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The evolving retail landscape

CONSUMER PRODUCTS INSIGHTS  | 

Following years of rapid expansion, the retail landscape is undergoing significant changes as customer needs and expectations evolve. Retailers must be agile to anticipate changes and sustain growth, focusing on the entire consumer experience, instead of just price. RSM director, consumer products industry, former industry analyst Jeffrey B. Edelman, evaluates changes in the market, including how customers leverage technology, the dynamic between baby boomers and millennials, and how two major retailers are attempting to transform their companies.

The pace of change is accelerating: For many years, high cash flow provided rapid retail expansion and diversification into new formats, further driving new store growth. Today, store rationalization is fully underway. The competitive advantage seems to be eroding faster in recent years as there is too much duplication and sameness.

Retail strategies are becoming obsolete faster—there is a need to anticipate and reposition. While the Internet leveled the playing field, allowing the Davids to compete with the Goliaths, consumers are redefining their use of the Internet as a means to facilitate a purchase. Consumers perform research and comparisons, and evaluate the convenience of pick-up and return–no longer only searching for the lowest price.

Shifts in distribution channels create dislocations and opportunities for new concepts. More importantly, business strategy needs to be addressed on an ongoing basis. Thus, we are witnessing ongoing store closing programs from retailers such as Abercrombie & Fitch, The Gap, Chico's and Macy's, while many formerly pure online sellers are moving into their own real estate.

Innovation and technology will continue to redefine retailing as the customer base evolves. Baby boomers are aging, while millennials are taking over. Spending priorities are different; millennials have less disposable income than baby boomers, and tend to emphasize value over quantity and have a passion for social issues. Baby boomers, on the other hand, tend to be more interested in luxury brands (in part because of their higher disposable income) and are more focused on health and wellness.

Two midmarket retailers are looking to reinvent themselves: Kohl's and JCPenney publicly announced new initiatives in an attempt to transform their companies. Unfortunately, their strategies do not appear, at least on the surface, to be sufficiently differentiated or address the earlier mentioned trends. Reinventing the wheel, but doing the same thing, does not ensure success.

Several years ago, both companies had similar sales; however, Penney had half as many, much larger stores, generating about one-half the sales productivity of Kohl's and a much lower rate of profitability. Kohl's maintained a steady course until it began de-emphasizing national brands too much in favor of private label merchandise, resulting in loss of market share. Penney's strategy was upended by an activist investor who pressed for new management and direction; that endeavor failed.

Kohl's CEO Kevin Mansell, a long-time veteran of the company, recently stated its three core pillars of the company—brands, value and convenience were no longer the traffic drivers they used to be. Kohl's was slow to innovate; it didn't want to upset what had been a highly successful formula. In addition, its store base increased almost 12-fold from 1995 to nearly 1,200 current locations. Sales per square foot declined in the last three years, as total sales approximate $19 billion. With perfect hindsight, Kohl's management was complacent for too long; nevertheless, it maintained its strong financial position, enabling it to embark on a new strategy.

Last fall, management unveiled a three-part plan, known as the "Greatness Agenda." Its stores are integrated with e-commerce, so both ways of shopping can feed business to each other—similar to what Macy's and Nordstrom have been doing. Second, a loyalty program called Yes2You was developed to incentivize its non-charge card customers (about 40-50 percent) to use a Kohl's credit card. Finally, it is updating its store presentation and merchandise mix. These actions have been producing more favorable results.

JCPenney appears to have a tougher task ahead: Recently appointed president and CEO designee Marvin Ellison unveiled his strategy for recovery. Addressing a group of investors, he said he was focused on sustainable shareholder value—getting into a rhythm of growing the business and creating a profit. A lot has been done over the past two years improving the store's look.

There is a considerable move away from Ron Johnson's strategy (2011-13) when higher-priced merchandise and a slicker presentation were installed and coupons were dropped, leading to a one-third decline in volume and mass customer defections. All departments were negatively impacted, especially its home store, which was a strong draw for Penney.

JCPenney has taken up several strategic initiatives to drive traffic. The company has brought back promotions that have successfully been driving sales higher. The company's efforts to extend the reach of its national and private-label brands, through effective marketing campaigns and point-of-sale technology initiatives, will aid top-line growth. Sales have improved in recent quarters against easy comparisons. Mr. Ellison said he felt good about service levels and favorable consumer response, and store morale is vastly improved.

In order to enhance customers' shopping experience, the company has been concentrating on remodeling, renovating and refurbishing stores. Penney has placed a special focus on enhancing its high-margin center core department that houses handbags, fashion accessories, sunglasses and fashion jewelry. The company is also enhancing omnichannel capabilities and expanding Sephora stores to boost sales and margins going forward.

Penney still has approximately 85 million charge card holders; the goal is to encourage them to frequent stores more often and purchase more. As mentioned, Sephora is a large draw, and those units will be expanded. In addition, in-store hair salons are expected to drive traffic.

Are these actions enough to move the needle? Both companies addressed many of the issues that impaired their results and will probably be able to restore some profitable growth. However, they are likely to remain market share donors to those that have adopted a strategy for today's consumer and competitive market.

"We lost our ability to engage new customers," Mansell commented to Fortune on June 23, 2015. "The core business we're in, selling apparel and accessories, is a very low growth-to-no growth business. And unless you have a really great play, you can be really vulnerable to being pulled down to the lowest common denominator, which is price. I don't think anyone is thinking Kohl's can grow at 10 percent again."

The bottom line: The sector will probably grow at a slower pace than the past, driven by an evolving consumer looking for different shopping experiences. There are opportunities for newcomers to capture market share by better focusing on its target customer, and maintaining the lowest price strategy alone is the fastest way down the slippery slope. Rather, one must enhance the shopping experience, however the consumer wishes and when.

Availability, information, service and ease of return have become most critical to a successful formula. One thing is certain; one cannot survive and grow profitably by doing the same thing as yesterday and last year. The vendor community needs to maintain its focus on its target customer and how and where they prefer to shop.

Jeffrey B. Edelman is director of retail and consumer products advisory services for RSM, and is located in the firm's New York office. He routinely advises senior management of companies operating in the consumer and retail sectors on strategic, sourcing, financial, marketing and distribution issues. He also works closely with internal teams on matters such as new business development, transactional advisory, including due diligence and tax. Jeff can be reached at 212.372.1225, or via email at jeff.edelman@rsmus.com.

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