Remarkable Retail

Are Small Stores the Answer to Department Stores Woes?

Episode Summary

This week we ask the question: can small stores save department stores? And do they, in fact, need saving? Despite the suggestion that the department stores may be rebounding, it is looking more like a dead-cat bounce. In response to decades long declines, Macy's and Kohl's are placing big bets on rolling out smaller stores as a way to revitalize market share growth.

Episode Notes

This week we ask the question: can small stores save department stores? And do they, in fact, need saving? Despite the suggestion that the department stores may be rebounding, it is looking more like a dead-cat bounce. In response to decades long declines, Macy's and Kohl's are placing big bets on rolling out smaller stores as a way to revitalize market share growth. We dig into how we got here, why most departments stores have engaged in timid transformations, where we're going and what needs to happen to make a small store strategy work. We also explore Nordstrom's "Local" format strategy and whether a hub and spoke go-to-market strategy may be the way forward. 

But first we open up with the retail news that caught our attention this week, including our take on what to make of last week's monthly retail sales data and a slew of earnings reports. As we heard from Walmart, TJX, Kohl's and others the vexing question is how they got stuck with so much inventory and what Target smart to take a big hit this past quarter. Then we discuss the new buy online pick up on floor initiative from Yeezy at the Gap, before dipping into a Business Insider story (pay wall) on Amazon's reboot of its physical store strategy. We close with a visit to the Wobbly Unicorn Corner as "disruptor brands" largely continue to underwhelm.

Thanks to our presenting sponsor, MarketDial!

GroceryShop discount offer:

Valid for Retailers and Brands only, use code RBR1950  to access our special rate / ticket price is $US1950.  Offer code  expires 9/22/22.

Past podcast episodes of note:

Honey, I Shrunk the Stores

Amazon and the Fault in Their Stores

The Mall is Dead (Long Live the Mall)

Blow It Up? It's Time for The Great Reconfiguration

 

About Us

Steve Dennis is an advisor, keynote speaker and author on strategic growth and business innovation. You can learn more about Steve on his       website.    The expanded and revised edition of his bestselling book  Remarkable Retail: How To Win & Keep Customers in the Age of Disruption is now available at  Amazon or just about anywhere else books are sold. Steve regularly shares his insights in his role as a      Forbes senior contributor and on       Twitter and       LinkedIn. You can also check out his speaker "sizzle" reel      here.


Michael LeBlanc  is the Founder & President of M.E. LeBlanc & Company Inc and a Senior Advisor to Retail Council of Canada as part of his advisory and consulting practice.   He brings 25+ years of brand/retail/marketing & eCommerce leadership experience, and has been on the front lines of retail industry change for his entire career.  Michael is the producer and host of a network of leading podcasts including Canada’s top retail industry podcast,       The Voice of Retail, plus  Global E-Commerce Tech Talks  ,      The Food Professor  with Dr. Sylvain Charlebois and now in its second season, Conversations with CommerceNext!  You can learn more about Michael   here  or on     LinkedIn. 

Be sure and check out Michael's latest venture for fun and influencer riches - Last Request Barbecue,  his YouTube BBQ cooking channel!

Episode Transcription

Michael LeBlanc  00:06

Welcome to Remarkable Retail podcast Season 5, Episode 7, brought to you by MarketDial. I'm Michael LeBlanc.

Michael LeBlanc  00:13

And I'm Steve Dennis.

Michael LeBlanc  00:14

Well Steve, we are together we're here, welcome to Canada my friend, - 

Steve Dennis  00:18

We are, we are up close and personal, -

Michael LeBlanc  00:20

Up close and personal. If this sounds a bit different, we're recording this live, in my backyard on our on our mic set. So, it's great to have you here. How are you, how are you, how are you? What are your impressions so far, of it's not your first time to Toronto, but what are your impressions, (crossover talk), -

Steve Dennis  00:33

Well, the weather is beautiful, and you have cooked a tremendous amount of food. So, that's been awesome and my daughter's are about to arrive. So, it's all good.

Michael LeBlanc  00:41

So, we're just getting our podcast episode in before we head off to the airport and hi-, pick up your the kiddos and then you're going to be continuing on to visit the third amigo in Montreal, -

Steve Dennis  00:52

That's correct, - 

Michael LeBlanc00:53

Mr. Carl Boutet, -

Steve Dennis  00:54

Carl Boutet, coming up, coming up fast.

Michael LeBlanc  00:56

Yeah, fantastic. All right. Well, listen without, without further ado, that's probably enough do for our listeners. Let's get into our news of the week. It's a solo episode, we're actually talking about an episode where we're, and we've been asked this a couple times, we've done episodes on what we would call it small store strategies before in fact, what was our Honey, I Shrunk the Store. So, this is not our first cut or first episode dedicated to thinking about small store strategies. But this episode particularly, we're getting a lot of questions about it. So, talk, talk, just a little preview, before we get to the news about what we're talking about in small store strategy thinking.

Michael LeBlanc  01:30

Well, the main thing is around department stores, Macy's and Kohl's in particular, who have announced small store strategies as part of their hopes, I guess, to reinvigorate growth. So, we're going to go into that, in particular, as well as kind of talk just in general about large formats versus kind of satellite or hub and spoke kind of strategies.

Michael LeBlanc  01:53

All right, and that's going to be coming up. So, let's jump into the news, let's see what, what strikes you I see some numbers, which actually look fairly positive from a consumers perspective. I've often said, the US consumers like that time-, Timex watch takes a licking but keeps on shopping. So, they se-, we continue to see the consumer is still spending.

