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Why Are So Many Retail Brands Closing?

why are so many retail brands closing

Is a retail evolution happening before our eyes?

Commercial real estate firm Crushman & Wakefield estimates that more than 12,000 retail stores could close their doors in 2018.  You can hardly go a week without reading a headline of a retail chain closing their doors or going into bankruptcy protection. The most prominent in recent memory was Toys “R” Us Inc. in the US. And while they’re still in business in Canada, they are hoping someone will buy them out.

The retail business is notorious for its cutthroat, aggressive tactics in a dog-eat-dog world—Walmart and Target are great brand examples of driving the market into low profit margins and destroying local merchants. Meanwhile, brands like Amazon, Uber, and Airbnb have taken the traditional retail model and completely transformed it, dominating their competition by daring to think differently. This success, plus the fact that in-person transactions still account for a whopping 84.5 % of total retail sales, suggests the problem is much bigger than online shopping options.

Willy Kruh, Global Chair of Consumer & Retail at KPMG, says there are three distinct revolutions taking place to create “a perfect storm that has been and will continue to hit retailers.” According to Kruh the changing demographics, geopolitical dynamics, and technological transformation make up these revolutions. While these certainly play a factor, sometimes a business’ demise boils down to the basics—bad business decisions and poor financial management in a world of cheap credit. If anything has remained consistent through the years, it’s that eventually someone has to pay the bank. Here are six reasons why so many retail brands are closing:

Shifting Demographics – Fashion Trends

At the end of 2017 and after 65 years in business, Sears Canada closed the last of their 130 stores, putting 12,000 people out of work. In 1952, Simpson-Sears started as a national mail-order business, and for years the Sears catalogue was more popular than the phone book. Every small town had a catalogue depot—their presence was better than Amazon with representation in 900 communities. On a regular basis, they produced a 556 page catalogue that sold everything from Allstate Car Insurance, live baby chicks, saddles, and even radiation detectors, according to the Canadian Museum of History website.

The harsh truth is that, after being the economic driver for the last 50 years, the Baby Boomer generation is taking a back seat. The Boomers (54 years and older) represent over 37% of the population but will not be a major target audience for retail brands unless you sell adult diapers (a $2 billion industry projected to grow 10% annually).

There has been a great deal written about the perceived “touchy” Millennials (check out 5 Traits Brands Need To Know About Millennials), but the underlying message to retail brands is that Millennials are different than their parents. They are a demanding crowd who expect more than just the traditional customer service model—they want an experience they can Snapchat or Instagram to their friends. They want to feel good, be socially responsible and, if possible, they want a one-of-a-kind bargain. Simply put, they want the Gucci bag without the Gucci price. They want to feel in control of the entire process. They want to engage brands via digital channels and if that’s too hard, they’ll go somewhere else. This is where the Internet of Everything continues to grow.

So what does all of this mean for retail brands? First, don’t rely on the Boomers to keep spending as they move to a fix income (called a pension). Generation X is doing fine, but isn’t a large enough group to replace the big spending Boomers (and they have too much debt). The Millennials will be the next big spenders when (if) they can secure stable employment. But how those Millennials will spend their money will be very different.

The cold reality is the past isn’t the future. Sears lost touch with their customers. They had their eye on their fierce competition instead of on who was paying their bills. If they had continued to innovate, could they have been today’s Amazon? Retail consultant Richard Talbot said “It’s very sad, and it’s just amazing how they could fritter away their name, reputation and business model.” The watch is now on US Sears Holding and Kmart to see how long they will keep their doors open.

 

The Right Business Model – Retail Therapy

Starbucks is the world’s best-known coffee retail brand. They built their empire on the insight that people wanted a small indulgence of a great cup of coffee in a wonderful atmosphere, and would pay a steep price for it. Past Starbucks International President Howard Behar explained that “We’re not in the coffee business serving people, we’re in the people business serving coffee.” This customer-centric model catapulted Starbucks’ success, so why didn’t it work for their tea offshoot, Teavana?

