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The Transformation of Abercrombie & Fitch

The Abercrombie & Fitch brand and specialty chain is on fire. Sales grew 30 percent YoY in the last four reported quarters. The share price of Abercrombie’s parent ANF has rocketed from $35 to a high of $194 in the last year, aided in part by sibling brand Hollister’s 10 percent growth over the period. 

The previous high point was $85, hit in April 2007. Once considered an icon of mall-based specialty retailing, Abercrombie had become increasingly irrelevant, rocked by scandal, and dispatched as a canceled relic of the dying mall economy. So, what accounts for this remarkable turnaround?

A Complete Reinvention

Credit goes to Fran Horowitz and her management team. When Horowitz was elevated to CEO in February 2017, sales and profits were sliding and shares were at $12. Her mandate: a complete reinvention – of talent, culture, and processes in the back of house; brand, product, marketing, and stores in the front. Of course, they also needed to stabilize performance, manage through the pandemic, and endure ongoing brand reputational hits from damaging media reports on Abercrombie and its former CEO Mike Jeffries, who left the business in 2014.

I attribute the brand’s turnaround to three foundational initiatives: re-engineering merchant processes, reinventing the brand, and accelerating digital investments.

Re-Engineering Merchant Processes

When Horowitz took over, the merchandising function was broken. Jeffries was notorious for controlling or at least approving all customer-facing creative decisions. For clothing, this extended from the “no black” stricture (black was considered “too dressy” for the Abercrombie brand), to building the line and determining the cut, make, and materials in a garment. From the beginning, the buyers were “glorified sourcers,” according to one former exec. When the merchant princes reigned over much of specialty fashion retail in the 1980s and 1990s, similar divisions of labor sometimes worked famously well. But over the years the ANF corporation became wildly more complicated growing Abercrombie Kids, Hollister, and Gilly Hicks, while also expanding into new store formats, channels, and geographies. When this geometric growth in complexity proved beyond the capacity of Jeffries to make every decision, the merchants had limited experience and capability to step up.

Under Horowitz’s leadership, the merchants were given both longer-term strategic and shorter-term tactical responsibility for building their merchandise categories and incorporating customer, competitive, and fashion trends into their work. Re-engineering the role of the merchant had become standard at The Limited Inc. in the mid-to-late 1990s, but Jeffries’ Abercrombie was so uniquely successful at the time that he was exempt from the mandate. The current re-engineering took a substantial investment in process redesign, consumer research, and new talent – and needless to say, several years to operationalize and optimize.

Reinventing the Abercrombie & Fitch Brand

Evolving the Abercrombie brand was an even bigger hurdle. There was no clear endpoint, and thus, no roadmap. In the 1990s, Jeffries and The Limited Inc. CEO Les Wexner created a fictional narrative of the aspirational customers – a ripped, handsome, cool guy and his equally comely, totally natural girlfriend, both juniors at the University of Virginia living a full frat/sorority social life; and (when wearing clothes) dressed in casual prep. The idea behind these images was that teens would buy into the brand because they aspired to look like them, socialize with them, date them, be them, etc.

Jeffries famously said the brand was designed “not for everyone” but for the “cool kids.” Its lifestyle brand architecture was copped from the luxury designer world with Ralph Lauren as the biggest influence. Indeed, Abercrombie quickly became the teen luxury brand, offering premium fabrics, premium prices, and a club-like store atmosphere.

This positioning worked fabulously. In fiscal year 1999, the brand achieved a billion dollars in sales and wait for it, a 23.5 percent operating margin. The brand continued to grow until the Great Recession in 2008/09 (which impacted nearly every premium brand), but mostly recovered by 2011.

  • Fall From Grace

It worked, that is until it didn’t. Beginning in 2012, the brand entered a seven-year slide, eight if you include the pandemic. The brand had edged to $2.1 billion in sales in 2011. By 2019, it shrank to $1.5 billion.

There are many reasons for Abercrombie’s decline – the quick rise and cannibalization from Hollister, the tsunami of smartphone culture and ecommerce, and declining mall traffic, etc. But perhaps the most significant factor was that the Abercrombie brand was increasingly considered not just out of touch but also actively discriminatory. The focus on the singular “hero” body and attitude no longer exerted its pull.

  • Rising From the Ashes

Most new CEOs tasked with saving a legacy brand would reference its “deep heritage” (Founded in 1892!). But Horowitz and her team had other ideas. They knew in 2017 that the brand needed to become more modern, inclusive, and digitally driven; millennials aging out of their teens were still the largest segment of the population and the teen specialty apparel space, led by the American Eagle and Hollister brands, was hotly contested. Hollister’s sales surpassed Abercrombie’s in 2012.

But Horowitz wanted to get all the foundational stuff done first, stabilize the business, and fix the merchant function. During this transitional period, the team did major consumer-listening as well as merchandise and marketing testing. Horowitz’s catchphrase at the time was, “Patience.” You could see that their assortments were evolving, but it was unclear what the final destination was.

Then at their June 2022 investor day, the corporation announced that they were no longer targeting teens with Abercrombie, but rather millennials and adults 21-40+ years. Corey Robinson, a talented creative and merchant, was elevated to Chief Product Officer in September 2023. In the Q4 2023 Investor Presentation, the team further fleshed out the new positioning. They killed the drop-dead, gorgeous college kids. They incinerated the prep. In the stores, on the website, and on their social media, there was not one whiff of the legacy brand (except for their fragrance, Fierce).

Accelerating Digital

Jeffries always promoted the youthful attitude of ANF’s brands, and his creative vision was most vividly imagined in analog. The younger Horowitz and her even younger team better understood digital natives.

They began closing Abercrombie flagship stores in New York and other international fashion capitals and invested more heavily in digital marketing, ecommerce, and unified commerce capabilities. These investments proved prescient during the pandemic. In 2022, as part of their “>>FWD >>” strategic plan, they announced an initiative to “Accelerate an Enterprise-Wide Digital Revolution,” propelling investments in customer analytics and a concerted effort to improve the customer experience. To increase awareness and buzz around Abercrombie’s new brand positioning, the plan was to spend more money on digital and influencer-driven marketing.

Interestingly, their digital and real estate strategies are nuanced by nameplate. With 260 stores, Abercrombie is primarily a digital brand, with about 60 percent of sales in ecommerce. In contrast, Hollister customers are fully engaged digitally but prefer to buy in their 500+ stores, with only 30 percent of sales online.

They Aren’t Done

Completely reinventing a brand is courageous. That A&F has seen robust, early success with their new brand positioning is, well, impressive! But, in my view, the team isn’t yet done.

  • When you walk into a store or visit the site, you cannot immediately tell where you are. There is no design signature, no unique voice. You don’t yet feel like you “know” this brand; you have no emotional associations, no hits of dopamine. They still lack an updated, holistic brand identity.
  • For now, they’ve done a great job designing and assorting products for their target customers, creating a great shopping experience and drawing in their new target customer segment. But there is nothing distinctly different from their competition.

I do find the brand today “hotly inclusive”: Millennials in a range of races, ages, sizes, gender identifications (at least during Pride month), occasions, and locations, all express confidence. Perhaps there is something to own there, but it is not yet “signature.” Given the team’s track record, I can’t wait to see what’s next.

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Yaromir Steiner: Urban Planner, Icon, and Iconoclast

Columbus, Ohio is the 32nd largest metro area in the U.S. ranked by population and known, primarily, for its Ohio State NCAA Big 10 football team. But according to one of Placer.ai’s geolocation benchmarks, Columbus is also home to America’s #1 trafficked open-air shopping center, Easton Town Center. Easton thrives despite these contradictions: It’s an outdoor mall in the wintry Midwest and a New Urbanist development nestled in the suburbs. It counts Gucci, Tiffany, Louis Vuitton, Apple and RH Gallery as thriving tenants and paradoxically, Macy’s outperforms Nordstrom. The lesson here? Don’t make any assumptions. The true insight is understanding why people buy.”

