – and were also presented as a global average. Credible secondary sources supplemented data for the cut-and-sew and consumer use phases. “The LCA is cotton-centric, meaning it does not compare the environmental impact of cotton to competitive fibers,” says Berrye Worsham, Cotton Incorporated President and CEO. One finding, echoed in a life cycle assessment completed by Levi’s® in 2007, found an area that poses the greatest potential for improvement is in at-home garment care. The retailer found that 58% of the energy and 45% of the water used over the course of a lifetime of a pair of Levi’s® jeans happens at home, in the consumer
Issue Two 2012
use and laundering phase. Levi’s® has since implemented new garment care tags that encourage consumers to wash their denim in cold water, wash less often, line dry, and donate to charity when no longer needed. The Cotton Life Cycle Assessment also revealed that the primary energy and environmental impacts of agriculture are due to nitrogen, irrigation, and ginning. In the textile manufacturing phase, opening through spinning and dyeing are two areas that represent the greatest environmental improvement opportunities. These findings have helped to shape strategic initiatives for the cotton industry, with the hope that environmental improvements can be just as good for the bottom line. “As a result of the Cotton Life Cycle Assessment findings, we’re expanding research initiatives in water and nitrogen-use efficiencies; working with the LCA community to develop a more accurate model of agricultural toxicity impacts, including the incorporation of textile chemical profiles; continuing support of wastewater reduction research in textile manufacturing; and educating consumers on sustainable garment care,” Reed says. Even though consumers do not regularly seek out green apparel, they appreciate
companies that make the effort to provide it. The Environment Survey finds two thirds of consumers (66%) would be bothered if they found out apparel they purchased was not environmentally friendly. Forty-three percent would hold the manufacturer responsible, followed by themselves (15%) and the brand (12%). Patterson, of RITE Group, says firms can start reducing their environmental footprint via full supply chain traceability, ensuring minimum standards for environmental compliance, implementing health and safety standards and then improving efficiency and product mix. "Too many brands try a top down approach where they buy a few items of recycled/organic and try to pretend they are saving the world – when the reality is that the other 99.9% is business as usual -- which can be products made in horrible conditions using very high environmental impact processes." Emily Thompson is the Associate Director, Editorial at Cotton Incorporated, the research and marketing company representing upland cotton. For more information on the Lifestyle MonitorTM Survey, please contact her at ethompson @cottoninc.com. The data found in this article, as well as additional relevant information, can be found at CottonLifestyleMonitor.com.
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Home Away From Home? ...Not so Much By Warren Shoulberg
They say it’s a global economy, but don’t tell that to the home furnishings industry. This is a business that never met a border it not only didn’t respect, but wasn’t downright terrified of. Think about it: Fashion stores like H&M and Zara have invaded the United States with a fervor and enthusiasm that would make George Patton jealous. Likewise, American apparel stores like Gap, Abercrombie and Anthropology have moved into Europe and elsewhere in ever-increasing numbers.
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(Even worse, the Mexican operation is a joint venture and hasn’t grown beyond those two stores since it launched last decade.) Europe or Asia? Way Beyond its horizon right now.
own size beds, requiring suppliers to localize the assortment. That creates some enormous problems if you’re trying to take advantage of economies of scale.
But that puts Bed Bath significantly ahead of most of the guys out there. Home Depot has six stores in China. The problem is that it entered the Chinese market in 2006 by buying a local operation that had 12 units. So, in just a few short years it had worked that down by half. Last summer it abandoned the Beijing market to focus on two other cities. Not exactly a ringing endorsement of a growth strategy.
There are also local peculiarities when it comes to cooking and food. Asians want rice cookers, a product you couldn’t give away in the Western world. Americans would barbecue salad if they could figure out a way to make it not stick to the grill, but many other cultures don’t adhere to the outdoor cooking principle once they put a roof over their heads.
Depot’s move came only months after Best Buy did pretty much the same thing, shutting its nine branded stores in China. Now at least Best Buy has a Plan B, having bought the local Five Star consumer electronics retailer years ago. Today Five Star is nearing 200 units and Best Buy has outlined an aggressive new store program for the future. But not under the Best Buy name.
And the big, high-falutin’ fashion houses like Louis Vuitton, Chanel and Hermes are all over the place, having conquered more countries than Napoleon.
This pattern basically repeats itself around the globe and while there are some valid reasons for the phenomenon, some of the excuses for why this is happening (or not happening, depending on your point of view) are just plain dumb.
But home stores are an entirely different matter. Sure, the American giant Bed Bath & Beyond has moved offshore, or at least crossed the border: It opened its first stores in Canada a few years ago and has a whopping two units in Mexico.
People come in basically the same sizes around the world, even if those sizes are called by different names or numbers in different places, but for some reason, beds don’t. So if you’re trying to sell a product like sheets, every country has its
There are different electronic systems, formats and giggawats all around the world so you can’t stock the same products at stores away from your homeland. But it’s when you start talking about fashion and design that the conversation quickly bogs down. While there used to be wild disparities in preferences for color, pattern and motif in different parts of the world, they have largely being homogenized, thanks to a long process that began with MTV and Vogue, and is currently being Facebooked, Tweeted and YouTubed to infinity and beyond. The assortments at stores like Zara take some local tastes into consideration, but they are remarkably the same whether you are shopping in Düsseldorf or Paramus. The same thing is happening in home design. Paisleys are popular every where. If you like modern it’s clean
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and contemporary east, west and everywhere in between. If a retailer says they can’t sell the same designs around the world, they are just being obstinate. Or lazy. Pretty soon we’re going to see proof of that. Both H&M and Zara have launched home stores in Europe and at least the former says it will bring the format to the U.S. later this year, first online and conceivably in-store at some point afterwards. H&M Home is the most unusual retailing format to come along in quite some time. The merchandise itself is true to form: young, contemporary and inexpensive as befits the store’s core customer.
