The Surprising Winners and Losers in
the Retail Revolution
The growth of ecommerce is
creating new leaders in retail while putting many famous brands at risk.
Professors Rajiv Lal and José Alvarez pick the winners and losers in part two
of our series on their new book, Retail Revolution. PLUS: An excerpt on
the future of grocery stores.
The
new book Retail Revolution: Will
Your Brick-and-Mortar Store Survive? lays out the thesis that traditional store-front retailing is at an
inflection point, under tremendous pressure from ecommerce and the changing
wants and needs of a new generation of shoppers—the millennials.
In
Part 2 of our three-part interview with Harvard Business School Marketing
professors Rajiv Lal and José B. Alvarez, they discuss who is winning this
revolution and which brands appear to be losing ground.
Rajiv Lal: Home Depot thought about the challenges facing their
business very strategically. They've gone category by category and asked: What
is the best way to service the customer in this category? Does it makes sense
to sell these products online, in the store, or both, and how? Take lighting as
an example. Home Depot asked: How do we best help customers with their lighting
needs? What knowledge, products, and services do they need and in what form?
What should we do with lighting in the stores? Should we eliminate it, sell it
only online? If not, what is the requisite assortment we should carry? What's
the appropriate pricing in the store? They decided on a limited assortment
in-store, that is mostly private label and where price comparison is not possible.
Jose Alvarez: This approach to categories is seminal to what they've done
to reinvigorate their business. They looked strategically at all aspects of
their offering across the various channels they have at their disposal to
maximize customer satisfaction and the return they get on their TIPS
(Technology, Inventory, People, Space) assets. For example, if your toilet
blows up, you aren't going to wait two days for delivery for a part from
(competitor) Amazon Prime. You need that part right now. You need it to be in
stock, and you need somebody to help you understand what to do, what kind of
silicon sealer you need—Home Depot does a great job of that. They make sure
they carry enough inventory so you can get that job done immediately. Lighting
fixtures, on the other hand, are a different animal. There are hundreds of
thousands of options to choose from and generally the need is not an immediate
one. They carry a selection of good, better, and best options in-store along
with the electrical supplies and tools you will need to install the fixture.
Online they carry an endless aisle of products and they provide videos and
expert advice to help with installation. They do not deploy their TIPS assets
in a one-size-fits-all manner. Home Depot has studied deeply how to best deploy
their assets in order to satisfy the customer in a way that allows for an
excellent return on invested capital.
They have also paid very close
attention to what is likely their most profitable customer segment,
professionals. They have created wonderful technology and processes to support
customers that align with their entrepreneurial culture. If you are a
professional today buying from Home Depot, an app on your phone lets you order
directly from the job site and gives you the option to get delivery to the site
based on urgency of your need and willingness to pay.
Lal: They've created new sources of value for their customers
that did not exist before.
Q:
And PetSmart. What's made them so successful?
Lal: PetSmart saw the online threat early and built a strategy
to insulate themselves from the damage that ecommerce could inflict. They saw
what was coming, and entered services. If you look at the store today, almost a
third of PetSmart's sales are in services, things like grooming or hoteling—those
sales aren't going away, they are not threatened by the Internet. And while the
pet parent waits for the services to be completed, PetSmart provides a wide
array of in-aisle treats and accessories to drive impulse purchases. At the
same time, they've maintained a strategy of exclusivity with pet food so that
they are not stocking all of the same items that Walmart and the supermarket
carry.
Alvarez: PetSmart saw the Internet challenge back in 1999 and 2000
when Pets.com came along; they dreamed up this strategy very early on. To me,
it's a lesson on just smart strategic leadership. They saw the threat and came
up with a smart strategy that placed them where the puck was going.
Q:
Those are two winners; which businesses do you think are at risk?