Decline and Fall

To put Easton’s success into perspective, let’s review some history. U.S. malls were once a huge driver of the retail economy, numbering around 1,200 at their peak. Their ascent began in the 1970s, fueled by the rapid growth of highways, the suburbs and the middle class. And then what happened? The decline and fall of the American mall are evident in the sad, sorry deserted shopping centers that were once community and retail hubs. Today there are roughly 800 viable retail shopping malls and large-scale lifestyle centers remaining, and the numbers continue to fall.

The reasons are many, as readers of TRR know. As a refresher, here are a few key factors that drove malls into the ground, some literally.

  • Ecommerce and the smartphone created increasingly compelling alternatives to in-person mall shopping, especially for younger generations infusing them with different shopping habits and preferences.
  • The middle class, once the core economic engine of the mall, is declining. The share of adults living in middle class households fell from 61 percent in 1971 to 50 percent in 2021, according to Pew Research Center’s analysis of government data.
  • A shift in income distribution spawned the growth of discount, outlet, dollar and off-price sectors that became more compelling to the large population of needs-based, utilitarian shoppers.
  • The trend in discretionary spending is shifting from products to services and experiences.

Visionary Icon and Iconoclast

So, what is a mall owner to do? We went to a grand master who works at the center of mall development and culture. Yaromir Steiner, born in Turkey and educated in France, is the master planner of Easton Town Center and helped develop the CocoWalk open-air shopping mall in Miami. He has a studied interest in urban planning and design and regularly teaches a continuing education seminar at Harvard’s School of Design.

His company, Steiner + Associates, has developed a total of 7 million square feet of mixed-use real estate in Florida, Ohio, Wisconsin, Missouri, and Virginia. These projects, according to one source, “represent some of the most iconic, innovative and influential retail and mixed-use environments in the United States.”

Steiner has a good grasp of systems thinking and viewing problems holistically. He’s the first to admit that America’s malls are at risk and offers a lucid analysis of the problems plus proposes some novel solutions.

Origins

Steiner adds two other factors eroding the mall economy to our list. First, the enclosed mall has fallen out of favor with consumers as an experiential shopping environment. That formulaic design – a windowless behemoth surrounded by heartbreaking acres of car parking asphalt – started with the Southdale Center in Edina, Minnesota, which opened in 1956. It was a stunning innovation at the time.

However, architect Victor Gruen’s original vision was to mimic the pedestrian arcades of his native Europe, with their mix of retail, residential, office, restaurants, bars, entertainment, and parks. But the Dayton Company, the department store chain that financed the project, had another idea. It wanted its department stores to be the main attractions, so it flipped the model with indoor streetscapes, placing parking out of sight around the outside perimeter. Entry was available primarily through the star of the show – the department stores. It was exclusively shopping and the other retailers along the corridors had no exterior signs. There were few, if any, restaurants and cinemas.

As malls evolved, they played a central role in customer acquisition for retail brands, delivering remarkable experiences, and handling returns and other post-sale issues. Fast forward two+ decades and the New Urbanism movement gained currency in the 1980s, promoting open-air, pedestrian-friendly, mixed-use projects. In a back-to-the-future moment, Steiner notes the shift was more along the lines of Gruen’s original vision. Ten years later, open-air malls, or lifestyle/experience centers, had in fact become the predominant new mall model.

Mall Understory

The second reason Steiner cites for mall erosion is more controversial: REIT ownership. He notes that malls elsewhere in the world are resilient and thriving unlike the vast majority of failed and failing malls in the U.S. There were 1000+ REIT-owned malls in 2005, but now, the number is down to around 400. Why?  Steiner explains that REITs are required by law to distribute at least 90 percent of their taxable income each year to shareholders, obviously limiting how much they can reinvest into the properties.

This model works well for utilitarian “needs-based” mall shopping, say, a Walmart or supermarket anchor where demand and capex are relatively stable. But for trend-driven “wants-based” shopping, where properties need to continually adapt to changing consumer fashion and lifestyle preferences, the REIT model can be a death knell.

Steiner Solutions

  • Ramp up the experience. Steiner’s original vision for Easton was to deliver experiences. This was informed by his childhood growing up in Istanbul and France where marketplaces and bazaars were embedded into street and consumer culture. Digital-first brands such as Purple, Marine Layer, Untuckit, Warby Parker, and Allbirds have all chosen to open stores at Easton. As Steiner says, “If Easton did not exist, where else would they go?” The Center is inspired by the eclectic mix of the Grand Bazaar of Istanbul, built in the 1500s. Proof of concept? Easton was recognized by Chain Store Age as the #1 consumer shopping experience for three years straight (2020-22).
  • Create a new department store model. At the crux of today’s Grand Bazaars, Steiner advocates for a new iteration of the department store model with a focus on showcasing primarily third-party brands. He was a great admirer of Ron Johnson’s vision for JCPenney. Logically, he says, it makes no sense for some brands to design, build, operate and pay rent on their own stores when they could operate under the broader tent pole with dedicated space, sales, and visual support enhanced by upgraded food and beverage brands and other lifestyle-based experiences. Following that holistic vision, imagine a Levi’s denim bar with dedicated service and an interactive Lego department for the kids to keep them safe and busy.

Bridging Theory to Practice

Steiner’s two ideas aren’t just idle speculation. The Hunt family is currently putting together a fund in the $300-$400 million range to acquire failed malls and then reposition them into mixed used properties. “Demolish the buildings, maybe get a department store, put in some specialty retailers, restaurants and offices. Make Easton’s out of them,” says Steiner. Likewise, he foresees cities and townships leading efforts to repurpose depressed/underleveraged commercial districts and rebuilding them into serious traffic-driving experience centers.

The Future of Easton

Taking a step back, in 1999, Steiner teamed up with Limited Brands and The Georgetown Company to develop Easton’s first phase and then the second phase two years later. Today Easton is 1.8 million square feet, featuring 300 stores, 48 restaurants, cinemas, offices and residences. While Steiner can’t stop philosophizing about retail and urban development, he continues to work tirelessly to ensure the future of his own Easton development.

Based on his European sensibility, he’s convinced that environmental sustainability will eventually become second nature to Americans. In the meantime, he’s focused on converting the entire Easton project to renewable energy and aims to implement more effective recycling and composting programs and donate more food from its restaurants to pantries.

Moreover, Steiner wants to see Easton Town Center become a true village. “We cannot be solely a commercial project. There must be art galleries. There should be dry cleaners, a childcare center, and senior living homes. We need to think more holistically about how people live their lives – what they want and need.”

He concludes, “We still have 150 unbuilt acres. I don’t know if I’ll be alive to see it, but 20 to 25 years from now, Easton could be transformed from a mall to a village. That’s my idea.”

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Loyalty Lifts Brands in a Recession

As recessionary clouds gather over the U.S. economy, retail CFOs are busy cutting capex, opex, and inventory. Facing the prospect of lower sales and higher borrowing costs, preserving cash seems the wisest option.

But there is an area where we believe you should consider spending more: your loyalty program and member marketing. If the overall marketing budget needs to be cut, then shift funds from customer acquisition into loyalty. Why? Consumers behave differently during a recession and they typically:

  • Gravitate to “budget” channels
  • Seek deep discounts
  • Spend less
  • Are less loyal

In other words, the performance marketing models you’ve built over the last dozen years no longer apply during a recession. New customers will be more expensive to get into the funnel, and they will be less valuable. Loyalty program members may also need some incentive to stay and spend during a recession, and focusing on them will likely be your most efficient way to preserve sales, keep them from chasing deals elsewhere, and maintain their long-term relationship with you.

