The Robin Report - Issue 14 - June 2012

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Dear Reader “ Value 101” from Professor Lewis: Value, like beauty, is in the eye of the beholder, defined differently and individually in every case.

It is imperative to match the value created to the targeted buyer’s definition of value, both real and perceived, or the buyer will not purchase.

The conundrum that exists on both sides is... continued page 2

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SPACE BUBBLES, SHARE WARS AND FLAT TIRES

By Robin Lewis

The continuously inflating retail space bubble will continue to inflate forever.

Occasionally, during tough times, a little air will be let out, (some stores and malls will be shuttered), but net, net it will expand into infinity, likely on the same pace as shown in chart #1 on page 3. And, that’s just brick and mortar space, because one cannot translate websites into square footage (more on this to come). So, what’s wrong with that? It indicates retail is a growing sector does it not? Yes it does, but why do you think some economist invented the word “bubble?”

A bubble means that, like a balloon, its demand for air is limited to a physically defined capacity, beyond which it will pop, immediately deflate and come crashing down. So, theoretically, there is a demand limit among consumers for retail stores and the stuff in them. And, if such stores and stuff expand beyond that limit, they should (theoretically) go “pop” and deflate (hopefully not crash) back to some equivalent level of consumer demand.

Forget about it. The theories coming out of “Economics 101” and Shumpeter’s continued page 3

INSIDE this issue • Dear Reader ...........................1 •S PACE BUBBLES, SHARE WARS AND FLAT TIRES ........................1 Robin Lewis

• T hink Global, Act Local Goes Organic – And Then Some …..................................6 Russ Schaehrer

• F urniture Sales: Going Virtual might be its second life..................8 MasterCard Advisors

• F rom Profit Center to Competitive Mandate: Shifting Your Shipping Strategy ..............................10 Kurt Salmon

• Eastward and Upward: Chinese Consumers Spend with Optimism and Open Wallets ................................12 Cotton Incorporated

• The Battle for the Bottom of Home ..............................14 Warren Shoulberg

• When “Like Us” Doesn’t Equal Buy From Us (and What to Do About It) .........16 Tanya Shaw

• WE TOLD YOU SO...................18

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that the seller has a tendency to overestimate the value while the buyer underestimates. So, agreement between sellers and buyers as to fair value, and the total satisfaction of each, is seldom reached upon first engagement.

And by now, you’re falling asleep in my class. So how about this: the competitive path of least resistance - winning a sale by slashing price - has become “the road to hell, paved with good intentions.”

This road is lined with so many sale signs, coupons, daily, weekly and monthly deals, outlet stores, booming off-price stores, and one new website after another with a better deal, that you can’t see the sun.

Blurred value, confused consumers hooked on finding the biggest discount, and retailers fighting hundreds of equal competitors to win the purchase, with “sales” accelerating downward as their weapon of choice, is a major characteristic of the madness in today’s marketplace.

If you want to dive deeper into devaluing hell, read this issue’s feature story Space Bubbles, Share Wars and Flat Tires.

It’s not for the faint of heart.

• Online-based grocery delivery thrives at last…....22

But, we’ve provided some lighter fare in this issue as well. From the great minds at Kurt Salmon, insight into how shipping strategies at leading online retailers like Zappos and Amazon have moved beyond just a seasonal hook to become a core component of their brand’s value proposition.

• quotes to remember……....24

Also in this issue, tips from Me-Ality on how to implement

Robin Lewis

• When is a Sale Really a Sale?

A Shopper’s Perspective…...20 Jane Singer

David Merrefield

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Dear Reader

social media strategies so that “Like Us” translates to “Buy from Us.” Cotton Incorporated’s article on Chinese consumers reveals that despite the shaky economic news coming out of China, consumer demand for goods and services is not slowing down any time soon. MasterCard Advisors predict that as the housing market bottoms out and starts to pick up in key parts of the country, furniture might be the next category to take the online space by storm.

As always, we offer thoughtprovoking insight by our columnists including Warren Shoulberg, who shares his views on the Battle for the Bottom in home, Jane Singer on Sale Shopping, and David Merrefield on why online grocery home delivery services are finally starting to turn a profit.

Let us hear from you. And, as always, have a good read.

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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Creative Destruction are now over a century old and no longer apply to the real world of the 21st Century.

So too, the theory about how “free market capitalism” is supposed to work, doesn’t come close to describing reality today. If it did, General

Chart 1

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Motors would not be called “Government Motors” today, along with numerous other examples. Get it?

The government (the Fed), printed trillions of dollars out of thin air to patch the popping balloon to avoid a crashing collapse and depression.

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By the way, regarding the overall economic recovery, it pales in comparison with all other recoveries including the Great Depression. In 1934, ‘35 and ’36, growth rebounded 11%, 9% and 13% respectively. And, following the double dip recession of 1981 and ’82, growth averaged 6% in 1983 and ’84. So, here we are, three years after the Great Recession officially ended and our growth rate, at best, hovers between 1.5 and 2.5% (chart #2).

Back to reality.

Space Reality

Chart 2

Chart 3

Without getting over-professorial, let’s just stick with bubbles, balloons and never-ending retail space expansion. In reality, chart #1 defines a smoothed out rate of retail space expansion of 4% net per year from starting in the 1970s, (incidentally, population growth has been about 1-2% during the same period). Lazard Frères conducted a study at some point in the late 1980s that found there was twice as much retail space as demand warranted. How astounding was that?

Yet, the expansion continued upward.

Helloooo! Check out chart #3 and just think about what 20 square feet of retail space for every man, woman and child in the U.S. looks like. Now, add in all the “mom and pop” stores and all 55,000 square foot and under shopping centers and try to imagine about 46 square feet per capita.

It is nothing less than a mind-blower.

Have you had enough? Well, how high would retail space per capita be if one could translate some 4-5 billion e-commerce sites into square footage? Over-stored is an enormous understatement.

And, since those buildings and sites are not empty, “stuff reality” means an equally inflating balloon of stuff, way beyond what every man, woman and child needs or even wants.

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SHARE WARS

Chart 4

Anecdotally, chart #4 provides a picture of blue jean proliferation, from about 6 major brands in 1980 to over 800 today. And, just to provide a parallel metric of overcapacity in the food and grocery industries, see charts #5 and #6.

And, I could go on, essentially describing inflating bubbles in most consumer facing industries.

Forever Blowing Bubbles…

So, why don’t they pop? Why will the space and stuff bubble inflate forever? Many reasons, among them: • Every time a retailer opens a new “door” it’s an immediate new revenue stream for growth, so why not?

• There are financial barriers to closing underperforming stores, not the least of which are penalties for breaking lease covenants • The realtors’ willingness to incentivize (cut deals) for retailers to stay in business • As long as an underperforming door in a chain is “breathing,” it may financially be less costly to keep it open than to close it

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What this admittedly gimmicky but absolutely appropriate sub-head means is that for any business competing in an over-stored and over-stuffed marketplace, the only way one can grow is either to win a customer away from a competitor or to get one’s existing customer to buy more and/or more often from the store they are currently in.

• Under-performing doors and/or space productivity in general, are not always easily or measurably identified • Just as there is too much stuff sloshing around the globe, so too, there’s too much capital in pursuit of investing in even more capacity and/or propping up “losers” (iconic brands that investors believe can be fixed). Sort of like the Fed and “Government Motors.”

• The liberal and “strategic” use (or misuse) of bankruptcy during which businesses shed debt, renegotiate contracts and emerge as new low cost competitors, thus preserving overcapacity • The continuous stream of foreign brands and retailers entering the U.S. marketplace • Finally, of course, the unrelenting acceleration of e-commerce, with virtually no barriers to entry, including financial. This is an unprecedented phenomenon, and there are no measures that indicate these enormous additions to the supply side are being offset by corresponding declines in the ‘brick and mortar ‘ or any other retail sector.

All of this leads to what?

And, how does one do that?

One must provide products and/or services that are newer and/or better, and/or cheaper, where, when, how and how often the consumer desires, and, oh yes, whatever it is must also be a great experience.

Now, just for argument’s sake, we assume hundreds of competitors have equivalent recipes of newer, better, where, when, how, how often and an experience. What weapon are they left with to win in share wars?

