I have been really intrigued by publicly traded retail companies for the last 6 months. Seems like the big box store brands went double down this year in a last ditch effort to compete with Amazon and lost the bet big time.
But what has been fascinating me is the handful of retail brands that are doing great in spite of the Amazon disruption to retail stores.
After 20 years of getting pushed out of the marketplace, I think there is finally an opportunity for small business owners to have an advantage in the retail marketplace.
Is retail dead? I don’t think so, but it definitely just shifted coarse in a major way last year. Small businesses have the opportunity to delight their customers with amazing in store experiences. Emphasis on the word Delight. Small business brands that focus on delighting their customers are going to thrive in a whole new way going forward.
-If you are a free spirit, that’s it… go create amazing shopping experiences. For the analytical out there, continue reading on…
I remember watching a transition in consumer behavior happen when I was growing up. I would guess it was 1996, Walmarts were opening in every town. Family owned businesses were slowly dying off.
Then Target, Lowes, Home Depot and Dollar Stores seemed to open everywhere and really put the nail in the coffin for Small business retailers. Fast forward to November of 2008, consumers turned to shopping online in droves.
I’m guessing that Macy’s led the charge in online clothing sales and Amazon led the charge in a number of other departments. A battle for market share between the big box stores (Walmart, Target, Best Buy, Home Depot, Dollar General, Bed, Bath & Beyond) vs. the online retail giants (Amazon, Macy’s, Overstock etc.) played out from 2008 to the end of 2016.
Now Walmart is learning how it feels to be up against the ropes.
Here is what I think happened: In the 3rd & 4th quarters of 2016, retail box stores made a huge bet, they bought a ton of inventory and then heavily discounted their pricing (if you noticed huge sales, even in the major malls etc.) tons of inventory marked down to Amazon price levels. They were either desperate, they over-bought based on a good economy or they were thinking that they could win at the volume game with narrow margins. From what I can tell on their balance sheets, they didn’t win the bet.
Where did brands like Walmart get the money to make this bet? Income investors are out there starving for income beyond just owning dividend paying stocks, so income investors turned to buying corporate bonds. (Higher risk/higher return etc.) Then companies like Walmart took that debt to ramp up inventories, finance heavy in-store discounts and buy back shares of their own stock (prop up their stock price and hide underperformance).
So when a big box store heavily discounts their products, but then they don’t increase volume enough … they see a decrease in the operating income (the money that’s left over from their direct Cost of goods). In other words, they may have sold more items than ever before but they became less profitable… I’m guessing 10% less operating income.
The people who lead these companies will look at the numbers and say … “lets cut labor” and prop up our company with stock buy backs financed by debt.
At the customer facing levels, company morale goes down, they under-staff their stores and the customer experience goes from average to awful.
What’s left are these giant warehouses of stuff, with a greeter standing at the door. Customers come in, pick out what they need and then check themselves out (note the increase of self check outs) basically it’s the same experience as shopping online or worse, it’s actually not an experience at all.
Here is the Small Business opportunity… believe it or not, there is a growing marketplace of customers who value a delightful shopping experience over getting the most dirt cheap price.
Lulu Lemon Athletica… ok, so not exactly a family owned small business, but it’s publicly traded (I can read their financials) and it’s a good example. They have 360 stores that focus on delighting the customer. Looking at a number called Gross Margin, I can tell you that they are not offering deep discounts, they are offering a delightful shopping experience.
In conclusion… 20 years ago, Walmart disrupted the small business marketplace and consumer behavior transitioned to Shop Cheap. In 2016, Walmart got pushed to the wayside by Amazon as consumers decided to Shop Online.
In 2017 the big box stores will start to cut direct cost (labor and rent) and become self checkout warehouses. Some big box stores will start to fall to the Amazon disruption (from 2017 – 2025). A large number of consumers will return to small businesses and brands that offer a delightful shopping experience at a fair value.
(On a side note, someone other than Spirit Halloween will figure out what to do with 30,000 Sq.Ft. of retail space… and indoor electric go cart tracks, trampoline parks, indoor golf/put put, etc. will become a thing in every city.)