By John P. Lass
I grew up in the retail sector. My first jobs were in retail, I focused on retail in my MBA studies, and I’ve advised retail clients throughout my career. I’ve had a life-long fascination with retail and the forces shaping the future of the sector.
So, I paid close attention when I heard recently that Sears/K-Mart could file for bankruptcy within the next 12-18 months. In its prime, Sears was the Amazon of its era. Its catalog retail model completely disrupted the way consumers fulfilled their merchandise needs, and it held sway for many decades. But now its reign is over.
Sears is not alone. During the past year, the list of retailers filing for bankruptcy includes Sports Authority, Sports Chalet, The Limited, BCBG Max Azria, Wet Seal and Payless ShoeSource. Investors’ Business Daily recently ranked the department store sector #197 of the 197 industries it tracks. J.C. Penney, Kohl’s, Nordstrom and Target have all seen declines in comparable (i.e. same store) sales. J.C. Penney is closing 130 of its 1,000 store; Macy’s is closing 100.
The demise of major chain retailers carries significant economic costs. Traditional retailers reported 200,000 layoffs over the past four years (Pacific Standard, 4/11/17). January and February of 2017 alone saw another 38,000 layoffs.
It is unclear whether the growth of e-commerce can offset job losses in traditional retailing. Amazon recently announced plans to hire 100,000 workers in 2017. At the same time, a Sears/K-Mart bankruptcy could cost 140,000 U.S. jobs. Experts differ on that question, but on one point they agree: the workers joining the e-commerce sector will not be the same as those losing their jobs in traditional retailing.
Goodbye, Malls
This shift also has major real estate implications. In a recent American Banker article Garrick Brown, who is head of retail research at Cushman & Wakefield, estimated the number of malls in the U.S. could decline from 1,150 currently to 850 within the next couple years. That is a drop of more than 25%. Daniel Walker, CEO at F&M Bank of Long Beach says, “Many of these malls will be leveled and replaced with housing.”
What is causing this massive disruption? The short answer is “Amazon.” The e-commerce model introduced and perfected by Amazon has had a hugely disruptive impact on the entire retail sector. But the real story is more complex. Many factors are driving the disruption of retail.
First, department stores and malls were overbuilt. Richard Hayne, CEO of Urban Outfitters, recently stated, “Retail square footage per capita in the U.S. is six times that of Europe or Japan. Our industry saw too much capacity added in the 1990s and early 2000s…That bubble has now burst. We are seeing the results: doors shuttering and rents retreating. This trend will continue for the foreseeable future and may even accelerate.”
Second, retail logistics and supply chain management are being upended by new technology-driven approaches. Zara and H&M are “fast fashion” retailers who use globally distributed manufacturing and logistics to deliver new fashion items to their stores in as little as six week after an item hits the runways in Paris. Traditional retailers like Neiman Marcus and The Gap are still locked into supply chain models that require six-to-nine months or more to get new products into stores. Karen Katz, Neiman Marcus’ CEO, summed up the challenge in a Fortune interview by saying: Shoppers want to “buy now, wear now.” Neiman Marcus’ comparable store sales have declined for five straight quarters.
Third, e-commerce has transformed the consumer shopping experience end-to-end, including product research, price discovery, ease of ordering, speed of delivery, and ease of returning unwanted items.
Some retailers are learning to adapt to the new competitive environment by focusing on tight niche strategies. Dollar General, for example, recently announced plans to add 1,000 stores in the U.S., with each store following their proven small-footprint, low cost, low price strategy.
Embracing Digital
Other retailers have embraced digital channels with growing success. Wal-Mart recently acquired Jet.com for $3 billion, suggesting e-commerce will be a major part of Wal-Mart’s future. Wal-Mart also recently announced plans to hire 1,000 tech workers in Silicon Valley to enable it to keep pace with Amazon. Williams Sonoma already generates more than 50% of its revenue from its digital channels.