Loyalty’s Benefits

According to Accenture, 90 percent of retailers have some form of loyalty or subscription program, which usually includes a combination of a rewards program, exclusive benefits, member-only access and experiences, and personalized offers and communications. Customers can gain even more value by opting for the brand’s credit card, which serves as a rewards and benefits accelerator.

The benefits for retailers are substantial: Loyalty customers shop more, spend more and stay longer. They’re more likely to engage – rating products and advocating for the brand, online and IRL. Moreover, in the current climate of iOS privacy protections and increased privacy legislation, these programs have become the richest source of permission-based consumer data collection, which can then be used to fine-tune program features and communications for maximum impact. Lastly, companies with high loyalty and/or dependable subscriptions get higher valuations on Wall Street.

Loyalty During a Recession

If you’re a startup or otherwise part of the 10 percent with no loyalty program, rolling out a new regime on the eve of (or during) a recession will be expensive. Most costs will be spent on new member acquisition, with the major benefits accruing only years hence. But for the other 90 percent, here are a few ways to ensure you get the most out of your loyalty members when the economy and consumer confidence dips.

  1. Affirm the strategic importance of reallocating resources into loyalty and get alignment across the leadership team around the cross-functional efforts required to execute an effective program, including Marketing, Finance, Stores, IT, Planning, and Merchandising.
  2. Revisit program rewards and benefits. Your customers will be most concerned about saving money and lowering risk, so consider tweaking the program’s value proposition. Changing the messaging from “points” to “$ cash back,” for example, is a simple and commonly used tactic. You may also want to do qualitative research among your existing members to understand what language they use to express their anxiety and what benefits would mean the most to them during an economic downturn. Then communicate with them based on these hot buttons.
  3. Remove friction, and streamline components. To increase sign-ups, use emails or phone numbers as the connection points to easily sign up for entry-level benefits. If you haven’t already done so, integrate all elements into one program by using a single loyalty bank with stair-stepped rewards and benefits for non-credit card and credit card loyalty. This will make it easier for members to track and see all rewards in one place.
  4. Raise the visibility and frequency of loyalty messaging. Leverage every opportunity across all channels to promote the loyalty program and the value loyalty members receive. But don’t stop there. Message non-loyalty customers on the rewards and benefits they missed with their last purchase.
  5. Don’t forget the stores. It’s easy and inexpensive to make all these program changes online. But during a recession, customers generally continue to shop in stores, if only for the purpose of finding the very deepest markdowns. Store staff must be well-trained, first and foremost to provide loyalty-worthy service. Maintain ongoing messaging to recruit new loyalty program members and promote its value.
  6. Test and learn. Remember, you have no valid performance model that’s been tested through a recession! Set up experimental tests measuring costs vs. impacts to understand what’s working and what’s not.

Preserve Your Most Valuable Asset

You’ll note that these six steps are not materially different from best practices (and hopefully your own practices) when times are good. The difference in a recession is that your loyal customers will more likely drop quintiles or exit the cohort entirely if you fail to stay top of mind and provide better value. Anticipate the future. Do the work now, and you’ll emerge stronger on the other side.

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An Argument for Neighborhood Stores

Specialty retailers – from legacy brands and DTCs to startups – are all facing the same challenge: Declining mall traffic and higher downtown office vacancy rates are making traditional store location decisions far riskier. Brands are wondering if neighborhood stores are the next frontier. If Target, Macy’s, Starbucks, Faherty, Lululemon, Vineyard Vines and others can do it, why can’t we?

Local Incubators

In fact, neighborhood locations have always played an important role as incubators of new specialty retail concepts. Notable brands, including The Limited, Gap, Anthropologie, and Lululemon all began as neighborhood locals. To grow fast and scale, however, they chose regional malls as their primary channel.

The rationale was that mall stores, with their larger trade areas and “cookie cutter” formulas, were generally more productive and less risky. Neighborhood stores, with their smaller trade areas, had lower revenue potential, didn’t fit the cookie cutter size and assortment models that drove mall store operations. They also often required a different store design due to local architectural standards, odd space configurations and a different customer journey. The mall prototype model did not work for neighborhood stores and vice versa. Traditional wisdom believed there were too few opportunities to be worth the effort required to build a different financial and operating model for small, local stores.

That calculus, however, may be shifting.

Think Local

With 20+ percent of a brand’s revenue now coming from ecommerce, neighborhood stores can play an important role as ship-from, pick-up and return-to depots. Having these services much closer to home adds huge value for customers. It increases in-store visits, which increases conversion. Data confirm that physical stores in a market can improve the brand’s ecommerce sales by 25 percent or more.

And there’s more in favor of local stores. The insights from mobility data and AI can significantly improve the predictability of local site selection, with related improvement in productivity. Merchandise assortments can be matched to neighborhood customers using data analytics. From a practical perspective, the normalization of WFH and hybrid work have created a renaissance in neighborhood store traffic and access to local talent as a workforce that represents the community.

In many markets, the neighborhood center/district can beat the mall on occupancy costs by offsetting the higher capital cost of customized store design. Such local centers can also give the retailer more flexibility on operating hours, reducing labor costs.

Lastly, local stores can bring intensity and intimacy to the brand’s value proposition. They strengthen community bonds and can develop longer-term customer relationships. As part of a unified commerce strategy, going local brings the brand into the neighborhood in a valuable way, increasing customer lifetime value (CLV) and total market profitability.

Location, Location, Location

Strategically, building a fleet of stores has always been the art and science of identifying, on a market-by-market basis, the right number of stores to efficiently serve all potential customers in that market. Physical retail stores are expensive to build and operate, and mistakes are costly. Spacing is important – attractive opportunities may lie in the shadow of more current or future productive locations. Geo-analytics can help optimize markets. The investment against return can be daunting if you get the basics wrong.

Regional shopping centers, as the name implies were developed to reach a broad swath of the [population. There are more than a few markets where shopping center developers literally built centers called Northland, Eastland, Westland, and Southland, explicitly and geographically describing market coverage. But by whatever naming convention, by the mid-1990s the regional mall coverage map was becoming overbuilt.

For the last two decades the regional mall market share has been in a steep decline. Today, roughly half of the once 1,100 regional enclosed mall shopping centers have closed or are the walking dead. Let’s face it, the U.S. has been over-stored for several decades and declining mall locations have more than replaced the growth of outlet centers, big box power centers, specialty, and hybrid lifestyle centers, and by the rebirth of metro neighborhood strip centers and street districts.

While these local locations may not have the trade area draw of the large regional malls they replaced, they may well have a higher concentration of core customers. These are locations that are destinations, not accidental retail. When customers come to a center intentionally, the chances are good that their expectations will be met with purchases that matter.

A Unique Role in the Portfolio

Mature specialty retailers sell across multiple real estate channels — workhorse mall stores, high-street flagships, outlet stores, and online. What role do neighborhood stores play?

Mall stores may continue to dominate for some time, but the neighborhood channel has inherent advantages of its own: convenience, novelty, intimacy, personal connection, and being part of the community. The timing could not be better to play into the hands of local retailers. In a fractious world, consumers value these qualities more than ever.

Here’s a playbook to maximize going local:

  • Originality and intimacy of the store environment, including visual merchandising.
  • Product displays that are novel and diverse.
  • A high level of personal service, combined with full-service, omni-capable tech.
  • Engagement with the local community.

