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The little “Redbox” rewrites movie rental retail

Kiosk success underscores the retail fundamentals

The definition of retail is: a place where consumers buy a product or service one at a time off the “shelf”.  While much has been written about the advances of internet retailing, there is little attention paid to the lowly vending machine.  Redbox vending kiosks are generating serious cash and have changed the perspectives on movie rental retailing.

The counter intuitive trend of Redbox kiosk retailing

When we first highlighted the concept of “Redbox” kiosks, it just still that … an early retail concept in fact piloted by McDonald’s.  There was considerable debate about whether consumers would rent a movie while at the grocery store, drug store or “Micky Ds”.  Many also postulated that the convenience of movie downloads or rentals from cable/satellite TV would quickly wipe out movie rentals on DVD.

Redbox is essentially a vending machine about the size of large side by side refrigerator.  This kiosk can hold up to 700 DVDs, with typically 200 popular titles.  Something must be working.  Redbox has grown from a handful of locations to over 15,000, with 5000+ more planned this year. 

Both Blockbuster and Netflix are scrambling to come up with some kind of kiosk alternative.  Perhaps, it is because the ubiquitous Redbox can generate as much as $50,000 annual revenue per machine, with no staffing present and minimal infrastructure.

What makes Redbox so successful?

From the eye of the consumer it’s as simple as:  “milk, shampoo … and a $1 movie rental.  Redboxes are strategically located in the highest traffic areas, where consumers shop for consumables like groceries, health and beauty or fast food.

The naysayers quickly point out that Redbox success comes at the time of recession, when consumers are shopping for bargains on everything.   The movie rental price of just $1 drastically undercuts the competitor pricing models.  Won’t this business simply go away when the economy turns around?  Perhaps, but there significant consumer experience factors with Redbox that go beyond pricing.

Redbox consumer experience & execution factors that make it work

·         Location, location … location – Redbox is where consumers shop for mainstream consumables every week / day

·         Redbox was piloted and rigorously tested by McDonald’s

·         Redbox was purchased by Coinstar, who is a specialist in vending machines, locations and servicing them

·         Assortments are carefully managed and replenished based on both hit and classic titles

·         Consumers can quickly find hot and preferred movie titles … literally right in front of them

·         Consumers can swipe a credit or debit card to rent

·         Consumers can easily return the movie rentals to any Redbox regardless of where they rented

Will Redbox meet the demand of all consumers? No.  But, the Redbox concept and brilliant execution have radically changed the movie rental business for “spur of the moment” renters who literally “bump into” the opportunity for a movie night.

From the consumer point of view, Redbox is a “killer app”! It enables a very efficient experience of finding, renting and returning at a movie for just a $1.  No hassle with finding movie guides, scheduling downloads or recordings, or returning DVDs in the mail.

Let’s see now … should I order the fries from the $1 menu, or get a movie?  Redbox has made the choice incredibly easy for busy shopping moms and many overweight dads like yours truly.

We need a worldwide retail calendar!

Where’s the online “App” for retail holidays & events?

As I was sitting on several worldwide conference calls with Asia last evening, I realized that they did not have a clue that July 4^th is a big family holiday celebrated in US this weekend.  Likewise, I didn’t realize “The Festival of Lights” was celebrated as a holiday in Hyderabad, India.  An absolutely “killer app” would be a worldwide calendar of holidays and festivals … especially those impacting retail.

Local holidays have huge seasonal impact on retail sales

Most working in retail recognize the seasonal nature of the business.  In the US, “Black Friday” (the day after Thanksgiving) is one of the two largest shopping days of the entire year.  The largest day on the internet in the US is “Cyber Monday” (the Monday after Black Friday).  The holiday seasonality associated with November and December is so dramatic in the US that retailers start locking plan-o-grams and advertising as early as June, so as not to miss peak sales seasonality.

The US is certainly not unique.  December holiday seasonality impacts sales in much of Europe, where countries also celebrate similar holidays and traditions.  However, neither the holidays nor retail sales seasonality is universal.  For example,  retail seasonality is greatly impacted by the lunar New Year in much of Asia [Year of the Ox].

With global retailing – We need a Global Retail Calendar!

The nature of retail has become global.  Walmart and Carrefour have hundreds of stores spread across many countries.  Best Buy, Apple and European CE retailers are also expanding internationally. 

Each retailer must have an internal calendar of key holidays and events by country.  Such an international retailer calendar would be essential in planning effective ads, promotions and inventory to support them.  But, I can honestly say:  “I don’t know … I’ve never seen an international calendar from within a retailer”.

What I do know is that I rarely if ever see a consumer electronics manufacturer with a current, up-to-date global retailer calendar that marks significant holidays and events by country.  If  there are any vendors who have one, it has to be in the packaged goods and food categories.  The sales in packaged goods categories are highly impacted by local customs and holidays.

Who knows how many “Independence” Days are in July?

If you don’t travel or live in another country, it’s very easy to become parochial.  Americans tend to think that Independence Day is celebrated on July 4^th and unique to the US.