In the third quarter of 2017, Starbucks announced the closure of all 379 Teavana locations across North America. They couldn’t blame the demise of Teavana on Millennials, who are just as big a fan of tea as coffee. Instead, they attributed it to declining mall traffic. The big difference between a Starbucks restaurant and a Teavana outlet is that Starbucks is a place to sit down and enjoy your coffee experience, while Teavana was a walk in and walk out retail outlet.

Teavana had no ambiance nor community. Charlie Cain, once a VP at Teavana, said “Teavana’s success was as a novelty gift shop in high-traffic, Class-A shopping malls.” Starbucks eventually understood this business model’s limitations, but it was too late. Teavana sold you tea leaves, not an experience, and this mistake was ultimately responsible for its failure.

It’s not all bad news. While some retailers have seen the writing on the wall and given up, others have innovated their way to success. PetSmart, a big-box retailer of pet food and pet toys, saw shrinking margins and understood they had to diversify and create more value by adding the convenience of veterinary medicine, pet grooming, pet training, and pet boarding.  All of these were complementary services that strengthened their brand and protected them from being obsolete—at least for now.

 

Pile it High and Sell it Cheap

The economics of retail aren’t for the faint of heart. Real estate and operational costs, including higher minimum wages, continue to increase pressure on retail margins. Pop ups, fast fashion and off-price chains create an impossibly competitive landscape.  “A pair of men’s dress pants cost less today than they did a decade ago,” explains Manny Chirico, CEO of PVH Corp. (parent company of Calvin Klein & Tommy Hilfiger). E-commerce has also added another pressure point, making it easier for consumers to comparison shop. “The internet has acted as the great price equalizer,” said Joel Bines, managing director of AlixPartners retail consultants.

When a brand is not applying retail economics well, they tend to focus on the bottom line and forget about the customer. But every time a customer goes to the store and gets frustrated, they go somewhere else instead.  Target’s launch in Canada was a great example of this frustration—after many years of Canadians shopping at US Target stores, there was a huge and pent up demand for the same experience in Canada. Instead poor prices, lack of merchandise, and void of service quickly drove them out of the Canadian market.

It’s no surprise that off-price retail stores like T.J. Maxx, Winners, and Marshalls are booming. T.J. Maxx and Marshalls’ annual sales exceed those of Nordstrom Inc. and J.C. Penney Co. combined. Today T.J. Maxx and Marshalls have over 3,800 locations, with the hope of another 250 stores within a year. Discount retailer Dollarama who has over 1,100 stores across Canada has been one of the most successful retail chains who has motivate customers to  increase their spend from one dollar to over four dollars per visit in less than ten years. This equates to almost $3 billion in sales in 2017. It’s interesting that these retail brands aren’t relying on a digital strategy or big data to figure out what their shoppers want—they know its affordable pricing for quality merchandise.

Who’s Minding the Store? Or Is It a Layaway Gone Bad?

Moody’s Investors Service analyst Charlie O’Shea says that US retailers have been under duress for years with the rise of new retail brands and online shopping. Those brands with heavy debt—much of it from leveraged buyouts similar to Toys “R” Us—have been able to push off a reckoning because of a decade of low interest rates and central bank stimulus keeping the credit markets loose and free. Now that interest rates are rising and the credit market is tightening, many retail chains are on their creditors’ radar. J. Crew Group Inc., Claire’s Stores Inc., Nine West Holdings Inc., and Bon-Ton, to name a few. According to Moody’s Investors Service, the amount of debt coming due for 19 distressed retailers is set to more than double over the next two years. So this painful trend of failed retail business will continue.

 

Political Catwalk

The retail industry thrives on stable and growing economies where consumers know where their next paycheque is coming from. In the last couple of years, nothing can be taken for granted. Terrorism, Brexit, uncertain trade deals, wild stock market swings, mass immigration, political shifts in the US and UK, anti-establishment sentiments, and growing “nation-first” attitudes all add up to a pervasive sense of uncertainty that has a negative effect on the retail industry.

Nielsen Company tracks consumer confidence of the top 123 countries quarterly. At the end of 2016, there were only 15 countries that indicated an “optimistic” view on the economy and their situation. Interesting that the US is in third place for optimistic consumers and Canada is just a hair under in the pessimism camp –Trump tweets aren’t helping.

