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    The New Rules of Retail: Competing in the World's Toughest Marketplace
    The New Rules of Retail: Competing in the World's Toughest Marketplace
    The New Rules of Retail: Competing in the World's Toughest Marketplace
    Ebook364 pages7 hours

    The New Rules of Retail: Competing in the World's Toughest Marketplace

    By Robin Lewis and Michael Dart

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    About this ebook

    In The New Rules of Retail, industry gurus Robin Lewis and Michael Dart explained how unprecedented consumer power, enabled by technology and globalization, is revolutionizing retail. They warned that survival in these dynamic times called for a business model based on three distinct competencies: preemptive, perpetual distribution; a neurological customer connection; and total control of the value chain. In the years since that book published, many of their predictions have come true. Now, they revisit timeless case studies like Ralph Lauren and Sears, as well as new additions like Trader Joe's, Lululemon, and Warby Parker, to assess how retailers must continue to evolve in the era of e-commerce, data mining, and tiered distribution. They also identify the five current trends that are currently driving consumer demand, including technology integration and channel consolidation, as exemplified by Jeff Bezos at Amazon. This is a fully revised and updated guide from two proven retail prognosticators.
    LanguageEnglish
    PublisherMacmillan Publishers
    Release dateAug 12, 2014
    ISBN9781137480897
    The New Rules of Retail: Competing in the World's Toughest Marketplace
    Author

    Robin Lewis

    Robin Lewis is the CEO of THE ROBIN REPORT, a knowledge-based, multi-media strategic report for C-level executives in the retail industry. He was the founder of the Goldman Sachs retail consulting subsidiary, Vantage Marketplace, which provides clients with strategic information and consulting on all sectors of retailing worldwide. Prior to Goldman Sachs, he was Vice President and Executive Editor of Women's Wear Daily, where he originated and led Fairchild's Strategic Information Services and the WWD CEO Summit series. He has consulted for Kohl’s, Bloomingdale’s, JC Penney, Macy’s, Liz Claiborne, Estee Lauder, Ralph Lauren, Sara Lee, and financial firms such as Bear Stearns and The Carlyle Group. He serves on the Board of Governors for the Fashion Institute of Technology, the Board of Directors for the Fashion Group International.

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      Book preview

      The New Rules of Retail - Robin Lewis

      Prologue

      In Search of the Future

      The Past Is Not Prologue

      On the morning of January 25, 2012, in an event that felt like a cross between a Fashion Week extravaganza and one of Apple’s famous product launches, JCPenney’s newly appointed CEO, Ron Johnson, took the stage at New York’s Pier 57. More than seven hundred industry executives, designers, merchandisers, members of the media and other luminaries had assembled there to hear Johnson lay out his plans to reinvigorate the venerable retailer.

      It was a potentially Woodstock-like defining moment for a new era of retailing, with Johnson as JCPenney’s Jimi Hendrix. Everyone present felt that they were part of something groundbreaking. Years from now, they’d be able to say, I was there.

      Crisply, clearly and logically, Johnson explained how he and his team were going to completely transform the department store into America’s favorite store, period.

      He recalled how, back in the 1960s, department stores had it all. Using the Dayton-Hudson department store as an example of an unbelievable experience, he described how families would spend the entire day shopping, dining and enjoying fashion shows and other festivities. He then recounted the share loss of the department-store sector as a whole over the past twenty years—much of it to specialty stores, because consumers prefer those brands and the experience over what he referred to as tired stores, stale presentations, not the newest products and zero integrity in pricing.

      He continued: Department stores have all the competitive advantages: low real estate, big marketing budgets, lots of space, before concluding, Something is fundamentally wrong here. Another comment was a lead-in to one of his transformative strategies: In an Internet age where you can have exactly what you want with one keyword, people won’t tolerate big stores. You have to break it down for them. When we want a great product today, we go to a specialty store like J. Crew or H&M.

      Johnson’s plan was to transform about seven hundred of Penney’s eleven hundred stores into small, JCPenney-branded enclosed mini-malls. A new, architecturally modern layout would house what he called streets of branded boutiques or shops, with one hundred strong, modern brands, all in their own image—meaning JCP would be shedding about three hundred of the brands it then carried, as well as some of its own private-label brands. Johnson said, We want private brands, not private labels. Ironically, this new approach took much of its inspiration from the very stores that stole the department store’s thunder over the past thirty to forty years: the specialty chains.