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The soft home-dominated assortment has lots of neutrals punctuated by touches of pink, red and orange. But it’s the merchandising that is different. At a store in Frankfurt I recently visited, merchandise is displayed on walls and vignettes much like a wholesale showroom. But there is no inventory on the floor. Instead there are small magnetic tiles arranged on hooks around the product displays. Shoppers grab a tile that has an image and details of the specific item they want and place it on a magnetic panel in the shape of a house. Once all the selections are made they are brought to the checkout desk where a clerk goes into the backroom and gets the goods.
Fashion stores like H&M and Zara have invaded the United States with a fervor and enthusiasm that would make George Patton jealous.
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Yes, those with long unhappy retailing memories may recall the late, unlamented catalog showroom, which had a somewhat similar convoluted checkout process. We know how well that went over with shoppers. But this is a different time and a different customer. This consumer is used to dropping things in her Amazon basket and then checking out. Is the H&M experience any different? Maybe, maybe not. What’s fascinating here is that somebody is trying something different, and trying it in a format that could work anywhere in the world. So can home furnishings retailers succeed around the world? It’s a good question, the answer to which remains to be seen. One last thing: Ignore everything you’ve just read. It’s all a bunch of crap. Ladies and gentlemen, I give you IKEA. The Swedish based company has over 300 stores around the world and does more than $20 billion a year in virtually every home furnishings classification. The 10,000 IKEA products are remarkably the same from Bayonne to Beijing. The layouts are the same. The prices are the same. The meatballs are the same. IKEA is the exception in that doesn’t prove the rule, it damn near blows it up. Home furnishings stores should be able to go global. Indeed they should be falling over themselves to do so. There isn’t a reason in the world not to. Warren Shoulberg is editorial director for several Sandow Media home furnishings business publications and is working on his next book, Stupid Business.
Issue Two 2012
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The Teen Retail space: Ripe for Deals? By Michael Dart & Jay Agarwal
Best Practices from Kurt Salmon
Looking for a hot retail deal space for 2012? Look no further than the teen and youth lifestyle segment.
While at first glance the sector may look extremely competitive, it in fact presents attractive deal and investment dynamics and opportunities. For many companies, the idea of operating in a private setting is quite appealing, since it provides the possibility for a turnaround without the constant short-term scrutiny of Wall Street. It also allows a rapidly growing company to accelerate its growth by deploying private capital more aggressively. For investors, the challenge is to find the company or companies that promise the right risk-adjusted potential returns. Speaking of investing in the teen specialty retail segment brings to mind an old Rolling Stones song (yes, today’s teens still listen to The Stones): “You can’t always get what you want … but if you try sometimes, you just might find you get what you need.”
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So how should potential investors think about this space? Let’s get the bad news out of the way first. Competition is fierce. Since 2005, per-capita teen apparel retail space (the number of square feet divided by the total population of 15- to 24-year-olds) has grown 20% in the U.S. The total number of teen apparel stores has increased 22%. Fast-fashion retailers like Zara, H&M and Forever 21 have increased store count by more than 200%. And these numbers don’t even include online shopping, which grew from 7% of total teen apparel sales in 2005 to around 15% in 2011. Retailers from Old Navy to Charlotte Russe to Wet Seal continue to evolve their strategies to compete in this environment.
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To make matters worse, teens are still reeling from the Great Recession. Their unemployment rate hovers around 23%, up from 15% in the pre-recession days. And teens say they’re spending less. A recent survey of high school students found that fashion spending has dropped an average of $167 since pre-recession periods for middle income teens, and $485 for those in the more upscale ranks. However, the economy has begun to show signs of life, and teens’ likelihood to increase spending as the economy improves is as high as, if not higher than, that of any other consumer group. The teen space, like high school, is squarely divided between winners and losers. Over the past decade, teens have gradually shifted their spending to fast fashion, trendy action sports brands and youth lifestyle retailers, and away from the more traditional brands. Given this backdrop, many teen retailers, particularly the more traditional ones, were forced to use uber-aggressive promotional strategies to encourage spending during the 2011 holiday season. It was not uncommon to see price discounts of 30%- to 50%-off entire stores for the weeks leading up to Christmas, with some promotions rising to an unprecedented 70%-off by late December. Now, the good news. In the midst of what looks like a lot of clouds, there lurk several silver linings that make for interesting deal opportunities. Specifically, this environment creates promising deal opportunities across four different types of segments.
1. Undervalued concepts. Despite the
headwinds, several iconic retailers, such as Aéropostale, Abercrombie and Fitch, and American Eagle, will be able to take advantage of the improving retail trends heading into 2012 to substantially improve their performance. They have strong brands, considerable customer loyalty and are well-managed. However, they need to focus more effort on providing a unique consumer proposition in both product and experience, rationalizing their store fleet, and exploiting both omnichannel and international growth -- strategies best executed in a private environment away from the gaze of public investors.
