The New Rules of Retail
Competing in the World's Toughest Marketplace
By Robin Lewis, Michael DartPalgrave Macmillan
Copyright © 2010 Robin Lewis and Michael Dart
All rights reserved.
ISBN: 978-0-230-10572-0
Contents
Acknowledgments,
PROLOGUE TSUNAMI,
INTRODUCTION THE STORY,
PART 1 DEFINING THE THREE WAVES OF RETAILING,
CHAPTER 1 WAVE I Understanding Producer Power,
CHAPTER 2 WAVE II Learning about Demand Creation in a Marketing-Driven Economy,
CHAPTER 3 WAVE III The Final Shift to Total Consumer Power,
CHAPTER 4 WAVE III The Transformation,
PART 2 THE NEW RULES OF RETAIL,
CHAPTER 5 MAKING THE MIND CONNECTION Neurological Connectivity,
CHAPTER 6 REDEFINING THE RULES OF ENGAGEMENT Preemptive Distribution,
CHAPTER 7 THE IMPORTANCE OF VALUE CHAIN CONTROL The Bottom-Line Winners,
CHAPTER 8 WHAT IT ALL MEANS Control, Collaboration, Collapse and the Chinese,
PART 3 THE MASTERS,
CHAPTER 9 THE MASTER MODEL Apparel Retail Specialty Chains,
CHAPTER 10 IDEAS FROM THE MASTERS Wholesalers, Retailers or Brand Managers?,
CHAPTER 11 THE TURNAROUND ARTISTS Masters Returning?,
CHAPTER 12 LESSONS FROM SEARS Success to Struggle,
CONCLUSION MODELS FOR THE FUTURE,
Notes,
Index,
CHAPTER 1WAVE I
UNDERSTANDING PRODUCER POWER
Wave I (1850–1950)
In the late 1800s, the population of the United States was about 60 million, spread out across 38 states, with 65 percent living on farms or in small towns. There were only a dozen or so cities that had 200,000 or more residents, and yearly national income was about $10 billion. The Wild West was still wild, even as rail was being laid to follow the migrating population.
Despite suffering from the "Long Depression"—not as deep as the Great Depression, but longer, stretching from 1873 to 1897—the country nevertheless generated enough capital to spawn the so-called Gilded Age (1865–1900), with its infamous tycoons, or robber barons, who built our railroads, drilled and distributed our oil, made our steel, launched our banking system and built the foundations of our manufacturing infrastructure. America was just beginning to understand how to harness the use of electricity and new industrial processes to accelerate production in order to provide the growing population with the products and services they really needed.
The phonograph, typewriter, telephone and electric light were invented, and after Karl Benz's invention of the first combustion engine automobile in Germany in 1886, Henry Ford created the Model T Ford, ultimately replacing horse-drawn carriages. In 1913, Ford developed the concept of the assembly line, for which he was labeled the father of mass production. By the Roaring Twenties, Ford was selling hundreds of thousands of Model Ts, and he still couldn't keep up with demand.
Compare that to today, when every household has two or three cars in the driveway, yet the Big Three—General Motors, Ford and Chrysler—are not only cutting capacity but facing potential bankruptcy.
Ford's inability to keep up with demand occurred for several reasons. During the early years of Wave I and well past the turn of the century, the period of vast industrialization, transportation and communications infrastructure building was still in its infancy. There was limited access to goods and services because supply-side growth could not keep up with growing consumer demand, exacerbated by an embryonic and fragmented distribution structure and a continuously migrating population, both east to west and rural to urban. Moreover, even when there was sufficient supply, its distribution was at best uneven and inefficient, and at worst nonexistent.
It was also during this time—which is considered, not coincidentally, the beginning of America's rise to global economic dominance—that two dominant retail distribution models were conceived: the mail-order catalog and the department store.
Sears and Montgomery Ward in Wave I
Following a brief stint in the watch business, Richard Sears partnered with Alvah Roebuck in 1886 to form the classic American retailer Sears, Roebuck and Co. By 1895 they were heavily into the mail-order business, primarily targeting farmers and small-town residents, who made up the majority of the population during that period, and had limited access to stores. And while Sears was actually formed later than the first such catalog, Montgomery Ward, founded by Aaron Ward in 1872, the Sears catalog would grow bigger and also succeed longer. Monkey Wards, as its competitor was affectionately called, succumbed to the marketplace challenges of Wave II, which we will discuss later.
These catalogs demonstrated a brilliant distribution strategy: placing their "store" and all their products directly in the living rooms of all those farmers and people scattered across the country in small towns. These were people who needed things and had no other place to get them. In the truest sense of the old adage "Location, location, location," these catalogs were in the consumer's face, in his living room, faster and more frequently than their monthly treks from the farm to the general store in a town many miles away. Indeed, these companies' vision of bringing their value to the consumer was one of retailing's early and competitively innovative distribution strategies.
