As December 31st, 2018 came and went, it brought to end another tough year for the retail sector. 16 national retail brands filed for bankruptcy in 2018, the fourth highest number in the past dozen years. Well known brands like Nine West and David’s Bridals, and a retailer that was founded 125 years ago in Sears, all filed for Chapter 11. And that’s coming off of a brutal 2017, which was the worst year for retail bankruptcies since the 2008 recession with 20 bankruptcies. It’s gotten so bad that there’s even a term for the recent current carnage in the retail sector, the Retail Apocalypse, first coined by The Atlantic in 2017.
But it wasn’t all negative news for retail. During the holiday shopping season from November 1st to December 24th, US shoppers spent more than $850 billion dollars, which was the best holiday shopping total in the past 6 years. Overall sales were up 6% year over year, with categories like apparel and home improvement showing even stronger growth. It was yet another sign of strong consumer confidence, as the consumer confidence index has grown 5x since its 2008 recession lows, and even hit an 18 year high in October.
Ironically, the consumer confidence graph looks strangely similar to the chart of retail brand bankruptcies by year. From 2012, both have climbed steadily hitting high watermarks over the past 2 years. So as consumers’ confidence in the economy is near record highs, and they are spending more on holiday shopping than we’ve seen in many years, retail brands are also going bankrupt at record rates.
How is that possible? You might immediately jump to the conclusion that ecommerce is to blame, and you wouldn’t be wrong. But it goes beyond that. While growing quickly, ecommerce is still only 10% of total US retail. This holiday season, overall brick-and-mortar sales actually grew 3.3%. Dollar General opened almost 1,000 new physical stores in 2018 alone. Ecommerce is eating the world, but there’s still also plenty of spending left to feed retail mouths offline.
The challenge for many existing retail brands is where that spend is being distributed. Consumers are eagerly spending money, but they are also choosing to buy different brands from different places (both online and offline) than year’s past. So while retail is going through a bumpy period, it’s not so much an apocalypse as it is a disruption as the consumers’ brand preferences are shifting in record numbers.
Retail is dying, but at the same time it is thriving. And this has happened many times before.
The circle of (brand) life
“First we dominate North America, then South America, then Europe and Asia.”
David Glass, Walmart
For multiple decades, one commerce giant in particular dominated the entire industry, causing an estimated 40% decline in the number of smaller competing retail businesses during that time. Guess who? Try Walmart, who in the 80s and 90s transformed (i.e. disrupted) retail with the introduction of the superstore. During that period, total retail square footage in this country grew 40% through new giant retail centers operated by Walmart, Target, and the like. Walmart alone added almost 3,000 new US stores over two decades.
But retail sales grew only 8% during that same period so the additional retail square footage was not supported by increased consumer spend; rather a shift in spend occurred from existing retailers to Walmart and the superstore operators. Studies have shown that when Walmart opened a superstore, revenue in surrounding retail businesses dropped 25% as customers took their spend to the shiny new megachain.
Brands were also deeply impacted by the superstores. Before the superstore, an average brand’s top 10 retail partners would account for about 30% of their business. But after the rise of superstores, the top 10 superstore retailer partners now controlled 80% of a brand’s revenue. Furthermore, brands responded by reallocating 60% of their marketing budget to the superstores in the form of “trade spending” (ex. buying ads in in-store circulars and merchandising displays), which increased their dependency on the superstores. Also at the same time the superstores were driving the majority of a brand’s revenue, they were also directly competing with them through their own private label products. An estimated 50% of Target’s products are private label, competing against branded products on the same shelves inside Target. The superstore giveth, and they also taketh.
What the superstore represented was effectively a new, dominant distribution channel that changed consumer behavior and reshaped the retail landscape. Sounds like the Internet right? Another retail apocalypse if you will, 25 years ago. And even that disruption caused by the superstore wasn’t an anomaly, rather it was part of a continuously repeating cycle.