Since I lived in Canada for awhile, I do remember that July 1^st is “Canada Day”, and it truly is a “bank holiday” that impacts retailing and planning.  There must be something about the heat of July that makes for a good celebration in the northern hemisphere. 

Can you name all of the “independence day” celebrations by country in July? … can you even look them up?

In searching for a worldwide calendar, I have found one that is very simple, easy to search with worldwide holidays and celebrations.  And, it is a non-profit website!  While Earth Calendar comes with a disclaimer that holidays listed may not correspond to bank or store closings, it is one of the simplest, searchable sources I have found on the web to date.  Check out the “Wikipedia” of worldwide holiday calendars:

            www.EarthCalendar.net

Major Opportunity – Create a Worldwide Retail Calendar App!

Ok, I’m probably one of the last people not to have an iPhone, so I don’t know how to search the 45,000+ iPhone Apps to find a worldwide calendar.  What retail professionals and vendors need is a worldwide retail calendar “app” that can be downloaded to any “smartphone” or calendar system.  I would gladly pay to have the Earth Calendar downloaded to my Outlook.

Note to anyone who develops this “killer app” and makes tons of money …

Please note that the US has a dearth of “bank holidays” that create 3 day weekends. We desperately need the time off for July 4^th without conference calls, so that we have time to go shopping to celebrate … with enough time to “recover” from celebrating.

Happy Independence Day to all those celebrating in July!

 

Never run out of toilet paper again

Do you really “need an Alice” for household shopping?

Alice was a character on a popular TV show called The Brady Bunch.  Alice was the “domestic coordinator” that had an uncanny ability to run a household with 8 kids.  Now, there is a new web site Alice.com.  It is betting that “everyone needs an Alice,” as a personal shopper to help coordinate purchases of household commodities online.  Do you really want to buy your toilet paper online and have it shipped to your door?

Clever name … Interesting Business Model

The first key to web success is a clever, memorable domain name.  Alice is a very well known name with some brand cache for US consumers who grew up watching sitcoms.  Alice was the housekeeper on The Brady Bunch saving the day, dispensing wisdom and managing a crazy household like many parents aspire to.  Ok, it was television.  But, who knew that Alice.com was available as a domain name?  Good choice!

With “Alice” (let’s be personal and drop .com), the appeal for consumers is competitive pricing, coupons, AND free shipping.  To do that, Alice allows manufacturers to set their own prices.  Alice also requires that manufacturers pay the site to handle logistics, including the free shipping.  Alice makes money by selling ads, intelligence on consumer spending, and distributing samples for vendors. 

Why it might succeed – Appeal for CPG Vendors

Consumers will readily go to research and make purchases online for “significant” items like MP3 players, cameras and even computers or TVs.  It is simply not practical to go to each CPG (Consumer Packaged Goods) vendor site and search for different brands or deals on commodities like soap, tooth paste or toilet paper.

Alice seems to have perfect timing.  In this economy, consumers are searching for savings, and trading down from major brands to cheaper house brands at Walmart and the club stores.  Many CPG brands are seeing the potential benefits of selling products through Alice:

1.     Ability to set their own prices … “real time”

2.     Reduce expensive retail ad and promotion costs

3.     Increase ability to promote their brands and identity

4.     Promote and test new products … especially “green”

5.     Pool costs of shipping, so consumer can receive total purchase basket shipped free to their home

Challenges of online retailing

The challenges of online retailing are complex.  Simply put, “Retail is Detail”.  There are just as many “devils in the details” for online retailing.   Just ask Amazon about the infrastructure, processes and systems required to be profitable a wide assortment of items.

There have been many less than spectacular attempts to sell commodities online.  “Peapod” and others have tried selling groceries online in major US markets.  Alice is starting with the fundamentals most consumers need, and avoiding risky fresh and perishable foods.

US consumers are use to driving the cars and SUVs to “Wally World” to stock up on what they need at good prices.  To succeed, Alice first has to meet and beat the EDLP price benchmarks set by Walmart and others.  While Alice currently has more than 6000 household items for sale at launch, it must maintain or exceed the assortments of the big box mass merchant retailers that offer both key brands and their own house brands.

What differentiates Alice – What are the success factors?

Alice.com was founded by Brian Wiegand and Mark McGuire.  This is not their first startup or web based venture.  They started Jellyfish.com, which was purchased by Microsoft and morphed into Bing Cashback, where consumers can save money across online purchases. 

Differentiate or Die!  We have referenced this “Law of the Retail Jungle” many times … and it applies to online retailing as much, or more than bricks and mortar retailing.  So beyond the pre-requisites of competitive prices and free shipping, what differentiates Alice?

“Everyone needs an Alice” serves as good tag line and synopsis of Alice’s value proposition.   Alice is based on the concept of being your “personal assistant” than helps manage the household.   The founders compare Alice to being “like Netflix”, which helps remind shoppers to reorder.  Alice also has social networking components - like Amazon where consumers can review products, and Facebook network components where they can share experiences and what they purchase.