Steve Dennis  02:09

Regular listeners may know that every month, the US Census Bureau puts out their overall commerce report. Once again, the press focused on the month over month numbers which were flat, which made it sound pretty bad. But if you actually look at the year over year numbers, they were up 10.3% overall, -

Michael LeBlanc  02:27

Good results, good results (crossover talk), in general, right?

Steve Dennis  02:28

Now, it's a little bit hard to parse out the inflationary aspect of that, though, we know that's a pretty big, pretty big part- ,

Michael LeBlanc  02:35

Yeah, - 

Steve Dennis  02:36

And when you dive a little bit, (crossover talk), -

Michael LeBlanc  02:36

But it's no, it's an uneven part, I was looking at Jason Goldberg's, post about, you know, smoothing out inflation, but at some categories, there's actually D-inflation. 

Steve Dennis  02:37

Yeah, consumer electronics in particular has had a lot of deflation. I think there's some evidence that apparel is going through that. -

Michael LeBlanc  02:44

Yeah, - 

Steve Dennis  02:45

food is on the on the higher side. So, yeah, (crossover talk), -

Michael LeBlanc  02:53

Some foods though like, if you look at the what, what we call in the business, that trifecta of food, beef, pork and chicken, chicken price has actually come down, -

Steve Dennis  02:57

Chickens come down, right, yeah, -

Michael LeBlanc  03:00

Right. So, you know, the details are all in the numbers, you know, when you throw out inflation at this percentage versus this, right, once you get down into it, it gets really interesting.

Michael LeBlanc  03:09

Yeah. And, and if you look at the category level, year over year numbers, a lot of them were up again, hard to tell exactly how much is inflation when you look at the aggregate numbers, but clothing, general merchandise, and the home categories, were all pretty flat. So, when you think about transactions likely be down or, or flattish. And then again, consumer electronics and appliances were down a lot. So, I think a lot of that is the deflationary impact, because there's just a ton of excess supply. 

Michael LeBlanc  03:40

Yeah, - 

Steve Dennis  03:41

That people are heavily discounting, you can get a little bit more sense of what's going on. When you start to look at some of the big players, not only just looking at the numbers in total, but a lot of times in their earnings calls, they really unpack transaction growth versus average retail growth in which categories were, were strong. So, some of the key things from their earnings were, were definitely that inventory is a huge issue. A lot of the major retailers reported having their inventory levels, way up. Kohl's in particular, inventories up 49% year over year, -

Michael LeBlanc  04:12

Now we're we, (crossover talk), - 

Steve Dennis  04:13

On negative sales, - 

Michael LeBlanc  04:14

We were sitting around the campfire last night talking about a number like that,  and, -

Steve Dennis  04:17

Because that's how exciting our Friday nights, (crossover talk), - 

Michael LeBlanc  04:19

That's what we do when we sit around a campfire, but we you and I were both a bit flummoxed or vexed at that number because it was like, how does somebody authorize a 40% lift (inaudible), - 

Steve Dennis   04:22

(Crossover talk), I know. I still don't I mean, I do think and we've heard a little bit as there's, there's some of this over inventorying which are orders that got hung up, - 

Michael LeBlanc  04:37

Timing, - 

Steve Dennis   04:38

That couldn't be canceled. Got stuck in China or on the seas or whatever. But yeah, it's, it's hard even if you say that's a decent amount. When you're maybe I mean, it's hard to imagine Kohl's, Kohl's is probably not planning for a down month. We'll talk about them a little bit more in a second. But you know, they weren't planning for 20-30% increase and Walmart, Target way over inventoried and also they certainly weren't planning for those kinds of sales increases. So, TJ Maxx, same thing, so you go down the line here. And there's just these huge, huge increases in inventory with sales, you know, frankly pretty tepid to not great. So, a great time to buy apparel,  great time to buy a big screen TV. 

Steve Dennis  05:18

The big news, maybe not such a surprise was Target. So, Target had their profits down 90% year over year, and it was almost entirely on the aggressive markdowns they took. So, folks may remember either from the podcast or from just following the news that Target warned, actually twice. - 

Michael LeBlanc  05:36

They're one of the first ones , (crossover talk), - 

Steve Dennis  05:38

In the past has three months to, to really talk about how they're seeing some decelerating demand overall, some reallocation of spending, but that they had way too much inventory. So, they took a very aggressive posture. They still ended the quarter, though, pretty heavy. So, I don't think they're done quite yet. But there's a sense that maybe they're going into the fall a little bit cleaner.

Steve Dennis  05:58

Walmart, a lot of people were pleasantly surprised they did a bit better than their lowered expectations, sales, just up a little bit. profits, you know, solid but very high inventory levels, so that there's kind of a sense that they need to get a bit more aggressive, but really across the board. Again, we're not going to get into everybody. The other one I guess I'll mention (inaudible) Kohl's, not only do they have this crazy inventory level, but they were really one of the few retailers that have reported that actually had sales down significantly, their revenue fell by 8%. And their net income of course plummeted, - 

Michael LeBlanc  06:32

And that's year over year, not month over month, -

Steve Dennis  06:34

Year over year. So, not to bad mouth Kohl's, but you know, they've, they've been trying a lot of new initiatives of, of rolling out Sephora to continue to go to all their stores are not quite there yet. 

Michael LeBlanc  06:46

Yeah, - 

Steve Dennis  06:47

That supposedly has been a great source of traffic, you know, they're doing Amazon pickup, they're rolling out this new buy online, pick up in store self checkout thing, a bunch of these other brands that have been, been showcasing. And you know, it just doesn't seem to be gaining any traction. So, I think that's now they're going to have to deal with moving this big pile of inventory through. So, I think the next quarter is going to be especially ugly.