Technology Transformation – Bricks and Clicks

There is no question that Amazon has changed the book industry forever, and now has set its sights on all things retail. Many brick and mortar retailers are scrambling to build their digital presence in spaces like e-commerce and social engagement. It’s curious that while Walmart wants to become more like Amazon, the reverse can also be seen.

Willy Kruh says retailers must become more connected to customers at all potential touch points. This includes “unifying data and analytics to create a holistic view of the customer; going ‘beyond the sale’ to improve the customer experience; upgrading systems to be more agile and better able to integrate commerce and mobile technologies; improving the supply chain; improving ties with brands; and expanding partnerships, especially with fulfilment centres.” And don’t forget—do this at the lowest price possible.

All of this will be possible with big data and artificial intelligence (AI), assuming privacy laws don’t curtail its advancement. While the off-price retailers don’t seem to waste their time or money on technology by overcomplicating the customer experience, others like Walmart and Costco are pouring billions of dollars in to e-commerce and digital capital. They have the business model to allow them to transform, while others who don’t have the ability to compete as this level will struggle. Former Walmart CEO Bill Simon claims that e-commerce retailers like Amazon have an unfair advantage against the small, specialty retail chains because they don’t collect sales taxes unless they have a physical store or office in that state. “Amazon sells below cost and continues to do that. It’s destroying jobs, and it’s destroying value in the sector.”

 

Selling Out

The foreseeable future doesn’t bode well for some retailers. Robert Schulz, analyst at S&P Global Rating, predicts that “[retail] defaults in 2018 could match or exceed last year’s record report level.” As retailers move away from trends, fads, and colours and move towards algorithms, clouds, and robotics, new retail models will come and go—and so will the brands.

While it seems to be a perfect storm, there are many brick  and mortar retail stores doing just fine. E-commerce isn’t the answer to all the challenges, because e-commerce will not replace the desire for human interaction. We are social animals who like to explore and try new things. We are physical, and need to use our senses to get excited to attach ourselves to material things. Because of this, it is estimated that e-commerce will take 25 years to reach 50 percent of retail sales. “This is not the end of retailing as we know it,” says Joel Bines. “People are not going to stop going to stores.” But the experience will continue to evolve and become more interactive with every experience being capture on social media.

No question, brands must have a digital strategy to better service their customers, but it shouldn’t be the brand’s ultimate goal. The goal should be to build a relationship on the customer’s terms, one customer at a time.

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5 Important Tips to Protect Your Brand in an Economic Storm

Daily economic news in Canada and around the world is replacing my desire for suspense novels. Every day, we are seeing new financial lows and ominous warning signs to make any brand get nervous. Household indebtedness is an important number to watch because it tells us how much disposable income consumers have to spend on our brands.

 

Canadians are leveraged through the Teeth

Statistics Canada reported that the ratio of household credit-market debt to disposable income rose to its highest level of 173%!  Total credit-market debt reached $1.89-trillion in the third quarter another record. Mortgage debt makes up 65% and the other 35% is consumer credit, such as credit cards, car loans, personal loans, etc.  If we assume most of this debt resides with people aged 20 to 65 years of age, the average consumer debt (not including mortgages) is $25,744. The Bank of Canada sounded the alarm that household indebtedness and imbalance on the housing sector are key vulnerabilities to the financial sector. In particular there is a segment of younger households with debt-to-income of 350% or higher!

So what does this all mean for brands? The ultimate outcome is consumers have less disposable income to spend on brands. Decrease spending on brands means decrease profits.

But looking just at the wallet isn’t the only thing we have to be concerned about. We also need to understand what consumers are thinking and feeling. Are they optimistic or pessimistic about their future and money supply? Some economists say consumer expectations concerning economic conditions tend to be a self-fulfilling prophecy. If they expect doom and gloom, the economic conditions worsen because they stop consumption. But in most cases they just follow reality.

A Storm Is a Brewin!

