Retail on the rollercoaster, between innovation and failure #1

In brief
Innovazione, liquidazione e consolidamento dei modelli operativi, spesso in aperta contraddizione, sono le montagne russe sulle quali si muove il Retail internazionale.

When innovation works, it becomes the norm. This applies not just to retail but to any other industry. The information provided by the festive period leaves no room for doubt: the record growth of digital commerce (+17.1% over the previous year, with frenzied peaks of activity on Black Friday and Singles’ Day) establishes it as the new norm which retail can no longer afford to overlook. At the same time, the difficulties experienced (or confirmed) by traditional industry brands who have been unable to innovate as required represent a potentially definitive watershed; in the latter part of the year, the brands which made the name of the retail industry have strived to ensure they fall on the right side of this divide. While discussing historic brands, it is impossible to avoid talking about the United States, where six of the top ten retailers in the world are still based today (according to recent surveys by the extremely well-respected National Retail Federation). Macy’s, Sears, J.C. Penney, Kohl and Barnes & Noble have all endured major hardships, provoking a debate about what must be done to compete, or more simply to survive, in a market affected by a high rate of digitalisation, and even more significantly by the radical change in spending habits and purchasing processes. The new year will be marked by a wave of closures, some of them sensational, while the industry’s biggest names will begin to stabilise. As we write this, a very sad message appears on the screen:

All orders that have not already shipped have been cancelled

This is the home page of The Limited, one of America’s most important clothing chains for over 50 years, which has just under 300 stores across the country. It is just one of many brands forced to file for Chapter 11 bankruptcy, following in the footsteps of genuine industry institutions such as Aéropostale, which did so very recently.

Crew, Gap, Abercrombie & Fitch: the struggles of America’s most popular clothing retailers – These brands are racing against time to adapt before they die in a landscape dominated by price-conscious consumers and Fast Fashion’s smart supply chain.

By contrast, off-price clothing chains were among 2016’s clear winners: two thirds of consumers made at least one purchase there in the last year, according to researchers from NPD Group Checkout Tracking. This resulted in net growth of more than four percentage points. The difficulties faced by department stores are high on the industry’s agenda.  On 4th January, in the wake of a disastrous Christmas period, Macy’s (the definitive department store for many Americans) announced that it planned to cut more than 10,000 jobs, close down 68 outlets and restructure its remaining branches. A day later, Sears Holdings announced the closure of 150 unprofitable stores – 108 Kmarts and 42 Sears stores – to limit losses. Robin Lewis, CEO of The Robin Report (one of the “bibles” of American retail) didn’t mince his words: “The problem is that we have too much stuff, more websites, more stores, and less demand. There will be an inevitable downturn in the market, and we will see more failures in 2017.”

Retail - Walmart

But it’s not all clouds: there will be silver linings as some of the industry’s key players – both old and new – strengthen their positions. While Amazon now appears in the NRF’s top 10 global retailers for the first time, we can also learn from the experience of Walmart, the titanic embodiment of traditional retail (number one in the world, $482 billion versus $116 billion for another American retailer in second place – CostCo). We discussed Walmart three times in 2016, most notably in June when we commented on CEO Doug McMillon’s proposal “to reimagine retail again”. The scope and influence of its restructuring must be considered among the most important moments of the year for the industry, especially in the second half.

I believe that 2016 will be remembered as the year in which Walmart mapped out an aggressive, long-term path to defeating Amazon.

Robin Lewis, The Robin Report

First there was the acquisition of for $3.3 billion, then the acquisition of online merchant ShoeBuy for around $70 million (a move that sees the group in direct competition with Amazon), and finally the implementation of an organic omnichannel approach which focuses on the customer service front among other things, with new same-day delivery models thanks to the partnership with Uber and Lyft. These models are currently being established not only in the US, but also in Europe and China, albeit with substantial differences. While the Otto Group dominates digital commerce in Germany (over 100 online shops) thanks to its control of a highly-efficient logistics network, the sector is fragmented in China, and the country’s carriers are struggling to keep pace not only with the staggering growth of digital commerce, but also with the wide variety of services required. During quieter periods for the Chinese market, lorries are often only 30% or 40% full, which increases costs significantly. Meanwhile, at peak times such as Singles’ Day last November, when five to ten times more shipments are made, merchants complain that orders are lost due to delivery delays. Around 50 Chinese companies have tested a new app-based approach, using digital and social technology to manage major fluctuations in demand. A delivery platform similar to Uber connects retailers with fleets and drivers, allowing companies to share their load capacity and transportation when necessary. From here, we can easily move on to another major driver of change, namely the convergence of many facets of retail on social networks. 2016 established the importance of social commerce beyond any reasonable doubt.

A brief summary of the most important facts tells us that Facebook has opened its own online bank, Instagram has added new commercial features to its platform, Cosmopolitan is now available via Snapchat, Pinterest has announced its own digital commerce service, and social advertising is marching on, predicted to double in size over the next three years. All this without really mentioning the rise of WeChat, whose consumer services ecosystem is the norm for 93% of smartphone owners in the enormous Chinese market.

Innovation, failure, and the search for and establishment of working practices and models, with choices that are often sudden and equally often contradictory, are the rollercoaster which international retail is currently riding and will continue to ride for quite some time.

(end of the first part)

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