Stores must innovate faster
Since the relaunch of its website six years ago, Target has furiously pushed itself to become a retailer that seamlessly blends its store operations with e-commerce.
The company has spent more than $1 billion on digital services. It has opened an innovation center and a showroom dedicated to Internet of Things products in San Francisco, created mobile apps and experimented with augmented reality.
But for all of its money and energy, there is a sense that Target is still not moving fast enough.
“It’s time to accelerate the transformation of our business model,” Chief Financial Officer Cathy Smith told analysts on a March conference call to discuss the company’s poor financial performance in 2016.
More than two decades after online giant Amazon made its debut, brick-and-mortar retailers are still trying to figure out how to integrate their core store business with the Internet, even as new technologies — drones, virtual reality, robots — continue to pop up. Companies like Target and Macy’s, which have invested considerable time and treasure to reinvent themselves, are finding in-stores sales are declining faster than they can innovate and adapt.
“We all know the industry shift has begun to accelerate, and we believe that rate of acceleration will only continue to increase,” Target CEO Brian
Cornell told analysts during the earnings call.
Williams-Sonoma, the home goods chain based in San Francisco, probably comes the closest to mastering the blend of store and online retail. The 61-year-old brickand-mortar chain has managed to generate an equal amount of sales at stores and through its e-commerce business without hurting profit or revenue growth.
Ironically, one key to Williams-Sonoma’s ecommerce success is the old-fashioned printed catalog. Prior to creating its first websites in the late 1990s, Williams-Sonoma had a strong catalog business, which armed it with a wealth of consumer data it would later integrate into its digital operations.
Walmart, the nation’s largest retailer, has also generally outpaced its rivals in embracing digital technology. For example, the company allowed customers to pick up online orders in stores beginning in 2007, far earlier than Target and Best Buy.
Last year, Walmart paid $3.3 billion in cash and stock to acquire fast-growing online retailer Jet.com.
But even Walmart executives acknowledge that they need to pick up the pace.
“Are we making progress? Yes,” Seth Beal, Walmart’s senior vice president of incubation and strategic partnerships, told me. “But we still need to better serve (consumers) wherever they are. There’s a lot more opportunity.”
Other retailers are still lagging. A recent survey of retail executives conducted by JDA Software Group and PricewaterhouseCoopers found that 47 percent of U.S. retailers are still trying to craft a strategy on how to use the Internet to drive sales, communicate with customers and more efficiently transport products.
The struggles are manifest in store closings and on balance sheets. At San Francisco’s Gap, despite a boom in ecommerce, the apparel chain’s online sales remain virtually flat. Until the fourth quarter of last year, the company had not posted a quarterly gain in sales at stores open for at least a year since 2014.
Last month, Neiman Marcus’ board of directors said it was putting the luxury retailer up for sale after scrapping its IPO. Macy’s, J.C. Penney, and Sears have closed hundreds of stores, with more to come.
“All of the stuff retailers are doing is still wrong,” said Brian Kilcourse, managing partner of the RSR Research consulting firm. He predicts that within three years, 30 percent of U.S. retail chains will be gone.
We’re already starting to see the shakeout. In 2017 alone, RadioShack, the Limited Stores, HHGregg, Gander Mountain, and BCBG Max Azria have all filed for bankruptcy. Payless ShoeSource is also reportedly weighing bankruptcy. And it’s barely spring. Retailers have confronted the Internet with varying degrees of urgency and effort, but the changes have been mostly superficial, Kilcourse said. The real problem is with business models, he said.
In the past, the industry generally made money by purchasing large amounts of similar goods from suppliers and then selling them at higher prices. The profit margins were thin (operating stores requires a lot of cash), but physical retailers enjoyed strong sales because they were the only game in town.
The Internet changed all of that. Today, thanks to mobile devices, social media, and recent innovations like on-demand delivery, retailers must go to the customer instead of the other way around, Kilcourse said.
“Retailers must meet consumers at many more points than just the store,” he said. “All of which cost more money than the old way.”
That’s why many retailers still struggle to make any money from their online operations.
“We need to change the economics of e-commerce,” Beal of Walmart said.
Only 52 percent of business and technology leaders, a group that includes many retailers, were confident that they could generate profit from technology, down sharply from 67 percent in 2016, according to a report by PricewaterhouseCoopers.
“Margins are so thin that it’s hard for many retailers to find the money to make very proactive investments,” said Chris Curran, a PricewaterhouseCoopers principal who wrote the report. “They do it on the cheap.”
Retailers recognize they need to go digital, but they often feel overwhelmed by the number of new technologies hitting the market, he said.
The companies say they have support from CEOs, “and now we have to get going on executing the strategies,” Curran said. “But they don’t have a systematic approach to do it. They are bewildered by the technology. ‘The more we know, the more we don’t know.’ ”
Walmart has thought long and hard about omnichannel retail. Both the company’s e-commerce business and Walmart-Labs, its innovation center, operate out of San Bruno. But the company wants to go faster.
It recently said it will create a technology incubator called Store No. 8, headed by Beal and Katie Finnegan, a top Walmart e-commerce executive. The goal is to work with venture capitalists, startups, and academics on technologies like drones and artificial intelligence.
“As Walmart has gotten bigger, it’s gotten a lot harder to innovate,” Beal said. “It’s sometimes hard to make the big bets when you have a big organization. You have to create the startups and then let them act like startups.”
Walmart is especially interested in how drones can more efficiently transport goods from suppliers to warehouses, stores and consumers.
“Drones can have a fundamental impact on our supply chain and e-commerce,” Finnegan said.
A retail incubator is hardly a new idea. But Beal wants Store No. 8 to produce technologies that Walmart can use within three to five years, an ambitious time frame.
Given the state of retail, Walmart will probably see a lot less competition by then.