There are a number of possible storms that can trigger a negative change in consumer consumption such as:

  • A recession or economic downturn with loss of employment
  • Physical disaster or state of war
  • Increased interest rates
  • Increased government taxes
  • Hard to borrow money or obtain credit
  • Housing bubble burst
  • Fear and political instability

All or none of these could happen. If I knew, I wouldn’t be writing this article. I would be too busy spending my millions from my last successful financial prediction. If any of these storms appear, brands need to be prepared and take the necessary steps to respond to the market and adjust their brand strategies appropriately.

 

Consumer Mindshift in a Storm

In a time of uncertainty and fear of losing one’s job or investments, consumer purchasing habits will change and in some cases drastically. Most brands have a knee jerk reaction not dissimilar to their customers by cutting costs, including advertising, reducing prices and postponing new investments. Harvard Business Review has analyzed historical market downturn data since the 1970s identifying four distinct psychological groups of consumers in hard times:

Slam-on-the-brakes

This is the group that is directly hit with financial pain and reduce all types of spending. It might be futile to go after this group if they truly are strapped for money or credit.

Pained-but-patient

This group tends to be the largest group who aren’t as pessimistic as the slam-on-the brakes but they too economize in all areas. As the bad news gets closer to home they can easily migrate to the slam-on-the-brakes group. Let’s hope it’s not the middle class. MoneySense estimates 60% of Canadians fit in the middle class (based on 2013) and have an average family income between $40K to 125K (a difference of 200% from the lower-middle to the upper-middle).

Comfortably well-off

Like the title describes, these consumers feel secure to ride out the difficult times but are more selective and careful about their purchases, it’s less about their pocket-book but more about image. This group is generally part of the top 5% income bracket.

Live-for-today

This group is less concerned about the downturn (if they are aware of it) and make little changes in their buying habits focusing more on experiences rather than stuff (except technology like smartphones, tablets, etc.). The only way this group’s consumption pattern will change is if they become unemployed. This is the group that has great parties every weekend. I want to be friends with these guys.

Remember, these are just generalizations but can help in setting your brand strategy when the economy gets difficult.

The main issue that brands need to address is price and value if they want to connect with the largest group (pained-but-patient) unless they feel they can survive with the top two groups. WPP, the world’s largest multinational advertising agencies, says in a study that brands need to face the reality of the situation and address customer needs by showing a sense of honesty and care. There are intelligent ways to acknowledge the problem and to reinforce your brands positioning and relationship. Similar to customers, brands must make difficult decisions with limited resources. But most importantly, don’t stop communicating to your customers in some way or fashion.

 

5 Tips to Manage an Economic Storm

Here are some possible tips for your brand to get customers to pull out their wallets, debit cards and credit cards during economic challenging times:

 

Create Added Value

Justify price – demonstrate superior performance and value, product comparison, and testimonials, are some examples.

Add features and services – free support & servicing, check-ups, extra quantity, extended warranties, free shipping or setup, and choice of colours, are some examples.

Economy sizes – buy more, get more – you are positioning savings, retaining sales and not sacrificing value. This is the Costco model of buying bulk.

Do it yourself – The IKEA model. The perception that you have to assemble it means you will be saving money – or just creating more pain at home – “what do you do with all the extra bolts and screws they give you or should there be extra?!”

bounty 25 thicker

The Screaming Deals

Create urgency that this is the best-time to be buying your brand. Pull out all the starbursts, yell and scream – “We have a deal for you!” Art directors will cringe at the thought of this but it does work. Everything from price discounts, promotional and special offers, contests and giveaways. Remember, all you are doing here is renting customer loyalty in the short-term but it will help keep the cash flowing.

ford employee pricing

Reduce Risk & Barriers

Show that you brand cares and understands the situation customers are facing in difficult financial times. Provide alternative payment options – nothing down, don’t pay until next year, zero percent interest payments, free financing, no-credit-check, job loss protect, etc.

hyundai offer

New Innovations and Technology

Make consumers forget about the bad times and create excitement towards a new product with never seen features or never experienced benefits. For many brands this might be difficult to accomplish in a short-time frame. But you can adjust your brand to have new efficiencies or reduce costs. Reduced costs can be accomplished many ways such as production efficiencies, cheaper ingredients, smaller package size, single servings, and slimmed-down basic version with no bells or whistles. So if you can’t wow your customer into buying your products, then reach out with an offer they can’t refuse. Chances are they will end-up buying the more expensive version but the less-expensive version got them through the door.

