Karen Webster

Are You Ready For 2015’s Retail Reinvention?

What does retail today have in common with retail in 1982?

Everything – and nothing all at the same time.

And if you want to know where it’s going, and what it means for you, here are some clues.

Starting with Jane Fonda.

Last week, Jane Fonda announced that she’d be releasing the digital version of her famous workout video series which debuted in 1982. The still very well-toned 77-year old actress/activist said that fans of her workout regime “begged” her to do this because their VHS tapes had either broken or, more likely – the VHS tape players needed to play them had long ago been tossed in the garbage heap. VHS tapes, for those of you who weren’t watching TV yet in 1982, are how the ancient human species known as Baby Boomers, and their Gen X kids, used to watch movies at home before there were DVDs and video streaming.

Fonda’s tapes are said to be, remarkably, the highest-grossing VHS videos of all time, which is pretty amazing since movie blockbuster, Jurassic Park, is No. 5 on that list. Hey, never underestimate the allure of big hair, disco music, legwarmers and the aspiration to look as good as Jane did in a leotard to sell 17 million VHS tapes.

Leg warmers, big hair and disco music weren’t the only things in vogue in 1982.

1982 was the start of a new bull market and a whole new area of consumerism. Madonna’s consumerism anthem, “Material Girl,” released in 1984, sort of captured the spirit of the time – “we are living in a material world, and I am a material girl."

Those material girls, as it turned out, also bought a lot of expensive designer fashions and jewelry in the ’80s. The really, really wealthy ones flew to New York or the French and Italian fashion capitals to do their shopping in luxury at the ateliers that bore the names of their very upscale fashion designers. The other 99.9 percent got their fashion fixes elsewhere. Ralph Lauren and Calvin Klein came of age in the 1980s, selling their clothes in their own boutiques and upscale department stores. Specialty retailers catering to an increasingly designer/fashion conscious young woman also emerged then: The Limited, BCBG, J. Crew, J.Jill, Tommy Hilfiger, Aeropostale, Guess and Express, to name a few.

All those brands took up residence in the shopping malls that were all the rage then, too. Forty-five new malls opened in 1982, and dozens more opened the year after that. In fact, according to PricewaterhouseCoopers, by the mid-1990s, 140 malls a year were being built. Consumers flocked to them to shop, to eat and to socialize. Michael Galinsky, who wrote a book about shopping malls in America described the 1980s mall as the “new public space, the new community center where people would interact."

And, speaking of shopping malls, bookseller Barnes & Noble bought the shopping mall based chain, B.Dalton in the 1980s as part of its ongoing physical store expansion to sell the hardcover books that Americans bought and read then.

1982 was also the year that Time Magazine named the computer the “man of the year.” By the end of the 1980s, there’d be 30 million personal computers in use. This technology and innovation inspired office superstores like Staples, Office Depot and Office Max and national direct PC hardware seller, Gateway, to come into being, as well. All you grey hairs out there might recall Gateway as the PC store chain that sold its own branded computers direct to consumers and shipped its products in boxes with cow logos on them.

The 1980s was also when the Wal-Mart Supercenter format debuted, and when fast food was on fire. QSR chains like Panera Bread, Five Guys and Hooters emerged and joined the 130,000 outlets that satisfied the consumers’ needs for cheap, decent food served with speed during that decade. Natural foods’ grocer, Whole Foods, also began its expansion in 1984 out of Austin where it had started four years earlier.

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On the music scene, Michael Jackson released his album, Thriller, in 1982. It sold 40 million copies, making it the most successful record in history. Two years later in 1984, Bruce Springsteen would release the first ever music CD in the U.S. (Born in the USA), setting up the music industry for massive revenues and profits as consumers rushed to trade in their vinyl records for CDs from their favorite artists.

Mobile phones in the 1980s were big, bulky and totally not ready for prime time. This little beauty, the Motorola DynaTac 8000x had a talk time of about 30 minutes and a recharging time of about 10 hours.

1982 was also the year that Jeff Bezos started his first year at Princeton University.

In 2015, 33 years later, the digital reprise of Jane Fonda’s workout tapes serves as a fitting analog for the disruption that’s forcing the reinvention of all aspects of retail as we know it today.