Back-story – Power of the Alpha Moms and Mommy Bloggers

Marketers are paying increasing attention to “alpha moms,” who become powerful advocates for products and sites.  Many of these advocates are also prolific “mommy bloggers” who become conduits for viral marketing to moms and women who are the CPOs – Chief Procurement Officers for the home.

As Alice.com formally launches, it has been the rage on many of the female blogs these past few weeks.  Just take a  look at this recent post from www.5minutesforMom.com.   You cannot buy better advertising for reaching Alice’s core target market:

I am beyond impressed with Alice.com. It’s ingenious, it really is. And really, doing my shopping with a few mouse clicks, beats emergency trips to the grocery store, hands down. Thanks to Alice, I will never run out of toilet paper again.

Ok, people get paid to post some blogs.  But, Alice.com is popping up on a host of blogs and web sites … that’s how it ended up in this blog!

Will Alice.com crack the code for on-line consumables?

The most powerful word in the English language is FREE.  It is free to setup an Alice.com account.  Shipping for six items or more is free to your house.  Do you really want to make an emergency run to the store for toilet paper?   Maybe you need Alice … go to Alice.com and see if she delivers what you need at competitive prices.

Turn! Turn! Turn! … To everything there is a season

The popular ballad is today’s theme song for retail

This hit song made popular by The Byrds is actually credited to Pete Seeger.  Seeger did write the music.  However, the lyrics, with a few minor Seeger adaptations, are almost verbatim from the Bible, Ecclesiastes 3:1.  While the Bible’s message posits that there is a time and place for everything, The Byrds song could most certainly be the anthem for today’s retail success and survival!

A time and a reason to Turn in Retail

With due apologies to Seeger and the Bible, here are the first few lines of the ballad quickly adapted for retail [retail substitutions in blue]:

To every product (turn, turn, turn)
There is a season (turn, turn, turn)
And a time for every purpose,in retail

A time to be born, a time to die
A time to sell-in, a time to sell-through
A time to end-of-life, a time to transition
A time to laugh, a time to weep

To every SKU (turn, turn, turn)
There is a lifecycle (turn, turn, turn)
And a time for profitability, in retail

Retail U à  More details on Turns & GMROII

The majority of questions and requests from last week’s Retail University workshop were related to “turns” and the impact on profitability.  The requests for more information on turns couldn’t be timelier, especially with today’ economy and moves by both retailers and distributors to increase turns and profitability.  While some countries refer to “turnover” as the annual revenue volume, retail “turns” typically refers to inventory turns on an annualized basis.  While inventory turns can be calculated in units or dollars, the basic formula is:

 

Caveats about retail inventory turns                        

In the strict sense of the definition, inventory turns has nothing to do with the total amount sold … it’s all about how you flow the goods to achieve the inventory levels required to achieve sales.  Retailers manage this through the dynamic process called “Open-To-Buy”. The key to Open-To- Buy is forecasting future inventory requirements (shipments needed) based on the inventory required to meet sell-through targets @ the weeks of supply or turn level objectives.

Since inventory is one of the most expensive things retailers own, it is not surprising that they have been drastically cutting inventory levels since the recession.  Instead of trying to achieve in-stock in all stores, retailers are sacrificing some sales in order to achieve less weeks of supply.  Reducing inventory might sacrifice a few sales, but the benefits of significantly increasing inventory turns lower both risk and working capital costs.  As a result, there now is even greater demand on suppliers and distributors to:

1.     Hold more inventory for quick response to sales

2.     Enable and execute more frequent, smaller shipments

3.     Provide the infrastructure to enable “just in time” shelf inventory

Why turns are so critical to retailer profitability

Inventory turns are an index of both investment and risk.  If a retailer can achieve the same annual sales at 8 turns versus 4 turns, their investment in inventory is cut by 50% … and profitability is doubled! This is most easily illustrated through a case example showing the impact of turns on GMROII – Gross Margin Return on Inventory Investment.

Inventory Turns and GMROII Case Example

Let’s make the math and assumptions easy and use the following:

Annual sales = 1,000 units

Retail sale = $ 100 / unit

Annual Sales = $ 100,000

Gross Margin = 20%

Total Gross Margin = $20,000

 

Scenario 1 – 4 Turns	Scenario 2 – 8 Turns
Total Gross Margin = $ 20,000 (1000 units X $20/unit)	Total Gross Margin = $ 20,000 (1000 units X $20/unit)
4  turns = Inventory 250 units Avg Inventory @ cost = $ 20,000 (250 units X $ 80/unit)	8  turns = Inventory 125 units Avg Inventory @ cost = $ 10,000 (250 units X $ 80/unit)
GMROII =  $ 1.00 (GM $ 20,000 / Inv $ 20,000)	GMROII =  $ 2.00 (GM $ 20,000 / Inv $ 10,000)
Retail Rule of 100 à  80 (GM 20% X 4 turns)	Retail Rule of 100 à  160 (GM 20% X 8 turns)

Simply put, retailers can NOT survive getting a return of $1 GM for every dollar invested in inventory.  All things being equal, doubling the turns doubles the GMROII profitability by reducing the inventory by half.  While not exact, the same doubling effect can be seen in the Rule of 100, which is good way to approximate an index of retailer profitability.