Would that be price?

Flat Tires

Unfortunately, and with disastrous consequence, it seems as though price discounting is becoming the priority weapon of choice across all of retailing, including the luxury sector. And, those who do not have parity with the other elements of the so-called recipe of superior benefits, use the pricing weapon even more flagrantly because it is the only weapon they have.

A few factoids out of Mark Ellwood’s soon to be published book CHASING THE SALE: Our Obsession with Getting More for Less: Ten years ago retailers sold just 15-20% of their inventory at some kind of promotional price, today it’s up to 40-45% (according to A.T. Kearney); and, there were 322 billion coupons distributed in 2010, up from 279 billion in 2007.

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A recent consumer survey described in WWD, indicated that 75% of women said “it’s important to get the lowest price on everything,” 68% “regularly use coupons,” 45% “only buy on sale,” and 43% “search online for discounts” before they shop. Jane Singer points this out in her article “When is a Sale Really a Sale?” (in this issue) along with the fact that if you Google “sale shopping” it will yield close to 2 billion results.

Of course the discounting is exacerbated by an unknown number of new website stores launched every day, onto a distribution platform that has virtually no barriers to entry. And, each of those new sites has a discount “deal” bigger and better than the one before it. Flash sales and the now, many Groupontype sites and all other kinds of on-sale online models are proliferating at the speed of light.

As I’ve stated many times, everything is on sale all the time, both offline and on, and shipped for free.

What’s more, if you wait for two seconds, your smart phone will beep with an ad or a friend telling you where you can get whatever it is you’re thinking of buying, cheaper.

Major brick and mortar retailers have shifted their pricing structures (good, better, best) down. Outlet stores are growing faster than full price stores, even in the luxury sector.

Saks Inc. has 46 Saks 5th Avenue stores and 60 Off 5th outlet stores, and plans to open three Off 5th stores annually. Nordstrom Rack sales in the 4th quarter of 2011 grew 18%, out-pacing full-line and online sales combined at a mere 10%. They currently have 125 fullline stores and 116 Rack outlets.

They opened one full line store so far in FY 2012 and 15 Rack stores,

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and expect to open that many annually going forward. And, Nordstrom now has a flash sale discounter, HauteLook. Bloomingdale’s has 7 outlets and plans 5 more for 2012.

Two examples in the specialty chain sector: Chico’s CEO David Dyer said the outlet channel is where “the lion’s share of new center development” will be. With 127 outlets currently across their three brands, he expects “all of our brands (Chico’s, White House Black Market, and Soma), over time will have 100 to 150 outlets each; the Gap has reduced their full-line square footage by over 4%, and will grow outlet footage by 4%.And, I have not even scratched the surface with these few examples. As the

darker side of my mind works, I could easily build a vision of outlet stores turning full-line stores into mere marketing tools to maintain the integrity of the brand, while the main revenue source becomes the outlets.

Across the entire marketplace, value is being recalibrated – down.

The end result of all of this is the devaluation of value across the boards, both in real and perceived terms, essentially a lowering of all ships. Or, to use an automobile metaphor, it flattens all tires and the car just collapses.

Will that be the fate of retailing? At what low level does the discounting/ devaluing stop? In the meantime, it seems like a race to the bottom.

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Think Global, Act Local Goes Organic – And Then Some

By Russ Schaehrer

Most people know that you need to adapt your business, products and marketing to local tastes and cultures when you’re expanding globally. What fewer understand is that, increasingly, the same applies to marketing in the good ole U.S. of A. The so-called “foodie” movement that continues to gain momentum and traction in this country has become defined by the appetite of many consumers, called “locavores,” for locally produced (not to mention organic, free range and grain fed) farm fresh food products. It now also has a number of local beer, wine, and liquor followers all becoming agents of continued change in where, what, and when we produce and buy food.

Although the localized production and consumption movement is looked upon as something new and different in the U.S., it of course dates back to before the early 20th Century, when processed foods became the norm.

The crux of the proverbial biscuit though, is that this lifestyle is centuries old for the rest of the world, and ironically it’s now coming back around to us.

Locavores embrace the availability of organic, local, seasonal, and same-day fresh produce as well as seafood, baked goods, poultry, and various meat products. They have their own language, using terms like artisanal, biodynamic, grass-fed, heirloom, line-caught, market table, and terroir. The movement has even impacted urban centers like New York City, where large rooftop gardens are emerging and succeeding as small businesses. Urban farmers rent the top of commercial rooftop buildings to grow local, organic produce. Landlords benefit from the free insulation, saving on energy

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bills. These urban farmers sell direct to restaurants, stores and street shoppers.

Demographics and geography are driving these changes. The more affluent and educated urban dwellers, as well as suburban and rural locavores with more discerning lifestyles, are increasingly preferring quality over quantity. They eschew the characteristics of traditional supermarket chains and fast food operators.

Local specialty and gourmet stores are thriving in affluent areas. And, the rural farm stands, craft beer and local wine producers are increasingly appealing to seekers of agritourism and agritainment.

The big retail game-changers are ‘specialty’ grocery chains like Organic Valley, Whole Foods, and Nature’s Bounty. In addition to alternative upscale products, they are successfully positioning and marketing themselves as a “shopping experience” or destination, rather than just a way to tick items off a shopping list.

Something to Drink with That?

Adding a whole other cool dimension to the “foodie” movement, and further confirmation of consumers’ desire for everything “local,” is the accelerating growth of local craft beers or microbreweries, wineries, and distillers, whose sales growth outpaced that of the overall beer industry during the recession.

In fact, micro-breweries and craft beers are gaining such a foothold in the beer market that the big national brands like Budweiser, Miller, and Coors are now exerting pressure on their wholesalers and distributors for more favorable treatment based on their volume history. Imports like

Heineken are also concerned about U.S. sales and market share, as the craft beers attract like-thinking beer consumers with a similar palate.

Small, independent and traditional craft brewers (defined as producing fewer than 2 million barrels per year) are a $7 billion market. The largest is Boston Beer, maker of Samuel Adams, with 1.8 million barrels per year. Microbreweries, which by definition produce fewer than 15,000 barrels, are another hot segment.

There are a total of about 1,700 craft or micro-breweries in the U.S., and that number is growing. As we speak, the big commercial beer companies are kicking up their advertising spending as well as adding new beer brands to hold on to their base of younger beer drinkers. If all else fails, they will continue to invest in these craft or microbreweries, or just acquire them outright.

The wine market has been slower to embrace localization. The U.S. is now the largest wine consuming market in the world, with sales of 347 million cases per year, or $32.5 billion in sales in 2011, up 5% over 2010. Though domestic wines hold a smaller market share than imported wines, there are 6,100 wineries in the U.S., and that number is rapidly growing. Smaller, local and independent wine makers have begun to attract younger consumers, which will no doubt cause local wines to begin to grow in popularity and number. Many upscale restaurants and wine stores now feature local wines. Continued growth may have as much to do with marketing as it does wine-making.

Last but not least are the local spirits distillers all over the country who are garnering a notable and enthusiastic following. One example in the New

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Urban farmers rent the top of commercial rooftop buildings to grow local, organic produce. Landlords benefit from the free insulation, saving on energy bills. These urban farmers sell direct to restaurants, stores and street shoppers.

York area is LiV, makers of Long Island’s first vodka, produced in micro batches from Long Island potatoes. Launched in 2006, the brand has won several awards, not the least of which was the top (gold) award in vodka, beating 44 other vodkas from 30 countries worldwide. Riding that success, they are now introducing a new scotch-style single malt whiskey called Pine Barrens.

A “Localized” Big Mac? A final irony of thinking globally but acting locally is that, as our antifoodie fast food corporations aggressively expand internationally, they’re discovering the cookie-cutter model employed in the U.S. does not work in the more locally oriented foreign markets. The likes of McDonald’s, with more than half of their operations now in foreign countries, is adapting to each country’s local tastes and local cultures in order to compete with many countries’ more established and numerous street food vendors.

So, as the foodies and locavores gain influence in the U.S., the cookiecutter models may be forced to adjust here as they are doing internationally.

The conundrum has already begun with some second and third generation fast-food franchise owners lobbying for the flexibility to adjust menus according to local preferences, and to get more directly involved in their local communities.