Michael LeBlanc  07:10

Speaking of big piles, I had to laugh when I looked at the merchandising for the new Gap line from, -

Steve Dennis  07:16

Oh, yeah, Yeezy, - 

Michael LeBlanc  07:18

Yeezy. And, and what did you, what did you say online, buy online pick up on floor, -

Michael LeBlanc  07:24

Yeah, because I saw the I didn't I wasn't aware of this. But a friend of the show, Neil Saunders is always out there showcasing the fault in people's stores with bad merchandising and displays and whatnot showed the Yeezy, I get what were they hoodies or something that were stored in like, big bags on the floor, -

Michael LeBlanc  07:42

Purposely, like purposely, (crossover talk), - 

Steve Dennis  07:43

Yeah, - 

Michael LeBlanc  07:43

That's the way he wants (crossover talk), to merchandise, yeah, - 

Steve Dennis  07:45

And it just looks like a pile of crap, basically. So, yeah, I don't I don't understand, (crossover talk). I don't understand what the kids are into these days. But, (crossover talk), -

Michael LeBlanc  07:55

So, maybe, yeah, maybe we're, (crossover talk), - 

Michael LeBlanc  07:56

Maybe we (inaudible) will ask, ask your kids when we pick them up, about what think about that, how about that -

Steve Dennis  07:56

Maybe, yeah, (crossover talk), - 

Steve Dennis  08:00

Okay, (crossover talk), I'm sure they'll have brilliant merchandising suggestions.

Michael LeBlanc  08:03

Let's talk about Amazon for a sec. So, there's a, a bit of a memo released on Business Insider, and I couldn't read it. I just don't happen to subscribe to Business Insider right now, but it was talking about, and it gets back to the fault in our Amazon stores, but they're reordering including Whole Foods (inaudible), -

Steve Dennis  08:16

Yeah. 

Michael LeBlanc  08:17

So what, what would, would you would, what did you pick up from that?

Michael LeBlanc  08:19

Yeah, -

Steve Dennis  08:19

So, there's quite a few things in there. And um, you know, I guess it's not clear how much of this is, you know, absolutely the case. But yeah, Business Insider got their hands on? Well, they talked to a few people off the record, I guess. And they also got their hands on a few, few emails. But I think the key points were, first of all, they're bringing in a couple of new executives into the grocery part of the business, one from Woolworths in Australia and the other from Tesco. So, you know, to the, I mean, there's been some sense that maybe Andy Jassy, is the new CEO wasn't too enthralled with a physical store strategy. This certainly suggests you know, not only that Harrington becoming the new the new head of the group, but, -

Steve Dennis  08:20

But some pretty high paid, expensive, well experienced talent coming in. And then there was just some more detail around plans to roll out and license the Amazon Go technology, and just some of the things they need to do to improve Amazon Fresh, which we talked about on that episode. 

Michael LeBlanc  08:45

Yeah. 

Steve Dennis  08:45

So, it seems like they're, you know, they're clearly going to be investing behind it. There wasn't nothing in the I wouldn't necessarily make anything of this. But there was nothing in particular about Amazon Style that was revealed in the story. That's the new apparel concept.

Michael LeBlanc  09:27

It, it wouldn't surprise us that Fresh would be a big, big focus of any retail thinking. Right? 

Steve Dennis  09:31

Yeah. 

Michael LeBlanc   09:32

I mean, it's, it's the big play. 

Steve Dennis  09:33

Absolutely, yeah. And there's also a sense that there was a little bit of sort of the drama or the history of the battle between the old Amazon execs and Whole Foods, which apparently was relatively contentious, according to that. I mean, we I've heard that but this seemed to really support that and that whole foods executives were going to be more prominent in the grocery strategy going forward.

Michael LeBlanc  09:53

Let's take a visit trip to the wobbly unicorn corner. 

Steve Dennis  09:56

Yes, (crossover talk), our new part of the metaverse, (crossover talk), while the uni-, corn-, corner (crossover talk). This week, some of the re-commerce folks are circular commerce folks, Poshmark and thredUP, both reported and a consistent pattern here we saw with Warby, Allbirds, others, sales up, profits getting worse, some layoffs being announced as well. And then they, they've been in the news quite a lot but Peloton continues to be, -

Michael LeBlanc  10:23

Yeah, - 

Steve Dennis  10:24

Quite the train wreck, laying off a ton of people, raising prices, closing stores, -

Michael LeBlanc  10:29

I think I read their closing almost all their, like they're very aggressive, (crossover talk), -

Steve Dennis  10:33

It's a little unclear, (crossover talk)I think exactly how far they're going. But yeah, it seems like a big, big, (crossover talk), reset on, on those stores and I also saw I mean this is I'm sure part of the I think they laid off 1500 people a something very big number that they Peloton opened a big office not too far from me in, in Dallas up in the suburb of Plano and apparently they're going to try to get out of that space. And one that didn't make it onto our little notes here that happened is our friends at Wayfair. Way work or we fair? Also big layoffs.

Michael LeBlanc  11:05

Hey, come on. He's just got funding from, (crossover talk) he did get funding from your, your favorite, -

Steve Dennis  11:10

Yes. -

Michael LeBlanc  11:11

Horowitz, (Crossover talk), - 

Steve Dennis  11:13

At Andreessen Horowitz have given Mr., Mr. Newman $350 million. I saw I forget which reporters said that, -

Michael LeBlanc  11:18

I'm going to fail up like, (inaudible), -

Steve Dennis  11:19

I can't think it was something like in, in the most efficient way to incinerate a big pile of cash, Andreessen Horowitz. So, yeah, that's interesting. But yeah, Wayfair I think they laid off about 10% of their staff. So, a pretty significant attempt to try to get on the path of profitability.