People, of course, like to start that conversation by talking about Amazon’s impact on just about everything that touches retail. About eight years before Amazon launched, Americans bought $19 million of books from around 4,000 independent bookstores and two major chains. Those stats were a big part of why Bezos launched Amazon as an online bookseller.

Amazon’s impact on physical booksellers is well-documented. Today, only one of those large book chains remains, Barnes & Noble, and it’s a shadow of its former self. There are 658 stores now (not counting its stores on college campuses) down from 726 at its peak in 2008 and its CEO says that it will continue to shutter stores until it skinnies down to roughly 450-500 retail locations. And at last count, the number of independent book stores is 1,900 and declining. (But who knows, maybe Mark Zuckerberg’s New Year’s Resolution to read a book every other week will change that. His first choice, is already sold out on Amazon.com….)

But that’s not really what is contributing today to the retail death spiral for the book industry. Hardcover books are being replaced by their digital counterparts. Bezos said in 2012 that Amazon.com customers purchased “more Kindle books than hardcover books” – a stat that even he found “astonishing” since Amazon had been selling hardcover books for 15 years and e-books and Kindle e-readers for less than three.

Physical books have gone digital.

The music industry is no different. Sure, Nielsen’s latest reports suggest that vinyl record sales were on the increase last year, but they’re a tiny percentage of overall music sales – less than 7 percent. Music consumption is increasing but just like the VHS tapes were cannibalized by DVDs and streaming video, vinyl record sales were cannibalized by CDs that were cannibalized by digital music downloads which appears now to be losing ground to streaming.

Even Taylor Swift can’t prevent the move to streaming.

All of this is, of course, thanks to the mobile devices that just make access and consumption of digital goods easier and more efficient. According to the State of Media report published by USC, in 2012, the average consumer consumed 30 gigs of digital media each day. Last year, in 2014, that number doubled to about 63 gigs of digital media per person per day. If all of this media were printed, they say it would create a stack of paper 14 feet high. By the end of 2015, that number is expected to increase to 74 gigs which consumers will spend 15 hours each day consuming. This digital media is consumed while consumers are also doing many other things – watching TV, riding the subway to work, eating lunch, talking to friends, killing time during boring conference calls, waiting in lines at the stores.

Which, it seems, they’re doing less and less of these days.

When Jane Fonda was the reigning queen of fitness, music and book stores were among two of the big attractions in the malls that were once the social hubs of communities. Then, people used to “go to the mall” to shop, to eat, to socialize. Teenagers used to beg for their parents to take them to the mall to hang with their friends, visit the record stores, hang out at the book stores, shop for clothes, and eat at the food courts. People would spend hours at the mall – every week – browsing and buying. They were drawn to the malls, with their friends, to check out what was new and what was worth buying.

Today it’s different. Malls today are in real trouble. People don’t have to schlep to the mall anymore to see what’s new. The unique stores like the music and book stores that were the only places consumers could buy such things simply don’t exist anymore. These products are bought and consumed digitally now. The mainstay specialty retail stores that could ride their draft – Gap, Limited, Aeropostale, Abercrombie – also struggle to stay afloat in malls that no longer have the foot traffic that they once had. That, of course, was the job of the anchor stores that are also pulling out or shutting down – getting name brand anchor stores was a vital shopping mall ignition strategy.

Yesterday’s (Jan. 4, 2015) The New York Times described the death spiral taking place in retail today, as a result of the change in consumers’ habits, something I first wrote about last year. The article reported that nearly 20 percent of all malls have a vacancy rate of 10 percent or higher. More than 3 percent are “dying” with vacancy rates of 40 percent or more – three times the rate in 2006. And, in the U.S., there hasn’t been a new enclosed mall opened since 2006.

The Owings Mills Mall cited in the The New York Times story is one that I used to visit when I lived in Maryland. The Saks Fifth Avenue there was one of its anchors and a huge draw. When it closed in the mid-1990s, it eliminated a big incentive for people to make the trek there. And that loss in foot traffic contributed to the closing of H&M, Kay Jewelers and a slew of other stores, including the fast food outlets in the food courts that relied on hungry shoppers to drive their sales. The Owings Mills Mall will be demolished at the end of 2015 and turned into what developers call a “power center” – a reinvented strip mall concept with Costco and Target as its main anchors.