Field Reports

There is a P4 formula to getting the big-picture playbook right.

Place

  • Create an engaging sub-brand, e.g., Nordstrom Local, Market by Macy’s, Express Edit, Starbuck’s Roastery, etc.
  • Embody a warmer, more accessible interior design.
  • Make the décor authentic, relevant, and contextual to the neighborhood.
  • Revitalize the local area with an infusion of energy and promise.

Product

  • Showcase more variety with style/color choices in tune with local customers.
  • Create demand through merchandise scarcity rather than inventory depth with lookalike merchandise.
  • Focus on the “sizzle” (quickens the pulse) and not so much the “steak” (fulfills a utilitarian need).
  • Curate an assortment tailored to the local trade area and maybe sprinkle in local-themed merchandise and local artists/designers/artisans/craftspeople.
  • Focus more on services (e.g., sales, styling, alterations, and omni — the Nordstrom Local model)

People and Tech

  • Build a staffing model that allows for high-quality, one-on-one service.
  • Hire influential local residents with a service orientation and personal connections in the community.
  • Make sure the systems delivering omni options are integrated.
  • Empower the store manager to act as store owner (P&L), who will:
    • Play a direct role in product selection and ordering.
    • Lead or direct the store’s visual merchandising.
    • Manage the P&L of controllable items.

Projection

  • Create robust local social media inviting customers to contribute.
  • Advertise to customers in digital and local media.
  • Host periodic store events, featuring locals, to draw in local traffic.
  • Participate in commercial district/association and events.
  • Celebrate employees and local customers with recognition.
  • Give back to the community.

Back to Basics

Neighborhood stores can more deeply connect with and “wow” customers, focusing less on product sales within the four walls and more on creating brand converts and loyalists. Think of it as a store where everyone knows your name. Deeply personal, relevant to local lifestyles and interests, and committed to improving the quality of life as a mantra, not a motto.

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The Empress’s New-ish Clothes

The value propositions of Rent the Runway, The RealReal and Stitch Fix are indisputable. As these concepts grew quickly through the 2010s, the digitally-driven rental, resale and subscription business models induced dopamine rushes in the fashionista set and strategic anxiety among fashion industry execs.

Yet RENT and REAL gush red ink – arterially. Even pre-pandemic. SFIX was nominally profitable until the pandemic and is now back to profitability in its most recent quarter, but the company’s multiple growth initiatives, I believe, will likely not add much more to the bottom line.

So, why don’t these fabulous concepts also make fabulous money?

The RealReal

Buy gently used upscale and designer fashion at a fraction of retail? What’s not to like? Consign your least joy-sparking items for a quick buck? Ditto. The RealReal, while experiencing a dip during the pandemic’s depths, continues to grow revenue and customers significantly over 2019 levels.

The company will never make serious money if any at all. Its accumulated deficit in retained earnings last quarter summed $659 million. The major problem is the high variable cost of receiving, processing, and inventorying individual items for resale. Think: Opening the consignor’s box, inspecting, authenticating, photographing, retouching, pricing, describing, posting, and warehousing each item. Then add on consignor acquisition cost, CAC, fulfillment and, in many cases, reprocessing the return. The contribution profit per order in 2019 was a record high $20 per order, while the fixed cost per order was $53. I estimate they’ll need to sell four times their 2020 revenue before they make a decent return to investors.

That won’t be easy. Fashion resale is a huge business offline, where the intake and selling processes are less labor and fulfillment intensive; and even then, judging by the lack of corporate chains in resale and the predominance of nonprofits, it’s not a big, per-store moneymaker. There’s also plenty of online competition: think Vestiare and ThredUp (a more mass model but also burning cash) and the platforms Poshmark and eBay, among other formats. You might be surprised where the largest number of authenticated Birkin bags are offered.  

Rent the Runway

My wife founded and ran a nonprofit. During her 10-year anniversary campaign (in the Before Covid Times), she pitched big money donors and attended many events. Her wardrobe solution was, of course, Rent the Runway. Given her exquisite taste, even her for-profit husband was thrilled at the selection and flexibility the service afforded – for a perfectly reasonable, subscription price.

Reasonable prices for customers, yes, but not for shareholders. Like REAL, RENT’s business model is operationally complex. Returns are built into the model. After wearing, each garment is shipped back, received, cleaned, and returned to inventory. And depreciated. Even in its last pre-pandemic fiscal year, investors would have been better off if, for every dollar a customer spent, the company simply rebated $1.50.

RENT has been in business for over 10 years, and still filed its S-1 as an “Emergent Growth Company” entailing a “high degree of risk” for future buyers of its common stock. Another sign that the business model is inherently problematic is RENT’s lack of peers. LeTote filed for Chapter 11 and seems a shell of its former self. CaaStle supplies a rental platform for other brands to use. Who did I miss? Who’s killing it in clothing rental?

Stitch Fix

SFIX has a different value proposition than REAL and RENT, and a business model architected to make money. The company’s clients subscribe to receive personal style advice and periodic outfit selections, in return for buying, at full ticket, items mostly in the better and contemporary price segments. Healthy gross margins, check. If a client returns everything and purchases nothing that period, they still pay a $20 styling fee.

The company further utilizes an array of 140 data scientists who match purchase behavior with customer demos and product characteristics to model and maximize conversion and AOV and minimize returns. Check, check and check. The company also uses the data to guide development and selling of higher-margin private brands. Finally, the business continues to grow its topline, even through the pandemic by expanding into new customer segments (plus, kids, men’s) and geographies (the U.K. so far).

SFIX returned to nominal profitability in its latest quarter, but implicit in its reporting of outsize growth in and emphasis on non-core growth strategies is that the core women’s business – its largest and likely most profitable segment — has matured, despite a ~$250 billion TAM. (What keeps an articial lid on their women’s business, it seems to me, is that their brand imaging is too literal and practical rather than aspirational and emotional.)

The Business Back Story

These three businesses are all 10+ years old. Why haven’t they yet figured out their profit models? I have a few thoughts.

All three of these concepts were/are venture financed. These tech entrepreneurs and financiers are willing to take on substantial risk to play the long game, solve for complex business models, invest until they completely dominate their sector, and figure that’s approximately where “scale” will begin to deliver an ROI.

It’s worked before. High fixed cost creates a barrier to entry; low variable costs create a steep and predictable glide to profit. But when variable costs are also high (and contribution margin low), as in the cases of RENT and REAL, the path is longer, and the expected error dilates. What happens if the market ends up being smaller than you thought, becomes very competitive, or the model is just inherently unprofitable at any scale? Well, maybe the public markets will be frothy enough to bail you out.

In SFIX’s case, I believe founder and former CEO, Katrina Lake, always had the company’s profit model guide its decisions. However, I think she and company shareholders may have overestimated the ultimate appeal, and peak SOM, of subscription clothing for all.

A wild card in these models is stock-based compensation, which applies to SFIX currently and may affect the others’ future P&Ls — if they should be so lucky. For the top-tier executives living in San Francisco (SFIX, REAL) and NYC (RENT), they accept relatively “modest” salaries and finance their Model S Plaids with stock grants and options. SFIX traded largely flat after its debut four years ago, mostly in the $30s, until this winter, when prices briefly rose over $100. Stock- based compensation this last fiscal year blew a $100 million hole in its P&L.

There’s always the pivot. In recent earnings calls, REAL mentioned that they are opening more stores – because they are more profitable; RENT now encourages you to buy its clothes; and SFIX is strongly promoting its new, “Freestyle” non-subscription platform. Less dopamine, but more real.