There have been many new products successfully launched during difficult financial times such as Rice Krispies, Plymouth and the iPod.

ipod

A Beacon in the Storm

The smart brands not only weather the storm but they continue to strengthen their brand relationships. Remember that your best customers can be your best backer during difficult times. With the help of social media they can quickly be mobilized to get your brand message out – from a simple customer referral program to getting “likes” for a new product. Always talk about the value your brand brings –the rational and psychological. Tap into the concepts of small indulgence, sharing and helping. Do random acts of kindness like Starbucks did with #TweetACoffee campaign where people were encouraged to buy a friend a coffee using twitter, or Coca-Cola’s #WishUponACoke campaign in Dubai where they fulfilled wishes for immigrant workers who left home for a job.

 

Weathering the Storm

John Hayes, American Express CMO said at the American Marketing Association’s MPlanet 2009 conference “Consumers are more likely than ever to award their hard earned dollar to those brands that provide the greatest value, build the strongest relationship and connect in the most meaningful way.”

Keep an eye on the economic weather and have a plan ready if a storm should hit. Remember as you scrutinize your customers to determine if they can pay, they too will be watching your brand on how it also handles tough times.

 

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Can You Put Your Trust In Brands?

Is brand trust in a crisis? Brand trust is earned through consistently delivering on the brand’s promise. Brand trust is the only way you can build loyal brand advocates. But the global trend is working in the opposite direction. Young & Rubicam BrandAsset Valuator reveals that consumers trust in renowned brands continues to slide. In 1997, consumers indicated that they had a high level of confidence in 52% of brands. By 2008 that percentage dropped to 22%. The Edelman Trust Barometer confirms the same trend with their annual survey. In 2015, for the first time since the end of the Great Recession of 2007-08, their survey signaled a major decline in trust with 16 of 27 countries dropping below their acceptable 50% level into the “distruster” category. For example, Canada went from a 62% trust level in 2014 to 47% in 2015. A drop of 15%! What’s going on?

 

In the climate of austerity are we starting to see brands cutting corners or blatantly deceiving consumers to protect their bottom line. Since 2007-08 the world economy hasn’t been the same and the recent financial instability in China will continue put pressure on brands to perform.

 

 

Profits vs Brand Equity

 

Professor Klaus Schwab, founder and chairman of the World Economic Forum, explains that “There are four prerequisites of the company’s survival; profitability, growth, risk protection and earning public trust.” While we may expect people sometimes to lie, like athletes, actors and most certainly politicians, we don’t expect brands to lie. Why would global companies risk their brand equity by outright lying to their customers?

 

Volkswagen VW, the world’s largest carmaker (past tense) did exactly that when they lied about their emissions tests through cheating software. Why would a mega brand risk its reputation? Profits seems to be the ultimate goal. Jointly Germany car manufactures, actively promoted to Americans that diesel was the future to meet tougher US emission standards. The only way VW was able to compete and live up to the promise was to lie. The arrogance that they thought they wouldn’t get caught is scary, especially since they publicly promised to be the ‘greenest’ car producer in the world by 2018. The lie allowed VW to claim their diesel engine were superior – selling over 12.6 million of them. The fact that buyers used to pay a $2,700 premium over gasoline engines for VW diesels meant an additional $34 billion in VW’s bank account. But the real problem was the fact that their engines emitted nitrogen oxide pollutants up to 40 times above US standards. This environmental damage can’t be fixed.

 

Alan Hilburg and Tracey Linnell say distrust is very expensive. “Low-trust brands pay a ‘trust tax’ in multiple forms, including higher transaction costs and unwanted legislation. The broader and faster the low-trust reality spreads, the deeper the effect of the higher tax.”

 

In a CNN Money report, the financial service holding company Credit Suisse estimated the cost of the VW diesel emissions scandal could exceed $86 billion. About the same GDP value as a country like Ecuador. Volkswagen is facing a very big trust-tax notwithstanding that they are trying to attract customers today through deep discounts.