      The most exciting and fun attraction in this new shopping extravaganza promised to be what Johnson called a Town Square, located in the center of the store. Here there would be events, fashion shows, eateries, cooking and other classes, a place of learning (Genius Bar, anyone?), music, videos, and so on. The surrounding streets, in addition to shops, would be scattered with seating, coffee stands, gelato stations, popcorn vendors and more. The whole JCPenney brand would be transformed into a compelling experience so consumers would come more often, stay longer and spend more. And more importantly, if successful, JCP would become a leading example of a neurologically connecting shopping experience so compelling that it would preempt consumers from buying online—by giving them a reason to come to the fun place called JCPenney.

      Penney’s new business model was intended to capture a different core consumer—young millennial families—which meant it would, by design, lose part of its current customer base, particularly lower-income and older customers. Additionally, the new concept would be applicable in only about seven hundred doors. However, in those doors it was projecting a productivity rate of $300 per square foot compared to their current rate of $120, and it would be poised for growth rather than slipping into maturity and decline, which had been the case upon Johnson’s arrival.

      Johnson, architect of the vaunted Apple retail stores, had big plans for technology in all its forms, not only for an omni-channel strategy but also for every aspect of JCP’s value chain, from sourcing to building to empowering salespeople.

      A final key part of his transformative strategy was to be a bold, revolutionary fair and square pricing model, designed to abruptly terminate all discounting. In Johnson’s opinion, fake prices were driving the consumer crazy in hundreds of different ways. The fundamental flaw of department stores is the pricing strategy, he said at one point. In the prior year, Penney had held 590 separate sales, while the average customer purchased only four times a year. So customers ignored us 99 percent of the time, he said. In their analysis, Penney found that on average, consumers were forcing prices back down to their pre-markup levels. Noting that about 75 percent of its products were selling at a 50 percent discount, Johnson said, I thought to myself, this is desperation.

      This led him to a three-pronged fair and square pricing strategy:

      (1) pricing all goods about 40 percent lower than where they currently start; (2) holding themed promotions twelve times a year, not 590; and (3) launching Best Price Fridays, promoting sales on the first and third Fridays of every month to clear slow movers.

      This grand vision, he declared with great confidence on that big stage in New York, would be initiated pretty much simultaneously, despite the barely recovering economy. He explained that simultaneous implementation was necessary because all the pieces were interconnected; if they were acted upon sequentially, it would be much more complex and possibly deleterious to achieving the whole vision. And, as evidenced by the very public disclosure of his entire strategy, there would be no quiet testing.

      Across the entire JCP enterprise, the transformation began on February 1, 2012.

      The first step was his revolutionary pricing strategy. Almost overnight, the company shut down all discounting, enacting the formula outlined above. And, indeed, a revolution it became. The first of thousands, maybe even millions, of JCPenney customers, who would ultimately represent billions of dollars in lost sales, walked out the door and never returned.

      Scarcely a year after his Steve Jobs–like big-stage launch presentation, after JCPenney’s sales had shrunk by more than $5 billion and earnings had plunged by almost $1 billion, Johnson was gone.

      What was to be the biggest transformation in the history of the industry became its biggest, fastest and most-discussed failure.

      There is nothing in retailing’s past that would serve as a prologue to this book and to the future of retail. We are entering what we call retailing’s Wave IV, in which its leaders, grappling with a new, fully birthed technology era, are attempting to address the enormous challenges it brings, hoping to turn them into equally immense opportunities. To borrow from the mantra of Amazon CEO Jeff Bezos, Wave IV is Day One of the future of retail. It is characterized by the explosive expansion and disruption of technologies and the Internet, with smartphones and millions of apps as its primary accelerants. It is a time of unprecedented competition, overcapacity, price deflation and uncertainty. And it is the era of the all-powerful consumer.

      It was during this time, the very beginning of Wave IV, that JCPenney attempted to massively and fundamentally transform itself. However, while most experts agreed at the time that Johnson’s vision was strategically transformative, its implementation was a cataclysmic failure.

      Johnson made the risky bet that consumers were ready to kick their bargain-addiction habit—cold turkey. Worse, he introduced the new pricing strategy before the great new brands or the fully redesigned and laid-out stores with all the wonderful envisioned experiences were even in place. Thus, even if consumers were inclined to swap deals for fair value, there was no new visible value in place for them to choose.