2. The youth lifestyle segment. The teen space is a tale of two markets, where retailers like Zumiez and Buckle have stolen share from less differentiated players. While both Zumiez and Buckle are richly valued, thanks to their best-in-class value proposition and unique brands and products, they still have significant growth potential in bricks-and-mortar expansion. Billabong, another rising star, has in its portfolio some of the most sought-after brands in action sports, such as RVCA, Dakine, Nixon and Element, and was recently
Issue Two 2012
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approached by TPG Capital. However, its core brand has suffered in some regions, but has the attributes needed to regain traction. Again, is this not better completed in a private setting?
3. Hot brands and concepts. There are several smaller concepts and hot brands that have helped fuel the growth of the action sports lifestyle segment and numerous brands that operate in high-growth niche areas such as street and urban. Several smaller private players come to mind, such as Shiekh Shoes, Active Ride, Obey, Shoe Palace, LRG and many others, which, while private, present opportunities for well-capitalized financial and strategic investors. 4. E-commerce and direct-to-consumer concepts. Online retail is especially important for the teen segment and will continue to take share from traditional brick-and-mortar stores. Sites like Karmaloop.com, which combine selling, social media and crowd sourcing, continue to be the model for future success.
Management teams considering a sale or seeking a path to going private need to clearly articulate their value proposition and unique brand story in advance of any deal process. Any interested private equity buyers will also need to understand capabilities and opportunities for growth in an increasingly competitive environment. Retailers and brands that can articulate a clear value proposition and differentiate themselves from competitors will be better insulated from price wars, giving them a better chance of success in both private and public capital markets. We continue to see a lot of interest by financial sponsors in the teen segment. So while the teen space is competitive, it also presents an opportunity to find pearls and diamonds in 2012 and beyond. So if you have the “moves like Jagger,” and are looking for an attractive reason to take a teen retailer or brand private, look carefully— you just might find what you need. Together, Michael Dart and Jay Agarwal have over 30 years of experience advising the world’s leading retailers and private equity funds. They can be reached at michael.dart@ kurtsalmon.com and jay.agarwal@ kurtsalmon.com.
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The Art & Science of Retailing Converge
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Let me be very clear. This is not, I repeat, not another story about Apple’s incredible retail experience. And, it’s not just about how Jobs, who didn’t graduate from college, understood the technology well enough to know how far he could go in creating its “art,” its magnificent design along with the ease and fun of its use for consumers. It’s about how Jobs, and his right brain artistic skills, happened to either start technology’s third iteration, the era we are now in, or at least crystallize and accelerate this convergence of art and science. The first phase, some 30 years ago, defined the early use of the Internet and all of its contiguous technologies, unleashing globalization, and unlocking incredible efficiencies and speed in the “back end” of the supply chain. The next evolution was its explosive generation and delivery of information and the early beginnings of e-commerce 20 years ago. And, now, what I call the “Jobsian” era, converging art and science at the “front end” of the supply chain, connecting consumers with compelling experiences. Another genius of this era, Jeff Bezos, founder and CEO of Amazon, 14
who by the way had degrees from Princeton in computer science and electrical engineering, is known less for his use of the “art” of retailing, and more for how he pioneered the science of the Internet into the juggernaut of all juggernauts, creating an entire global marketplace where anybody can set up shop, selling anything and everything to the world. The important difference between these two giants is that while they both relentlessly focused on satisfying the consumer, they diverge on how to do it. Both, in their own words, would likely agree that providing a “compelling experience” for consumers would be the ultimate goal. However, Bezos, favoring the left side of his brain, would understand how the technology could provide access to anything and everything, for low prices and
incredible service, as defining a “compelling experience.” While Jobs, favoring the right side of his brain, understood how to make the raw technology into artful design and a more consumer friendly application. Further, he envisioned, and accomplished, the final ingredient for a holistic definition of a “compelling experience,” by providing an artfully designed and consumer friendly place for consumers to learn about and purchase Apple products. Steve Jobs was once quoted: “What incredible benefits can we give the customer?” As pointed out in the same article, he did not say something like, “…let’s sit down with the engineers and figure out what awesome technology we have and then figure out how to market it.” He would say, the answer isn’t in having more engineers. All of them come up with brilliant ideas in their specialized areas all the time. It’s figuring out which ones, and how they will benefit and excite the consumer. He said, "We're going to integrate these things together in ways that no else in this industry can to provide a seamless user experience where the whole is greater than the sum of the parts. We're the last guys left in this industry that can do it. And that's what we're about."
