Too big not to fail? the new retail landscape
by Debra Scherer
Robin Lewis is the co-author of The New Rules of Retail and editor-in-chief of The Robin Report. He stopped by our Flatiron studio in New York City to talk about everything that’s wrong with the direction of the very complicated and broken system that serves as the middle man between the fashion industry and the consumer.
With his 40 plus years on the business side of fashion, unique insight and scathing humor, we discuss much more than just how the industry has evolved but more importantly, how the consumer has evolved, the blind spot in many retail strategies faltering today. In other words, growth, which has always been the retail endgame, is now sinking a lot of ships.
Robin Lewis: Charles Dickens said in his book, “It was the best of times, it was the worst of times,” of course that’s one revolution, but talking about this retail revolution which we are in, I’d say it’s the most exciting of times, but the most challenging. I say exciting because of really the enormous opportunity that retailers and brands have today to fundamentally transform their businesses. They’ve never had an opportunity like this. But I say the most challenging of times, because of the necessity for them to do so.
There is no other option, they must transform or they’re going to die. Period. And, the problem is it’s very complex, it’s so complex that the older generation, people who are running these businesses at you know, my age, the CEOs, they’re having to deal with technology, the internet, things they’re not familiar or comfortable with, and quite frankly, 50% of it they really don’t have an understanding of, particularly how to use it all. So, talk about challenging, that’s what they’re going through today. On a scale of 1 -10, the whole industry is probably 3 or 4. There are a few outstanding, like a Nordstrom’s or a Macy’s, who have been able to move further ahead with it all and they might be a 6 or 7 on a scale of 1 to 10.
So technology and the internet, globalization, and the new generation of consumers – the millennials – are the main three driving dynamics forcing this transformation, which is the biggest in the history of retailing. The millennials are really driving it…
Debra Scherer: Right, even though we’re not sure there’s really such a thing as a millennial, but let’s just say the next generation of shoppers?
RL: Well you know by 2020, the age group from 18-34 will account for 40% of all retail sales in this country. They’re replacing boomers who are either dying or downscaling into retirement and therefore aren’t as interested in stuff or spending more of their money. Boomers as you know are the biggest consumer segment in the history of the US. But now they’re spending more money on travel, leisure, entertainment and health and wellness, than on stuff. So the millennials are going to replace them as the biggest group.
DS: Another interesting thing you point out about the millennials is that they actually want to spend less on stuff and more on experiences, which to me is so interesting. So whether you’re Net-A-Porter or Bloomingdales, you need to provide some kind of experience.
RL: Yeah absolutely. And experience for these young people, millennials, is defined differently than it was for us. For generations, young people used to hang out in malls for that very reason, that was the experience, but today, these young people, their smart phone is like another appendage, they are connected with it 24/7. So, the way I’d like to put it is that, today every store and every mall in the world is sitting comfortably in their pockets and they can scan through more brands, more stores, more malls in 10 minutes than they could hanging out all day at the mall. Plus the fact they can be together on their smart phones anywhere in the world.
DS: Right, the mall was not only shopping it was also the social network.
RL: It’s crazy. And the other thing about them is that on their smart phone, they’re finding more fun and interesting things to do than shopping. Sharing videos, selfies, posting on Facebook, playing games together. So not only are the retailers, the malls and the brands just competing against each other anymore, they’re now also competing for the time and dollars that the kids are spending elsewhere on their smart phones!
DS: They’re probably spending more on in-app purchases playing a game than getting another pair of sneakers or another T-shirt. You also talk about a major shift from retailers selling things that people needed and going after holes in the market that were underserved and bringing products to people that needed products. I got this sense of dread. There’s just too much stuff.
RL: In 1980 there were 6 major blue jean brands and now there are about 800. We talked about the growth period between 1950 and 1980 in this country, just explosive growth, and one of the things that made this possible was Eisenhower signing the interstate highway bill. And this country built, during the 50’s and 60’s, fifty-four thousand miles of interstate highway and of course the automobile industry was booming. It gave mobility to people. It allowed them to move from the cities and build into suburbs that were just mushrooming across the country.