      This untested pricing initiative launched overnight was arguably the primary reason for the rapid collapse of the business, which JCPenney’s former CEO, Mike Ullman, is now trying to turn around.

      From our perspective, since The New Rules of Retail was first published in 2010, we could see and totally understand Ron Johnson’s vision for transforming the department-store business model. It aligned with the New Rules we laid out in that book. We discussed its similarity to what Selfridges department store had accomplished in London in the 1990s, and how the department stores in Wave I, called palaces of consumption, provided the same kind of experiences Johnson was pursuing.

      Today, as we observe the evolutionary (as opposed to revolutionary) transformation of Macy’s and its Bloomingdale’s division, as well as Nordstrom and a few other traditional department-store models in this book, we believe that these retail brands are actually achieving much of what Johnson had envisioned—but in a more methodical, strategically sensible way.

      In this more expansive and technology-inclusive revision of the book, we strongly advise that such transformations must take place in Wave IV across all retail sectors, and that the only way they can succeed is through our (now technologically enhanced) New Rules, by creating powerful neurologically connecting experiences—online, offline and on the move; preemptively distributing one’s value, digitally, physically and on multiple other platforms, 24/7; and totally controlling one’s value chain—the only way to achieve the first two Rules.

      We invite you to join us, then, as we charge forward into Wave IV, identifying the awe-inspiring technological enablers, enhancers and wholly new business concepts that are further empowering not only already-omnipotent consumers but retailers as well. We will take you from Johnson’s Day One well into the future, providing a view of what new strategies and business models will be required to delight the changing and totally empowered consumer. And while the Rules (neurologically connecting experiences, preemptive distribution and value-chain control) have not changed strategically since the release of our first edition in 2010, they have been immensely expanded upon, reflecting the full-on power of the digital age.

      It will quickly become obvious that nothing in retailing’s past provides an adequate prologue for the transformation businesses must now go through. And transform they must, or they will be no more.

      Welcome to the new New Rules of Retail, and enjoy the read.

      Part 1

      Defining The Four Waves of Retailing

      Chapter 1

      Wave I

      Producer Power

      The Emergence of Organized Retail

      In the late 1800s, the population of the United States was about 60 million, spread out across thirty-eight states, with 65 percent living on farms or in small towns. There were only a dozen or so cities with 200,000 or more residents, and yearly national income was about $10 billion. The Wild West was still wild, even as rail was being laid to follow the migrating population.

      Despite suffering from the Long Depression—not as deep as the Great Depression, but longer, stretching from 1873 to 1897—the country nevertheless generated enough capital to spawn the so-called Gilded Age (1865–1900), with its infamous industrialist tycoons (called robber barons by some) like Jay Gould, John D. Rockefeller, Leland Stanford, Andrew Carnegie and many others, who built our railroads, drilled and distributed our oil, made our steel, launched our banking system and built the foundations of our manufacturing infrastructure. America was just beginning to understand how to harness the use of electricity and new industrial processes to accelerate production in order to provide the growing population with the products and services it really needed.

      The phonograph, typewriter, telephone and electric light were introduced, and after Karl Benz’s invention of the first combustion-engine automobile in Germany in 1886, Henry Ford created the Model T Ford, ultimately replacing horse-drawn carriages. In 1913, Ford developed the concept of the assembly line, for which he was labeled the father of mass production. By the Roaring Twenties, Ford was selling hundreds of thousands of Model Ts, and still he couldn’t keep up with demand.

      Compare that to today, when every household has two or three cars in the driveway, yet the Big Three—General Motors, Ford and Chrysler—are not only cutting capacity but also fighting numerous global competitors for market share.

      Ford’s inability to keep up with demand in the 1920s occurred for several reasons. During the early years of Wave I in the mid-nineteenth century and well past the turn of the century, the period of vast industrialization, transportation and communications infrastructure-building was still in its infancy. There was limited access to goods and services because supply-side growth could not keep up with growing consumer demand. This was exacerbated by an embryonic and fragmented distribution structure and a continuously migrating population, both from east to west and from rural to urban areas. Moreover, even when there was sufficient supply, its distribution was at best uneven and inefficient, at worst

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