The Jobsian Effect Is Bigger and More Game-Changing
While Amazon may continue with lightning speed to become the Walmart of e-commerce, it is the Jobs-like convergence of the art and science of retail that is having a more profound, longer, broader and deeper effect across all of retailing and consumer-facing industries. And, again, it’s important to note that I’m not just talking about the example of Jobs converging the art and science of Apple and its stores. I’m talking about the much broader universe of hundreds of new technologies being www.TheRobinReport.com
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invented almost daily that are profoundly impacting the way consumers shop and buy, as well as those being used by retailers to enhance the shopping and buying experience. Some of them weigh in more on the science or technology side, like mobile device apps that scan barcodes to find lower prices. Others contribute more to the “art” or experience enhancing side like smart phone apps developed by Ralph Lauren with which consumers can design outfits they and their friends can view and buy at a Ralph Lauren store, or an open-sell, interactive touch screen Beauty Spot kiosk being tested by Macy’s, for those who want to shop without the help of sales associates. Literally hundreds of other new technology solutions were on display at the recent NRF Big Show Convention in New York. And, I expect those numbers will increase rapidly well into the future until the landscape across all consumer-facing industries will be totally transformed. The bigger and more game-changing point here is that, as Jobs said, it’s not about a technical innovation a day, or two or three, it’s about how you use them to benefit the consumer, which is really an art unto itself. It is about how businesses converge the technology/science and the art to elevate the consumer experience. Furthermore, as exemplified by Apple through the vision of Jobs, and an equally important component of the “art” and ultimate experience, is the shopping environment. And, this part of the “art” doesn’t necessarily have anything to do with technology or science per se. For example, the architectural design of the Apple stores, the less-is-more, clean, crisp and cool presentation, the lighting and so forth, are all imperative for providing the experience. And perhaps the most over-arching “glue” for solidifying the art/science
Issue Two 2012
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experience is the human touch, the associates, the brand advocates. The Apple art/science convergence could not exist without its incredibly welltrained, eager, energetic, and knowledgeable associates cum “teachers.” And, the businesses that strategically plan and effectively implement the convergence of the art and science will not only win, in the aggregate they will change the game. They will transform old business models and give new shape to entire industries. Those who possess neither the understanding nor know-how to converge these to benefit the consumer will disappear. Amazon still has a lot of work to do in tapping into the more experience enhancing, “art” side of the business. Perhaps we’ll witness the beginning of this initiative in the predicted launch of their first brick and mortar “boutique” in Seattle.
The Convergence Starts and Ends With the Consumer
Point number one on the path to successful convergence is that it must be co-created with the consumer. In other words, just converging all kinds of innovative technology tools, applications and cute in-store gadgets with the “art” of an experiential environment will fail if it is not a holistically envisioned creation that directly links to the mental and emotional triggers that compel the consumer to proactively seek the experience. In our book, The New Rules of Retail, we call this making a neurologically addictive connection, a quintessential experience, one that goes beyond just an emotional connection to connecting with the mind. This sounds like more of the same old “stating the obvious” of the need to be consumer driven. But, too often among traditional retailers and brands, “consumer driven” means
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getting the product or service “right,” without taking in the “whole” of the consumer’s emotional and perceived desires. The Apple stores stand as premier examples of art and science holistically connecting with consumers’ “minds” and emotions, in an addictively compelling way. Another example, featured in this issue’s Q&A, is the Disney Stores’ renovation under President Jim Fielding. It’s no small irony that Steve Jobs was on the Disney Board, and surely provided some inspiration. Fielding’s holistic vision emanated from Disney’s consumer and generated his mission, in his own words: to create “the best 30 minutes of a child’s day.” He said: “…we wanted to filter everything through that lens. We view the store and experiences from a kid’s point of view.” And, with a “Jobsian” convergence of art and science, Fielding is implementing his vision, not with randomly placed technologies and gadgets throughout the store, but with an understanding of how the whole experience comes together. And, Disney Stores arrived at the experience by, as Fielding said: “…building a full-scale working model of the new store which we built in a warehouse near our headquarters. It gave us time to work through every aspect of the store design, try new technology, and really get a feel of how our guests would experience the store.” The results include technologies like an interactive “Magic Mirror,” a store “theatre” to view videos, movie trailers and clips from Disney Channel shows. And, the “art” of the experience created a spiffed up, more pleasant, better lit and laid out shopping experience. Double digit traffic and “dwell time” increases have been realized since the store launch in 2010.
S- & M-Commerce
So much has been written, discussed and lectured about social media
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The businesses that strategically plan and effectively implement the convergence of the art and science will not only win, in the aggregate they will change the game. They will transform old business models and give new shape to entire industries. (seeking a commercial path) and mobile or m-commerce (still in its infancy), that one’s head spins trying to identify and understand the myriad ways in which both of these “sciences,” so to speak, can converge with the art of retailing. Retailers and brands are still seeking “social” acceptance, much less figuring out how to commercially engage the various “communities” without being scorned as a “hawking pariah.” But, there is not even a sliver of doubt that if brands and retailers do not learn how to become loving members of these social groups, it will be one big step toward oblivion. Conversely, the upside for those who do converge social media with their “art,” (products and services), is that it will generate tremendous growth. This is because the most powerful medium for influencing purchasing decisions is word of mouth.
saw itself as another Amazon-type retailing channel, Forrester Research Sucharita Mulpuru, said, “….it was like trying to sell stuff to people while they’re hanging out with their friends at the bar.” M-commerce is all the rage right now. The bombardment of communications on this topic is overwhelming. Most insiders believe it’s still in its early stages, and that the eventual scope of its applications is mindbending. Its convergence with the art of retailing enhances the shopping experience in-store or wherever the consumer happens to be. If implemented correctly, the ability for businesses to gather profiles and detailed information about each of their loyal customers can be used to provide individualized products and services, which is a huge enhancer to the “art” of the shopping experience, both in the store and online. The fact that a loyal North Face customer walking within a two mile radius of one of the brand’s stores can have his mobile device text him a message that a new back-pack just arrived with his name written all over it is an example of not only “taking the brand to them,” but more importantly, compelling them into the store.