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Obviously, this kind of strategic flexibility is not something most of the centrally structured giants of fast food are quick to embrace. Even though they are continuously testing and experimenting with new food and beverage offerings, they are cautious about significant changes that are not proven, which makes change slower than the younger generation of owners prefer, which is probably a mirror of how their younger consumers feel as well. And, that is something the giant fast food chains should pay attention to.

In fact, they are being preempted by another niche segment, called “fast casual,” and best exemplified by Chipotle Mexican Grill Inc., one of the fastest growing restaurant companies in the U.S. Now with over 1,100 restaurants in 38 states, Chipotle owes its incredible growth to its menu’s response to foodies. Instead of frozen foods processed centrally and distributed throughout the chain, dishes are made from scratch. And, instead of frozen or otherwise preserved products from agribusiness, ingredients are local, fresh and raw.

Media “Acting Locally”

Every movement thrives on media exposure and support. While cooking magazines like Bon Appetit and Food & Wine represent the “old guard” of gourmet food titles, and The Food Network and related websites have become new media’s answer to same,

the poster child for the locavore foodie movement is clearly Edible Communities, produced by a publishing and information services company that creates community-based, local publications focused on food and beverages. It is member-owned, and includes local food advocates and residents of the communities in which it publishes.

This is a business model that not only supports the message and values of its members, but preserves the integrity of each of the local publications and its communities. Also supported by local web sites, radio podcasts, book publishing, and numerous ongoing promotional events, Edible connects readers and consumers to producers and sellers.

Edible is the country’s largest publisher dedicated to the local food and beverage movement. Launched in 2002, they currently publish 70 edible titles like Edible Manhattan, Edible Boston, Vancouver, etc. The content for each magazine and location is region specific, focusing on farmers, fisherman, chefs, and food artisans from each area. Although national in reach, they represent the local perspective and speak the local dialect.

So think global, eat (and drink) local…and be merry.

Russ Schaehrer is President of RKS Associates, an advertising consultancy.

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Furniture Sales:

Going Virtual might be its second life

By Andrew Mantis

With SpendingPulse retail and online sales data going back to 2005, we have been able to spot clear trends in the growth of ecommerce by sector. It has been well observed that books and consumer electronics were the first products consumers were prepared to buy online. During those early days, online women’s apparel seemed a hard sell in the absence of fitting rooms, not to mention the lack of ability to see and feel the fabric. But gradually, women began to buy some of their apparel online, eventually with less trepidation and more anticipation.

Eventually, it became the norm to buy children’s and teen apparel online, as return policies and procedures eased. During that time, few people ever believed that customers would ever buy jewelry online. Nevertheless, that changed too, and now hundreds of millions of dollars of jewelry at all ends of the spectrum gets sold that way.

We can also see that during the recession, ecommerce spending on apparel was in positive territory even while total spending was in the red.

So with furniture, the thought of buying it online, untouched and unseen at scale in real space, on the face of it seems unlikely to catch on in any pervasive way. Yet, the yearFigure 1

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over-year sales stats are beginning to show that more and more furn-iture sales are happening via the online channel.

The drawbacks of buying furniture online are very tangible: the size and weight of furniture makes shipping and storing it, not to mention possible returns, a much bigger logistical challenge than, say, ladies’ apparel.

So furniture retailers might want to consider exploring new ways to invest in the online channel, in part by rethinking shipping, and in part by reworking the supply chain to reduce the number of stops along the way before the furniture reaches its ultimate destination. To do this, retailers will need to look at preferred manufacturing locations, distribution and storage. And to do that, they need a strong understanding of present and future demand. Fortunately, there are new sources of macroeconomic and sector sales data that can help with this, both in terms of monthly year-over-year growth, and in terms of forecasting the future.

The furniture sector has been struggling to keep its head above water even as other retail sectors have begun to perform again in the new economy. Sales are more than 20% below pre-2009 levels, and at $3.5 billion, furniture sales in January Figure 2

Consumer Insights From MasterCard Advisors

2012 were the lowest January levels in SpendingPulse history.

The common wisdom is that furniture and furnishing sales are tied to the housing market – and until housing makes a rebound, furniture sales will continue to be stymied. The question is: can a smart use of granular data help decouple the two?

We think so. We looked at Furniture and two other sectors that had tanked in the 2008 market collapse, Department Stores and Apparel, and began to ask ourselves if, through the use of transaction data analysis, any insights or possibilities could be uncovered that might free up these sectors from their bigger-picture burdens.

What we found was that, on a yearly basis, online furniture sales grew enormously in 2010, a whopping 15.4% growth next to overall growth in the sector of only 2%. And while furniture sales growth in 2011 was in deficit overall, online sales still managed to grow at a healthy 11.6%.

Even for 2008 and 2009, the receding overall growth in furniture sales – negative 10.8% and negative 12.6%, respectively – were offset by smaller negative numbers in ecommerce – only negative 3% and negative 1.8%.

The other two sectors told a similar story, though Apparel was the Figure 3

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strongest of the three by a significant margin. While department store sales showed negative growth overall in 2008 through 2011 – beginning with a deficit of 8.9% and closing near even at negative 0.2% by 2011 – ecommerce sales growth remained in the black all four years, dipping from 16.5% in 2008 to 8.2% in 2009, but then growing steadily by 9.2% in 2010 and 11.5% in 2011. What the data illustrates is that even when brick and mortar Department Stores were struggling, their online operations were beginning to grow.

Apparel ecommerce sales showed even stronger gains, hitting 18.4% growth in 2010, while overall growth has climbed back out of the hole -negative 2.5% and negative 3.4% in 2008 and 2009 -- and back into positive territory by 2010. But the overall growth figures in all three sectors can hardly compare to the growth in ecommerce sales.

What can we deduce about Furniture by looking at this data? Well, overall, and based on the overwhelmingly upward curves, it would seem that tapping into the ecommerce channel would be an advantageous move for furniture retailers, notwithstanding

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the points made earlier about more challenging logistics for the product.

In thinking about distribution, here’s where analyzing the data can once again be extremely useful.

Understanding geographic needs and volumes can help determine demand, distribution, and the economics of those all-important factors. By looking at granular geographic data, the furniture retailer might be able to determine specific needs in specific regions or locations, thus being able to achieve more efficient and effective distribution to meet those needs. For example, if data on building materials indicates a specific geographic region is adding housing or hotel units at a faster rate than the national average, furniture retailers can anticipate that there will be a commensurate increase in demand for their products and be prepared on all fronts, from manufacturing to lining up distribution channels.

Widening the lens once more, we could imagine other important uses for this type of granular geographic data. Given how the three sectors we looked at are behaving in a similar way, can we use the data

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to find signs that different geographies are emerging from the recession at different rates? And how might this affect not only distribution across all these retail sectors, but the spectrum of goods offered, and even pricing?

What other data, apart from local employment figures, could be used to determine how sales will recover geographically? Those regions that show a pickup in sales are regaining greater consumer confidence. Might that indicate an opportunity to add distribution warehouses for ecommerce channels to better deliver in that geography?

The economy is slowly building momentum, enough for retailers to be able to gain from the rising tide, if they understand where it’s rising fastest. We think that if retailers begin to use spending data to make better informed, more timely decisions, it will help bring improvement, particularly in still-troubled sectors such as furniture.

Andrew Mantis leads the MasterCard Advisors Information Solutions Merchant practice. He can be reached at Andrew_ Mantis@mastercard.com

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From Profit Center to Competitive Mandate: Shifting Your Shipping Strategy By Al Sambar and Graham Poliner Although the rush of consumers shopping online shows no signs of slowing, with an increase of 15% during the 2011 holiday season alone, many retailers’ shipping strategies haven’t kept pace.

A December survey of 8,000 U.S. consumers revealed that 86% thought free shipping was important or very important when shopping online.

And retailers responded — 93% of retailers said they offered free shipping at some point during the 2011 holiday season, according to the National Retail Federation.

No longer just impacting a standalone profit center, shipping pricing and policies have become potent and competitive tools to drive revenue and market basket size. Leading online retailers like Zappos and Amazon have stretched the use of shipping and returns policies well

will only increase, how should a retailer think about profitability related to shipping?