Brands have always risen and fallen, been popular and then out of favor, started and then shut down, for a wide variety of reasons. But a primary reason for the continuous cycle of brand turnover is generational turnover. The US population clusters into large demographic groups, such as Baby Boomers and Gen Z. Each group eventually enters the workforce, accumulates buying power, and becomes the dominant consumer. And at that critical moment, they vote on brands with their dollars. To illustrate this cycle, see the chart below from my partner Mary Meeker’s Internet Trends Report.
It’s the circle of brand life. With each generational transition, a new crop of leading brands emerged that did a better job reflecting the sensibilities of their generation and servicing their needs, which allowed them to rise to popularity and win their loyalty. Many of these leading brands went on to eventually fall off as the next generation emerged with its own unique buying preferences. Rinse and repeat.
But while we’ve seen this movie before, this time around the showing has gotten particularly interesting.
Accelerating change in retail
“Every day I’m thinking about change.”
Miuccia Prada, Prada
50 years ago as Baby Boomers were asserting their purchasing power in the 60s, a shopper in that generation looking for clothes might go to JCPenny and buy a Towncraft shirt. Skip ahead 25 years and a Gen X’er in the 90s looking for clothes might go to Merry Go Round and buy a Z. Cavarrici shirt instead. In both cases, a demographic was voting with their dollars on a retailer and a brand for their generation. And in both cases, the factors influencing that vote were actually quite similar.
Putting aside our questionable fashion sense in the 90s (myself definitely included), there’s not much difference in the overall shopping experience of a Baby Boomer and a Gen X’er in the above examples. They both physically visited a multi-brand retail center (a department store, and a store in a shopping mall), and then purchased a brand through an impersonal interaction with a retailer. For these generations, winning the circle of brand life was determined mostly by cultural tastes mixed with effective marketing. There wasn’t any factor in the purchase decision that was truly differentiated and unique. JCPenny versus Merry Go Round, and Towncraft versus Z. Cavarrici were shopping battles made between retailers / brands that were more similar than different.
Compare that with today’s Millennial shopper who might buy a Hawker Rye shirt from Stitch Fix. Suddenly, it’s not just the marketing that’s changed, rather the entire shopping experience is different. Shopping is done anywhere at any time, with limitless brand options, curated by a retailer who knows and tracks your every interaction and then personalizes their product selection for you. Ecommerce is certainly a big part of this change, but it goes beyond that to using new technology, new platforms, and new data to create differentiation both online and offline that digitally fluent Millennial and Gen Z shoppers can recognize immediately.
The brand battle, the JCPenny versus Stitch Fix, is now a vote between retailers that are more different than similar. And this wide distinction in user experience between a legacy brand like JCPenny versus a new brand like Stitchfix is what’s causing record numbers of brand and retail bankruptcies these days. The circle of brand life is cycling faster than ever before and leaving more brand turmoil in its wake because of the new experiences that technology has made possible. And when there’s a clear difference between brand experiences, there’ll be more brand changes as shoppers have more reasons to pick a different winner.
How brands are winning
“For us, our most important stakeholder is not our stockholders, it is our customers. We’re in business to serve the needs and desires of our core customer base.”
John Mackey, Whole Foods
The current circle of brand life has generated more casualties than ever before, but also created tremendous opportunity in the process. As each incumbent brand falters, there’s now an opening for a new brand to take its place as an industry leader. After all, the circle brings about both brand death and brand life. When determining which new brands will be successful, there are a number of winning formulas at work. But two strategies in particular have allowed many new brands to differentiate themselves and better serve the needs of their customers:
- Differentiated Specialization
- Differentiated Data
There has always been specialization in the retail industry with brands and retailers often concentrating on specific categories like pet supplies (Purina and PetSmart), sporting goods (Under Armour and Dick’s), cosmetics (Covergirl and Sephora), etc. But leading new brands have taken the concept of specialization and made it, well, even more specialized. For example, incumbent brand Gillette specializes in shaving products with a selection of 19 different razors, while new brand Harry’s specializes in the same category but with only 2 different razors. Incumbent shoe brand Converse specializes in casual shoes with 146 different styles, while new brand Allbirds specializes in the same category with just 4 different styles.