Michael LeBlanc  11:38

So, Peloton is up on their pedal so to speak with their management, (crossover talk), taken, I mean, you know, circling back to the beginning of the conversation, whether it's Target or Walmart. Pelo-, they're taking aggressive moves, like there's, (crossover talk), no question. They're not sitting on their laurels they're take-, they're making big moves, and trying to turn, -

Steve Dennis  11:52

Making moves, -

Michael LeBlanc  11:53

Making moves, making moves, -

Steve Dennis  11:54

Generally, I like the more positive moves, but sometimes, -

Michael LeBlanc  11:57

Sometimes you got to do , you got to do, right, -

Steve Dennis  11:58

You got to take. Got to take the, h-, heat and the hit.

Michael LeBlanc  12:01

All right. Well, that's the news of the week. Now before we get to talking more about small store strategy, let's hear from our presenting sponsor. 

Michael LeBlanc  12:08

MarketDial is an easy to use testing platform, emboldens great decisions leading to reliable, scalable results. With MarketDial, you can be confident in the outcome of your in store pilot initiatives before rolling them out across your fleet. In a challenging retail climate of supply chain disruption, labor shortages and dynamic customer behavior. The need for reliable insights has never been greater. validate your remarkable ideas with MarketDials in store testing solution. The proof is in the testing. Learn more at market dial dot com. That's marketdial.com. 

Michael LeBlanc  12:41

You know Yogi Berra once said, "it's Deja vu all over again", we're back talking about, can small stores save the department store? How is your thinking evolving around all this? What you know, why do we think it's a it's a good another opportunity to take a good run at it in, in this episode, -

Steve Dennis  12:58

If you go back to the episode you referenced, we talked kind of more holistically about different small store strategies. So, we got into Target, Urban stores, and IKEA and a whole bunch of different types of strategies and motivations for doing smaller stores. This time, I think we want to go a little bit deeper, particularly the efforts from department stores. But also since that time, both Kohl's and Macy's have opened more of these stores and have made this strategy a important part of what they've articulated, -

Michael LeBlanc  13:34

Yeah, (crossover talk), clearly listening to the podcast.

Steve Dennis  13:36

I don't know about that. I mean, if they listened, they don't they don't take the advice too, too aggressively. But anyway, -

Michael LeBlanc  13:41

You know, I, I wanted to ask you one other thing. So, do department stores still need to be saved? I think they didn't they do pretty well during the, the COVID era is did they get a new lease on life, so to speak?

Steve Dennis  13:52

I really don't think so. I know, this is a not everybody agrees with me. But if I guess what I would say just kind of fundamentally, if you look at department stores, they have been losing market share for actually over, I went and checked the numbers it's, it's like 27 years straight. In 1994. their share of total retail is about 14%, that dropped to 11% by the year 2,000, 5% by the year 2013. And right now they're around 3%. So, this massive (crossover talk), shift, and you know, maybe we could talk a little bit about why where that's gone and why. 

Steve Dennis  14:30

But if you just look at the last few years, the performance of, of Macy's, Kohl's, Dillards, JC Penney, harder to know because they're private, but essentially, it's flat. This is on the heels of hundreds and hundreds of Sears and JC Penney and other stores closing. So, there's not much evidence that any of these guys have become more relevant. Best case, I think you can make a case that they're sort of treading, treading water but I would argue going forward, most of the trends continue to be negative. And some pretty significant things are going to need to change for these players to stay relevant. And in some cases, stay in business.

Michael LeBlanc  15:12

I mean, there's a lot wrapped up in, in talking about department stores, both you and I have worked for department stores, I worked for Hudson's Bay still around now with Saks in the US, for example. And, you know, over the last 20 years, we've seen iterations they get into eCommerce, they do different things, they do shop in shops, and is there a way that we can see that department stores can be relevant again, I mean, they had a moment during the COVID era, because it was a one-stop shop, could, could they rise again?

Steve Dennis  15:36

You know, the heyday of the department stores, is the 60s and 70s. And we got into this a little bit with Alexandra in the last episode, you know, malls and department stores, you know, their fortunes were inherently intertwined. Malls, and the department store anchors were places to go, where you could see all this stuff at once. And you know, in one way of looking at it, they were very convenient. 

Steve Dennis  15:36

I really don't see a compelling reason to think that, that can happen in any fundamental way. I believe department stores will still be around in 10 years, I just think there will be fewer of them. And you know, they need to be the strategy needs to be quite different, which we can start to tie it to the small store strategy. 

Steve Dennis  16:18

But as discount department stores, you know, Walmart, Target etc., started to grow in the 90s, as category killers. They started to become prominent, you know, they started to lose both malls and department stores started to lose share. The thing that really happened, that I think a lot of people and it does very much relate to what we'll talk about with small stores, that a lot of people don't understand is a lot of the business started to shift to off the mall competitors, you know, certainly some share was lost to eCommerce. 

Steve Dennis  16:50

But nothing prevents Macy's or Penny's or whatever from having a strong eCommerce business. The but the share that was very difficult for them to hold on too, was the business that was being lost to, to Target and Walmart and T.J. Maxx and Ross, and you know, a litany of Ulta, Sephora, you can kind of go down the list. I mean, that's where a lot of the preventable market share ar-, you know, arguably preventable market share loss occurred. And that has almost everything to do with distribution and location, not digital versus physical.