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The Covid Chronicles

Being declared nonessential during the Covid-19 pandemic lockdowns perfectly captures the literal truth about mall-based specialty retail.

In fact, specialty stores only exist in the first place because they are magic. They invite us into beautiful stage sets, create new aspirations and help cater to our most refined tastes. Les Wexner, the one-time owner of over a dozen specialty retail chains, frequently reminded his executives that they were in the “wants” business, not the “needs” business. His most scathing (and still printable) critique of his brands’ marketing or displays would be “this looks like JCPenney.” The more magic his stores created, the more margin. The…math…was…that…simple.

Over the past decade, we’ve witnessed a broad and steady decline in that magic, inflicted in part by the infectiousness of a handheld supercomputer that brings the world directly to us. During this pandemic, we worry whether a trip to the mall would be safe; but the journey had already become increasingly unnecessary and banal.

So, what’s next for the malls and their tenants?

The Covid Chronicles

There’s a group of retail executives in Columbus, Ohio who are still committed to perpetuating that magic. We call ourselves CBUS Retail, with the motto, “We love retail.” We are currently producing — supported by Klarna and other like-minded sponsors – a nine-episode, streamed video series entitled “Specialty Retail in Crisis: The Covid Chronicles.”  The series describes the massive disruption in this sector, paints a view of its future and suggests strategies for post-pandemic success. So far, we’ve interviewed 40 analysts, operators and founders from retail hubs across the country. Here is a synthesis of the series.

1. Pre-Covid

Of course, the mall economy was already troubled well before the pandemic, plagued by a persistent supply-demand imbalance, eroding margins and falling productivity. The dynamic duo, Michael Dart and Robin Lewis list several key reasons:

  • Oversupply
    • Persistent falling manufacturing costs.
    • Continued growth of non-mall options – discount, value, outlet and off-price; clubs and big boxes; everything digital.
  • Shrinking demand
    • The mall’s targeting of, and dependence on a shrinking middle class.
    • Consumers spending more on experiences and health & wellness, and less on physical products (aka “dematerialization”).

Other speakers highlighted two other distinct failures of the mall’s tenants:

  • A generation’s-long inability of department stores to increase mall traffic.
  • Specialty chains’ increasing lack of novelty, creativity and differentiation.

In short, too much product, too many stores, and not enough magic.

2. Direct Impacts of the Pandemic

If zombie malls with zombie stores filled with zombie product populated much of the retail landscape pre-pandemic, Covid-19 appears to be finally killing off many of these walking dead. Since March, retailers will have announced the closure of an estimated 25,000+ stores, and a net ~300 malls are projected to “repurpose” or succumb during the next three years. So far, over two dozen specialty and department store retailers have declared bankruptcies, with most emerging much slimmer, with new owners. We are told to expect more Chapter 7’s and 11’s this spring.

NPD’s Marshal Cohen describes “The Discretionary Divergence” in consumer spending.

Shows the categories diverging in spending

3. The Silver Lining

As the pandemic continues to wreck stores, profits, jobs and livelihoods, not to mention lives, our speakers see plenty of future upside for the sector. First, much of the structural oversupply will be gutted from the marketplace. BMO Capital Markets analyst Simeon Siegel argues that the current crisis allows public retailers to strategically downsize without incurring shareholder ire. Most agree that digital commerce is racing through puberty during the pandemic and now stands at least as tall as its offline parent. All in all, there’s a scramble to re-form and reform retail: The future of specialty retail is up for grabs.

4. The Future

A More Diversified and Dynamic Landscape, With Faster Lifecycles and Lower Peaks

With malls and legacy retailers hobbled, the barriers to entry for emerging retailers have never been lower. Traditional wholesalers and DTC brands are finding more mall vacancies with lower rents and more flexible terms, according to Steve Morris, Asset Strategy Group’s CEO. Ottawa-based Shopify provides inexpensive Retail-as-a-Service to over a million ecommerce merchants, who can also co-list their products on other shopping and social platforms including Amazon, eBay, Facebook and Instagram.

Forrester’s Sucharita Kodali foresees an intense battle over the next decade between legacy analog brands now adopting digital first mindsets vs. digital natives seeking heightened customer connection and growth through operating stores.

Whoever wins, the spoils will likely be smaller than before. Analog-first brands that took a generation or more to build tend to top out at $2-3 billion in the U.S. at retail, according to Siegel, with only NIKE swooshing beyond. The current generation of venture-fueled concepts – monied, impatient, and viral-when-successful – will peak faster, but at a level limited to consumers’ goldfish-sized attention spans.

Given the increasingly complex and integrated nature of the equation, analog + digital = sale, J.Crew’s Billy May believes we should focus mostly on market and customer profitability, not channel.

Oliver Chen of Cowen argues that community is the unlock for sustaining consumer loyalty in an attention-deficit world. Aerie and Glossier use social media especially well to foster engagement, according to Chen. Pre-pandemic, Revolve, a brand positioned to party, hosted big, fab, in-person parties instead of investing in brick and mortar.

A Re-Engineered Retail Value Chain

During the pandemic, the design and merchandising teams at the tween girls’ retailer Justice took the whole product development process virtual — from inspiration to concept to line — removing months from their calendar. The compressed timelines prioritized merchant conviction and improvisation ahead of test-read-react. Truly energized by the speed, efficiency and empowerment in the new process, VPs Kat Depizzo and Julia Hanna  are convinced these changes will largely be permanent.

More frequent and smaller buys closer to floorset/listing is a recurring theme. Lower markdowns will make up for slightly higher unit costs. Supply chains will be leaner, faster and more distributed, avoiding single points of failure. Inventory transparency is doubly important as omnichannel options proliferate. Good forecasts are the ultimate lubricant in a lean, forward-positioned supply chain. From a tech perspective, Karl Haller demonstrates how IBM projects demand to the store level.

In stores, all agree that we’ll move towards contactless customer service and payments post-pandemic. Kodali states, “a customer should never have to wait in line to talk to a person.” WD Partners’ Lee Peterson reports that Alibaba is way ahead on these and other innovations in his talk “Innovation, Alibaba Style.” There was widespread agreement that Chinese companies and consumers provide a good benchmark for what’s ahead.

A New Role for Physical Stores

Cathaleen Chen wrote a Business of Fashion article in August, both profound and so obvious (as in why-in-my-decades-in-this-business-hadn’t-I-thought-of-it kind of obvious). There are four roles for physical stores: brand, service, immersive experience and community. Think slow on this.

A future strategy for a market-based store “portfolio” makes sense. Some stores offer full brand presentation, high-touch service and interactive community building; at the other end of the spectrum, are dark stores that only fulfill pick-ups and deliveries.

Less Algorithm, More Imagination

Author of “Aesthetic Intelligence,” Pauline Brown, states that in business there should be a tension between analysis and aesthetics. But that the only way to beat the robots is through the uniquely human ability to create beauty, infuse joy, and surprise and delight customers.

Aaron Walters, CEO of Altar’d State, asserts that the larger a business gets, the more it needs to either simplify the model or empower its employees. He advocates bringing the “special” back to specialty retailing.

Former Google executive and arts student, Abigail Holtz, observes that ecommerce has not evolved for 20 years and now seems emotionless and flat, not effortless and fun; and stores have their own shortcomings. She created online shopping site The Lobby to merge the best of both channels, where they curate emerging brands “doing something special” and make shopping fun with an original, authentic and very human-centered interface.

Magic.

NOTE: This is just a small sample of the smart commentary in the series. Please visit https://cbusretail.org/covid-chronicles-season-one/ to stream for free and join our live Community Roundtable https://cbusretail.org/member-events/ on January 6 to discuss the series content with several of the speakers.