The Sears catalog would eventually grow to over five hundred pages, offering everything from the cradle you rocked your babies in to the coffin you were buried in. You could even buy a readymade home with everything in it.
Today, of course, the Internet is the new catalog; however, it is not a replacement for the "old," but one of many additional distribution platforms: mobile electronic devices, kiosks, vending machines, airport stores, door-to-door selling, in-home selling events and ubiquitous stores on virtually every corner, to name a few. We live in an age of consumers having total accessibility. Therefore retail success can no longer be just about "location, location, location."
In the early 1920s, as the population began migrating from farms to small towns, Sears and Montgomery Ward, continuing their distribution strategy of following the consumer, began opening stores in those towns. Now they had a multichannel distribution strategy, with both catalog and stores, and also a unique competitive advantage of offering high-quality essentials for fair and credible prices. They thus positioned themselves as the go-to stores for the growing middle class, a niche not competed for by the big-city department stores.
The Department Stores: "Build It and They Will Come"
In 1846, an Irish-American entrepreneur named Alexander Turney Stewart founded a soft goods store called the Marble Palace, which sold European goods. Later, it would evolve into Stewarts department store, selling apparel, accessories, carpets, glass and china, toys and sports equipment.
In 1856, Marshall Field & Company was launched in Chicago. In 1858, Macy's was founded in New York City, followed by B. Altman, Lord & Taylor, McCreary's and Abraham & Straus. John Wanamaker founded Wanamaker's in Philadelphia in 1877. Zion's Cooperative Mercantile Institution (ZCMI) was opened in Salt Lake City in 1869, and became the first incorporated department store in 1870. Hudson's opened in Detroit in 1881, and Dayton's in 1902 in Minneapolis.
These and many others, which grew out of small general stores at the same time that their small towns became cities, would become the most dominant retail segment until well into Wave II (generally defined as 1950–2000).
These Wave I department stores were called "cathedrals" and "palaces of consumption" at the time. They became daylong outing destinations for families, at first because of their breadth of offerings, and later because of the additional sponsored entertainment, kids' events, fashion shows, restaurants and more. Many of these palaces were also architecturally beautiful, using new building materials, glass technology and new heating, among other innovations.
Indeed, the often-misquoted line from the movie Field of Dreams, "If you build it, they will come," perfectly describes the juxtaposition between the department-store distribution strategy and Sears' and Ward's original distribution model of following, and bringing their value to, the consumer.
We need look no further than the current overstored, overstuffed retail landscape to see how these original department stores have evolved into what might more accurately be called big stores loaded with so much stuff that it's a daunting challenge for consumers. The contrast illuminates how the scarcity of competition and growing demand in Wave I provided these stores with enough pricing power, and therefore profit margins, to be able to afford all the compelling amenities that made them not just stores, but entertainment destinations.
The shifting balance between supply and demand, and how it drives changes in retail distribution models, is fundamental to our thesis, as we follow retail's evolution through Waves II and III. Just as the Sears and Montgomery Ward catalogs and early department stores were innovative new distribution models responding to the supply-and-demand equation of the time and real consumer needs, so too were their successors.
Ramping Up to Wave II
Despite the Great Depression, the overall period during Wave I, from the early 1900s through World War II, was one of positive economic growth, particularly because of industrialization. The huge expansion of highways and railroads—indeed, of all transportation and communications—marked the birth of a modern distribution infrastructure, all centered on the growing population and its migration to the cities and suburbs.
Fueled by the growing use of innovative processes, assembly-line manufacturing and electricity, the supply side of the economy (products and services) could finally try to catch up with consumer demand. There was tremendous growth in housing, new household appliances and, of course, automobiles. All this growth would survive the severe downturn of the Great Depression, and would presage the truly explosive growth after World War II and during Wave II.
Meanwhile, the retail industry continued its inexorable march in its ramp up to Wave II. In 1902, James Cash Penney launched JCPenney, which would be incorporated in 1913. While initially offering only soft goods, and without catalog distribution, JCPenney quickly became a fierce competitor of both Sears and Montgomery Ward, with all three rapidly opening stores in small towns and suburbs, chasing after the growing American middle class. JCPenney, like its predecessors, offered high-quality basic products for a good value. This value model was exactly what enabled all three competitors to continue growing even through the Depression.
Following World War II and the subsequent explosive economic growth, Sears expanded upon its distribution strategy, following the migration of consumers to the suburbs. Sears arguably built and anchored the first regional malls, leading the way for rivals like JCPenney, Macy's, McRae's and Dillard's, all of which would eventually anchor the rapidly expanding number of suburban shopping malls. And, to further solidify its domination of the niche, Sears vertically integrated and began to develop its own private brands (such as DieHard batteries, Kenmore appliances and Craftsmen Tools) and localized distribution, long before those concepts entered general practice.