Vendors can’t afford to make up retailer profit on margin!

The old saying about retailers is still true – “Buyers get measured on negotiating Gross Margin %, but Gross Margin $ pay the bills.”   In the example above, if turns were kept constant, the vendor would have to double the GM% in order for the retailer to achieve the same GMROII at the level of 4 turns. It is highly improbable that vendors can significantly increase margins in these days of commoditized products and eroding prices.  Still, that doesn’t stop the “800 lb big box retailers” from asking for both margin and turn increases.  Without partnering to measure turns and GMROII, vendors are flying blind!

Bottom Line à It’s all about Execution to Turn, Turn Turn!

The single most powerful force driving retailers and distis worldwide is execution that drives inventory turns.  What are the keys to that execution?  Shared data and ultimately shared forecasts via CPFR (Collaborative Planning Forecasting Replenishment) initiatives.  If there is true partnership, it can be a win-win-win for all partners in optimizing sales at the lowest costs with reduced risks.

To paraphrase the final stanza of the Byrds “Turn” song:

A time to gain, a time to lose
A time to break the silence, a time to invest
A time to share, a time to partner
A time for profitability, I swear it’s not too late

Now if I could just get the tune out of my head and into those that need to partner to Turn, Turn Turn!

Join Retail University now on Facebook

Facebook @  IMS Retail University

In an effort to reach out to all of the recent participants in Retail University, as well as the 12,000 past graduates, IMS has created a fan page on Facebook.  If you have a Facebook profile, simply use the search bar to search for:  IMS Retail University (spaces between).  Click on option to “become a fan” and you will receive updates as the fan page is updated. You can also click on the Facebook badge that is located on the bottom right of our blog. It will take you directly to our fan page, if you have a Facebook profile.

The IMS Retail University fan page will provide information on upcoming events … and future sessions like those planned in Vietnam, China and Australia this July.  You will also see periodic retail news headlines and links to retail articles that are noteworthy.

The Retail U fan page is not intended to replace the ResultsCount.  We will continue to post in-depth insights and observations on the blog weekly, and send monthly e-newsletters to subscribers monthly.  

Become a Facebook fan today:  IMS Retail University

 

Retail University held in Redmond, WA

Channel Wars – Better than reality TV

“Class warfare” is playing out before our eyes in retail

 

Even though Best Buy is the last US retailer standing in the Consumer Electronics (CE) channel, the war for CE dominance is really just beginning. The following post reflects the intensity of the battle for CE consumers, and how battle lines are being redrawn in store and across the blog-o-sphere:“The only interactive displays at Walmart are the greeters.”  Now that’s cold,  “smack”  talk of any good reality showdown.

Are there retail channels in the US anymore?

A retail “class of trade” has historically been defined as “a class or group of retailers carrying similar products, competing for similar customer segments”.  In the past, retailers focused on winning the war for customers against competitors within their channel – Walmart vs. Target vs. Kmart. 

Even as recent as 5 years ago, retail “channels” were a primary basis for how vendors went to market in retail.  Product lines were differentiated by class of trade or channel – mass merchants were not sold exactly the same products as Best Buy or Circuit.  Even today, vendor programs, bundles and promotions are often customized to fit the needs and the nature of the retailers by “channel” or class of trade.

Declaration of War - Walmart vs. Best Buy

Make no mistake about Walmart’s CE intentions to go head to head with Best Buy.  There are Walmart stores now carrying more than 100 flat screen TVs, multiple notebooks, a large assortment of digital cameras, accessories, etc.  In search of consumers and to replace declining volumes, manufacturers are now more willing than ever to sell Walmart premium lines of their products.

Today, Walmart is no longer just competing on the traditional mass merchant dimensions of product and price.  Walmart is retrofitting its 3,500 stores with interactive digital merchandising displays, and even dedicated staff in some electronic departments.  Even Costco has established “concierge services” for digital flat screen customers.

Best Buy is not stupid enough to compete with Walmart on price.  Best Buy is firing back with its strengths: services, Geek Squad and the Blue Shirts. Best Buy also just announced 13 store locations with new levels of interactive product merchandising and consumer experience.

Why the lines between US retail channels are blurring

There are host of reasons why US retail channel distinctions are blurring:

·         Search – 74% of consumers search online before purchase

·         The internet levels the playing field – especially on price

·         Traditional retailers are now multi-channel with their own sites

·         Economic conditions force even Walmart to look for new customers and ways to build market basket

·         Manufacturers  can ill afford to miss any sales where today’s consumers now choose to purchase

One of the Retail University workshop participants this past week made a very astute comment regarding US retail channels:

 “The classification retail channels seem to be very fuzzy if you look at products or even consumer segments.  If there are retail channels in the US today, it seems to be more about business models and how to differentiate customer experience.”   

These are the kinds of observations that make this Professor of Retail U a proud and humble student!  Great insight with major implications. 