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Five Forces Shaping Retail’s Post-Pandemic Future

This is a precarious time for all retailers, but particularly those deemed non-essential: Inventories are piled up and on-orders slashed; relationships with suppliers, landlords and employees are fraught; cash is scarce and the timelines for stores opening and customers responding are murky. Many, if not most, are focused only on short-term survival.

Multiple Scenarios

As we plan for the post-pandemic future, we’d do best to plan for multiple possible scenarios. For over a decade now, we assumed steady consumer spending growth, some jockeying among competitors and steady momentum continuing towards digital. Today, there are so many more variables at play and a much wider range of outcomes to consider, contingencies to plan for and opportunities to exploit.

For management teams engaged or soon-to-be engaged in scenario planning, you should consider five broad forces shaping the future of our industry: Acceleration, Distortion, Depression, Natural Selection and Government.

1. Acceleration

The march to ecommerce has become a sprint, which is perhaps the most obvious outcome of the coronavirus crisis. Remember several years ago when website developers adopted the mantra of mobile first? It’s clear now the paradigm for much of retail, today and for the foreseeable future, will be digital first. For an increasing number of retailers, the primary role of brick and mortar will be to facilitate digital transactions and promote brand loyalty through the experiences of showrooming, ordering, fulfilling, pick-up and return.

The impact of digital first on stores is crystal clear. Even before the pandemic, a large part of the mall-based, non-essential retail economy was past maturity and in decline. This crisis will kill off the weak, including full-scale retail brands, retail locations and shopping centers.

Digital first applies to retail operations as well. Design is moving to 3D, sometimes linked in real-time to sourcing and pricing. These 3D images can also be tested with consumers, in multiple phases, to help optimize assortment and help manage an individual product’s lifecycle, from product development, buying and planning through to allocation and clearance. Finally, this crisis has cratered today’s supply chains, but will definitely spur retailers to develop processes that are more technologically integrated and responsive in real time, connecting hyper-local, dynamic demand forecasts to decisions far upstream, even to the selection of raw materials.

2. Distortion

There will clearly be differentiated impacts by sector. Retailers and their locations supported by travel, tourism, entertainment, sports venues and gyms are suffering the worst. Others are benefiting: the obvious, Amazon, plus nesting-driven retailers and food retailers. When the commercial world opens its doors again, retailers and brands that offer safety and familiarity may have an advantage over lesser-known brands that trade on innovation and novelty. Marketplace distortion is nothing new, but it looks more dramatic now in separating the winners from the losers after the crisis has abated.

There is also a consumer behavior distortion we are experiencing from shelter in place. We are dressing down, cooking, DIYing and drinking in place. No one knows if these trends will continue after lockdown or whether we might herd towards the exact opposite when “normal” returns. The opportunity is to bank on consumers’ needs to celebrate emergence back into their lives, marketing in mindful, sensitive ways to reconnect with customers who want to reclaim a sense of personal agency and freedom.

3. Depression

A sustained and deep economic downturn is possible, if not probable. Recent reports suggest a realistic “return to normal” may take two years or more. Plus, any retailer who has suffered a bad season knows it takes a good 18 months to regain momentum. And it’s still unclear when that clock will start ticking.

Even if this crisis is relatively short, retailers’ cash will be rationed, resulting in reduced investments in inventory, infrastructure and innovation.

A prolonged downturn will also scar consumer psyches. The generation that lived through the Depression lived, spent and saved far differently after it ended. We’ve all heard the phrase, “Depression mentality.” It’s important for retailers who target Gen X through Gen Z to understand and connect with the changed attitudes and behaviors of these consumers if we do enter a significant economic depression. They have been hammered twice now – just as they started looking for or beginning their first job then came the Great Recession. Now, 10 years later, we have COVID-19.

4. Natural Selection

Some commentators compare this global crisis to a mass extinction – a consequence of a catastrophic global event. For retail, this means the big and the liquid will survive while the weak and indebted die off. Amazon and Walmart are winning because as they increase scale for their concepts, it results in more selection, lower costs, better service and higher switching costs. They have the cash, leadership and determination to keep the flywheel spinning.

Retailers with strong brand equity including Nike, Louis Vuitton and Apple will survive. And those with superior value propositions including Ulta, Warby Parker, Amazon and Costco will emerge even stronger and more dominant. Yet size is no protection from mass extinction. Macy’s, Sears and JC Penney have proven to be too set in their ways to adapt to a changing environment. Toys R Us is gone. Other iconic brands are struggling, including Gap, Victoria’s Secret, J Crew. This crisis will kill the dinosaurs, even some of the biggest.

Survival during a catastrophic global event historically favors those with diverse portfolios and practices, plus the quickly adaptable. Diversifying sourcing in countries outside China will take on even greater urgency after this crisis. Retail chains that are targeting ever more diverse customers and creating different store and pop-up formats for different types of locations have a better shot at long-term success. In fact, the mall economy’s reliance on a monoculture of national fashion specialty retail chains made it especially vulnerable when customer demographics and shopping behavior changed. Successful retailers target customer micro-segments, adapting personalized marketing with adaptable operations, including micro-warehouses and customized merchandising.

Small may in fact thrive post-pandemic. Digital native brands that are flush with cash and lower fixed costs will have the financial ability to ride out the crisis. Small neighborhood businesses may benefit from customer loyalty and valued as places we know and trust, even if many reopen with new owners.

5. Government

Government continues to play a huge and necessary role in this crisis. Some of its post-pandemic impact will depend on which political party wins in November. Progressives hope the lessons from this crisis will generate political support for a higher minimum wage, universal healthcare and a more generous safety net. Many voters across the political spectrum have gained renewed confidence in their state and local governments through their able handling of the crisis. But let’s not forget that post-crisis, governments at all levels will cumulatively have added many trillions in debt and depleted their rainy-day funds. As a result, retailers may have to plan for being hit with some combination of higher taxes, higher borrowing costs and higher employee costs.

What Next?

This first step of the scenario planning process (i.e., identifying the forces likely to drive change) employs deductive reasoning: we start with general principles (e.g., Acceleration) and test them to gauge their power. This set of five may work well to describe the specialty retail sector generally, but may not fit your situation precisely; feel free to come up with your own list. Then build the various scenarios you feel are most likely and create plans for each. To describe each scenario, you’ll want to develop specific narratives around what’s likely to happen to customer segments, competitors, shopping centers, the macroeconomy, etc.

The five forces I’ve described above do map to some pretty bleak scenarios. The silver lining is they each create their own set of strategic opportunities: The culling of weak retailers will open up some pretty sizeable market spaces; a depression will lower asset prices, creating good investment/acquisition opportunities; and the closing of legacy department and specialty chains will allow legacy wholesalers and emerging digital native brands to scoop up less expensive leases with less risky terms. Using this framework, you’ll be best prepared and ready to seize these opportunities when, hopefully, they arrive.

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True Stories: Strategies from Seven High-Growth Specialty Retailers

There is not much “new” to write about when it comes to specialty retail. How often can we talk about the inexorability of Amazon; the metastasizing of dollar/value retailing; the exigency for experience; the hotness of young, unproven business models; the hard march to AI and automation? And let’s re-mention the digital-native darlings.

What I’ve never seen remarked upon is that there is a small group of quite traditional, offline-native specialty retail chains, focusing on things that specialty retailers have always focused on, who are also experiencing significant store, comps and profit growth.

This G7 is: Aerie, Athleta, Bath & Body Works, Boot Barn, Lululemon, Madewell, and Ulta Beauty.