Michael LeBlanc  17:23

Is it to do something like, you know, the frog in the boiling water, right, that the water just keeps getting hotter, but nobody moves because there's not a crisis? Like, I don't know, I guess Sears going out of business is a pretty crisis. But, you know, you've said it before, a lot of the sectors kind of watched the last 20 years happen. They get into some things, they get out of some things and they, they poke along, Is it is that what prevent like what, what in your mind and you you've sat in these pre-, senior chairs in department stores, what, what prevents a group of individuals who are very capable from saying, you know, this isn't working, we got to we got to get out of this business or change it fundamentally?

Steve Dennis  17:59

I think there are a couple of things. One is, and I think this is a very fundamental shift in the way business operates. But I think if you look at most of the leaders of these companies, they have grown up in a world which was physically dominant, where incremental change was important, you know, it's about the right assortment, pricing, you know, markdowns, those were the skill sets that were important. 

Steve Dennis  18:25

So, this idea that you could make incremental improvement, I think, just really started to break apart over the last 15 or 20 years. Because the things that, like I say, I mean, in the case of formats like a Macy's or any general department store, winning on this vast assortment of inventory, and being a convenient place to go see it. Those two fundamental premises have been blown apart between TJ X companies, Ross and Burlington, they collectively have over 5000 locations. Macy's has 570 locations. So, to go to Macy's, you, you have to drive forget, you know, Target, Walmart, Kohl's etcetera, but like, you know, -

Michael LeBlanc  19:04

You got to buy by a lot of retailers, to get there, right?

Steve Dennis  19:07

Sephora, Ulta, right. You know, as cosmetics players all have many more locations. So, the convenience dynamics in just the physical world have completely changed over the last 10-12 years. Then when you layer on top of that the way eCommerce works now, again, Macy's, nothing prevents Macy's from or JC Penney (inaudible) from any compelling eCommerce business. So, I don't tend to focus on that so much, because if they didn't do well, there, you know, that, that was a readily fixable kind of problem.

Michael LeBlanc  19:34

Well, in fact, you would think you would think, I mean, this was my value proposition, when I launched the Hudson's Bay in 99-2000. They said listen, we, we don't have stores in every city and we don't have our assortment in every store in every city, eCommerce is perfect. People know the name, it's hard not to think of the Bay.

Steve Dennis  19:49

Absolutely. Well, and I, I was at Sears when we launched eCommerce and we had, you know, very quickly had a several 100 million dollar business. Then I was at Neiman Marcus, we were we were on our way to a billion dollars, almost 25% of our business was done on eCommerce because we, we leveraged you know, the, the relationships we already had. And it was pretty easy to both, you know, pick up customers, like you say in places where we didn't have stores, as well as in some cases brochure wallet with customers we already had that prefer to shop that way. 

Michael LeBlanc  20:19

Sure, sure. 

Steve Dennis20:21

So, anyway, I you know, I just think that the at the risk of stating the obvious, you know, the, the playing field is so shifted, but a lot of these management teams still seem to be operating from the same kind of strategies that they were leveraging 20 years ago. I think the other thing, and this is a little bit perhaps more inside baseball than people want to get into. But one of the things about the department store business, which I'm sure you know, is most of these retailers pay little or no rent, you have fully depreciated stores, (crossover talk), -

Michael LeBlanc  20:54

But long leases, - 

Steve Dennis  20:55

And long leases. 

Michael LeBlanc  20:56

Yeah, yeah. 

Steve Dennis  20:57

So, this, this idea that you would go and spend money to, you know, invest in different formats, in different type of real estate that might cannibalize your existing business. You know, the, you know, they're getting cannibalized by all the competitors, right. Like, that's, that's like, that was always my argument at Sears and Neiman Marcus, when we get that pushback, we're like, oh, we're going to spend all this money. And then we're just going to take some business away from our mall stores. And I'm like, well, it's happening anyway. It's just that we're getting none of that. But I do and well I know, because I've lived in a couple of companies, as well as some consulting clients were this idea that you would spend a bunch of money to build new formats that might compete with your low investment, existing, even though it's failing slowly, business model, it is often hard to get your head around doing that. And then, you know, the other thing that I think that happens with some, maybe not all, is when your performance gets so terrible, you know, your investors aren't going to go along with (crossover talk), -

Michael LeBlanc  22:02

You have lost your levers, right? 

Steve Dennis  22:03

Yeah, or you don't have the capital or the cash to do what you need to do.

Michael LeBlanc  22:08

And then it's then it's tough, tough to recover. Well, let's, let's talk about what the, the big department stores that you think about are doing today. Because basically, what you're saying is, if they're to survive, I don't know if we're at thrive yet. They got to re-, really got to reconfigure their strategy, but what, what are they doing towards that goal? I mean, talk about what you're observing and describe that and, and what you think of it.