One Law of the Retail Jungle prevails – Differentiate or Die!

Retail is definitely not collapsing into one channel with several “brands”.  To survive, retailers require a business model that drives both sufficient traffic and a profitable market basket.  To do that in today’s economic climate, retailers must rely on more than just “assortment” or price, both of which can easily be trumped by any internet retailer.  The key channel differentiator for bricks and mortar retailing will be based more on levels of consumer experience rather than assortment. 

The question now becomes: how vendors will move beyond traditional product assortment to differentiate channel programs, based on levels of consumer experience and satisfaction?  

Who will be the first vendor to come up with “consumer experience” rebates and programs versus just volume discounts?

Downsizing Retail – What is the right size?

The “Big Box” may not always be better or profitable

Last week’s post was about the impact of the economy on the struggling US mega malls.  But, even the successful “big box” retailers are aggressively exploring new smaller formats.  What are the retail drivers and implications of the downsizing of retail space, and what is the right size?

Challenges of the Big Box mega retail space

The US suburban malls are the epitome of destination retailing.  In the times of a robust economy, accessible credit and cheap gas, US consumers readily drove their cars to the malls as a destination for shopping and entertainment.  The current metrics are showing not only a slowdown of consumer spending, but a shift in shopper habits away from suburbia malls.

The challenge is similar for major big box retailers.  Like the mega malls, they have to be able to drive traffic and repeat trips.  For the mass merchants like Target, this has meant an even greater shift to groceries and consumables.  This creates a new challenge: the commodities drive traffic, but also generate lower margins, often on an increasing number of SKUs, which in turn, can impact SG&A and operating costs.

Two of the major challenges of running a very large store environment are: 1) the amount of people required (SG&A costs), and 2) the amount of SKUs and inventory required to stock the big box and get consumers to come evaluate the “breadth and depth” of the assortment.  Both of these potential differentiators are also huge cost drives.

What if you are more of a “specialty big box” retailer like Best Buy or an Office Super Store?   What do you do then to compete and drive traffic?

Testing the potential of smaller retail shops

The good retailers test concepts.  The great retailers are always evaluating how to evolve stores to meet evolving consumer needs and behaviors.  The current trend and best practice is toward evaluating smaller, more focused formats.  Funny how the most successful retailers are also the most aggressive testers … obviously, the best don’t rest on their laurels!  Here are just a few of the downsize concepts being tested:

Best Buy, the last big box CE specialist in the US, is aggressively rolling out new small format mobility stores.  They continue to test new concept stores focused on women through their WOLF group.

Office Max, a big box office warehouse, is currently testing much smaller more focused stores called Ink, Paper, Scissors. 

Radio Shack, not a big box retailer, but a very large retail chain with 7,000 stores located in a lot of malls, is testing some very targeted high end wireless concept stores.

Walmart, even the biggest of the big box retailers, continues to test a variety of smaller format and specialty stores, including Marketside, stores within stores, medical clinics within stores etc.  

The advantages of smaller “test stores”

There are a host of advantages to testing smaller concept stores:

1.     Lower entry real estate costs into new markets

2.     Much lower capital, inventory and operating costs

3.     Ability to move concepts and stores closer to consumers

4.     Ability to focus on differentiation, both SKUs & services

5.     Ability to quickly bail out at lower exit costs if doesn’t work

Winning formula? – Must balance the numbers

At the end of the day, if the retailer can find the right formula to drive enough traffic to a smaller format, there is a potential to lower operating costs and drive a greater profitability per square foot.

But, there are a lot of “ifs” to make smaller stores work … BIG IFs!  

The power of the big box is the breadth of the assortment that drives traffic to the one-stop shop, where they can purchase it all at one stop, at attractive prices.

The smaller retail space must be very focused on consumer needs.  There must be a differentiated assortment “deep enough” and with enough “value adds” that consumers are compelled to make a special trip to a specialty shop.  Here in lies the art of “location, location, location”.  It is far easier and more profitable to move a smaller store to a location to “harvest” natural consumer traffic, than to build in remote locations and attempt to drive traffic to a new store, despite the lure of “cheap real estate”.  “Cheap” real estate is not cheap if there is no traffic.

At the end of the day, perhaps, the best metrics to evaluate smaller specialty retail formats are both SG&A (Sale General and Administrative – “operating costs) and Revenue per square foot (meter).  

One only needs to take a look at the latest stat from the latest US retailer financials to see the winning combination of Apple combining the power leveraging focused assortments in small shops to drive revenue per sq. ft., which in turn and offset labor costs as percentage of revenue (SG&A).

Click picture to enlarge. 

Vendors must start executing category management!

There is an old retail fundamental that is still bottom line truth today:

Vendors don’t sell to retailers … they sell through retailers.

It is still a retail jungle out there, and it’s getting both more competitive, and more complex with increasing numbers of formats within retailers. 

Account teams and category marketing must move beyond “selling in” a product line and programs to a retailer like Walmart or Best Buy.  Walmart is no longer just a “mass merchant” … it is many different formats of stores:  Walmart super centers, Walmart small box, Sam’s, Marketside, Walmart international, etc.