That’s when regional malls were built. And at the same time K-mart, Walmart and Target were launched in the 1960’s. All of the retail apparel specialty chains started by The Gap exploded across the country. Then you have the big boxers, so all of a sudden we’re getting more and more retailers, more and more stuff as a result of the mobility and tremendous growth in this country. So this all is wonderful between 1950 and 1980 until somewhere in the 80’s, what was once supply sufficiently fulfilling demand – people needed stuff – all of a sudden was turning over more damn supply in stores and stuff than people needed. And it didn’t stop…
DS: Yeah that moment, that is a big shift from making stuff because people need stuff and people want to buy stuff, to just continually turning stuff out every time somebody has an idea.
RL: And this is the bad news of capitalism. It is the one thing that nobody can do anything about because we believe that you must produce, you must grow. If you don’t you’re going to die. So we’ve got all these businesses that all this money is going to, and in the mean time, nobody keeps an eye on demand and the consumers don’t need it all. So what do we continue to do? We must create, we must market and try to steal consumers away from those competitors because there’s not enough organic growth. We’ve had since the 1980’s, probably an average of 1% growth in population, but retail square footage growth has been 4% a year, year in and year out. Today we have 46 square feet of retail space for every man, woman and child in this country. Next runner up in the world is the UK with 3%. So fast forward, these young people exacerbated with their smart phones, have more selection than they care about. So to win them over, you have to again, either provide them with some kind of an experience or this pricing competition that I call the race to the bottom, and it’s going to destroy everybody. It used to be 20% off, today it’s 70% off before you even look at it. It’s crazy!
The future excitement in growth in the market place will be a combination of what the millennials really want out of life, which are things that are special. They don’t care about finding a brand, it doesn’t mean anything anymore. What they do is, they’ve got their own individual sense of style and when they see anything that they like, it’s cool.
DS: That’s an excellent point, if you want a black leather jacket you’re not thinking I have to get the Balenciaga one, you don’t search by brand, you search ‘motorcycle jacket’ and get everything from a $200 one to a $20,000 one.
RL: It’s not just designer stuff either, I mean it used to be cool to wear Levi’s jeans back in the middle of the last century, and Levi’s was doing 8 billion in revenues every year.
DS: Right, that was when there were six denim brands!
RL: Exactly, for example, Levi’s spent billions of dollars over 100 years pounding it into consumers heads that they were a blue jean brand. Okay? Well all of a sudden, in the ’80’s when things started to get tough, they decided to become a lifestyle brand, it just never worked. The brilliance of Ralph Lauren is that he created this real lifestyle brand.
DS: From the beginning, yeah. And Tory Burch followed suit. So many people asked me what was her secret, how did she succeed when so many people failed? Its because she did it step, by step, by step, by step.
RL: And guess what, she’s got as her new CEO, Roger Farah, who used to be the CEO of Ralph Lauren.
RL: Today, because there’s so much out there, a brand like The Gap in the early 2000’s went kaput under Mickey Drexler, and he to this day would tell you the reason it went kaput was because it became ubiquitous, it was no longer cool, it was everywhere, on every corner and young people said ‘that’s yesterday’s brand’ and it’s over. And for 15 years, one CEO after the other has not been able to bring that brand back. It’s still slogging along but it will never be hot again. And I just wrote recently about Mickey Drexler again, now CEO of J. Crew, that if a brand misses a few seasons in terms of style and what’s trending and what isn’t trending, it goes from being a product problem to a brand problem. And once it’s a brand problem and that consumer leaves, they aren’t going to come back to the brand.
I’ll tell you, I think in the future landscape, when it happens I don’t know, there’s going to be a lot of small businesses that are very successful and people running them, like these young people today who are going to be very happy making a little bit of money and having a nice lifestyle. That is I think the best path and I think it will happen.