Since shipping is now a marketing strategy, we should evaluate it on its ability to support the brand and improve sales. An effective modern shipping strategy may not stand alone as a profitable offering, but should increase revenues and profitability by driving changes in customer behavior. Similar to other marketing initiatives, a successful shipping strategy should increase basket size, conversion rate and purchase frequency, among other metrics.

Consider taking a page from the book of Tony Hsieh, CEO of Zappos.

In a recent article in Harvard Business Review, he laid out his view that while shipping alone may not always be profitable, it should spur long-term sales and customer loyalty.

Since shipping is now a marketing strategy, we should evaluate it on its ability to support the brand and improve sales. An effective modern shipping strategy may not stand alone as a profitable offering, but should increase revenues and profitability by driving changes in customer behavior. beyond the seasonal promotional spur to become a core component of their brand’s value proposition.

Consider the implications. The question is no longer “How much does this policy or promotion cost?” but rather “How does it support the brand and drive sales?” Given that consumer and competitive pressures to offer discounted or free shipping

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“In the United States we offer free shipping both ways to make transactions risk free and as easy as possible for our customers. A lot of them will order five different pairs of shoes and then send back the ones that don’t fit or that they simply don’t like—free of charge. The additional shipping costs are considerable for us, but we view them as a marketing expense.

We also offer a 365-day returns

policy for people who have trouble making up their minds. (Originally our returns policy was only 30 days, but we kept increasing it at the urging of our customers, who became more loyal as we lengthened the returns period.) Our returns run high—more than a third of our gross revenue—but we’ve learned that customers will buy more and be happier in the long run if we can remove most of the risk from shopping at Zappos.”

Here, then, are the four key considerations to guide the development of an effective shipping strategy: 1. Brand and customer attributes. The brand experience must transfer not only across channels, but through the entire purchasing and receiving process. In a Kurt Salmon study of 50 retailers’ online shopping and shipping processes, Saks set itself apart with high-quality custom gift-wrapping, ensuring the luxury experience carried over to receiving the product. But a brand targeting lower-income consumers may instead focus on keeping the consumer’s costs down. An order from Walmart. com may arrive without tissue paper or a fancy ribbon, but Walmart offers numerous ways for customers to receive the order quickly at no or low cost and with very little lead time.

2. Product attributes.

Shipping strategy will be impacted by the size, weight, value and margin of a retailer’s products, and by how much these attributes vary across a retailer’s assortment.

Consider the case of a specialty home improvement retailer. The retailer wanted to be seen as a one-stop shop for all things home improvement, but offering free or flat-rate shipping meant losing money on some products. To battle these losses, the retailer added a shipping charge

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Best Practices from Kurt Salmon

a retailer can test within budget and resource constraints, the better. Deciding which models to test depends on the four considerations above.

2. Layer in pricing for each model.

Best practices dictate testing several prices for each model and layering in a free shipping threshold for each.

3. Set parameters for how long the test will last and how much shipping profit will be at risk.

4. B egin testing each model and price combination across multiple customer segments and order or product types. The results of these multivariate tests will help illuminate which shipping strategies to keep and which to toss. Look for increases in new and returning customer visits, conversion rates, basket size and value, units per transaction, and purchase frequency.

These metrics will help determine the ROI of the new strategy and whether it is encouraging purchases without hitting the supply chain with unsustainable costs.

to oversized items, set a minimum price threshold for free shipping eligibility and identified a set of lowmargin SKUs for which home delivery would no longer be available.

3. Infrastructure. Promotions will cause spikes in Web traffic and sudden increases in required labor and supply chain capacity. Key features like in-store pick-up and two-way shipping also require additional infrastructure investments.

Of course, these infrastructure elements can be built, but a retailer’s current capabilities should be considered when deciding how quickly a given strategy can be implemented.

4. Strategy considerations. Is the retailer ahead

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or behind on revenue or margin targets? Does the retailer have too much or too little inventory available?

Is the retailer considering only direct channel sales when impacts on store lift should also be considered? These larger strategic questions will help guide the development of a shipping strategy that will help meet overall business objectives.

It’s also essential to test any new shipping strategy as if it were a marketing or promotional campaign by following these steps: 1. D ecide which models to test (see accompanying illustration for an example with several models).

There are a virtually infinite number of options, and the more

In the example in the illustration, flat rate was the clear choice because it had the strongest impact on positive behavior, such as increased conversion rates and order sizes, while impacting shipping income less than the other models. In fact, for one Kurt Salmon client who followed this process, the flat rate shipping model had the potential to increase gross margin dollars by 2% to 5%.

Clearly, the right shipping strategy can not only increase customer loyalty and market share, it can actually pay for itself, and then some.

Together, Al Sambar and Graham Poliner have more than 30 years of experience advising retail industry leaders on their shipping strategies. They can be reached at al.sambar@kurtsalmon.com and graham.poliner@kurtsalmon.com.

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Eastward and Upward: Chinese Consumers Spend with Optimism and Open Wallets By Emily Thompson A study in contrasts, China is showing signs that its rapid economic expansion may be unsustainable, even as western companies continue to develop a presence there to woo a growing middle class.

Some on Wall Street are bearish on China, including Jim Chanos, who said in a recent CNBC “Squawk Box” interview, "If you looked at the performance of the banks over the last two years...

in IBTIMES. But China’s National Bureau of Statistics recently reported that the country’s GDP decelerated to 8.1% during the first three months of 2012, compared to the previous year, a figure that is lower than the 8.4% analysts had expected.

Yet these economic developments have not slowed expansion plans for many western companies.

From Levi’s to Louis Vuitton,

" Chinese consumers are economically optimistic, and their spending reflects that."

Kim Kitchings, VP, Corporate Strategy and Program Metrics

they have been great shorts. They have been going down — they're down 30 percent over the last two years."

The country has targeted economic growth of 7.5% in 2012, representing a decrease compared to recent years, according to a recent article

and from Proctor & Gamble to Starbucks, the last eighteen months has seen a veritable explosion in companies looking to gain a foothold in China, eager to attract its booming middle class.

Just as in the U.S., where “middle class” is an ambiguous term,

“middle class” in China also continues to defy classification.

Many analysts peg it as those making between $6,000 and $15,000 a year, which represents about 350 million households.

Based on international dollars, that figure is about one-third of the average spending power (GDP per capita) in the U.S. Chinese consumers are economically optimistic, and their spending reflects that. Nearly 8 out of 10 Chinese consumers (79%) say current economic conditions in their household are "very" or "fairly good." More than 7 out of 10 (71%) feel the same way about the country's economy.

And half are bullish on the global economy, according to the CCI and Cotton Incorporated Chinese Consumer Survey. Meanwhile, Euromonitor International predicts consumer expenditures on clothing in China will increase again in 2012, to $147 million compared to $139 million in 2011.

Compare that to the U.S., where just 31% of consumers described themselves as being “very or somewhat optimistic” about the U.S. economy, and a full 81% were “very or somewhat concerned” about a reduction in their annual household income Economic optimism and discretionary spending go hand in hand,” says Kim Kitchings, Vice President, Corporate Strategy and Program Metrics. “Eighty five percent of Chinese consumers say they plan to spend the same or more on clothing purchases

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Consumer Facts from Cotton Incorporated Lifestyle Monitor

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in the next year, and just 15% say they will spend less.”

The Consumer Survey found Chinese consumers dedicate about 9% of their budgets to apparel and home textiles. Chinese consumers shop for apparel about once every four months, spending about $262 per capita annually on clothing for themselves. In this respect, they lag behind their Western peers in the U.S., where consumers shop for apparel twice a month in stores and once per month online, and spend about $638 annually.

However, the Chinese Consumer Survey also found 22% of shoppers are buying higher priced or higher-end apparel than they did 12 months ago, and those living in tier 3 regions are significantly more likely than those living in the other tiers (29% vs. 19%) to buy higher priced apparel.

“China is still very much a saving society, with the average consumer saving about 40% of his or her income every year,” Kitchings says. “But this may change in the coming years if wages continue to rise and consumers have more discretionary income – and a new willingness to spend it, too.”

Most (56%) cite “replacement” as the reason they purchase new clothing, while 55% do so due to “seasonal change,” and 32% to add new items to their wardrobes. Twenty five percent are attracted by promotions, and 18% cite a wish to “be trendy”.