The Times article suggests that the so-called “death mall” is a by-product of the recession and resulting income inequality issues that insulate “good malls” in upper income suburbs whose wealthy patrons will always visit them from the “bad” malls in less affluent areas that don’t and won’t draw a clientele that has money to spend.

If that were the case, then the Copley Mall in Boston and Newbury Street in Boston would have been going like gangbusters this holiday season.

I was there several times the last two weeks of Christmas and found it eerily empty – at a time when I expected to have to fight my way through the mall given the short holiday shopping season. But I had the stores mostly to myself. When I asked the various shopkeepers in the mall – Saks and Neiman Marcus along with the specialty retailers and kiosk operators, they all had about the same answer: foot traffic was down about 15 percent this year from last, which was also down from the prior year. When I asked what they thought accounted for that decline, they offered no clear view other than to express some optimism that what foot traffic they might have lost leading up to the holiday might be recaptured post-holiday with consumers looking for deals and making purchases with their newly acquired gift cards.

I think there is a much simpler explanation, yet one that will require a much more complicated solution.

Mobile and digital have changed the way people shop.

And buy.

And their expectations of retailers.

Consumers now have apps and email promotions and spiffed-up websites that make deals and product selection and availability now very transparent – and immediate. I get emails daily from the retailers I follow reminding me of what’s new, what’s newly on sale, and what I might like based on what I just bought or put in my shopping cart. I don’t have to go into stores to look around and browse. The selection online is nearly endless and it’s easy to see what’s available in my size and the sizes I need to buy for others. That actually wasn’t my experience when I went shopping in-store this holiday season. I found the selection limited and even disappointing. I ended up doing most of my shopping online. It saved me a lot of time and I got what I wanted and needed to buy.

Better designed websites make all of this possible and mobile devices allow consumers to do it whenever it is convenient, including between the hours of 10 and midnight when, apparently, at lot of shopping gets done online. And, one click shopping via PayPal or MasterPass or Visa Checkout or ShopRunner makes it easy and efficient to make those purchases. Free shipping and returns are the icing on the cake and take the risk out of buying something that might not be exactly right.

And that seems to be what people, and women in particular, are doing more and more of.

Women’s apparel sales drive a big chunk of retail apparel spend, something like 50 to 53 percent of it. It’s also among its most profitable sales. In 2013, NPD reported that total women’s retail apparel sales in the U.S. totaled nearly $117 billion, up about 4 percent more than 2012.

But here’s the kicker.

Fifteen percent of those sales were done online, up 17 percent from the year before. And, those women who bought online, spent more than those who shopped in the physical stores. That’s, of course, highly correlated to who has tablet devices and what devices drive a lot of online spend (Apple devices) but the statistic is both important and informative.

And an indication of what’s to come.

Those numbers are all 2013 numbers. It wouldn’t surprise me if that 15 percent didn’t approach 20 percent in 2014 when all of the sales data is tallied.

So, even though e-commerce sales overall may only account for about 7 percent of all retail sales, that obviously doesn’t tell the whole story.

But here’s what does.

Instead of the mall, consumers start their shopping journeys online. They start at Amazon where they can search hundreds of millions of products and buy them with one click. Or ShopRunner which aggregates branded retailers and enables one-click purchasing and special deals. Or fashion aggregators like FarFetch, an online destination that assembles high-end clothing from designer boutiques all over the world and enables a single shopping cart and easy online checkout. Or Drugstore.com, which allows them to buy health and beauty staples. Or social sites like Lyst, which aggregates a consumer’s favorite brands and styles and serves up recommendations and stores in which to buy them – online, of course.

And all sent to consumers for free. With free returns, if needed.

And, so that’s the big retail disruption facing traditional retail.

Mobile devices that make it easy to access and consume a near limitless supply of inventory digitally with purchases delivered in minutes, hours, or days – and most of it delivered for free.