Finally, on social media, while its influence on purchasing behavior is beyond dispute, Facebook’s attempts at expanding into an e-commerce marketplace (“F-commerce” as it’s been called), have so far failed. Its first foray with 1-800-flowers.com in 2009 was followed by several other retailers, including Gap, JC Penney and Nordstrom’s, all of which pulled out. About F-commerce, which
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Then when in the store the art/science of the brand can be holistically experienced. The customer opens his app, and The North Face knows he's in store, and even where, (using wi-fi based location services). Since they already know product preferences and purchasing history, they can suggest other items that complement the new backpack offer that compelled the customer into the store. And, of course, the customer experiences
the art side of the store environment: streaming outdoor performance videos, demonstrations, music, and professional, well-trained associates. Sephora has another example of mcommerce connecting with a store experience. A smartphone app is integrated with a tablet app that plays how-to videos teaching how to apply a mix of their products. So, while the earlier use of mobile devices was primarily to link on e-commerce sites for browsing and information, followed by in-store price comparisons called “showrooming,” the more sophisticated retailers and brands are directly connecting with mobile users and attracting them into the store using personalized product and service offerings and other incentives.
A Few Gadgets
In response to the necessity for a holistic convergence of art and science emanating from consumer desires and expectations, there are hundreds of new technological gadgets that can enhance the shopping experience, and/or communicate to consumers through different media. I mentioned Macy’s Beauty Spot kiosk and Ralph Lauren’s smartphone app. Lauren has also employed touchmanipulated storefront windows for information. They developed a “4D” event in London and New York which beamed holographic images onto buildings depicting polo players becoming perfume bottles, followed by the release of the fragrance itself into the attending crowd. HSN worked with Intel to create a 13 by 8 foot interactive touch screen to be tested in airports and hotels.
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It can eventually be used for introducing new products, gaming, for special events such as cooking classes by Wolfgang Puck and, of course, for HSN to capture data for e-mails. Verifone Global Bay Mobile Technologies has a mobile retail software module that turns an iPad into an “in-store kiosk” of sorts. Guess? was able to increase transactions using it for their “look books” and placing it in dressing rooms, and further employed it for associates’ training. Further uses: rotating images; videos and commercials; music; loyalty program and credit card enrollment; usage tracking; promotions and coupons, and more. Cisco has several interactive technologies, two of which are used to enhance the shopping experience. First is its digital signing for: marketing; entertainment and informational
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content; communications and training; advertising; and many other applications. Second is the StyleMe technology that provides a virtual fashion mirror for trying on products. Shoppers can use gesture-based navigation to choose from the retailer’s complete inventory, build outfits, and try on their selections virtually. They can also capture images to share over social media and email, receive recommendations, and purchase products, with or without assistance. Or, from Intel, how about a vending machine that can scan your face and learn your age and gender, or scan license plates and offer up promotions on tires and even coffee? Or, there are any number of technologies that can replace people: cashiers; security guards; buyers; etc. Gift wrapping can now be replaced by Gift Wrap Solutions’ “The Big Wrapper” wrapping machine. And, this is not even
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the half of it. And, there are hundreds more of what could be called “gadgets,” some quite humorous, but certainly in over-abundance to the point where I have suggested we may be in the middle of another tech bubble.
This Is a New Era
In closing, all of the new technologies ---- the science --- and even some of the cool “gadgets,” should not be viewed as random, one-off kind of store enhancers. They should be understood as components of a strategically holistic new business model, and an incredible new era in retailing, one in which the winners will converge science and art to create an experience so powerful, that consumers are compelled to make it a must-go-to destination, both offline and on. It is yours to create.
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Why Shoppers Won’t Do Supermarket’s Work By David Merrefield The most valuable technology-based power a business could hope for is one that would inspire its customers to willingly perform tasks that were previously done by its employees. Although many consumer-facing businesses have been able to accomplish just that, retailing in general, and supermarkets in particular, lag behind. A few business sectors have been transformed by transferring labor from employees to customers, even though they remain location based (their customers must come to them.)
their customers to select product, pay for it remotely and have it delivered. But the vast majority of consumers still go to retail stores to select products and pay for them in a service checkout setting. But it’s not as if retailers haven’t tried to put their shoppers to work. Large numbers of customer-operated checkout lanes have been installed in many discounters, hardware stores, drug stores and supermarkets. By some estimates, the number of machines now in use exceeds 130,000.