Unsurprisingly, the percentage of those who purchase new clothing in an effort to be trendy increases

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as household income increases; just 9% of consumers making less than $308 per month, say they do, compared to 23% of consumers making $900 or more.

Most Chinese consumers shop for clothing at department stores (41%), followed by specialty shops (36%) and independent stores (30%), according to the Chinese Consumer Survey. Just 3% use the Internet, compared to the 27% of U.S. consumers who shop for clothing online and the 6% of U.S. consumers who purchase most of their clothing online, according to the Cotton Incorporated Lifestyle Monitor™ Survey. But Internet access is a significant obstacle; roughly 34% of the Chinese population had access in 2010, according to World Bank data, compared to 80% of the U.S. population.

“As access to the Internet becomes as ubiquitous in China as it is here

in the U.S., I think we will start to see purchasing behavior shift online, too,” Kitchings says.

Despite questions about the country’s ability to sustain its economic growth, China’s citizens still embrace a healthy optimism and a willingness to spend – and those brands and retailers able to capitalize on that will reap significant rewards.

Emily Thompson is the Associate Director, Editorial at Cotton Incorporated, the research and marketing company representing upland cotton.

For more information on the Lifestyle TM Monitor Survey, please contact her at ethompson@cottoninc.com.

The data found in this article, as well as additional relevant information, can be found at Cotton LifestyleMonitor.com.

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The Battle for the Bottom of Home Bottom feeders. It’s not a very pretty description for anybody, much less any company. It does not have a particularly admirable image.

But let me ask you: Have you ever seen a thin catfish?

Feeding on the bottom of a market segment like home furnishings turns out to be a very admirable strategy indeed if one considers the retailers who are trolling around on the underside of the business.

We all know about the luxury market and how retailers like Bloomingdales and Neiman’s online are doing quite nicely catering to the well-to-do. We know the guys in the middle who are slugging it out for the sweet spot of the American consumer, stores like Macy’s and Kohl’s and Bed Bath & Beyond. And we’re quite familiar with the discounters who go for the serious volume in the land of Walmart and Target.

But there’s a level several fathoms deeper in the retail biosphere where the lights don’t shine as brightly and the merchandising isn’t quite as slick.

It’s the bottom, and right now it’s booming. Blame it, of course, to a large extent on the Great Recession which continues to wreak havoc with the consuming ability of the American shopper. All of those anecdotal stories about customers lining up at stores at 12:01 a.m. on the day their unemployment or welfare checks clear are not just urban legend.

So, let’s take a look at the landscape (waterscape?) and see who’s there: The retail darlings of the Great Recession have, of course, been the dollar stores. Dollar General and

By Warren Shoulberg

Family Dollar are the big hitters in that category, and there seems to be an endless supply of dollar wannabes out there. These stores have put a big hurt on Walmart the past few years, to the point that internally the boys in Bentonville finally stopped trying to be Target and have now became borderline obsessed with the dollar dudes.

The dollar stores have certainly gained share and their challenge now, as the economy creeps back, is to try to hold on to those new customers. But the vehicle they’ve chosen to do that is the field of consumables: convenience store-type food, health and beauty aids, and paper goods.

So, down in dollarland, home is a factor but it’s not growing.

TJX is another story all together. With its flagship TJ Maxx and Marshalls units starting to – excuse the expression – max out as they each approach 1,000 locations, look for the company to start paying more attention to its Home Goods division. With only about 350 units, Home Goods is poised to get more than its share of Cap Ex expansion funding. Lord knows there’s enough available suitable retail real estate out there to put a Home Goods store in every strip mall in America, but I don’t think they’ll go that far.

But they are a comer and are going to continue to gain share out there. They are increasingly stocking their stores with in-line, reorderable merchandise, a fact most shoppers are ignorant of.

There’s a famous old story in the textile business about the glory days of Royal Velvet bath towels when every department store in America carried the line and twice a year they ran “IR” sales for what were then called Irregulars. They moved so many towels during those sales periods that it became clear to anyone who was paying attention that these couldn’t possibly be all seconds. If the Royal Velvet mills made that many irregulars, the entire manufacturing staff, not to mention the QC guys, would have been fired.

The off-pricers like Home Goods and Ross and Tuesday Morning have too big an appetite to subsist on just seconds, cancelled orders and overruns. Even if the consumer comes to ultimately believe that, it won’t much matter.

But there’s a level several fathoms deeper in the retail biosphere where the lights don’t shine as brightly and the merchandising isn’t quite as slick. It’s the bottom, and right now it’s booming.

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She loves this shopping channel and everyone knows it takes a bottom-feeding shopper to truly appreciate a bottom-feeding retailer.

Chances are you know all about the TJX business model but there are some sleepers amongst the bottom feeders too. Ever hear of Christmas Tree Shops? No, not the places that open up in November in converted outdoor furniture stores and then disappear as soon as the tinsel wears out. And no, not the ornament shoppes you see in tourist locations from Cape Cod to Carmel.

Christmas Tree Shops is one of the three legs of the Bed Bath & Beyond expansion strategy, along with Buy Buy Baby and Harmon Beauty/Face Values. With some 65 stores, it flies largely under the radar, one suspects even on the BBB balance sheet.

And it is cursed with one of the least appropriate, most misleading and downright dumb names of any retailer in America.

That said, if you’ve never been to a Christmas Tree Shops store, run there, don’t walk. Don’t worry about when you go. They are open year-round and chances are you’ll find one not too far from the Bed Bath mother ship. Once inside you’ll be greeted with a 30,000 or 40,000-square-foot merchandising monster that is a cross between a Home Goods, maybe a Garden Ridge and, a Bed Bath & Beyond. A person could bottom feed here for days and not get beyond aisle three.

But if you think Christmas Tree Shops is under most radars, there’s one more bottom feeder in the home business that puts it to shame. Allow me to introduce you to Anna’s Linens, the biggest little store you never heard of.

Spawned on the other side of the tracks in Orange County, California –not the blue-blood-moneyed-golfplaying crowd – and named after the founder’s mother, Anna’s Linens saw Bed Bath’s total domination of the

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home superstore space and decided that less was more.

It started opening 8,000 to 10,000-square-foot stores in second-rate strip centers and loaded them up with closeouts, opening price point products and the dregs of the home textiles world.

It also figured out a basic tenet of home furnishings mathematics: Homes have more windows than they do beds. With an emphasis on curtains, the store became the go-to location for lower income shoppers, many of them Latino, trying to put a little pop in their low-rent homes.

Today, Anna’s has 300 stores from coast-to-coast with just the Northeast and some far north regions yet to conquer. With annual sales approaching $400 million, it is the ultimate home furnishings bottom feeder. Look up the term in the dictionary – or Wikipedia more likely – and you’ll see a picture of smiling Alan Gladstone, Anna’s baby boy, who has made the worst of times the best of times for his company.

Anna’s is partially owned by private equity money but has talked about going public for years. Watch for that stock offering. It could be the best bargain Anna’s has ever put on sale.

So, the shopping seas of the country are well populated with bottom feeders. And there’s no shortage of bargainhunting shoppers either. Sooner or later, there will be some consolidation in the ranks of dollar stores and off-pricers, as there has been in every other retail channel of distribution.

But in the meantime, the battle for the bottom of the home business will go on. Unfortunately for America circa 2012, it still contains plenty of room for growth.

Warren Shoulberg is editorial director of several Sandow Media home furnishings business publications and is still working on his next book, Stupid Business.

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When “Like Us” Doesn’t Equal Buy From Us (and What to Do About It) By Tanya Shaw The longer answer requires you to understand your processes, personify your value proposition fully, and interface with customers in ways that they appreciate and prefer. The work is hard but it’s worth doing.

The following suggestions will assist you in moving your social media efforts from just a curious pursuit to build brand awareness or push out coupons to a powerful and useful sales tool.

Everyone wants to take advantage of the new marketing channel social media offers. The idea that we can drive sales to our storefront or website by being friendly, talking about ourselves, and engaging with our fans is an appealing and intoxicating one. We can offer some coupons, promote our specials and sales, and people will be flocking to our stores.