On the surface, these high-growth chains have little in common. Madewell and Aerie are adolescents, launched in 2006; Boot Barn is a grizzled-yet-vigorous 40+ years old. Five of the seven are mostly mall chains, combatting landlord traffic declines. Two feature mostly third-party brands. One is male dominant; another sees men’s as a huge growth initiative. Combined, they sell active, beauty, boots, denim, intimates, home fragrance, personal care, sleepwear, sportswear, workwear and cowboy hats.

So why are these retailers winning while their peers suffer? I recently posed that very question to a group of my colleagues (all current and former specialty retail execs). Our answers should not surprise you.

Aerie
This intimates brand took several years to find its footing, but for the past 20 quarters has experienced double-digit comps. With 141 standalone and 170 side x side stores, Aerie will soon exceed $1 billion in annual sales.

Aerie’s success stems from a brand positioning focused on un-retouched body positivity, a fun and more casual aesthetic and a genuine embrace of diversity and inclusion — a brand for “real women” according to brand President Jennifer Foyle. As Victoria’s Secret’s angels have fallen, Aerie has risen. Its core product focus was initially in t-shirt bras, bralettes, cotton undies and sleepwear, but as the brand attains more “lifestyle” dimension, it is expanding into apparel and active, with huge growth implications.

Let’s also not overlook Aerie’s strong sibling connection to American Eagle Outfitter, who generates its own store traffic, lends its strong brand equity and builds awareness and trial for whatever Aerie cooks up next.

Athleta
Athleta was founded in 1998 and acquired by Gap in 2008. With 190 stores and exceeding $1 billion in sales, the women’s activewear retailer is considered the singular growth vehicle within Gap Inc’s specialty labels (excluding Old Navy, which Gap Inc. will spin off in 2020).

Women’s active apparel is an estimated $24 billion market, growing six percent annually (NPD). While Lululemon owns the premium yoga wear positioning, Athleta merchandises a broader assortment of “sportwear” in the store, with sections marked for training, hiking, yoga, “commute” and girls. They also have more style variation, colors and sizes than Lulu. Additionally, the brand actively messages its social responsibility — for women’s empowerment and, as a B Corp, for fair trade and sustainability. Athleta positions itself as a premium brand, with prices just a bit lower than Lulu’s (e.g., core leggings at Athleta are $89-109 vs. $98-129 at Lululemon).

A big draw for many customers is the brand’s loyalty program. While the retailer runs mostly clean ticket, its Rewards program offers five points for every dollar spent, which build to coupons worth $10 for every 100 points earned.

Bath & Body Works
Bath & Body Works was birthed from the Express apparel chain in 1990, and is now, combined with White Barn Candle Company, a $5 billion unit of L Brands operating 1,740+ stores. The most dazzling statistic, however, is its 23 percent operating profit margin.

How does this personal and home fragrance brand continue to grow so rapidly when two-thirds of its fleet remains in malls? First, Bath & Body Works has chosen to compete in product categories – giftable and everyday products with high margins in categories that, through its merchandising skill and scale, the retailer can thoroughly dominate. Second, the body lotion, soap, fine and home fragrances are treated as fashion, with frequent launches and in-store storytelling driving demand that no other retailer can sustainably match. Third, it merchandises with agility and speed. Its domestic sourcing capability allows it to test and react quickly and confidently, helping to maximize sales and minimize markdowns. Lastly, the company makes major investments in consumer insight-led product innovation, which allows it to improve quality and innovate new products in areas its customers value most.

Boot Barn
With sales nearing $850 million and 250 stores, Boot Barn is the country’s largest western and work wear retailer. The roughly $8 billion western wear market (think Ariat, Wrangler and Justin) is driven by the popularity of country music, ranching and agriculture, horse ownership, and Western events like rodeo. The roughly $12 billion rugged workwear sector (think Carhartt and Wolverine) is driven largely by outdoor blue-collar jobs in construction and oil & gas. Over time, the western + work combo has evolved into a highly productive format, generating significant cross shopping between the two segments. Boot Barn had once grown mostly by acquiring smaller regional competitors in what has always been a highly fragmented sector. But since its last acquisition in 2015 of the 25-store Sheplers chain, Boot Barn has relied principally on organic growth.

Boot Barn’s biggest selling point is a category-killer sized assortment of cowboy boots in one section and a like assortment of work boots in another. The boots are all open stock, assorted by size. If you are a size 10, go to the rack marked size 10, quickly try any number of styles, and if a pair fits, walk to the wrap and hand over your $200+. The vendor then is immediately alerted of the sale, and delivers the replenishment SKU straight from its DC. But other selling points are: head-to-toe merchandise mix; full omnichannel ordering and delivering capabilities; a local store that authentically represents the western and work lifestyles; store associates who are boot experts and themselves live the life; and a brand that invests in community rodeos, 4-H clubs, veterans and other local organizations.

Lululemon
In 2000, Lululemon opened its first boutique in Vancouver, Canada, offering its own make of high-priced, yoga wear for women in a serene, centered aesthetic. The brand quickly evolved to be the status brand for all yoga-inspired fashion; and now “sweat” replaces serenity as a core equity. For FY2019, Lululemon claims 460+ stores in 14 countries, nearly $4 billion in sales, $1,600 in store sales per square foot, and an operating margin likely above 22 percent.

To achieve this success in what was a decade ago still a niche fashion segment, the brand did many things right — foremost was designing a legging that made a woman’s buttocks look toned and fabulous. It entered new markets by enlisting yoga studio instructors as brand ambassadors, hiring only yogis as customer-facing associates and sponsoring and supporting the local yoga community. The brand famously conducts yoga classes in-store on Sunday mornings. Its current phase of double-digit expansion is to use this formula to grow significantly across other “sweat” activities (running, training, etc.) and across more classifications of fitness apparel and accessories. Digital, men and international are also big targets for growth. One example of the business’ omni/digital prowess is that lululemon.com lists markdown product located in individual stores across the chain. Pop-up stores? Lululemon has over 40 of them.

That yoga wear/athleisure has now become mainstream, casual-occasion dressing also helps. One Canadian journalist best summed up the brand’s magic, “Lulu is not selling workout clothes so much as they are selling membership to a club with a very appealing uniform.”

Madewell
At 138 stores, roughly $650 million in sales and a looming IPO, Madewell’s continued growth momentum caught me and my colleagues by surprise. A fast-growing and profitable mid-market women’s specialty apparel chain?

With denim at the foundation of its assortment, Madewell has had the good fortune of riding (and perhaps playing a central role in) the diversity of denim pant silhouettes, fits and sizes for women. Remember when low-rise, skinny was the uniform? See how many more jeans and matching tops you now have to buy! But leave it to Mickey Drexler and his teams to somehow make basics “must have” fashion items through continuously landing on-trend collections and superior storytelling.

Another factor in the business’ success is the “heritage brand” play of Madewell 1937. The store design, types and copy convey a simpler time, but also help communicate the high quality (made well) garment construction, with an implied greater value and longevity than competing designer denim brands can offer. The brand also makes a unique commitment to social change: by donating an old pair of jeans, which will be recycled into home insulation for Habitat for Humanity homes, you get a discount on the next new pair you buy.

A Sample of Madewell Denim Silhouettes

Ulta Beauty
Founded in 1990 in suburban Chicago, Ulta has 1,241 stores and an estimated $7.4 billion in sales. The retailer adopted an old formula, the off-mall category killer, and added a couple “new retail” twists. Defining beauty broadly, Ulta has assembled an estimated 500 well-established and emerging brands from prestige and mass cosmetics, fragrance, skincare and haircare. Second, the store incorporates a 900+ square foot beauty salon, adding to the store’s “customer experience,” imparting expertise and providing product referrals. Third, Ulta has had tremendous success courting and quickly becoming the biggest outlet for celebrity and social-media fueled emerging beauty brands such as Too Faced, Kylie Cosmetics and SugarBearHair.