ComScore says that the free delivery of online purchases increased from 44 percent in 2013 to 68 percent in 2014. That means that the cost of that free shipping has now become an additional cost of acquiring and retaining customers. Amazon says that its shipping costs increased more than 32 percent through Q3, saving consumers $2 billion in shipping costs and cutting into the sales of retailers whose physical stores would have once captured those sales. Recognizing the reality of consumers and their desire to shop online, every single traditional retailer from Target to Wal-Mart to specialty retailers are now flagging the cost of fulfilling online orders as something that is likely to compromise margin growth over the next several years. Seeking Alpha reports that for every 1 percent shift in physical store sales to online sales for Target, its profit margin suffers by five basis points. The decision for all of these retailers is to take the hit on margin now and build up to accommodate these changing preferences or take the hit in sales longer term and wind down.

Consumers, with mobile phones in hand, are increasingly savvier shoppers too – consulting 12 sources of information (up from five) before buying – because access to information is easy and efficient to do with those devices. Brand loyalty takes a backseat to price, selection and immediate delivery. Google’s recent survey of consumers reports that nearly 60 percent of consumers don’t have a particular brand in mind before starting their shopping journey.

Traditional retailers, going into 2015, are faced with a pretty different reality than what they were faced with a couple of decades ago when satisfying customers was all about location, location, location in a brick-and-mortar world. Location is still critical, but location is increasingly defined by a consumer that’s increasingly mobile and increasingly less brand loyal. Location is now a function of where consumers they need their products delivered (or picked up or consumed) and who can accommodate those preferences and deliver what they want when they want it, whether that’s a second, a minute, an hour a day or two days from when the purchase was made.

Thirty three years since Jane Fonda’s VHS tapes hit the scene, we’ve watched retailers die or shrink dramatically in categories where consumers can just as easily order online and have items delivered to them. The disruption started with physical goods such as books, music, movies that can be purchased and consumed digitally. It’s accelerating with physical goods such as computers, office supplies, electronics, household products and even apparel that consumers can evaluate efficiently online and have delivered without the hassle of going to a store. We’re seeing retailers in those categories retrench, retool, and even shutter physical stores, and that’s of those that remain standing. Some chains, like Gateway and Office Max that started life in the 1980s just don’t even exist anymore.

Over the next decade and maybe more, we’ll see this trend continue as consumers buy just about everything they don’t feel like they have to go to the store to inspect before buying online, including a bevvy of consumer products once only purchased at grocery or drugstores. The savvy retailers will embrace this trend, improve their websites and make it easier for consumers to access what they need there to make a better purchase decision – reviews, sizing recommendations, inventory availability, etc.

Is every retail category at risk?

Pretty much, and even in categories where consumers say that they need and want to look and touch and try merchandise before buying like grocery, health and beauty products. People won’t stop going to physical stores but they’ll need a reason to make the trip, and an experience that they can’t get online when they get there. And, when they do visit a physical store, will buy and spend differently. For instance, a trip to the grocery store might only mean the purchase of fruits, veggies, meats, fish and dairy products, as well as prepared foods to take home for dinner. Paper towels, canned goods, spices, cereals may well be purchased online and delivered. Food and food services will increasingly be “purchased” online even though food will be consumed in a physical place.

MIT did a study a few years back about why people go to stores, browse and then buy. There are three things that their research found: the retail environment, psychological factors and social considerations. When Jane Fonda could only be found on VHS tapes, the mall checked all of those boxes and the stores inside of those malls benefited from the traffic that the shoppers who came for the retail experience that malls supported.

The retail survivors are going to have to decide how they are going to create an experience for their shopper that checks all of those boxes in a world where consumers will still want to use the physical store but move between the physical and online worlds at their convenience. Innovators will have to focus on ways to help retailers make that omnichannel experience worthwhile.

And as for payments and digital wallet providers?

I’d be checking my 2015 plans and making sure that they reflect the reality of what’s going on in retail and where and how people are spending their time and where they are making their purchases. I’d be focused 1,000 percent on making sure that buying online – via the browser and via the app – is as frictionless as it can possibly be and in all of the places that consumers want to shop.

And, preparing for a world in which purchases, even those that are consumed or picked up in physical stores, are made online. A world that’s not that far away.

But there’s no doubt about it. Retail reinvention is already underway and moving full steam ahead.

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