Steve Dennis  22:30

Yeah, so I'll talk about what they're doing. And then I'll talk about what I think they should be doing, which aren't necessarily exactly the same things. So, in the case of Kohl's, they are going to open I think they've said some different numbers. But I think the current number is about 100 smaller stores, I'll call them smaller stores rather than small stores. Because they're not that much smaller than the current Kohl's format. You know, and this is a little bit what we touched on the Honey, I Shrunk the Store episode, you know, and to me, there's a difference between optimizing your core format to make smaller trade areas or perhaps, you know, more difficult real estate sites work. So, Target pretty famously, has opened, you know, a lot of smaller formats, particularly in urban areas, -

Michael LeBlanc  23:18

The grocers, do a good job of this too, by the way, - 

Steve Dennis  23:20

Grocers do it. I mean, Walmart's got several 100, neighborhood stores. And so, you know, it's a way of getting deeper market penetration in places where you either couldn't fit a full format store, or just the economics of it wouldn't work. And I think that's essentially what, what Kohl's is doing. They've been a little bit vague, I guess we'll say about some of the details here, other than they say they've tested it, and it's, and they're performing well, and so they're going to  keep rolling them out. Some of these are in smaller cities, but some of them are really backfill stores. So, there's one being built, just north of me in a in a pretty major suburban area. It's a little bit different kind of real estate for them. And, and these stores look to be about a third smaller than their than their full format. I think it's a perfectly fine incremental opportunity. I don't think it's fundamentally game changing. I think you could certainly make the argument that Kohl's stores are a little bit over spaced anyway. So, is this really just a new prototype when it comes down to it?

Michael LeBlanc  24:20

Would it have been a smart strategy 20 years ago, more than it is today?

Steve Dennis  24:24

Well, I would say this about most of these efforts, because you know, it was crystal clear when I was I left Sears in 2003. So, it's been a long time. It was absolutely crystal clear at that point that department stores were going to continue to lose market share in fact, we probably could have drawn the line that you know and be pretty close to how it worked out. Because you know, I had that point I had been eight-nine years of, of pretty clear trends. So, I think that this if you were in the mall business, this desire to kind of protect your, your core format was clearly going to be of, of diminishing returns. So, yes, I think all of these things should have started much, much sooner. 

Steve Dennis  25:05

You know Kohl's issue is, is the same really, with all these, I mean, Kohl's has the advantage of having more stores and not being on the mall. That makes them much more convenient for most of their shoppers. And because they're single level, central cashiering, etc. You know, they win on convenience in a way that Macy's and Penney's and most others don't. So, that is an advantage for them. I think Kohl's issue is there a little bit too in the middle, you know, they don't have the lowest prices. But they also don't have a lot of, you know, special brands or much experience or customer service. So, their issue is being stuck in the middle, a little bit in terms of their positioning. But I think their distribution strategy is pretty good. 

Steve Dennis  25:49

When you get to Macy's, you know, Macy's got a bit more service, a bit more differentiated product, a bit more upscale. So, those are advantages, but their position on the mall is really their Achilles heel. So, what they're doing so Macy's, you know, Macy's Company, owns, Macy's Inc, owns both Bloomingdale's, and Macy's. And for both of those, those brands, they are experimenting with smaller stores. So, in Macy's case Macy's brands case, it's called the Market by Macy's, which is about a 20 to 35,000 square foot store, which I would describe as a little bit as a greatest hits store.

Michael LeBlanc  26:26

(Crossover talk), But (inaudible) basically, drum 20% of the merchandise that makes up 80% of the sales, is that how you would approach that store?

Steve Dennis  26:36

Well, I think what they did is and I don't know this for facts, I haven't seen them articulated, it's just from having been to these stores. And I think what they said is we want to appeal to a younger customer. So, we're going to edit, you know, the styles that are carried against that sort of customer. And we're going to focus on you know, and that, that  sort of leads you down a path in terms of certain categories that you're going to carry and emphasize. But, but pretty much all of the businesses at Macy's other than furniture are represented in the store. So, it feels a little bit like it was built by committee. But, but it definitely has a point of view that is that is younger, and a bit more upscale. 

Steve Dennis  27:14

So, from that standpoint, it's differentiated, they have gone into power centers, I guess you could say. So, they're in similar real estate to where you'd find an Ulta. And in some cases, maybe a T.J .Maxx, Target, etc. So, they're playing on that convenience, get closer to the customer angle. And I'm sure if they did their analysis, I've done this analysis at a number of retailers, it's pretty easy to figure out where you start to lose share, as you know which zip codes you're under penetrated in. So, you know, this seems to be what's driving their strategy. And they've opened in Dallas and Atlanta, I believe maybe another Market so far. 

Steve Dennis  27:51

And, and Bloomingdale's has only open one, as far as I know, Bloomies store in the DC area in Virginia, and sort of the same strategy. I mean, it's, it's more upscale, because the Bloomies brand is more upscale, but it's essentially the same size. And kind of the same general kind of editing process, I think went on there. I, I think, you know, having been to, to both of them, they're reasonably well executed. I'm just not sure what customer need they really meet in a meaningful, incremental way. Because, you know, we talk about all the, you know, all the Targets, all the Walmarts, all the Off-price stores, the Alphas, the Sephora, like there's plenty of competition in those same trade areas.

Michael LeBlanc  28:38

Is there an assumption that there's a Macy's shopper, and she's going to be better served if we have more smaller stores? Like is it kind of one of those particular lenses? Well, you know, we know she's, she likes shopping at Macy's, but she's, you know, she doesn't have convenient access to the store. So, boom, -

Steve Dennis  28:55

Right, - 

Michael LeBlanc28:56

We make more Macy’s, and we succeed kind of thing for that, (crossover talk), -

Steve Dennis  28:58

Well, right. Well, I well, first of all, I think you absolutely like I don't think Macy's or I mean Kohl's because they have so many more stores doesn't have quite this issue. But if you're, if you're Macy's, if you're Penney’s, if you're Dillard’s, if you're Neiman Marcus, you know, one of the issues is that you are not close enough to the customer, when you only have this one format, that has to be in a particular kind of real estate. So, I think the, the  motivation to get closer to the customer with some sort of physical aspect, you know, has the potential to get business from people that already like you, but you don't get your fair share. Because, -

Michael LeBlanc  29:39

Right, - 

Steve Dennis  29:40

The convenience, you know, so you're solving the convenience limitation. How the numbers on that really sort out, I I'm just not sure. I think the challenge for Macy's is they're not especially differentiated. So, by putting a bunch of money into, you know, building out all these stores, does that actually, win you a lot of customers that already sort of like you, but for the reason you point out that convenience, they don't shop with you? Or do you mostly get customers that already shop with you that say, oh, now great, I don't have to drive 20 minutes, I can just go, you know, around the corner. 