New brands are also specializing their distribution. For example, both incumbent brand Estée Lauder and new brand Glossier specialize in beauty products. But whereas Estée Lauder products are available to purchase everywhere from Safeway to Bloomingdales to Amazon, Glossier products are only available from its own website. Similarly, incumbent mattress brand Sealy has hundreds of retail partnerships, while new brand Casper has only 3 retail partners.
Specialization itself doesn’t matter to shoppers, but what shoppers benefit from with specialization is a shopping experience that’s more customized, optimized, and tailored for their needs. By focusing their product catalog and distribution channels, Harry’s, Allbirds, Glossier, and Casper have created best-in-class shopping experiences for purchasing razors, shoes, makeup, and mattresses. Shopping experiences that are custom, deliberate, and better for their specific type of product than their incumbent competitors. That’s why Allbirds has a net promoter score (NPS) of over 80, when incumbent shoe companies are at 30 NPS.
It goes to show that when you have less to do, you can do those few things better for your customers.
Since 2017, more than half of the products purchased on Amazon, over $100 billion of gross merchandise value, are sold through third party marketplace sellers. There are now more than a million businesses selling products on Amazon, many of whom are resellers of other people’s products but also many whom are direct private label sellers. Here are the top 4 best selling private label Amazon marketplace sellers in the United States (i.e. they create and sell their own branded products):
What’s particularly interesting about these four brands is that they are all Chinese companies. So how have 4 Chinese brands become the most successful private labels on Amazon in the US? By having a superior understanding of data, in this case Amazon’s ratings and reviews.
I met with the President of Anker back in 2017 and he explained how Amazon’s ratings and reviews system has transformed retail by bringing complete visibility and transparency into the customer satisfaction of every product. You can now quantify exactly how shoppers evaluate your products and your competitors’ products, and compare those metrics on a normalized, apples-to-apples basis.
Anker is using these insights to choose what product categories to target (by identifying categories that lack popular products with high ratings) and what features to build (by searching through suggestions and feedback within customer reviews). They’ve even built automated systems to continuously evaluate all this data. As Anker CEO Steven Yang puts it: “Amazon reviews were really enormously helpful. [They] just come and come automatically.” In other words, the ratings and reviews system has become a statistically accurate, constant, real-time, digital focus group that the best brands use to understand and serve their customer more accurately than ever before.
By paying attention to data like product reviews and ratings, product forums and discussions, user profiles, and other increasingly public and transparent information, brands everywhere can go from trying to predict what US shoppers want, to focusing on the precise “needs and desires” they should serve. Case in point of 4 Chinese brands understanding US shoppers better than any of their US competitors.
Both differentiated specialization and differentiated data have helped create winning products, winning shopping experiences, and ultimately winning brands.
The circle keeps spinning
A few days ago on January 10th, it was announced that 12 former Toys “R” Us sites had been purchased for reuse. Toys “R” Us had shut down down all remaining stores last June after operating for nearly 70 years. These closed sites were purchased by a company that had recently gone public in 2015 and almost quadrupled its stock price since then. Was this some high flying tech startup? No, it was Ollie’s Bargain Outlet.
Ollie’s is a discount retailer that’s built an incredibly impressive business doing more than $1 billion in revenue and $100 million in profits across 300 stores that have all experienced 18 consecutive quarters of sales growth. Notably, they have zero ecommerce revenue — their website does not offer up even a single product to purchase online. But that didn’t stop Ollie from raising its revenue forecasts for this year and announce a plan to open more than 600 new stores in 2019. The industry may be talking about a retail apocalypse, but apparently Ollie’s not listening.
The circle of brand life keeps on spinning.