Remarkable Retail. Steve Dennis

brands as diverse as Sephora and Tractor Supply Company—continuing to open many new stores, but a handful of savvy legacy retailers started using two really important strategies. These pivots have allowed a number of major players to not only mitigate the impact of, but actively participate in, the growth of digital commerce.

      The first was correcting mistakes made, in some cases, more than a decade earlier. One of the most important facts lost in everyone’s hyper-focus on the growth of online shopping is that, according to Forrester,⁷ digital channels influence nearly three times as many physical store sales as e-commerce transactions. Unfortunately, many traditional retailers invested in e-commerce as a completely distinct sales channel and managed it (as some still do) as a separate strategic business unit. Not only did this wildly miss the reality of customer behavior, it caused brands to systemically make the wrong decisions about where and how to allocate their investment dollars.

      Once these brands started to realize that digital was not only an online transaction channel but also a way to guide customers into their physical stores, they started to rethink what digital commerce really meant. Rather than fear digital, they started to harness its power. In practice this required greatly increasing their e-commerce capabilities to neutralize some of Amazon’s advantages. But it also meant understanding the critical role of digital in driving customers to physical stores and helping convert them once they got there. The more recent resurgence of Target is but one prime example of retailers that embraced this path.

      The second shift allowing brands to regain their footing is how they view their brick-and-mortar operations. A brand that fundamentally regards its stores as liabilities seeks to optimize them for efficiency. That often begins a cycle of cost cutting and store closings. Conversely, if a brand sees its stores as assets, it must still work on improving its e-commerce and digital enablement capabilities. More importantly, it leans into making its stores more relevant by leveraging the many benefits of stores that online-only retailers can’t match: providing immediate gratification; being able to touch, feel, and try on products; allowing for free and safe product pick-up; obtaining sales help from a real live person; and so on.

      Physical store spaces absolutely must transform for a digital age—in many cases quite radically. But the idea that all—or even most—of physical retail is doomed is clearly wrong.

CHAPTER 4

       The Collapse of the Middle

      “Bring out your dead! Bring out your dead!”

      —MONTY PYTHON AND THE HOLY GRAIL

      The extent of disruption varies widely depending on the retail sectors in which you compete. Some pockets of retail are already dead (or dying). For example, you probably haven’t gone to a video rental store in quite some time. You likely have a lot fewer bookstores near you than ten years ago. Bankruptcies, store closings and relocations, new winners and losers are par for the course in retail.

      The question isn’t whether physical retail is dead, whether malls are going away, or whether e-commerce is eating the world. Instead, ask yourself: how do these changes affect you, your organization, and your brand—and, most importantly, what are you going to do about it?

      Instead of an apocalypse, some major consulting firms, various pundits, and many industry associations have said we are seeing a retail renaissance of sorts. Dozens of disruptive new concepts have been created, exciting technology is being applied across a spectrum of categories, and even some old dogs are learning new tricks. That’s clearly true.

      As we take a closer look, however, we start to see what I first explored in a 2011 blog post as the “death of the middle.”⁸ Then, a couple of years later, I began referring to this phenomenon as “retail’s great bifurcation”⁹—a title later borrowed for an excellent Deloitte study, which I will discuss below.

      Figure 4.1 Net Store Openings, 2015–2017 (Deloitte)

      Source: Deloitte¹⁰

      What we see, on the one hand, is that many retailers that are strongly focused on the value end of the spectrum—i.e., great prices, extensive merchandise assortments, and a highly convenient and efficient buying experience—are growing both sales and number of stores. At the other end of the spectrum, many brands that focus on offering unique products, more personalized service, and a more upscale and distinctive shopping experience are also gaining share and continuing to open more locations.

      As the chart above illustrates, the problems in physical retail (and in troubled brands more broadly) are highly concentrated among those retailers trapped in what I call the boring, undifferentiated middle, or what Deloitte labels, somewhat charitably, “Balanced.” More recent research suggests just twenty retailers account for about 75 percent of 2019 closures.¹¹

      The notion that physical retail is dead for the brands that consistently meet real customer needs through a compelling value offering—and execute well against it—is simply not the case. Ditto for many brands at the other end of the spectrum that deliver a more upscale and experiential experience for the right target consumers.

      The differences between retail’s haves and have-nots are, however, clearly diverging. The market continues to bifurcate, and the collapse of the boring, mediocre, undifferentiated middle only seems to be accelerating.

       Demographics Are (Often) Destiny

      To get a better understanding of what’s driving change, it’s typically useful to unpack customer trends. Unfortunately, retail marketers often tend to rely too heavily on demographics to inform their strategies. Sweeping statements like “Millennials don’t like to own things” may have a ring of truth, but common sense tells you that Millennials are hardly all alike. Applying these general principles to marketing strategies can often cause a retailer to widely miss the mark.

      Yet when we look at the ongoing collapse of the middle, certain demographic factors are important drivers, at least in the United States. In their 2018 study “The Great Retail Bifurcation,” Deloitte examined several root causes affecting the overall health of retail and other consumer sector outcomes. Big-picture indicators like GDP growth and stock market performance, along with broad consumer behaviors, point to a generally healthy outlook. Many retail categories are performing quite strongly, both off- and online.

      The study features a deeper dive into shopping behavior based on examining consumers’ economic well-being. This look takes into account factors like total annual income, net worth, and discretionary cash. This more detailed and nuanced view paints a rather different picture—and one that helps explain the ongoing collapse of the middle. What Deloitte found was that high-income households have captured a disproportionate share of income growth in recent years. Indeed, the rich are getting richer, as the top 20 percent captured over 100 percent of income growth between 2007 and 2015.

      How did they have over 100 percent income growth? You guessed it: everyone else had negative growth—that is, they lost ground. More recent data generally confirms that this trend continues.

      For most Americans, however, the outcomes are quite different. They are downright depressing. For 80 percent of households, income growth has either declined or remained stagnant, while costs of non-discretionary expenses like healthcare, education, and other household essentials continue to increase, often markedly. For those with the lowest incomes in the study, non-discretionary expenses now exceed disposable income. Making matters worse, most lower-income households do not own stocks and often do not own their homes. As a result they have not benefited from the robust growth of the economy and the spike in asset values over recent years. For the majority, Deloitte called it “an abysmal decade.”

      The implications for retail are significant. As both discretionary income and overall wealth have risen sharply for the affluent class, many are spending their gains on both products and services, often trading up to ever more expensive items. At the other end, for the other 80 percent who are getting squeezed harshly, total spending