Far too many vendor teams are still focused on traditional retail programs, merchandising and product line reviews.  Success with today’s retailers and the emerging formats will require SKU rationalization and category management by store format … all the way down to the store front.

Will the US Retail Malls Come Tumbling Down?

The fundamental retail metrics for retail malls to survive

US malls were designed as “destinations”, complete with ice skating rinks, amusement parks, and a wide selection of specialty shops and department stores.  Analysts now classify more than 100 of these centers as “dead”.  What can the retail metrics tell us?  Will this become a worldwide trend?

The Malling of America

During the 1950s and 60s, the ubiquitous shopping mall sprang forth in the population centers of the US.  By the 1970s, every city of even a few hundred thousand people had to have a “mall”, or even two.  They were designed as “retail meccas,” where Americans could drive their cars and shop a wide variety of large “anchor” stores, as well as a dizzying array of specialty shops carrying the latest in fashion.  In short, they were huge, multi-level, self-contained super structures designed to pull consumers.

But, US malls were more than a place to “shop”.  They were designed as “destinations”, complete with food courts, movie theaters and other forms of entertainment.  The largest malls even had ice skating rinks and amusement parks featured in the center courts.  Kids became “mall rats” and went to malls to hang out, meet friends and to shop.  The Mall of America in Minnesota even had satellite hotels so that families could plan extended stays to shop the hundreds of stores.

Inside the center of Mall of America, Minnesota

So what changed? … Why are US malls dying?

These economic times have increased pressure on all retailers. But, the malls started struggling even before the recession hit the US.  There are fundamental trends in both consumer shopping habits and retailer strategy that have put the US malls at jeopardy:

1.     In these economic times, consumers are spending less on luxuries and fashion featured in mall shops.

2.     Growth of big box retailers with stand alone stores and discounted prices have lured cost conscious shoppers away from malls.

3.     The internet is everyone’s competitor not only on price, but convenience … why go fight the traffic to shop the mall when you can get the same item cheaper shipped free to your home?

4.     Key mall “anchor” stores are finding the mall rents too high in the face of double digit declines in sales, so they are building stand alone stores or focused on the internet.

What do the key retail metrics forecast for US malls?

One strategy is to revitalize old malls with new openness and courtyards to make them more like open air markets found in Europe.  But, this takes significant capital.  With the current recession, there is a critical credit crunch, especially for real estate and refinancing.  General Growth Properties owns more than 200 US malls and just filed for bankruptcy. They are unable to refinance the billions of debt still coming due on the existing properties, let alone generate new money to revitalize malls.

There is an industry rule of thumb that any large enclosed retail mall must collectively generate significantly more than $250 of sales per square foot of retail space, or it is in high risk of failure.  The current US average for all malls has already dropped to $381 per square foot.

Does this mean that individual stores in malls are failing?   Apple mall stores have certainly beat the average and set new benchmarks, often exceeding more than $3000 sales per square foot!  But, even at Apple there is worry that sustaining revenue will be difficult if store traffic goes down due to drops in overall mall traffic.    

The large mall “anchor stores” in the US often occupy two, three or more levels.  These major department stores are suffering double digit drops in sales, with very expensive mall leases for retail space.  When they leave, there is a very noticeable empty void and significant loss of customer traffic.  Literally hundreds of these major US mall anchor stores are in jeopardy, many not renewing their mall leases. 

According to Green Street Advisors, US malls posted a 6.5% overall decline in tenants’ sales.  Analysts project that there are already at least 80 “dead malls” with dangerously low sales and high store vacancy rates.  With no investment capital, this number will easily exceed 100 US malls by the end of the year.

The bottom line retail metric – Traffic!

After several decades, the big destination US malls have lost appeal, and financial viability.  Customers vote with their plastic.  They are going to “Wally World”, “Big Blue” and their computer screens to shop.  If the big anchor stores in US are suffering double digit loses and pull out of expensive leases, there is a death spiral in overall traffic for the mall and all shops suffer.

Key retail metrics like conversion rates, attachment of accessories and building the market basket are core drivers of retailer profitability.  But, there is nothing to “convert” if the customers stop coming.  If the malls don’t reinvent ways to get consumers to come back, they are doomed.   When US malls become “ghost towns” with empty parking lots, there are no other retail metrics that matter.

Will the failure of US malls spread worldwide?

First, not all US malls are failing.  The more recent ones built as more open air centers continue to drive traffic.  Instead of enclosed mega structures, the open air malls incorporate ball parks, green spaces and other attractive ways to get consumer to come stroll, shop and stay.

The large multi-level mega malls built in the US are not typical worldwide.   Many European “shopping destinations” are really a collection of shops built around a city center, or even historic districts that by nature draw traffic.

No lack of shops or shoppers in open concourses of historic City Center of Munich, Germany

 

From what I witnessed in my travels to Asia Pacific, the malls there are not destined to fail anytime soon.  While they are multi-level and even high rise, they are a collection of much smaller shops.  There are few, if any major anchor stores taking up a whole end of a mall.  While there are some shop vacancies on the very top floors, the vacancy is merely a “stall” waiting to be filled by a new vendor.