 

Recently, another scandal was released by CBC Marketplace revealing that Starbucks and Tim Hortons are misleading their customers. They claim the paper cups collected in their in-store recycling bins are being recycled but are actually going into landfills. It seems these paper cups have a plastic lining that requires an additional step in the recycling process, which costs money. So why would two big brands like Starbucks and Tim Hortons mislead their customers to think that they are being environmentally responsible?

 

What’s the impact of a paper cup? CBC estimates that Canadians use over 1.5 billion disposable coffee cups in a year which is equivalent to more than half a million trees. The environmental impact is significant. I don’t know what the cost of recycling a coffee cup is but it is obviously worth more than the truth. But we will have to see if consumers make them pay.

 

Who Makes These Decisions to Lie

 

There is an apparent financial gain that can be significant over time. But who analyzes the brand risk? In an Intangible Asset Market study by Ocean Tomo, they state that in 1975 intangible assets were just 17% of the market value of the S&P 500. Today, intangible assets are 84% of the market value of the S&P 500. What are intangible assets you ask? They are intellectual property (patents, trademarks etc.), goodwill and brand equity. Most of which is built on a foundation of trust.

 

Here are four factors that may be driving some brands to disregard consumer trust as a license to operate:

 

Brand Proliferation

 

Every day we are seeing new brands entering into the marketplace. The explosion of new brands, globalization and intense competition are major problems for brands. According to a Datamonitor report, 58,375 new products were introduced worldwide in 2006, more than double the number from 2002. The reality is consumers have more choices and more choices means more competition for brands, which means more pressure on profits.

 

Moral: Brand equity is important and should be cultivated and protected.

 

Loss of Message Control

 

Brand reputation and image are now firmly in the hands of the consumer, as they control the conversation via digital channels. Nielsen’s Global Trust in Advertising Survey of more than 28,000 Internet respondents in 56 countries said that 92% of consumers around the world trust recommendations from friends and family above all other forms of advertising; an increase of 18% since 2007.

 

Moral: Brands must integrate into digital channels to communicate with customers on their terms.

 

Disconnect with Technology

 

The Edelman Trust Barometer says that the major factor in depressing trust is the rapid implementation of new technology that’s changing everyday life. Of people surveyed 54% were very cynical about new technology, stating “business growth or greed/money are the real impetuses behind innovation.” The problem with most innovations introduced to the market is little work is done to explain to the consumers why this innovation is a good thing in the first place. Genetically Modified Organisms (GMO) are a good example. GM seeds were introduced to farmers to help them increase yields but for the average consumer what did this mean? What was good about inserting a gene from one plant to another and how would consumers benefit from this. Then add, misinformed activists and their scare tactics to label these ‘Frankenfood’ and consumers start getting concerned.

 

Moral: Brands must speak down-to-earth consumer language.

Companies are Greedy

 

There is an inherent belief that faceless corporations are bad and their sole purpose is to make money anyway they can. Greed is what makes the world go round. The famous legal thriller author John Grisham emphasis this belief in all his books which have sold over 275 million copies (2002) world-wide. Every time a bad apple brand gets caught this distrust is reinforced. Janelle Barlow, co-author of Branded Customer Service explains, “Consumers have come to expect advertising and promotions to overstate, to over promise, and to frequently not deliver.”

 

Moral: Take advantage of this belief and build a caring brand (Six reasons why brands should care)

 

The Truth Won’t Get in the Way of a Good Story

 

James Heaton President & Creative Director at Tronvig Group says “It’s just too easy to lie. The attraction is too great, the professional confidence in the gullibility of the consumer is too well-established, the benefits to the company of a ‘visionary and future-oriented’ brand are too immediate and bankable to pass up for the sake of such unsexy things as brand integrity.”

 

The moral of this story is brand’s need a strong governance model to uphold the brand’s core values. This foundation ensure all business decisions are based on those values. Building strong and lasting brands takes time and resources. Lying is one of the quickest ways to ruin a beautiful brand relationship. The real shame in all of this is there are many brands built and operated by honest people that pride themselves on being authentic and truthful.

 

Kees Schilperoort, managing director at Xfacta, a brand consultancy, said it best, “In Brands We Trust, and trust is a must. Because brands that lie, die.”