Recent remarks that the CEO of Sears made in defense of his company’s poor performance may appear to highlight an issue of physical vs. digital retail, but Sears’ problems — and those of similar chains — really come down to “old guard” vs. “new guard.” And brands of the latter category that can adapt are the ones that stand the best chance.
SHUTTERSTOCKLast week, Sears CEO Edward Lampert got personal as he went into detail about the retailer’s continuing woes and the challenges it (and many other “old-line” retailers like it) face in a rapidly changing industry.
Lampert’s statements may have been intended to downplay the consistently poor performance of the Sears brands, but instead it helped to shine a spotlight on the struggles that “old school” retailers are facing in an industry increasingly dominated by “new school” brands.
The disadvantages the Sears CEO’s brand has faced as it tries to compete with fast fashion, online retailers and an ever-growing sea of startup competitors help to articulate exactly why it is increasingly difficult for traditional retailers to stay competitive in today’s market.
Large retailers, like Sears and Kmart, are held to a separate set of standards than their eCommerce counterparts when it comes to collecting sales tax and paying above minimum wage to their large pool of in-store employees. Compare that, as a recent article by USA Today does, to online retailers who are often not held responsible for local sales tax collection and can outsource large portions of their support staff to other countries where minimum wage requirements don’t apply.
Add to that a new model for financing a retail business in which venture capitalists offer support well beyond the infancy of a brand … and the sum total may provide an explanation of sorts for Sears’ abysmal fourth quarter numbers. The chain, which operates both the Sears and Kmart brands, reported a loss of $580 million in the quarter ending Jan. 30, compared with a loss of $159 million in the same quarter a year ago, according to USA Today. As the article went on to note, most of the revenue decline was due to same-store sales falling, though some of it was attributed to fewer Sears and Kmart stores actually in operation compared to a year ago.
Meanwhile, startup style brands, like Birchbox and Nasty Gal, for example, are able to operate lean and pivot quickly to adjust to changing market and consumer behavior. Consumers don’t want to commit to a lipstick? Offer them a selection of three a month for a set-it-and-forget-it subscription fee and let the retailer simplify your beauty shopping routine. Add to that the fact that these new adversaries in the battle for shoppers’ spend don’t have decades of infrastructure, real estate, outdated technology systems and personnel to manage through changing seas.
When a new security protocol or piece of technology is introduced (like EMV), these early-stage businesses often have another advantage in that they don’t need to replace existing hardware but rather simply update cloud-based systems and take advantage of built-in options that may have already been present in recently purchased tech.
The changing behavior of increasingly important millennial consumers has also forced “old school” retailers like Sears to face new realities. For one, they aren’t shopping in malls, and they aren’t as interested in owning things. According to a new projection from National Retail Federation, retail sales are estimated to grow just 3.1 percent in 2016 as consumers shift their spending away from the mall and towards experiences. Meanwhile, what the NRF calls “non-store” sales, which includes eCommerce activity, will increase 6 percent to 9 percent in 2016.
Yet another element adding to retailers’ woes? The fact that recent decreases in gas prices and higher employment rates haven’t created much of a ripple effect in spending for traditional brick-and-mortar retailers. Consumers, according to a recent article from Bloomberg, have instead opted to spend their recently increasing discretionary income on experiences like travel and dining at restaurants.
Lampert and Sears are not the only ones feeling these woes. If store closings are any indication, the effects of this shift in consumer behavior and the retail business model have had wide-sweeping ramifications. This year alone, Walmart will close 154 U.S. stores. Macy’s will close 36; Sears will close 50. And that is in addition to other brands that have announced major closures in recent years — among them, JCPenney (39 stores closed last year), Macy’s (14 store closings), Gap (140 stores shuttered) and teen apparel brand Aeropostale (126 stores closed).
Is there a turnaround in sight for traditional brick-and-mortar retailers? That all depends.
The better question may be: Can the old guard adapt in time to find its footing in the new reality of retail?
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