Self-checkout machines confer no benefit to either retailers or their shoppers if shoppers won’t use them. The banking industry’s success with ATMs is the best example of that. Additionally, self-serve fuel purchases are on the rise everywhere but in New Jersey and Oregon, where they’re still against the law. Many libraries have patron-operated book-checkout abilities. The U.S. Postal Service makes wide use of customer-operated machines that allow patrons to mail parcels, insure them or buy postage without interacting with a clerk. Other business sectors, like travel agents and bookstores, have been transformed by the Internet to the point that traditional walk-in stores are scarcely required. Despite these successes, most retailers have been conspicuously unable to transfer much labor to their customers. To be sure, many broadline retailers and even food retailers have e-commerce web sites that allow
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That investment in self-checkout equipment appears to be completely rational, especially for high-labor supermarkets. After all, from the retailer’s perspective, the case for customer-operated checkouts would appear unassailable: They reduce front-end store labor, and several machines can be installed in the space consumed by a single cashier-operated checkout lane. Moreover, in a perfect world they’re a great time-saver, the very reason bank patrons have come to prefer ATMs over teller windows. But selfcheckout machines confer no benefit to either retailers or their shoppers if shoppers won’t use them. And the usage rate remains low, especially at supermarkets -- so low that chains like Boise, ID-based Albertson’s, and Big Y Foods, in Springfield, MA,which together comprise about 285 full-line stores, have taken most of them out.
Kroger, the nation’s largest conventional supermarket chain, and other major retailers are currently trying to determine the optimal number of self-checkouts to put in their stores. There are several reasons consumers tend to eschew self checkouts. Most are rooted in the fact that supermarket shopping baskets tend to be large. That increases the probability that a scanning problem may manifest during any given checkout session. Beyond that, supermarket orders are complex: Frequent-shopper cards must be scanned, coupons must be scanned, produce lookup codes must be understood by customers and correctly entered, and payment must be made. Moreover, self-checkout lacks the capacity to accept dual tender: Allowing consumers to pay part of the tab with cash and the balance with credit. In some areas, consumers find the checkouts can’t grant them credit for bringing their own shopping bags, nor can the checkouts read the scrip issued by container-deposit-redemption machines. Psychological challenges are also posed by self checkouts: Many customers, particularly elderly ones, are reluctant to give the checkouts so much as a trial because of a sort of stage fright -- the fear of looking stupid and attracting attention to themselves, or of delaying and annoying customers in back of them with their ineptitude. Also, some shoppers enjoy interacting with cashiers and miss that human element of the shopping experience. The frequency of problems such as these makes customers suspect that
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In the end, it should probably be acknowledged that at the current time, supermarkets can expect no more out of self-checkout than as a form of express purchasing. They should perhaps be confined to use in, say, 10-items-or-fewer lanes. Complex transactions will require cashiers until a technological breakthrough makes self-checkout more attractive to shoppers. Meanwhile, there’s the possibility that the entire issue of self checkouts will be rendered moot by nascent technology. Supermarket chains Stop & Shop and Giant, both units of Ahold, issue handheld devices to interested shoppers allowing them to scan as they fill their baskets. Fresh & Easy is experimenting with such a system too.
they don’t really save much time by using the self-checkout lanes, which robs self-checkouts of their chief advantage. Customers are right to suspect that self-checkouts may cost time. A large order generally is far more quickly tallied by a checkout clerk than by a customer. And, from retailers’ viewpoint, the promise of front-end labor savings may be a false one if attendants must be constantly dispatched to the selfcheckout area to assist shoppers. Along with all these factors, a legal challenge has arisen in California. That state has a new law prohibiting the use of only customer-operated checkouts in stores that sell alcohol. The law was union backed and is clearly aimed at Fresh & Easy, the only chain in the nation that uses only self-checkout lanes. The chain is still contemplating how to conform to the new law.
Issue Two 2012
In sum, the advantages to self-checkout proffered to both customers and retailers tend to fade in the real world. There are a few actions supermarkets might take to encourage the use of self checkouts, although some of them erode the advantages they could give retailers: More space could be used around the machines to make it easier to deal with large orders. Attendants eager to demonstrate ease of use should be present. Perhaps most promising would be to offer a financial incentive to customers who use the machines. That might be a percentage off every order, or issuance of an in-store coupon to be used during the next shopping trip. There’s already proof that even a tiny incentive can influence customer behavior: In many places, supermarkets have reduced the usage rate of bags by offering as little as two cents off an order for each shopping bag the customer brings to the store.
Beyond that, many high-end smart phones and other mobiles are fully capable of scanning items, creating a market-basket tally and processing a credit-card transaction. Indeed, the Ahold chains are soon to add apps to allow shoppers’ own mobiles to substitute for the hand-helds. With all scan-as-you-shop schemes, the biggest sticking point is the development of a speedy means to verify that shoppers have accurately paid before they leave the store. Finally, it’s also possible that RFID tags could be further developed. RFID tags can be attached to individual supermarket products, much as they are now attached to shipping cases and apparel to facilitate inventory tracking. The tags work by emitting a unique product identifier. This could make it possible for an order of any number of items to be instantly checked out. The chief drawback to their use in the low-margin supermarket retail context is tags’ prohibitively high unit cost. David Merrefield is principal of DRM Initiatives, Inc., a retailer consulting group. He is the former Vice President and Editor of trade publication Supermarket News. He is based in New York City.
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Detroit’s Disconnect problem & How To Fix It By Russ Schearher
As goes General Motors, so goes the nation. Uh, Oh! The problems in the mirror are closer than they appear.