Give us a “thumbs up” on our Facebook fan page, a friendly tweet on Twitter, a share of our blog post, and we are bound for social media success, right?

Integrate your offline and online efforts

When you run a Facebook campaign, weave in a physical in-store action as part of the transaction. For example, billboards should direct viewers to a website offer instead of just showing a sexy picture with a logo. You can require a QR code scan or digital picture share from within your store to be posted to social media for entries into contests. You can set up location based check-ins that allow visitors to tell their online friends that they’re

at your store. Bridge the offline and online worlds to stimulate both in-store foot traffic and targeted and motivated web traffic.

Brand awareness isn’t enough anymore. You have to connect the dots between where a customer finds your original provocative message, all the way to the cash register, including the points in between. Do this by including both physical actions with online virtual ones.

Incorporate calls to action

One of the simplest ways to make your social media campaigns work is to ask for an action. Don’t let a single lead be wasted. Move beyond name and brand awareness to direct appeal marketing.

Be sure to direct the visitor to a relevant, tightly focused landing page based on the original promise, rather than dumping them into just the home page of your website. If a visitor follows a Facebook link to a place on your website that has nothing to do with

As it turns out, the answer is no.

You don’t have to spend much time on social media before you start to see the difference between a “like” on Facebook, for example, and an ultimate sale. The metrics can be tricky to track. The types of customers happy to like your page if you give them a free gift via a contest are not necessarily interested in actually buying your product. In the end, having more fans and followers does not guarantee increased sales.

There is no magic wand.

What does help increase sales from your social media campaigns?

The short answer is an integrated approach based on how your customers actually decide to buy.

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How can you make your content and website more sharable? Add social media social icons to your shopping cart pages so a single click allows your customers to tell their friends about your product. Add “share this” buttons to your email campaigns. Add your Facebook signup and friends summary to your website. Add a strong call to action asking them to share and you’ll get more people talking about you and recommending you.

Track Your Results

Brand awareness isn’t enough anymore. You have to connect the dots between where a customer finds your original provocative message, all the way to the cash register, including the points in between. Do this by including both physical actions with online virtual ones. the element that attracted their attention in the first place, they will resent you for it. Avoid that. Be sure to keep the conversation going from your social media to your landing page, and to your order page.

Develop a nurturance cycle

Many people use the Internet to research long before they are ready to buy. They will reach out to interact with you prior to actually wanting to purchase. Being available and helpful during this education phase allows you the opportunity to impress, delight, and close them when the time is right.

If you develop a nurturance cycle that supports this investigative learning process, potential shoppers will begin Issue Four 2012

to develop a loyalty. If they find what they need from you, they’re more likely to buy from you. Nurture your audience with permission-based text or email marketing, regular yet friendly follow-up, and consistent “touches” that check the progress of the customer toward a purchase. Pay attention and express a caring attitude.

Make it easy to share

Social media requires the ability for frictionless sharing. The more complicated it is for your customers to share their experience, share your specials, and share their opinions about your products, the less likely it is that they’ll share it. In social media, sharing is what it’s all about, so you have to make it easy.

Relying on anecdotal evidence is not sufficient to build a strong business case for social media. Use tracking links when creating social media blurbs. Implement Google analytics on all your web pages. Start A/B or multivariate testing for headlines and offers so you can confirm what is working and what is not. Use the information to derive insights that can inform you on what to change – what worked and what didn’t. Do more of what works.

Results take effort

If all of this is too technical, hire technical support or a social media consultant. There are also numerous options to gain training if you insist on doing it all yourself. Move beyond simply seeking numbers in your social media audience to focused campaigns that allow you to channel your audience and craft unique messages for each segment. That way, you can go from just being “liked” to also hearing your cash register ring.

To learn more about how to optimize your marketing, go to Me-Ality.com Tanya Shaw has spent her career providing strategic solutions to many aspects of "individuality" and "fit". As founder and President of Unique Solutions Design Ltd., she continues her innovative work through the design and application of Me-Ality by Unique Solutions, the oneof-a-kind technology that finds the perfect fit for individuals in all products by way of a 10-second scan that measures over 200,000 data points.

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By Robin Lewis

At the risk of appearing to lack humility, I feel I need to point out that my co-author Michael Dart and I predicted several years ago all of the transformational events happening in retailing today. If our book, The New Rules of Retail, had been a Grisham novel, I wouldn’t need to be writing this because most of you would have read it, and would now be saying to yourselves: “…. Wow, those guys were telling us years ago that this stuff was going to happen.” More importantly, we told you why these things would happen. I say “more importantly” because most of the journalists covering these events don’t have a clue as to why they’re happening. For that matter, many retail executives don’t even know the deep strategic reasons why they’re doing what they’re doing. They’re simply reacting to market or competitive changes, not proactively capitalizing on and understanding their longer term, positive strategic advantages.

Just in the last few weeks, I’ve read the following articles In Ad Age: “Walmart to Marketers: ‘We Are an Experience Platform’” (The operative word here is “experience” – lo and behold, is Walmart becoming experiential?); and “Retailers Look to the Department Store for Salvation”, which describes early department stores as wonderful, experiential destinations for all day outings, complete with restaurants, music, special events, and more. Having had their share dominance stolen by the better experiences in specialty retailing and then by the Internet, the few traditional department stores remaining are realizing that they must now dust off the old model and create a compelling enough consumer experience so shoppers will once again make them a go-to destination. Of course, the new vision for JC Penney under new CEO Ron Johnson was exemplified in the article.

Then, guess what, the article goes on to say: “The idea of combining the ease of online shopping with the brickand-mortar experience isn't lost on pure internet players.

Giants such as Amazon, eBay, Google and LivingSocial are all looking into the potential of physical stores...Google is reportedly opening a store at its European headquarters in Dublin. Amazon may be looking into its first physical

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location in Seattle. During the holiday season, eBay rolled out pop-ups in New York, San Francisco and London. And LivingSocial recently opened a 28,000-sq. ft. store that includes a test kitchen for classes, space for dance studios and craft workshops, and a bar suitable for mixology classes or tastings.”

If this is not a “we told you so” moment, nothing is. Not only did we nail this whole transformation in our book, actually declaring that if department stores did not get back to being great experiences they would disappear, I have written several articles since then, in several different issues of The Robin Report, the very same point from many different perspectives. I also covered Ron Johnson’s grand unveiling of his futuristic vision for JC Penney in “CEO Ron Johnson’s JC Penney Vision: Brilliant, Doable and a Game-Changer.”

A recent Robin Report feature article: “The Jobsian Era is Upon Us: The Art and Science of Retail Converge,” was also the topic of a seminar I developed and presented which not only emphasized the necessity for brick and mortar retailers to create overwhelming experiences (the “art”) but, ironically, held that many new technology tools, including the Internet (the “science”), could actually enhance the experience. Apple, of course, is the quintessential example of the convergence of the art and science of retailing, thus the term “Jobsian Era.”

However, I took all of it a step further into what I believe is a profound strategic observation, upon which all brick and mortar retailers should jump. And, I opened the seminar by making the point. Essentially, all of the noise over the past few years about how the Internet could eventually reduce brick and mortar retailing to minority shareholder will likely end up being just that: “noise.” I say this because the brick and mortar guys should understand, if they do not already, that their business model has an enormous competitive advantage over the e-commerce pure players like Amazon because not only do they compete on the Internet, they also own the brick and mortar playing field.

They therefore can create wonderful, real world, physical fun and exciting experiences that the online stores simply www.TheRobinReport.com

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cannot replicate. In an ironic twist, the online customer might very well do her “showrooming” or “preshopping” online and go to the store to buy the item, compelled by the experience.

Then, right on the heels of that profundity (if you’ll pardon my modesty), I mentioned another prediction from our book, saying that because the online pure players like Amazon cannot create the experience, they will open brick and mortar stores or showrooms or whatever they wish to call them.

And, as previously noted by the perceptive Ad Age journalist:“Amazon, eBay, Google and LivingSocial are all looking into the potential of physical stores.”

Another Ad Age article, about the small store strategy of Walmart, Target and Kohl’s, could have come right out of our book, too. Why is this small store strategy necessary?