Alvarez: In the worst shape are the stores that said: I can fix
that. Maybe it's not fixable—maybe 80 percent of your products are now going to
be sold online or in a digital format, like books. Barnes & Noble and
Staples are two companies in great peril because, not only is the Internet more
efficient at what those stores sell, what they sell may no longer needed by the
customer!
Those are the easier ones to see in
decline. But there are some businesses that at first glance look to be OK but
on close inspection are in trouble. A company that's going to be in trouble
over the next few years is Kroger in the food space. They are a very large
company. They have all this leverage against suppliers. They have huge cash
flow, customer counts are fine, they've crushed the competition. But I think
they are at an inflection point. Is the typical Kroger store going to be where
the average person is going to want to shop in a few years? I don't think so.
This is true for the supermarket space in general; it's really not about Kroger
as an organization. Supermarkets are these very large, impersonal, and
inefficient spaces for customers. Grocery shopping is one of the most
unappealing chores for a large swath of customers. The supermarket space is
ripe for disruption by ecommerce.
But it's not just about the
ecommerce. Other changes are going on in the environment. People don't know how
or don't have the time to cook, so they are eating pre-prepared meals more
often. There is also the fact that if you go to a CVS or a Home Depot, there is
a panoply of products that were once the sole domain of supermarkets.
Twenty-five years ago supermarkets had more than 80 percent of the consumables
market share; today that number is in the low 40s. Now it appears that
everybody sells consumables including the 30,000 or so dollar stores in the
United States. You only have to take a look at the UK supermarket space to see
what is ahead for the US supermarket industry in this regard.
Q:
The book makes the case that even Walmart is under threat by the changing
environment.
Lal: Look at the business model. Walmart catapulted into a
$400-billion-plus company by luring customers into stores with groceries at
very low margins, reaping the benefits of additional trips, which generated
increased sales of higher-margin general merchandise items. But if you look at
what has happened to that model, it is challenged on all fronts. On the general
merchandise side, Walmart has competition from the Amazons of the world. So
their ability to make money with general merchandise has become compromised
because ecommerce forces prices down. Amazon's cost structure and their formula
for deploying assets is superior to Walmart's. At the same time, the traffic
that was being generated by lower food prices is being threatened by much
leaner and more competitive grocery stores. The icing on the cake is that the
lower-income customer has another choice in the form of dollar stores. So, on
all counts, you have a model that is under significant pressure.
Alvarez: What's fascinating is that the model has worked for Walmart
for a very long time and looked like a juggernaut that nobody believed could be
stopped. You had this strategy of drive-traffic-with-food and make money with
everything else—but everything else is really under a lot of pressure.
With dollar stores you have this
shopping trip interrupter that dissuades you from going to Walmart—they have
paper, milk, frozen food, bread. The Walmart machine was driven by traffic; now
they've lost the traffic, lost the margins, and you say, holy cow. That's the
conundrum that Walmart is in.
Think about this. There are more
than 30,000 dollar stores in the US, you can find one everywhere: in rural
regions you find Dollar General and in the urban settings you have companies
like Family Dollar. The Walmart machine is no longer printing dollars, it's
minting quarters. It's very, very problematic. Walmart has a new strategy that
uses smaller stores, supercenters, and their warehouses in an ecosystem that
includes ecommerce, but it's going to be a lot of work for them to make that
happen. The investments will be enormous and they will have to shift their very
strong culture in ways that will be uncomfortable if not impossible. I believe
this may push Walmart to make their first major acquisition in the US.
Q:
For what companies will 2015 be a make-or-break year?
Lal: The thing about retail is that no year is a make-or-break
year. Every retailer has nine lives. A&P, still alive. Sears Roebuck, which
has been on its deathbed for Lord knows how long, still alive. JCPenney. Even
though the business is sick, the patient fights on. Retailers always find a way
to repurpose the real estate.
Alvarez: We have seen a huge number of store closings but not a
concomitant number of store brands dying. The concept the brand represents may
be dead to the consumer but the stores are still there generating cash flow. In
retail location is still critically important.
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