The recent Clint Eastwood Super Bowl commercial notwithstanding, the auto industry is still clawing its way back out of the recession. There’s an estimated 90 million vehicle production capacity worldwide, and stable demand at 60 million vehicles. Many experts still believe there are too many dealers relative to demand, particularly as more foreign brands enter the market. There are now 3 or 4 times as many import brands than there are domestic brands. Volkswagen and other import brands are committed to being more aggressive. “Government” Motors (aka GM), Ford and Chrysler have been experiencing a disconnect with their dealerships for some time now. The auto dealerships, all privately-owned businesses, are not sophisticated marketers, and for the most part, get little guidance from the corporate types in Detroit when it comes to the retail end of the advertising process. The past few months have seen some positive sales numbers for Ford and Chrysler, but not GM.
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The disconnect I’m talking about, having been made more complicated by our friends in Washington, can and should be addressed immediately. Without success at the dealer level, big auto’s attempted comeback may very well fail.
one from another. It’s all hard sell, all “block buster savings and deals.” Not a word about brand positioning, stellar service, or the comforts of the service waiting area. Nothing about being Like A Rock or Built For The Road Ahead.
The Disconnect
Granted, it’s a tough market, and therefore some of the ads should be addressing special deals and discounted prices. However, what’s missing and most critical in this still oversaturated industry in which price alone can’t win is: “Why buy from me,” over and above just the price?
The chasm between these marketing-challenged dealers and their “brand-fathers” in Detroit is widened by the fact that Detroit spends billions each year on national advertising telling consumers how superior and differentiated their brands are over their competitors, while most of the dealers insist on negating all those wonderful brand promises by advertising bigger discounts over their competition and little else. If I’m the Ralph Lauren brand advertising my Gatsby-like greatness, and all of the retailers I sell to are advertising price only, I have no choice but to give them the old cowboy boot. Yet most auto dealers continue to drag their own retail brands down, along with the automobile brands they represent. Look at the advertising from any auto dealership. Cover up the dealer’s name and it’s impossible to tell
Seems like Marketing 101 to me. Sell the retail dealer as a local brand, offering compelling reasons for the consumer to visit your place first, like better service and more professional sales people, a bigger selection, a tighter connection with the community, etc. This is the stuff that steals a customer away from a competitor, creating repeat customers and “word of mouth” goodwill. These are the ways in which a business can grow in an oversaturated industry. The disconnect is a two-way street. Dealers and auto makers need to look both ways before they cross.
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The Fix
The first priority is to convince dealers that they must establish themselves as a brand, standing for something other than price alone, if they want to survive. Advertising has to be approached as a business discipline, rather than a whim, a need rather than a want. Maybe the CMO with the MBA sitting back in Detroit creating Clint Eastwood commercials could give a little guidance here. Next, these dealers should be helped with the basics of why, what, how, and how much advertising to do. They need to create advertising budgets, which will force the prioritizing of all aspects of ad decision making. They need to develop strategies for creative content and media based on where (and who) their customers are. Understanding where customers are coming from geographically is crucial for making media decisions. Another symptom of the dealers’ antiquated thinking is their theory on when to advertise. They tend to use last year’s sales numbers to determine when to advertise
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this year, as if those buyers had anything to do with the next prospective buyers. More importantly, it’s not when cars are bought that counts...it’s when the decision making process starts: determining which brand, which model, which dealers to consider. And, that cannot be predicted with any accuracy, so a consistent presence and topof-mind awareness are critical. On the other end of the disconnect, Detroit’s manufacturing and inventory control leave a lot to be desired, and do not always line up with what’s moving (or not moving) off the dealers’ lots. This leads to Detroit pressing models on the dealer because they happened to make too many. An example of a typical discussion between Detroit and the dealers might be something like: “You want a dozen Silverado pickups? We’ll give you 8, but you have to take 4 Volts too”. This makes for a very awkward supply chain relationship. Consumers are continuing to see fewer differences among domestic brands and between domestic and imported brands.
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Add to this the price check websites such as TrueCar.com, Edmunds, Kelly Blue Book and cars.com, manufacturers’ sites, and the whole issue of dealers selling price instead of brand may be resolved whether the dealers like it or not. These sites provide price transparency across broad regional market swaths, with some even tracking what others have paid for the same car being shopped. This of course reduces the hassle of the haggling that buyers typically hate. Is this an opportunity for Detroit auto makers to step in and level the playing field of pricing, with some uniformity and structure for their dealers? Is it time for them to become like Ralph Lauren or McDonalds? It can’t happen too soon. Go ahead, auto dealers, make my day. Sell your brand, not your price. Russ Schearher is President of RKS Associates, an advertising consultancy.
The first priority is to convince dealers that they must establish themselves as a brand, standing for something other than price alone, if they want to survive.