Because of a term we coined as one of the “New Rules”: Preemptive Distribution, using all possible distribution platforms, online and offline, to achieve access to consumers first, faster, more often, and ahead of equally compelling competitors in “share wars.” We also included in this definition of distribution, small, neighborhood, off-mall store strategies, mentioning the above three retailers and many more. This topic was also discussed in a recent feature in The Robin Report: “Size Matters: Small is In.” In fact, back in 2003 I first discussed the fact that Kohl’s was a pioneer in placing their smaller footprint stores right across the street from where their time-starved working mom customers lived. Kohl’s became so adept at preemptive distribution, that they stole billions in growth from JC Penney, forcing the latter to launch its small store strategy.

Finally, another article, this time in WWD: “Kohl’s Opens New Format Stores” describes how Kohl’s will be opening yet again, smaller stores. So, having been the pioneer, Kohl’s is now into its next iteration of physically moving its brand closer to its customers, with enhanced experiences as well.

So that I won’t have to write another “we told you so” article, here are the 10 major predictions we make in the book: Amazon and other pure e-commerce players will open brick and mortar stores ll of e-commerce will develop online “experiences” A vs. being only convenience- and price- driven

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Traditional department stores, discounters and big box stores will become enclosed “mini-malls” Big stores will accelerate their small “neighborhood” store strategies 70-80% of the brands in major retailers will be private or exclusive brands.

70-80% of major wholesale brands will forward integrate forward to become retailers Major wholesale and retail brands will accelerate their international expansion – particularly in China Major Chinese manufacturers and financial entities will aggressively pursue the acquisition of American brands, including retail brands/nameplates The traditional retail/wholesale business model will collapse 5 0% of brands and retailers that exist today will disappear in the next five years Furthermore, following are the three imperative “New Rules” that are driving the above predictions and that retailers will have to follow if they want to survive: • Neurological Connectivity: creating an addictive, irresistible shopping experience, from anticipation, through the actual shopping experience, to consumption satisfaction

• Preemptive Distribution: using all possible distribution platforms, both online and offline to achieve access to consumers first, faster, and more often, ahead of equally compelling competitors in “share wars.”

• Value Chain Control: vertically integrating control of a the retailer’s entire value chain, from creation all the way through to point of sale, for maximum delivery of the right product, brand or service, at the right place, price and time and within a great shopping experience.

Acknowledging the fact that this article was a major horn tooter, I want to point out that, tooting aside, it’s great to see the industry transforming in so many positive ways. It’s even greater that all of it benefits the consumer.

I guess the only bad news is that with each new initiative, the competitive bar gets raised ever higher.

And with a final note of humility, we can be the greatest predictors in the world. However, real greatness is only found “on the ground,” in actually implementing those winning strategies.

My hat’s off to you – the great “transformers.”

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When is a Sale Really a Sale?

A Shopper’s Perspective By Jane Singer I am a sale shopper, taught at an early age by my mother and aunts to look for bargains.

We needed to get the most value and style for our relatively limited means, but I soon became drawn by the sport of it. Why pay more for what you want, when you can pay less?

I belong squarely in that segment of shoppers who do not want to pay full price for anything.

Fortunately, there are so many sale shopping options today that I can almost always get what I want for at least 50%, if not 75%, off the full retail price. Just googling “sale shopping” yields nearly 2 billion results - and that doesn’t even include eBay. When I came of age there were only a few ways to get a good bargain.

One was to wait for the semiannual department store sales. Yes, there were only two: one right after Christmas (and before retail inventory season), and the other after Easter or Mother’s Day. If you had connections, you could also try to “get it wholesale.” That meant if an item cost $75.00 you could get it for $37.50.

Occasionally, if your connections to the manufacturer were particularly good, or, if you were a sample size, you might get the item for the wholesaler’s cost which would be about $18.75, or 75% less than full price.

There were also manufacturer’s outlet stores. These were ‘real’ outlet stores, filled with goods that were actually manufacturer overruns or mistakes, not outlet stores filled with merchandise made exclusively for outlet stores.

There were also off-pricers like Loehmann’s, the cathedral of deals in the Bronx, with its legendary community dressing rooms where you could buy a Bill Blass or

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Calvin Klein (when those were actual designer clothes, not licensed brands) for about one third the retail price. And, there was the original Filene’s Basement located in downtown Boston. I can remember the excitement I felt when I made my first trip there.

Retailing, manufacturing and pricing have changed dramatically since I learned to shop in the late 70s and early 80s, but the inherent customer behavior, quest for value, and ability to get more for less have not. And now, customers have been trained by retailers to expect value and sale prices every day, and to shop accordingly. Consumers today range from the most predatory sale shoppers who insist on a bargain to those who may sacrifice some savings for more convenience, prestige or other variables. There are also many more retail choices for consumers.

Too many options in fact, allowing consumers to buy whatever they want for the price they want to pay. Every retail channel - whether department store, warehouse clubs and every one in between, has its own pricing and promotional strategy, and customers know what it is. It is no surprise that Costco and TJX are among the best performing retailers today. They are purveying the perception of a better deal for their customers and delivering it consistently.

Despite the economic recovery, many consumers remain financially pressed. Job growth is sluggish, housing prices are depressed, and

many non-discretionary items like food and energy are relatively expensive. A recent consumer survey described in Women’s Wear Daily indicated that 75% of women said “it’s important to get the lowest price on everything,” 68% “regularly use coupons,” 45% “only buy on sale,” and 43% “search online for discounts” before they shop.

With a couple of notable exceptions, retailers are promoting more regularly than ever and have trained customers to buy on sale or to use coupons and other promotions to get the price they want to pay. It’s like retail heroin.

The weekly circular is like crack cocaine. Both retailers and customers are addicted to the process.

How can this situation be changed?

Or, more importantly, should it? And, what are the consequences of trying to change the situation, as JCPenney has done recently?

Retailing goes back at least to the 5th Century B.C.E. when the agora, in ancient Greece, was the gathering place or assembly. It was also the marketplace, where merchants kept stalls to sell their goods. The agora serves a basic need. People need stuff. But the agora also serves a deeper human need for community.

From earliest times there were buyers and sellers who congregated in the agora and negotiated a fair price for goods. Commerce, buying, selling, trading – all are basic human activities. Perhaps eBay is the largest agora ever. Anyone anywhere can buy or sell pretty much anything they want in this cyber agora, and, with a few clicks of the mouse negotiate the price they want to pay to effect the transaction. Is getting the lowest possible price an inherent aspect of the behavior or essential to the transaction? Not necessarily.

But, the expectation of a fair exchange between the buyer and the seller is. The seller wants to

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earn a fair profit from her end of the transaction. The buyer wants to pay the price that she believes the product is worth to her. The value proposition is fluid based on the customer’s expectation of value for every given transaction. The more choices the customer has, the greater the price elasticity for every purchase.

Now Penney has come along and wants to trade its previously heavily promoted sale strategy for a new ‘fair and square’ pricing model that will purportedly bring better value to customers and hopefully better profits for Penney.

As if to underscore the rationality or the fairness of the pricing strategy, or, to make it seem simpler or sound cleaner, or, who knows why, Penney has dropped the 99 cent, or 99 dollar, price ending that almost all retailers use, whether consciously or subconsciously, to signal value, a bargain or a good deal. At Penney, items will now be priced at $10.00, not at $9.99. Note that Apple, the leader in sales per square foot among retailers, uses the 99 model:” Apple iPad from $399,” “Mac Book Air from $999”, iMac from $1199,” etc.

Tiffany, the retailer with the second highest sales per square foot, is one of the only major retailers whose prices are expressed in hundreds, fifties and, of course, thousands: $200, $250, $10,000. Costco is all about 99 pricing although savings “you save $200” are expressed zero digit numbers.

Now JCP, must reeducate the customer and explain the difference between its new pricing and promotional strategy and the old. Essentially Penney is conducting a retail intervention, a detoxification and rehabilitation from the previously mentioned retail heroin of weekly promotions to the new, clean ‘Fair and Square’ strategy.

Right now the customer is getting the news with an expensive, well produced and fairly entertaining advertising and publicity featuring Ellen DeGeneres. The next step will be to get the customer to change her behavior. Live clean, shop when she

Issue Four 2012

wants and find the price she wants whenever she goes to Penney.