Perhaps it’s the company’s Midwest heritage, but the broad-based, accessible assortment is matched with attentive, expert and above all friendly customer service, forging significant customer loyalty. The company’s Ultamate Rewards program has 33 million members and captures over 95 percent of Ulta’s transactions. Within the beauty space, Ulta has a comparatively large and active social media presence and, at least during this holiday, dominance in paid search.

Takeaways
What can we learn from these retailers’ growth stories? Pre-Amazon Prime, malls multiplied and brands ruled. If a brand could claim one big thing (i.e., lowest price, biggest assortment, aspirational lifestyle, best customer experience, sexiest underwear, etc.), that was sufficient for success. In this current era of endless disruption, Barbara Kahn in her book The Shopping Revolution, argues that a successful retailer must stake a claim in at least two dimensions.

Here are the strategies that our G7, in some combination, employed to win:

  • Sell the right product categories, i.e., those with intrinsically high emotional content (and therefore loyalty and margin), like beauty, fragrance, yoga-inspired wear, denim, intimates, boots. Then merchandise to own the space in a format and channel you can dominate.
  • Create (or adjust) a brand position to resonate with current culture. Today’s culture values sweat, ruggedness, authenticity, innovation, value, convenience, body positivity, diversity, inclusivity, empowerment and social responsibility.
  • Support the local ecosystem and become its “local” store. Lululemon and Boot Barn invest in the local lifestyles that then support the store, a virtuous cycle.
  • Tell good stories. How else do you sell fashion? Bath & Body Works and Madewell excel here.
  • Innovate. Lululemon is the leader for yoga-inspired fashion and its expansion throughout sweat activities. Ulta offers the latest innovations from the trendiest brands across the market. Bath & Body Works now makes the absolute best three-wick candle.
  • Engineer loyalty. Ulta’s loyalty program covers 95 percent of transactions? Insane.
  • Roll up a highly fragmented sector. Boot Barn has a track record and the superior retail formula in its sector.
  • Consider the category, competition and cultural bend. Activewear is hot now. Denim is, too, but for how much longer? Beauty’s growth has slowed as women revisit more natural looks. (Handbags was the last major category to rocket then flame out – or at least suffer from oversaturation.) How fast would Aerie be growing if the Heathers and Mean Girls still ruled? Where would Athleta be if Chip Wilson had first started making leggings in technical cashmere?

So, let’s honor these seven retailers and their strategies as David Byrne might (though with less music) – with a celebration of specialness.

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Target’s New Business Model is Still a Work in Progress

No retail segment is more competitive than the mass segment, where retailers sell many of the same SKUs and must therefore compete based on differentiated consumer perceptions of value, access, convenience and customer experience. In 2016, the Target Corporation — facing scorching competition from Amazon and Walmart and saddled with negative comps — decided to check “all the above,” including product selection. In early 2017 the company launched a major, multi-year set of initiatives to remodel stores, improve store operations, expand omnichannel capabilities, increase the number of small-format and campus stores, and introduce dozens of new owned brands. A year ago, the company decided to accelerate these investments, and given their more recent operating results, they seem to be paying off.

It’s a difficult trick. A superior customer experience in a store often adds expense. Offering the complete suite of omnichannel options (including same-day to home or curbside pick-up) also adds expense. With these added costs, how will Target also excel in delivering value? Will this business model foot?

The New Customer Experience: A Great Start but Missing Basic Elements

The digital look and feel of the brand strongly reflect the company’s new direction. My www.target.com landing page featured three new brands in all their inclusive splendor, the day’s most pressing shopping occasions, and new omni-enabled ways to “get your Target Run done.” A very different approach than Amazon or Walmart. It seems to be working, and Target’s e-commerce, facilitated by its many omnichannel options, was up 36 percent in 2018.

Based on recent store visits I made in Columbus, Ohio, the in-store customer experience was a big change and represents a new business model. The new, remodeled, and re-fixtured stores, all with new marketing and visual merchandising, are a big improvement over the “old” Target packages. The company is essentially applying the techniques used for decades in better department, specialty and upscale grocery stores. Several departments are introduced with low tables and stands for displays, folded product or forms; varied fixture heights and types allow for good visibility and provide visual interest. Many of the aisles are now shorter in height and length and not all are parallel. Moreover, the displays and décor often showed enough sass to make you smile. I had never noticed the music before in Target, but the tracks had me “boppin” in the aisles. The total effect is that the store is more attractive, more fun, and easier to shop. The discrete sections, when merchandised well, suck you in to spend more time and money. Store traffic and comps were up 5 percent over the past year.

While the new format has raised the aesthetic bar, not all aspects of execution reached it. Several displays of folded product were askew or unkempt, and several bays read conspicuously empty or low on inventory. The swim trunks on one young mannequin rested around the boy’s ankles. There scurried no hawk-eyed associate nearby to fix any of these issues, even on a busy Saturday. Luxury-inspired displays will always feel less upscale, too, when bathed in Target’s fluorescent bulb temperatures. The company has selectively mounted halogen spots in the high ceilings, but the warmth added from those is often not sufficient.

Target says they are improving backroom operations to allow associates to spend more time on the floor for “customer-facing” activities. Let’s hope its end-state business model will allocate enough resources to fix the merchandising and inventory issues.

A potentially bigger miss, in my opinion, is the stores’ failure to change its associate engagement with customers. In a bright, happy, engaging store, we shoppers expect bright, happy, engaging associates providing great service. One consistently gets energy from Costco, Container Store, and Crate & Barrel employees. At Target, my engagement with the associates was unchanged from the many years I’ve been shopping there. And is still uninspiring.

Finally, there were still longer-than-necessary lines at checkout, queued next to several unmanned lanes – with the longest line at self-checkout. I actually like to shop in stores but am always anxious when I’m not sure if I’m in the quickest line. Why not train a camera with some AI to direct me to the shortest wait? Or, more old school, open up a lane or two so there is less of an annoying wait.

The Key to the New Business Model Lies in the Merchandise Strategy

In Target’s more recent public reporting and analyst coverage, all referenced the growth and success of its new omnichannel efforts and its impact on sales and store traffic. But how profitable can having associates pick, pack, and stage-for-pickup or deliver really be?

In fact, the unlock in this business model is in the merchandise strategy. I walk through the store and see upgraded product and presentations in apparel, intimates, baby, toys, home, and beauty — all designed to evoke emotion. And let’s not forget wine. The wine used to be stacked on regular grocery shelves. Now it’s merchandised like an upscale wine shop. Momma is going to notice and she’s going to smile. The math is: more emotion equals less commodity equals more spend and more margin. The company’s curation of private brands is also an integral component. The product may not add incrementally to sales if they replace a major national brand, but they definitely add margin, probably a net of 10 percentage points worth (after subtracting cost of design and development and co-op advertising dollars from the vendors).

In short, even with its recent innovations, Target still needs to spend more dollars on visual merchandising, checkout, and upgrading associate engagement. The company needs to fund this and further differentiate itself by de-commoditizing key departments. If they succeed, mass will never be the same.

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Victoria’s Secret: On a Precipice or a Platform?

With its U.S. sales, earnings and customer affinity deteriorating, many analysts are questioning the future of Victoria’s Secret. In his Robin Report article “Behind the Curve,” Robin Lewis credits Les Wexner’s historic ability to predict big shifts in the market, but wonders whether the brand’s unmoving, sexy positioning – long an asset – might be the primary cause in the brand’s current troubles.

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