Issue Two 2012
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By Paco Underhill
The view from my hotel window in Delhi was telling. In the left foreground was an elegant swimming pool adjacent to a white-tablecloth restaurant. Nearby, a spotlight waterfall, a manicured bamboo hedge and then a tall fence. On the other side of that fence was a squatter’s camp of tattered tents, campfires, wandering pigs and dusty, half-naked children, no running water, no sanitation. In India, a few meters separate extremes of wealth and poverty. Almost all of us who work in this intensely interesting place have a love/hate relationship with it. India is crowded and chaotic. It is friendly and gracious. Its population has huge national pride and almost nonexistent civic pride. It makes the best steel in the world and has a very modern plastics industry. It designs
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software and owns significant pieces of the world's assets, from real estate to car companies. Delhi may have a new airport and subway, but the country’s terrible road system and ancient railroad network remain fundamental flaws. So it is not surprising that India’s retail industry is right out of the 19th century. Over 90% of India’s retail sales are done through a network of small Ma & Pa businesses called Kiranas, most of which are barely bigger than a closet. To be fair, the system works. Most of those businesses are owned by families that live in the neighborhoods they serve. Serve is the operative word here. Want a cake of soap, or a small tub of yogurt? Call your grocer from your mobile phone and your purchase arrives in minutes. The Kiranas are supplied by a network of small wholesalers. The system is united by family ties and the relationships can go back generations. The network is vocal and politically powerful. To date, the Indian Government has protected this network, maintaining complicated legal barriers to the entry of foreign merchant organizations in India. The issue has been the survival of the Kirana network and
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India’s retail sales are done through a network of small Ma & Pa businesses called Kiranas, most of which are barely bigger than a closet. To be fair, the system works. the employment they provide. The fear of foreign control over distribution of basic consumer goods is only heightened by the legacy of colonialism. In recent months, the Indian Government has announced that it is considering reducing those barriers. Still, several companies have found ways to climb the fence as it exists right now. Walmart operates wholesale clubs as well as small networks of grocery stores. SPAR, the Dutch merchant, operates a hypermarket outside of Delhi. Reliance Retail, owned by the Indian uber-wealthy Ambani family, runs both grocery and hypermarket chains. Compared to the rest of the emerging world and BRIC territories, Indian retail is miserable. The stores are dirty, poorly-lit and badly organized. Merchandising is second-rate. It is especially hard to watch given the fact that, into the 1970s, they were merchants to the world. Across Asia and Africa, Indians ran stores. Visit the historic portion of Delhi and you see the vestiges of the ancient Souks, the jewelry merchants and sari dealers. But that was then, and this is now. Indians will tell you they like the chaos and tolerate the dirt. They are focused on low prices, and crowded and disorganized stores contribute to the sense of getting the bargain. Their connection to the local Kirana merchant is very real, and almost everyone is eager to share their experience about speed of delivery or the level of service this traditional retail system provides. Yet with more than 1.17 billion people and rising, the case for organized retail is more compelling than ever, and India need only look to other emerging markets for the evidence. First, the recognition that no one has time to shop a western-style supermarket or hypermarket daily is key. A middle-class population may visit weekly or bi-monthly for staples, but they will continue to patronize their local markets for immediate or fill-in needs. In other words, Kiranas will always be an important factor in India’s retail landscape. Second, the majority of Indians get paid daily and thus spend daily. Whether in the Philippines at the sari-sari store or in a tienda in Central America, these merchants serve as the extended pantry for the families they serve. They operate as co-packers selling food in meal-by-meal
Issue Two 2012
or day-by-day quantities. Cooking oil, milk and grains get repackaged in small affordable doses. Personal care products are sold in single-serve packets. No matter who enters the marketplace, these businesses will remain. In emerging markets, the small merchant finds better prices and higher-quality goods in 21st century distribution networks. The farmers who sell goods to the large wholesalers in India get better—and most importantly, consistent—prices for their crops. Those supply-chain savings get passed on to their daily customers, ultimately maintaining and even decreasing the cost of living. Across much of developing world, the small family store has prospered based on access to organized wholesalers. We in the US recognize that Sam’s Club, Costco, BJ’s and even Home Depot and Lowe’s have an important customer base in small business owners; the same would be true in India. Indian economists predict price increases of between 9 and 15 percent in basic food commodities in 2012. Current wages are simply not keeping pace with food cost. The only controllable factor is supply chain improvements. Just like the Dharma, retail is about birth, life and death. Merchants celebrate their longevity in part because their neighbors have disappeared. India needs to move forward and this is its chance to leap from the 19th to the 22nd century. India’s network of Kiranas needs to move forward, too. They need to sort through their offerings to include other services that provide better margins and futures for their children. They need to get creative and embrace a new age of retail opportunity. There is no question jobs will be lost, but better jobs will be created. It is time for India to face the future. 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.
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Quotes to remember WARREN BUFFET’S Q&A ON THE MONEY-LOSING AIRLINES
Q. "How do you become a millionaire?" A. "Make a billion dollars and then buy an airline." ABOUT OUR TREATY TO PROTECT TAIWAN IF INVADED BY CHINA:
“ There’s only one problem with that: We’ve got to borrow the money from China to do it.” - Erskine Bowles, former co-chair of the national fiscal responsibility commission
MURPHY’S LAWS:
Friends come and go, but enemies accumulate. After all is said and done, a hell of a lot more is said than done. An expert is someone who knows more and more about less and less until he knows absolutely everything about absolutely nothing. NEED WE SAY MORE ABOUT OUR NATION’S FISCAL MESS?
“ If you put the federal government in charge of the Sahara Desert, in five years there'd be a shortage of sand."
- Milton Friedman, Nobel Prize-winning American economist
COO, Editor Judith A. Russell
Contributing Columnists David Merrefield Russ Schearher Warren Shoulberg Paco Underhill
Art Directors Jodi Kostelnik Steffi Sauer
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CEO, Editorial Director Robin Lewis
IllustratoRS Jodi Kostelnik, Joey Parlett and Steffi Sauer
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