Welcome to 3-2-1nsight from Marketing Sciences.
We have had 5 new subscribers join since the last newsletter. Welcome, and thank you for subscribing. If you like what you’re reading, please continue sharing it with your friends or colleagues, as that’s the only way to grow this newsletter.
Continuing on the last post I continue to look at the retail space and its evolution. While the last post I focused on pop-ups, this post we look at how businesses are finally gaining clarity on what an omnichannel strategy looks like. For themselves, and potentially for the entire landscape. As the pandemic showcased that retail has changed and that there is a large enough market that can let both physical and online titans thrive, the next move in retail will be how each business adapts and runs its omnichannel playbook.
And as well, I feature a couple of great things I’ve read or started reading this week.
And as always, download my 130 slide consumer research deck looking at the future consumer in 2021, It’s a ton of primary research, and you can download it for free.
3 Stories
Amazon Plans to Open Large Retail Locations Akin to Department Stores - WSJ
Amazon is planning on opening new 30,000 square foot retail locations in Ohio and California. While 30,000 is smaller than the typical department store footage (100,000 square feet), this will be the biggest retail store that Amazon’s ever opened. So far, Amazon has smaller stores that prominently feature books, their cashier-less Go stores, and a few grocery market-type stores. Moving into physical retail at these sizes could mean trouble for Nordstroms or other retailers that have not figured out a winning omnichannel or eCommerce strategy. Still, stores like Target, Walmart, and Best Buy have long been expecting this move. Those retailers have competed with Amazon by using their stores as fulfillment centers for lots of their online orders, which makes it easier to create and maintain that direct customer relationship. Given a lot of the scrutiny that the EU has given Amazon, fining them $866M for what they’ve perceived as anticompetitive behavior, Amazon could point to these efforts to showcase and build a more compelling argument regarding its private-label offerings.
Macy's, Walmart, Target: The economy through retail's lens - Axios
Last week many retailers reported their Q2 earnings. The main themes were foot traffic for lots of retail is coming back despite the looming threat posed by the Delta Variant. High-traffic metro locations are still suffering because of the changing behavior regarding office work, and that revenue coming in from tourist travel hasn’t bounced back. Despite all those challenges, sales for all the established players are growing, and they believe it’ll continue to grow for the rest of 2021, despite a slowdown in consumer spending. As we close out Q4, there are many “known unknowns” and even more “unknown unknowns,” but the only certainty is that the businesses who plan to win the Holidays already have their inventory.
25% of U.S. malls are expected to shut within 5 years. Giving them a new life won't be easy - CNBC
While certain retailers have done an exceptional job during the pandemic, many others have not, and many of America’s malls are suffering from the direct impact of that. Before the pandemic, there were roughly 380 C- and D-rated malls that were going to close no matter what. The pandemic drove the same problems upstream as we see strong retailers like Brooks Brothers, Saks Fifth Ave, etc., not pay their rents due to the pandemic. The poor business models of those tenants have directly impacted mall owners across the country, making it harder to keep their spaces filled and attract the crowds and people needed to build healthy local and sustainable communities for those shops. It’s a vicious cycle, but the current retail transition as it grows from a single touchpoint experience to an omnichannel experience means we should expect to see more casualties.
2 Takeaways
The looming Delta is changing the physics of location for retail success
Location, location, location have been a familiar maxim for anyone working in the real estate field. For retail, it’s always been true, especially now as we expect to see 25% of US malls shut down over the next five years. Contrast that with A++ malls (the real estate industry gives grades to malls like report cards — A++ for top-tier malls), can still make $1,000 sales per square feet, and the Apple, Lululemon, and Shake Shack are gobbling up any leases available to those tiers of the mall. A good location meant that it naturally drove good foot traffic, which meant those malls could always lure the most in-demand brands. Poor locations meant less convenience, which meant less foot traffic and less desirable brands would occupy those spaces. It’s a tragic and vicious spiral, especially for the community (but that’s a story for a future newsletter). The pandemic even scarred the A malls, as most of them saw their values drop 45% compared to their 2016 values. Now that Amazon is planning to open large department stores across the country as it prepares to consume even more retail market share, other strong retailers are seeing the necessity to have both online and physical presence, the maxim of location, location, location, and location will change for retail. When you depend on physical transactions as your only source of revenue, prime location will always be the most significant variable for your potential success. Still, when you develop your proper omnichannel strategy, the location is less important than how you’re using your location. The future calculus for retail will evolve, and the future retail leaders will not root that calculus in location, but they will root it in function.