Why should this matter to credit unions? Most importantly, credit unions are retail financial services firms. Rather than selling physical merchandise, the “merchandise” is financial products and services. Virtually every one of the trends noted above will impact credit unions either directly or indirectly.
Second, a credit union’s branch strategy must adapt to the new physical store reality facing retailers. What happens if the demise of major retailers and malls spreads to smaller retailers and strip shopping centers?
Third, major e-commerce players are almost certain to directly enter the financial services sector. A few weeks ago the buzz on tech blogs was that Amazon wants to acquire Capitol One. Amazon already offers a credit card marketplace. Google has acquired more than 100 fintech companies, but has yet to unveil its grand scheme for financial services. Alibaba is bidding $1.2 billion to acquire Texas-based Moneygram. Each of the “Big Five” tech players – Amazon, Microsoft, Facebook, Apple and Google – has identified financial services as a primary expansion market.
What can a credit union do to remain viable and relevant in this new retail landscape? On the retail blog Salsify.com, Peter Crosby recently wrote, “Brands and retailers must start seeing digital commerce as a complementary aspect of the in-store shopping experience – not a competitive one. Or physical retail will go extinct.” (My emphasis added.)
He continued, “In the era of distributed commerce, it’s all about giving shoppers options – allowing consumers to buy products however, whenever and wherever they want. It’s also about personalization and creating a seamless, engaging and memorable shopping experience regardless of what channel customers are using.” Crosby’s advice has direct application in the credit union space.
Ten Ideas Credit Unions Should Consider
Here are 10 ideas credit unions should consider in applying the hard lessons learned from the retail sector:
1) Now is the time to act: The forces driving the demise of malls and major retailers have been building for the past 15 years, but the collapse has accelerated in the past three years. Don’t wait until it is too late.
2) Embrace omni-channel: Eliminate channel conflicts. Build an infrastructure so that physical supports digital, and digital supports physical. Break down product and channel silos.
3) It’s all about the member: Look at everything from the member’s perspective. We’ve been talking about customer centricity for the past 15 years, but today it is an imperative to survival.
4) Be nimble: When deploying new branch locations, consider lease vs. buy, and shorter rather than longer-term leases. Who can predict what lease costs will be five years from now, let alone which shopping centers will survive?
5) Small is beautiful: Creative small-footprint food retailers such as New Seasons and Trader Joe’s are posing major challenges to Kroger, Safeway and Whole Foods. Dollar General is thriving with a small footprint and just 4 FTEs per store. Chase is reducing its average branch footprint from 4,400 to 3,000 square feet. You can no longer afford to be inefficient.
6) Focus on Mission: Small and medium-size retailers thriving today are focused on providing a unique value proposition to specific segments of the market. If you’ve shopped at Trader Joe’s recently, you know what I mean. At TJ’s mission and culture are managed as key competitive advantages.
7) The 80/20 principle: The 80/20 rule states that 20% of the inputs account for 80% of the results. Trader Joe’s has mastered the 80/20 principle by carrying only merchandise that shoppers want to buy. The Amazon Bookstore is another example.
8) Learn to say “No”: A corollary of the 80/20 rule is that you must say “No” to products, channels, and costs that do not fit the new nimble strategy required to survive retail disruption.
9) Be wary of the low-price trap: As noted, some retailers such Dollar General are competing successfully with a low-price strategy. Note, however, that price leadership absolutely requires a low-cost structure to make it a viable strategy.
10) Urgency: Urgency does not mean crisis, nor does it mean panic. What it does mean, in the words of Jim Collins, is a disciplined readiness to “confront the brutal facts.”
In his book Only the Paranoid Survive, Andy Grove brilliantly elaborated upon the concept of strategic inflection points. He wrote: “Strategic inflection points are not a phenomenon of the high-tech industry, nor are they something that happens to the other guy.” In my view, if the factors driving the disruption of the retail sector do not constitute a strategic inflection point for the credit union system, nothing ever will.
John P. Lass is president of Lass Advisory Services, LLC. For info: www.lassadvisoryservices.com, or john@lassadvisoryservices.com.