This is the juncture, late in Wave I, when Sears began surging past its primary competitor, Montgomery Ward, which refused to enter the malls, considering it too costly. This would prove to be a fatal misstep, and the beginning of Ward's long slide downward.
So Sears' proactive response to the changing world around it allowed a long and powerful rise. By the early 1970s, it was one of the eight largest corporations, and one of the most powerful brands, in the world, with revenue higher than the next four retailers combined. Indeed, it was more dominant, and had greater momentum, than Wal-Mart does today.
The Downward Slide
But ultimately, like Montgomery Ward, Sears also failed to see, understand and respond to the changing economic, consumer and competitive environments outside its own four walls. Sears took a great risk and reinvented its business model, but it failed to strengthen it. In many ways, the decline of Sears can be traced back almost exactly to the day it moved into financial services, with then CEO Edward Telling's acquisition of brokerage house Dean Witter, and his infamous claim that consumers should purchase their "stocks and socks" under one roof. This inability to evolve their model to suit the times caused Sears to slip into decline. The historically savvy retailer lost its unique connection with its own consumers, delivering something they neither expected nor desired.
Ironically, latecomer JCPenney did evolve its business model, essentially adopting Sears' strategic advantages, such as private branding and distribution. And unlike its onetime nemesis, it has strengthened and adjusted its model to respond to the changing economic and consumer driving forces. As a result, JCPenney is currently thriving in Wave III.
It is tragic that Sears allowed its strategic advantages to dissipate. The same advantages that made it the biggest and best retailer are inherent in some of the winning retail specialty chains today, such as Abercrombie & Fitch or Zara. These stores vertically control their value chains from product development to manufacturing, operations, logistics, marketing, distribution, and the point-of-sale; therefore, they can develop their own brands and deliver the shopping experience the consumer expects from the brand. Such control also allows them greater access to, and therefore more effective distribution to, their consumers.
Sears and Montgomery Ward represent just two of many retailers whose business models and consumer value propositions were innovative and relevant to the consumer and economic environment at the time of their inception. They also evolved their competitive advantages, growing to occupy relatively dominant positions in the marketplace. However, they would ultimately represent the many chains that, after achieving such success, failed, for myriad reasons, to continue adjusting to the ever-changing economic and consumer conditions around them. Arguably, Sears' "stocks and socks" strategy was its attempt at changing its business model to adapt to the times. What it viewed as a strategy, however, turned out to be a poorly executed tactic.
Therefore, many of these historically iconic retailers simply vanished overnight, and others, such as Sears, slipped into a lengthy decline.
Chapter Highlights
We have aptly framed the evolution of retailing as the "Three Waves of Retailing." Wave I spans the time period from 1850 to 1950, Wave II from 1950 to about 2000 and Wave III, the third and in our opinion final wave, covers the period from 2000 to 2010.
As we depict each wave, we will describe the economic situation during that wave, including the supply-and-demand relationship, the competitive situation, the business strategies necessary for successful response to consumer demands and the business structure or models necessary to execute the strategies.
Wave I Key Market Characteristics
Production/Retail Driven: Pricing power resided with manufacturers and retailers due to a dearth of competitors, minimum and uneven level of products and services and a fragmented or nonexistent distribution infrastructure. Therefore, consumers had to accept what was available to them.
Production Chasing Demand: Producers and distributors, including retailers, were all growing and expanding to chase and capture business from shifting consumer markets. With some exceptions, notably in the larger cities, supply would continue to underserve demand, primarily due to the growth of the population, including immigrants, and the migration of the citizenry from east to west and north to south, and from rural areas to small towns and cities, all challenging an embryonic, fragmented and inefficient distribution infrastructure.
Single Product Specific Brands vs. Cross Categories: Lack of cohesive marketing and communications infrastructure, as well as a scarcity of producers, resulted in both a limited availability of brands and their confinement to single product categories.
Fragmented, Isolated Markets: Geographically dispersed, largely rural and small-town markets, many isolated and unconnected by transportation and/or communications; therefore the distribution of goods and services, including to retailers, was at best slow, random and inefficient.
Fragmented Marketing: Due to the dispersed and isolated market structure, and the lack of a national communications and media infrastructure, advertising, sales and marketing of any type was sporadic, local, infrequent and inefficient.
Dominant Retail Models
Freestanding department stores in cities ("palaces of consumption"), expanding later in Wave I to anchor the emerging shopping malls
Sears' and Montgomery Ward's mail-order catalogs (as responsive distribution to rural and small towns), and in the early 1920s launching stores in small towns
Sears constructed and anchored the first malls to be followed by department stores and JCPenney (founded in 1902) as additional anchors as they all raced toward Wave II and the mid-twentieth century
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