Singapore fashion malls are more compact with smaller shops

And many of these malls are built at natural traffic centers and crossroads. Often, the Asia Pacific malls are clustered together in close proximity making it easy for shoppers to walk between them.  

The bottom line:

The US built malls as elaborate destination locations with entertainment enticing shoppers to drive their cars to come shop.  The shoppers are now going elsewhere for entertainment and to shop.

Shopping malls in other countries, particularly in Asia are built at natural crossroads and centers with natural traffic, and accessibility.  These malls are built as a “mosaic of smaller shops”, that ebb and flow based on consumer preferences. 

In this economy it is far better and more profitable to build mall shops in proximity to consumer centers with traffic … than to build expensive destination malls with enough pizzazz to draw long distance traffic, with the hope they make the trek back.

Do Distributors have to be a “black hole”?

Creating more supply chain visibility and profitability

Distributors serve a critical role of getting products to retailers in most countries outside of North America and Western Europe.  Once vendors ship to distributors, it almost becomes a “black hole” devoid of information.  There are several ways vendors motivate and partner with “Distis” to improve supply chain visibility and profitability.

Distributors are essential for retail in many countries

As I was walking through the cramped stalls of shops in IT malls in India and China, I couldn’t help wonder how all that stuff got there.  The shop owner certainly didn’t bring it all in on his way to work.  And, even medium sized trucks certainly didn’t get through most of the alleys and narrow streets!  Distributors have amazing abilities to get vendor goods to the smallest of shops via auto rickshaws and even bicycles.

 

In most countries, retailers lack their own distribution centers and the ability to take large quantities of goods.  The retail shops are small – many are literally stalls with little ability to store back stock other than what is on the shelf. 

Distributors fulfill several critical requirements: 

·         Ability to receive large shipments on trucks from vendors

·         Storing sufficient inventory for large numbers of shops

·         Ability to distribute stock to shops quickly as sales are made

·         Navigating the smallest streets to reach small and remote shops

·         Collecting payment, administering programs, and some support

Distis have become the “black hole” of the supply chain

In situations where the relationship and the shipments to large retail chains are direct, there is a need for real-time need to exchange information.  Vendors with direct shipments to retailers rely on EDI (Electronic Data Interchange) to not only expedite orders, but to track inventory and sell-through all the way to the distribution centers and even the store front levels.

Old habits and business practices die hard … or at least hard to change.  In most countries where Distis are used, there is an exchange of data between vendors and the distributor to place orders, track shipments and payments to the Disti.   

From there, it is literally a “black hole”.  Once the vendor shipment has been made to the Disti, there is virtually no data on what happens to the inventory, where it is shipped, which retailers have inventory, who doesn’t, where it is being sold most rapidly, etc.  To further complicate matters, individual retail shops may be buying products through more than one distributor.  

And, if more than one division of the vendor ships products to the Disti, all hell breaks loose in terms of who’s got what, at what price in the channel.  When chaos reigns in the supply chain, the vendor usually loses.

Motivating Distis to change

Old habits die hard.  It can be especially challenging to change entrenched business practices, especially with distributors who often have long standing relationships with retailers.  But, Distis are smart business people.  The best way to motivate them is through “fear of loss” and the potential for gains in their metrics.

Depending on the country, the number and size of organized retail chains are growing.  The best global retailers like Best Buy, Carrefour, and Walmart are building stores in multiple countries.  They are also bringing supply chain expertise, along with demands for retail data exchange evolving to a direct supply relationship.   Without being crass, fear is a motivating factor.  Said another way, multi-national vendors have an opportunity to partner with Distis to understand and fulfill these new requirements for multi-national and local country retail chains.

Perhaps, the most effective way to motivate Distis is measuring gains achievable in their own metrics and business model.

Visibility Through Metrics and Measurement

Distis have a tough business model.  They take in inventory on their books, and don’t realize revenue until they sell it out to a retailer.  In many ways, the critical financial metrics of a Disti are very similar to a large retailer with distribution centers:

·         Inventory investment

·         Weeks of supply à Inventory Turns

·         Margin achieved on sales

·         GMROII – Gross Margin on Inventory Investment

Of these, the greatest on profitability is inventory turns.  If vendors can partner with Distis to gain visibility on their “sales out” to retailers, there is partnership potential to lower Disti inventory levels to increase turns, while maintain or even increasing sales revenue.

Partnering through Proof of Concept

Visibility enables both partners to take action.  Said another way, you can’t manage what you can’t measure.  Creating visibility to more data in the supply chain enables both partners to respond to trends proactively, rather than just take margin or price moves.

Ok, how do you cut through all the crap and get started?   Rather than logic or retracing history, the best way to get started by opening up visibility is to create a “proof of concept” test with a Disti.  The project doesn’t have to be “all in”.  It can be with limited SKUs and even limited retailers or regions.  The key is to move beyond sharing data to developing a joint scorecard that contains metrics that matter to both partners.