Michael LeBlanc  30:16

Yeah, yeah.

Steve Dennis  30:17

And it's not that much of an incremental opportunity. I worry, now, I assume this is something they're paying attention to. I worry that there's not enough of an incremental opportunity, because it doesn't meet that profound, a customer need in a very differentiated way. But you know, without that data, it's hard to know for sure.

Michael LeBlanc  30:36

Is there room in your thinking that having more stores, let's just talk about Macy's for a while, as gets you more consideration, you certainly got awareness, and then you go online and shop. Like we've talked about how some stores are, -

Steve Dennis  30:50

Sure, - 

Michael LeBlanc   30:51

Opening up physical stores, because it's a nice way to remind people they exist, and, okay, I've only got a small assortment, but I'm going to go, oh, that's right, they got a great inter-, internet site. So, it's cheaper than paying Facebook, (crossover talk), is there room in your thinking?

Steve Dennis  31:01

Absolutely. And I think that's, that's when you when you open any kind of physical store, now you have to think about all the different roles it performs. And one of them for sure, is marketing. And I think that's, you know, often been neglected by some of the traditional players. And so, I think if you are going to be a compelling player in each and every city trade area, metro area, however you want to think about it, you've got to think about this portfolio strategy. And I think one of the dangers of what we've seen with Macy's and Penney's and others over the years is they've been closing stores. And so, they're making themselves less convenient in the face of competition, which has many more outlets, both from you know, physical proximity to actually go buy stuff, but also that billboard effect of, of marketing plus, plus, you know, one of the things that's become hugely important is buy online, pick up in store, or fulfill from store. So, having more nodes, or, you know, what kind of a hub and spoke system could be pretty important in, in serving the customer, you know, not, not just having a place for them to go look at a ton of products. So, I do think that's important.

Michael LeBlanc  32:11

And it's a nice segue over to actually what you know, Nordstrom talked about when they opened their local, right, I remember seeing one of the, the Nordstrom executives talk about how you know, our customers driving around with a return in their trunk for three weeks, because our store isn't that convenient let's open smaller stores. So, she can return product and get stuff tailored. And let's you know, they, they seem to have taken a different tact, let's not figure try and figure out what assortment works in a very small format, let's re-think about what the format does, are you, are you a fan of what Nordstrom is trying to do.

Steve Dennis  32:44

I have liked Local for a long time I talk about them in my keynotes, I feature them in the book, it's not clear to me because they haven't opened any in two years, whether it's really getting the results they want. But, but for the audience, I mean, I know Local, there's, I think seven or eight of them in the LA area and in New York, their stores without any actual merchandise, they're only a couple 1000 square feet. They offer personal shopping and tailoring services, but they've mostly become a place for buy online, pick up in store and buy online return to stores. And I think you know very much their strategy is to kind of surround their flagship stores, if you could call them that, you know, their big department stores that, -

Michael LeBlanc  33:25

Yeah, - 

Steve Dennis  33:26

We know and love with the smaller hubs. And I do think that does give them some of that advertising halo effect that you were talking about. But it meets a very particular set of needs. You know, maybe they don't have it quite right, you know, maybe they need to have I'm making this up, but, you know, maybe their going to (crossover talk), need to have a shoe store, (crossover talk), or a, as you know, something with some more merchandise to, -

Michael LeBlanc  33:51

Something's not working, or else they'd have more. I mean, it's not like they, they lack funds to open, (crossover talk), -

Steve Dennis  33:56

And they're not they're not I mean, I'm sure operationally they're, they're not that simple, but it's not a big capital. And there's certainly plenty of real estate available and lots of places to take (crossover talk), 1800 square feet or something, you know, number one, if you're going to be a big store, with lots of stuff, what is really the pull to that store just beyond, it's a place to see a vast variety of things that aren't particularly differentiated, because on the one hand, the internet's really good at that. On the other hand, if you know what you want, and you're convenience driven, there's lots of stores in your neighborhood that are way more accessible and if the product isn't that differentiated, or if you're largely price driven then the mall stores, or you know, for the most part stuck in the middle.

Michael LeBlanc  34:47

I like going to a department store when I don't know what I want. It's a funny way of saying it but you know, -

Steve Dennis  34:52

Sure, - 

Michael LeBlanc  34:53

I don't always know what I'm going to get my wife for her birthday, just because I've been you know, so I've just I'm just go get on the escalators at Hudson's Bay or Nordstrom and see if anything jumps out at me. 

Steve Dennis  35:03

Sure. 

Michael LeBlanc  35:04

You know, I think that I, I, I like, -

Steve Dennis  35:06

That's why I think no, and I, I agree and I do that too. I mean, I'm not married at the moment, but, but so it's not because of my wife, (crossover talk). But, when I no, no, sorry, I should clarify that. But when I was married, I, I did that and this is why I don't think department stores are ever going to go completely away. I mean, they serve a certain need, but there's way more retail space, that is pretty undifferentiated than the demand. And so, unless the fundamental demand for that were to shift in a pretty profound way, and I just can't work out why that would happen, in the face of, you know, everything that's going on in retail, so I don't think that it's going to go away. 