The buying experience or in-store service has always been the most significant differentiator.
The most unspoken portion of retails’ Q2 analysis wasn’t omnichannel’s impact but how the in-store experience made much of the success possible. Target expanded Q2 2021 comparable sales by 8.9% not because of just improved back of house operations, but because they could maintain and improve the in-store experience so that customers still shopped in-store, just in a new way. As Amazon considers expanding into physical retail, especially big-box retail, they will have to figure out their in-store service. How that experience can scale and reward the behavior, they’re trying to drive. JC Penny showcased what a bad big-box retail experience can look like, and their stock tanked in parallel to that experience over the years. When shopping at a big-box retailer with a bad in-store experience, you wish you could just find the item you need with a search box, the successful big-box retailers elevate your experience. You don’t shop in-store at Target the same way you shop on Amazon, but you have unique use cases when using both retailers. Currently, the Amazon brand doesn’t have a physical world reputation (its current physical brand is Alexa randomly turning off my lights, asking me odd questions as it overhears my conversation with my mom, or asking me if I want to call the police because my Ring sees the shadow of my elderly neighbor slowly climb up the stairs). Can a brand have a physical in-store experience without a physical reputation that will attract customers to choose them over a competitor? Time will tell, but most people don’t go to a big-box retailer to have a cashier-less experience and repeat the phrase “Alexa...no...Alex stop...NO THAT’S NOT WHAT I WANT.”
1nsight
As everyone says that eCommerce is the future of retail, leading businesses realize it's not about clicks. It’s about clicks and bricks.
Before the pandemic, the most common headline for any retail analysis was the phrase “retail-apocalypse” or my favorite “retailmageddon.” Then, during the pandemic, all retailers needed immediately needed to shift to online only. The seeds for online-only, or online priority, were sowed long before the pandemic and were the answer to “retailmageddon.” Stores like the Children’s Place foolishly took that to an extreme and, in eight years, closed 575 locations (300 of those closures came in the last 20 months). The leadership at Children’s Place said all the right things before the pandemic, stating that their goal was to derive 50% of its sales from e-commerce (which is the wrong thing to focus on, as you should always focus on growing sales first rather than the makeup of your revenue). So while Children’s Place is making progress towards that 50% digital revenue number, it came at the cost of losing 70% of total sales.
Focusing on digital should and will grow your profitability, unless if your eCommerce sales strategy is overreliant on Amazon, Facebook, and Google (which is why it’s a safe bet to always have shares in those companies), then any profit is going straight to those respective company’s ad revenue. But often, focusing on just digital means two things, you will have to be more reliant on Facebook, Google, or whatever new trendy digital ad platform pops up next, and that you’ll always have extensive periods with limited reach. Fighting for mind share and relevance when the TikTok algorithm gives you better interpretive dance pimple popping videos, Ted Sarandos wants you to watch The Rock in their new Netflix holiday special, a CNN alert that a former nameless confident of a former president was just indicted for some egregious crime, and dozens of WhatsApp notifications that keep popping up, is a losing battle. Getting your customer’s attention because you’re near their dispensary or grocery store is a lot easier.
As the world gets some semblance of normalcy, two permanent changes have occurred; everyone is buying more online now, and consumers love omnichannel experiences. Target grew its omnichannel revenue grew by an extra 55% despite increasing 270% last year. That additional revenue works in tandem with its growth in digital as we saw Target grow its digital penetration 138% since 2019. The TAM for retail is so large that even though Target grew 138%, Amazon can still have 40% of all eCommerce market share, and a strong collective of big-box retailers and Amazon see record profits.
The pandemic has squashed the zero-sum framework that so many pundits have placed on retail regarding eCommerce. Growing eCommerce habits doesn’t mean that Amazon has beaten Target, Walmart, Best Buy, or Macy’s. Instead, it just means that Big Box retailers finally gained enough confidence and are fighting back. The future narrative of retail isn’t about clicks. It’s about clicks and bricks.
Other Reads
This week I love this new piece from up-and-coming food writer Michael Miller (check out his Substack and excellent podcasts), titled Can a Cookbook Change your Life?
Keeping in theme with this newsletter, I also found this piece from Gad Allon titled The Case Against Self-Checkouts, an Ops professor at Wharton who always writes outstanding commentary on business.
Finally, I devoured this profile from Greg Bishop over at SI, looking at Dak Prescott and all the adversity he’s faced.