Good luck. Well, there will be a catalogue every month featuring “deals on what you want now.” And my guess is there will be television ads supporting those deals. But, advertising, and no doubt it will be good advertising, will still have to be used to tell the customer what is going to be in the store. And it will have to get her to go there, instead of to another retailer where she can buy much of the same stuff, some of it deeply discounted, at Macy’s, TJ Maxx or countless other stores.

Time will tell how well the new JCP pricing and promotional strategy will work. Overall it is a multifaceted endeavor which includes new store prototypes and the promise of a more engaging shopping experience and some more exclusive merchandise.

Ron Johnson is changing the rules internally at Penney as well. Perhaps not as drastically as in 1987 when Penney left New York for Texas and stopped selling refrigerators, but a big leap nonetheless.

A friend who manages a large Wall Street fund and has followed retail over the course of a successful forty year career responded to my question

about his opinion of Penney’s new strategy: “I’d rather buy Kohl and short Penney. Customers like a sale.”

The question is not will the change in its promotional strategy work for JCP as it continues to evolve into a revitalized 21st Century retailer, but, will it work for the customer?

Will she begin to rely on Penney for her anytime/all the time needs and shop there more often? Will it become her favorite store, as Ron Johnson hopes? Or, will she continue to cherry pick competing shopping options for the best deal (either because she has to or wants to)?

Because for some customers, like me, buying on sale is in the genes. And it makes shopping so much more fun.

Jane Singer is a consumer product marketing consultant specializing in branding and marketing strategy.

She began her career at Grey Advertising, has held senior executive positions at BBDO, Bozell Worldwide, 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, Gold Toe, and others.

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Online-based grocery delivery thrives at last

By David Merrefield

all across the land, both in the West and the East. Each market was supported by a specially built and costly automated warehouse. Along the way, Webvan acquired Home Grocer in a stock swap with an astounding valuation of $1.2 billion.

In truth, it was more like a failing company swapping nearly worthless stock with another failing company with nearly worthless stock.

Operationally, Webvan guaranteed delivery times of a half-hour despite the fact that Webvan covered sparsely populated and far flung suburban areas. As if indulging in self-inflicted wounding, it offered extraordinarily generous free-product deals to consumers to generate trial.

Much of the attention in food retailing these days has been focused on electronic-based marketing such as mobile apps, mobile checkout, QR codes and iPad abilities of all sorts.

out happened when online grocer Webvan went out of business in 2001 after just a couple years of recklessly expanding and burning through $830 million of investors’ money.

That’s all justified, but the biggest action in electronic retailing is in a business sector that was once all but left for dead. That would be online-based grocery ordering and delivery. Right now, online merchants such as Fresh Direct, Peapod and others are doing well enough that they’ve become confident in their own futures and are splurging on costly geographic expansions.

Strangely enough, Fresh Direct, the online delivery service, now considered to be the nation’s most successful, was founded not long after the Webvan fiasco.

That stands in stark contrast to the fate that befell online grocery merchants several years ago. Back then, numerous conventional retailers and online-only retailers either drastically downsized or failed outright. The most spectacular flame-

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How did Fresh Direct manage to wrest success from those ashes?

Possibly the chief difference between Webvan and Fresh Direct can be seen as the space between hubris and prudence.

Webvan assumed that a never-ending flow of investor capital would be forthcoming, so it branched out from its San Francisco headquarters to nearly a dozen operating locales

In short, the cost of capital, product and operations simply couldn’t be covered by revenue production.

By contrast, Fresh Direct aimed for efficiency by starting in a densely populated urban area, New York City.

The initial market was Manhattan.

Backstage support was located across the East River in Queens, where warehousing costs were relatively low and Fresh Direct could move its delivery fleet to Manhattan across a nearby, toll-free bridge. Delivery trucks could be loaded with numerous orders and in many instances parked on a Manhattan street while deliveries were made to many residential or office buildings with-out moving the trucks again.

Fresh Direct was able to offer a two-hour delivery window with every expectation that such a goal could be met. Facilitating that was the fact that Manhattan apartment building doormen would receive

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Only after Fresh Direct had field-tested its methods did it start edging out to areas in nearby suburban New York, Long Island, New Jersey and Connecticut. deliveries if the consumer happened to be out during the delivery window.

Only after Fresh Direct had fieldtested its methods did it start edging out to areas in nearby suburban New York, Long Island, New Jersey and Connecticut.

That’s not the only form of expansion in store from Fresh Direct. It has acquired a 16-acre site in the Bronx on which it plans a new headquarters and a 500,000 sq. ft. distribution center. That is roughly twice the size of its Queens facility. Employment is expected to increase to 3,000 from the current 2,000. The facility is expected to open in 2015.

Fresh Direct’s capitalization is also growing. Startup capital came from several investment funds, but more recently Wm. Morrison Supermarkets of the United Kingdom acquired a 10 percent stake in Fresh Direct for about $52 million. It’s expected to seed workers into Fresh Direct to learn about grocery selling online. Morrison has also gone to school on the nonfood side of the business by means of its acquisition of kiddiecare.com, a baby-products retailer. Morrison is eager to learn the delivery business to better compete at home with rival Tesco, the U.K. supermarket operator credited with inventing internetbased shopping as early as 1984, leveraging off earlier successes

Issue Four 2012

with telephone ordering. Morrison intends to enter the home-delivery business in the U.K. next year.

Financial results for Fresh Direct and its rivals are difficult to ascertain since they are either privately held or units of publicly traded companies that don’t break out online results.

Many trade observers are of the opinion that Fresh Direct has been profitable for a couple of years, and that most or all of its rivals are doing fairly well, but haven’t yet achieved break-even.

Fresh Direct’s closest competitor has to be the Peapod online grocery delivery service. Peapod was founded in 1989 and in its early days partnered with several major supermarket chains, including Kroger and Safeway. That changed in 2001 when it was acquired by the Ahold supermarket chain of the Netherlands.

Ahold eventually jettisoned Peapod’s relationship with all supermarket banners but its own in this country, chiefly Stop & Shop and Giant.

Peapod’s current operating area is mostly in suburban areas of the Northeast and the Washington, D.C., region, but it recently entered portions of Manhattan, putting it in direct competition with Fresh Direct.

Peapod initially used affiliated retail stores as fulfillment centers. In time, it moved to dedicated centers,

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although some are attached to retail stores in a bid to increase efficiency.

Beyond that, many conventional supermarket operators have renewed their search for a means to offer neighborhood online-based deliveries or store-pickup services. For instance, Publix Super Markets, which abandoned online deliveries several years ago, has started a store pickup initiative to fulfill online orders.

Indeed, a majority of major supermarket chains offer online ordering and delivery services that they operate themselves. Many should be viewed as defensive postures, not as profit centers.

Walmart Stores, too, is experimenting with online ordering of groceries in an area of San Jose, California.

Finally, as if to sound a cautionary note, Amazon didn’t have much luck with its bid to join the burgeoning ranks of grocery-delivery services.

More than a year ago, Amazon introduced a van-based delivery service in Seattle dubbed “Amazon Tote.”

Although that would seem to dovetail nicely with Amazon’s successful experience in selling consumables online, and nationwide, Tote was discontinued in short order.

Nonetheless, the verdict is in: In one form or another, online retailing is back and here to stay.

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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Quotes to remember SOUNDS MORE LIKE YOGI BERRA

“The future is not what it used to be.” Paul Valery, poet A COUPLE RANDOM CHAPTERS FROM MY BOOK ON GOLF

Chapter 14 - How to relax when you are hitting Three off the Tee.

NO WONDER OUR WORLD SEEMS MORE LA-LA LAND THAN REAL

“ Men stumble over the truth from time to time, but most pick themselves up and hurry off as if nothing happened.”

Sir Winston Churchill

Chapter 16 - God and the meaning of The Birdie-To-Bogey Putt.

Chapter 12 - Why your spouse doesn't care that you birdied the 5th.

MARK TWAIN’S PUDD’NHEAD WILSON IS NO FOOL

“ If you put all your eggs in one basket, you better watch that basket.”

COO, Editor Judith A. Russell

Contributing Columnists David Merrefield Warren Shoulberg Jane Singer Russ Schaehrer

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