Steve Dennis  35:45

But I think you have to figure out if you're a Macy's, or a Penney's, or a Dillard’s, or really any of these brands, how do you reconfigure your portfolio? You know, can you make, for example, and I don't know what the number would be, but maybe 200 of the 570, I think it is, Macy's stores should really be extra special, you know, add more differentiated products, or services or restaurants or, you know, I don't know, what all those things should be, but be much more of a poll, you know, give you a reason to say, rather than just running into Target, or running into T.J. Maxx, or, you know, wherever, calls for that matter, you know, there's a reason, a special reason for me to go to that store, above and beyond, it's a great place to see a particular mix of, of merchandise. 

Steve Dennis  36:34

But then, you know, either exit, a lot of those other stores were just kind of a mishmash of, of, you know, nothing really, to do something different, whether that's category, specialty stores, whether it's, you know, what is what they're doing with these smaller, more boutique stores. But I, I, I think right now, this, this idea that we're going to have, you know, 650, JC Penney stores, 570, Macy's stores, 250 Dillard's stores like that, that's just way more space in the current configuration, then can possibly make sense. And the only reason more of them haven't shut is either because they have such a low basis, that it's easy for them to be cash positive, or the cost of getting out is, -

Michael LeBlanc  37:21

Prohibitive, yeah, - 

Steve Dennis  37:22

Prohibitive. Or in the case of JC Penney, in particular, they're owned by mall operators, that, you know, why to try to navigate, probably what it will end up being kind of the slow liquidation of that, that business as they reposition those malls.

Michael LeBlanc  37:37

Well, let's, let's end off, a great discussion. Let's end off with your thoughts on strategic lessons for retailers? 

Steve Dennis  37:43

Well, the first thing I would say is make sure that your aim is true. When you really think about the customers you're serving, do you really have a good understanding of the customers, their needs, their wants, and why they're buying from you? Or why you might be able to, to get them to buy from you, you've got to really focus on you know, which customers are you talking about? And how do you become well maintain, or ideally increase your relevance, because the reason why department stores have lost share for 25 years, is they became increasingly less relevant. And so, you're not going to store close your way to becoming more relevant, you're not going to cost cut your way to becoming more relevant, and you've got to deliver something, or a set of things that are more valuable. So, you really got to answer those questions and not let the real estate be sort of the anchor. And, and you know, we've talked about either there's anchor stores and there's anchor stores, right, like, -

Michael LeBlanc  38:43

Those anchor stores (crossover talk), around your neck, - . 

Steve Dennis  38:45

Right, and the anchor around your neck. So, I think that that's the first thing. The second thing, which we kind of touched on is, it's really important to think about your overall trade area or metro area, market area strategy. You know, if you had to do it all, like I can tell you for sure, if JC Penney had to do it all over again, they would not have their current format of stores in you know, 12 malls in the DFW area, right, like that, that would not be what you would do, -

Michael LeBlanc  39:14

Right, -

Steve Dennis  39:15

From the start, right, - 

Michael LeBlanc  39:16

Right, -

Steve Dennis  39:17

Both in terms of the size, location, etc. So, I think it's worth starting with a blank sheet of paper and saying, you know, ideally, what would our mix or configuration of formats look like? And that might be, you know, like I say, could be four flagship stores, you know, three outlet stores, five service, like, you know, I don't know, it'd be different for each retailer. 

Michael LeBlanc  39:40

Sure, - 

Steve Dennis  39:41

But the goal is to be more relevant to the customer and to outperform the competition, that you're trying to win the, the share away from or, or keep the customers from d-, defecting. So, I think those are the two main things and you should, by the way, on that trade area analysis, its physical and digital because to your earlier point, you know, we know that physical retail is important to maximizing the, the eCommerce opportunity and vice-versa. So, it's very important to take that kind of all channel view.

Michael LeBlanc  40:11

Well, it's a great discussion, because I think, you know, let's say the you know, some folks that listen may not all be department store, operators or interested in the category. But there's broader strategic lessons, which I think is a great way to end the discussionit is really, you know, whether you run a department store, a grocery store, a specialty store, or a DTC brand, consider some of the, the more interesting, strategic questions as you align, and make your brand remarkable, which is what it's going to take more and more to be successful. Great discussion. Let's leave it there. 

Michael LeBlanc  40:43

If you like what you heard, please follow us on Apple, Spotify or your favorite podcast platform, so you can catch up with all our great interviews, like our discussion with Seth Godin on what retailers can actually do to fight climate change. New episodes of Season 5, presented by MarketDial will show up each and every week. And be sure to tell your friends and colleagues in the retail industry, all about us.

Steve Dennis  41:02

And I'm Steve Dennis, author of the best selling book, ‘Remarkable Retail: How to Win & Keep Customers in the Age of Disruption’. You can learn more about me my consulting and keynote speaking at stevenpdennis.com.

Michael LeBlanc  41:16

And I'm Michael LeBlanc, consumer retail growth consultant, keynote speaker and producer and host of a series of retail trade podcasts including this one, plus the host of the popular YouTube cooking show Last Request Barbecue. You can learn even more about me on LinkedIn, or at meleblanc.co. 

Safe travels everyone.

SUMMARY KEYWORDS

stores, department stores, Macy’s, business, strategy, Kohl’s, customer, talk, Steve, bit, format, eCommerce, pretty, big, important, mall, brands, differentiated, numbers