Results Count … everything else is a conversation.

 

Battle Royal in the US for the Electronics Aisle

Why CE retailing will never be the same in the US

Analysts originally predicted that Best Buy would grab more than 50% of Circuit City’s $11 billion business.  On the surface it made sense – Best Buy was the only major Circuit City competitor left in the consumer electronics channel.  But, not so fast!  Vendors need to re-evaluate their retail strategies as the economy and the web transform how the top retailers are gearing up to compete in new ways across channels.   

Amazon business model sets new standards and benchmarks

Brick and mortar retailers use to benchmark pricing based on Walmart’s EDLP (Everyday Low Price) standards.  And, while EDLP has not gone away, the new standard everyone competes with is the online retailers like Amazon.  E-tailers can literally set pricing by the minute if necessary.

While e-tailers still only account for a minority of the overall sales, the business model and efficiency of Amazon is proving highly successful.  Amazon’s annual revenue of $19 billion continues to grow unabated.  Along with other successful e-tailers like Newegg, the pure CE online retailers are setting the standards for both price, and expansive SKU selections, which cannot be merchandised even in the largest of stores. 

When Walmart cites Amazon as a primary competitor, the nature of retailing has fundamentally changed toward multi-channel.

The “Whale of Retail” takes pages from Best Buy’s playbook

 

Retail restructuring didn’t start with the recession or the demise of CE retailers like Circuit City.  Walmart “got serious” about consumer electronics several years ago.  They not only stocked a considerable collection of flat screen TVs, but a limited selection of computers as well (albeit locking them behind glass prevented theft and sales).

The headline from the Wall Street Journal is descriptive and profound: “Walmart Steps Up It’s Game in Electronics Aisle.”  Walmart has literally gone after Best Buy’s core consumers by re-merchandising the CE aisles in more than 3,500 US stores starting this week.  Not only are the aisles roomier with more products, they include interactive displays, with stand alone and feature sections for popular brands such as Apple, Dell, Sony.

With over 135 million customers passing through its doors each week, Walmart has become a destination for “value” on quality technology, brands, and selection.

Best Buy must excel at “People and Personalization”

In analyzing the critical success factors of the consumer experience, we have identified the 5 Ps of retail success:  Products, Place, Process, People, and Personalization.  Best Buy must differentiate on at least two to survive.

With aggressive pricing and expanded assortments, Amazon and Walmart have made it virtually impossible for Best Buy and others to compete on price.  And, now that popular brands are featured in new expanded assortments on the web and in Walmart, Best Buy will be hard pressed to win on: Products (assortment/selection), Place, or Process.  

Don’t count out Best Buy just yet.  They are pioneers of innovation, such as the Geek Squad and partnerships with Carphone Warehouse. Best Buy has also been successful at growing a profitable market basket through attach, services and “house brands”.  But going forward, Brian Dunn’s big bet to differentiate has to be on his people.  The Blue Shirts must have the infrastructure, demo platform and capacity to personalize services in ways not found in the aisles of Walmart or in the virtual aisles on the web.

The question now before the former CE Champion in the US is whether they can differentiate on creating the “Best” experience to get consumers to  purchase at Best Buy … Or, will cost consciours consumers cross over to expanded selections of quality brands at best prices in Walmart or Amazon?  

What does all of this mean to Vendors …

CE retailing is no longer specific retailer or class of trade.   Success in CE will not be a function of product sets or assortment orientation, but more a function of execution and differentiation.  While Best Buy will continue to be successful as long as they differentiate, they will not be the only game in town … they won’t even be the largest CE retailer in the US.   This has new and profound implications for vendors!

CE vendors in the US must practice category and channel management like never before.  In simple terms, it makes no sense to give the same SKUs to Amazon, Best Buy and Walmart to bang away on price … one only needs to look at the price of netbooks to watch that price war unfold at the commodity level.

There are several key strategies vendors must evaluate to be successful in the highly competitive world of multi-channel CE competitors:

1.     SKU Rationalization by Channel – A very clear strategy for which retailer gets which SKUs … and WHY!

2.     Channel Management – As volumes consolidate, there will be no end to vendor requests for support.   A very clear strategy is needed to create accountability for levels of merchandising and consumer experience based on both products and investment.

3.     SKU Differentiation – A very clear strategy for both retailers and consumers on what differentiates sub-brands, models, etc.

4.     Category Management/Development – Pricing pressures on expanded assortments will require even more precision on managing retail assortments, inventory and execution.  It may even require the courage and discipline to reduce SKUs to grow sales and develop categories.

5.     Strategic growth over sell-in quotas –   Sell-in shipments to make a volume quota means nothing, and is a recipe for margin/erosion.  Vendors must become more strategic partners, who develop and drive the market basket of the retailers, as well as their own sell-through profitability. 

In the US, electronics will no longer be dominated by a channel or retailer.  The recent changes at Amazon and Walmart have provided consumers increased selection of quality brands at nearly identical pricing.   There never has been a more important time to “Differentiate or Die” in CE retailing.