DS: Do you think that can happen? Look at the tech industry now, they’ve had their first wave and their new wave, and it’s the same there. I don’t know why people think, ‘It’s not going to happen to my company,’ but we saw it happen to AOL, and you see it happen with Yahoo and behavior changes just a little and now, you know, let’s see how many CEOs they’ve had try to turn that around but it will never be what it was.
Then Microsoft was the same thing, and now it looks like Microsoft and the new-ish CEO is trying to bring it down, scale back on employees, focus on what they’re really good at, and not just have this big sinking ship. I want a company like Microsoft to figure itself out. It’s really good at a few things, it’s still better at a few things than other companies are, like get back to that and scale it down. They have all the money in the world, they don’t have to worry about going out of business tomorrow, they can do that.
I think it’s why Google is just doing the same thing, you know now Alphabet is this big company and they can have all the little businesses and focus on what they’re good at… you know, I call Mickey Drexler The Titanic Builder because he builds these huge things and like you said, one little thing happens and the ship starts to sink. I think you see that in all of these businesses and I think Apple’s next. I don’t care what anybody says. To me, Apple is the epitome of the ship that is so big and has gotten so loud tooting its own horn and it’s just going to take that wind to change direction in the smallest way… but they have what, 200 billion dollars of cash?
RL: Yeah, that’s a phenomenon and you may very well be right, I think it’ll take a while to happen, I don’t know. I don’t want to get off the point you’re making but it raises this issue of the Apple Watch and it’s very interesting, I don’t know anyone who owns an Apple Watch. Fortune Magazine called me because this reporter wanted to talk to me about the Apple Watch. The only reason I took the call was because I don’t know anything about the Apple Watch because I don’t hear anything about it; nobody can talk to anybody at Apple, you can’t get through there to anybody… Angela Ahrendts I know, who is now running it over there, I can’t get through to her. So I said to Fortune, ‘Frankly, I wanted to talk to you guys to see what you know!’ The reporter said, ‘Well we don’t know anything either! I’ve been calling all kinds of experts and people like you that I thought would know. Nobody knows.’ And I said, ‘Well that’s your story. Where are you Apple Watch?!’
DS: The smartest people I know who are saying that they had been at the conference in Sun Valley, where there’s like, you know, the cream of the crop of the people thinking about these kinds of things, let’s say. And they said the only person who was there who was wearing an Apple Watch was Tim Cook.
RL: Let me tell you why I think you’re correct in your prediction. They’re a brand phenomenon that I don’t think has ever existed before, but they are also so connected with the millennials, and like anything else, this is a fickle agnostic group of consumers. If Apple doesn’t keep reinventing itself, one day, one night at 11:01 in the evening, their young customers are going to say, ‘Apple is a boring name.’ It will become a brand problem.
I think you may be right. But your larger part about these long-tail companies, yes, this is an era of fragmentation as opposed to consolidation. When I say “long-tail”, I mean these huge, giant companies, if they manage themselves right and do what you just talked about, if they can fragment their businesses and turn them into a lot of different small businesses or services, I think they’ll survive. If they continue to be one huge multi-trillion dollar, monolithic brand, I think it’s going to be over. I mean look at Walmart, they’re spinning off smaller stores now. And if you look at VF Corporation, which I think is one of the best companies in the industry, they’ve got 55 different brands that are all autonomous. They’re all out there: North Face, Vans, Timberland, 55 brands and they’re all separate and the only thing that the corporation does is that they leverage their backend skills, their supply chains, human resources, etc. So those will be the big companies that make it. But in addition, at the long-tail, there’s going to be thousands of small little Mom-and-Pop businesses or small chains…
DS: Right, so at the end of the day, basically what we’re saying is that instead of “too big to fail,” I think that if you’re too big, you will fail. Do you agree?
RL: (Laughs) That’s very good. That’s a great line, you should do a blog on that and I’ll run it.
To listen to the entire conversation, click the podcast below: