What: A live event discussing BoF’s “Sephora’s Bid to Dominate Global Beauty Retail” case study.

Why is it important: Sephora is an interesting business to look at ahead of the IADS Cosmetics & Beauty

meeting to be held on 9 July 2021.

Case Study Sephora

What:  NRF examines in depth the less obvious lessons learnt by some of its members

Why it is important:  The distinction between B2B and B2C is increasingly disappearing, especially with the rise of marketplaces for retailers and the need to remain attractive to brands. This requires a new marketing structure, in parallel with a firmer control on the supply chain, which is key in the customer experience now more than ever.

It is not news to affirm that retail has been changed, and so has the customer, by the Covid-19 pandemic. All retailers in the world have now learnt the hard way that omnichannel is key, which implies fluidity across all channels, powered by efficient data management flowing through bots and apps, and completed by trained sales associates. However, there are also less obvious lessons learnt, and discussed by NRF with US retailers:

• Supply chain is now part of the customer experience: any supply disruption is now an issue for customers, who will not wait and go to another retailer. On top of that (and we see it these days), on some products on shortage, customers favour retailers with the most efficient supply chain. What is needed: an end-to-end visibility on the supply chain, implying to know vendors and use AI to de-risk the processes.
• SKU rationalisation: it is tempting to multiply products in order to satisfy each customer’s needs in a very individualized manner. However, this leads to an unmanageable complexity. A rationalization process, in cooperation with vendors, is therefore key. The article cites sodas which are supplied with basic ingredients and then customized on the point of sales.
• AI should be used to predict demand, or at least detect weak signals. More generally, AI for retail is now.
• There is no need to make distinctions between B2B and B2C anymore, especially with the rise of marketplaces and the necessity for retailers to remain attractive to brands, who will not hesitate otherwise to go direct to consulmer.

The article concludes on mentioning that superior technology is needed in the new normal, however, employees still dictate customer experiences and investments in that field will remain critical.

Store re-openings are not a return to normal 

What: McKinsey’s survey on opportunities in the wellness market.

Why it is important: The wellness sector is seeing growth, which gives retailers and businesses many opportunities to capture the market share.

Consumers are starting to view wellness through a broader and more sophisticated lens, encompassing not just fitness and nutrition, but also overall physical and mental health and appearance. Consumer interest is continuing to grow with 79% of respondents of a McKinsey survey revealing that they believe wellness is important and 42% considering it a top priority.

The global wellness market is estimated to be worth more than USD 1.5 trillion with annual growth of 5% to 10%. A rise in consumer interest and purchasing power presents tremendous opportunities for companies.

Some of the trends in the wellness market are using more natural products, increasing personalization, using digital channels, promoting through influencers, offering more services and experiences, and extending categories into new lines.

The future of the USD 15 trillion wellness market

What: Mental health services are being offered in national drugstore chains like CVS and Rite Aid.

Why it is important: Making mental health care available through retailers could reduce obstacles for those needing services.

CVS, the largest retail pharmacy in the United States, has added licensed clinical social workers trained in cognitive behavioral therapy to 13 locations in the Houston, Philadelphia, and Tampa metro areas since January. The providers will offer mental health assessments, referrals and counseling either in person or via telehealth.

The social workers are available during the day, and also on evenings and weekends in the company’s MinuteClinics, which provide a variety of nonemergency health care services either via walk-in or by appointment. The hours are more flexible than what therapists might normally offer, and the social workers partner with the clinic’s nurse practitioners and pharmacists to give prescriptions when needed.

CVS is not the only one investing in behavioral health treatment. Walmart has also announced its acquisition of MeMD, offering online medical and mental health care, which will be added to its Walmart Health services. Rite Aid is piloting teletherapy in the “virtual care rooms” of 13 stores in Idaho, New Hampshire, Pennsylvania and Virginia. And Walgreens is facilitating therapy appointments via the company’s web platform Walgreens Find Care, which connects customers to teletherapy from BetterHelp or Sanvello. Walgreens also offers free access to online mental health screenings.

In the past year, the number of people reporting symptoms of anxiety or depression nearly quadrupled. It is important to remove obstacles to mental heath care by making providers more accessible.

Pharmacies Are Entering the Mental Health Market 

What: Learning from the UK, where online penetration reached 75% in 2020 and is likely to climb to 85% over the coming period, according to a survey conducted by McKinsey.

Why is it important: While online will continue growing, customers’ highest priorities go to the basics of retailing: value for money, stock availability, efficient delivery proposition and reliable product information.

Online penetration

Some 90% of UK consumers under 34 yo have shopped for fashion online in the past year. And 64% of the over-65 yo say they are comfortable with online purchases. Across all age groups, the average online spend as a proportion of the total spend is 55 to 65%. Among the key fashion categories, athletic apparel and loungewear have proved most popular over the past year, reflecting the global trend toward athleisure. Accessories such as handbags and belts have also seen rising demand.

The new fundamentals

As fashion consumers become more accustomed to e-commerce, retailers must ramp up their capabilities with respect to four key pillars:

• Discovery. Customers want brands to stay in touch via interesting news and offers and provide timely and relevant online advertisements.
• Browsing. Features cited as important include appealing product content and relevant recommendations.
• Purchasing. Customer priorities are focused on value for money, accurate sizing, a selection of brands and products, and considerable discounts.
• Experience. Seamless delivery is a highly rated attribute, and customers value being able to return or exchange products easily. Loyalty programs are perceived positively.

Looking forward: Six vectors to stand out

In an era of digital disruption, retailers should remember that customers are not focused solely on innovation. Indeed, consumers continue to place high value on traditional qualities such as reliability, value, and excellent service. With that in mind, McKinsey sees six themes to aid retailers’ in executing their e-commerce strategy.

Reinforce the value-for-money proposition. Because online consumers find it easier to compare prices across fashion categories and brands, focus on finding the right price points and assuring customers that they are getting excellent value (although not necessarily the lowest prices).

Curate intelligently. Invest in cutting-edge segmentation techniques to ensure that your assortment will appeal to your target groups. Leverage advanced analytics, as well as internal and external data, to generate deep insights into customer priorities and behaviours.

Balance inventory and availability. Interrogate data to more effectively manage availability and visibility. Direct customers to where there is stock and redirect them when stock is unavailable. If something is not immediately available, let customers know and make contact when it is back in stock.

Stay connected. Forge ever-closer partnerships with your customers, leveraging omnichannel engagement, nudges, and fresh ideas. However, don’t be indiscriminate.

Design websites purposefully. Outstanding content goes a long way toward inspiring purchasing decisions. Prioritize great photography and sharp copy.

Get it right on the road. Logistics are a key element of e-commerce business models and a significant driver of costs. Put more emphasis on guaranteeing that deliveries are speedy, on time, and reliable.

Six vectors of success in online fashion

What: A paper on the improvement of sales analytics for a better decision making process.

Why it is important:  There is a significant gap between the need for data-based insight and the current methodology of information gathering. 53% of the organizations surveyed by Gartner attribute their poor sales data quality to inaccurate process leading to incomplete data.

Sales operations leaders are facing increasingly growing challenges:

• The decision-making process duration must be shortened, and it is expected that tech & analytics contributes to a better, shorter decision making time,
• Digital channels are increasing the number of options to retrieve information about the market, and make it harder to gather an helicopter view,
• AI is expected to help, but how?

Gartner mentions that AI will allow in the future to replace dashboards by ‘augmented analytics’, i.e. processes where the AI will perform many of the error-prone, inefficient tasks that stand between raw data and access to sales insights. Coupled to Continuous Intelligence, it allows to feed users with the right information when they need it.

While data science and usage of AI will grow among industries and organisations, dashboards and “one size fits all” analytics will disappear, to the benefit of tailor-made, customised analytics according to the needs.

strategic roadmap for sales analytics

What: Including the post-purchase experience in the evaluation of the customer journey

Why it is important: 95% of shoppers say that the handling of their returns affects their decision to purchase again. A first purchase does not guarantee a repeat one.

Retailtouchpoints proposes to examine 5 alternative KPIs which measure the way returns are handled:

• Purchase frequency before return vs. after return: 84% of customers are likely to shop with a retailer again if they are satisfied with the return experience. This indicator should therefore be helpful to measure up the efficiency of the process, and make sure that a portion of customer acquisition investments is not wasted on external factors such as a poor return process,
• Refund vs. Exchange: obviously, exchanges are better than refunds, therefore this indicator is key as it impacts profitability,
• Return rate and negative reviews: correlation might not be automatic, however, it might help to track customers who were not satisfied, left a review but did not care to return the product. How does this matter? Even though on the short run the profitability is not impacted, such customer might be lost on the long run.
• Percentage of calls regarding returns or refunds: a permanent tracker of return performances,
• Speed of returns: this is key in a customer-first strategy.

Five KPIs That Tell you Everything About Your Returns Customer Experience 

What: the case for automation and AI in stores.

Why it is important: automation is an opportunity and retailers should prepare for skilling and reskilling.

The future of work in retail automation

What it is: Looks specifically at the many roles a CTO must fulfil.

Why it is important:

This report identifies seven key roles across the company which a CTO must fulfil. It tackles the question from the viewpoint of transformational leadership. The role is particularly important in mature organisations where habits and structures may have become ossified.

The CTO needs to exercise idealised influence; intellectual stimulation; inspirational motivation; and individualised consideration. Creating a CTO role is a great way for organizations to ensure that they are planning for the future and have an interest in not only staying relevant but remaining cutting edge.

The CTO role explained

What : McKinsey report about the trends shaping the sport’s industry.

Why is it important : Sportswear only decreased by 7,3% from 2019 to 2020.

Eight trends are shaping the sporting goods industry.

1. Athleisure, the new default and a competitive battleground.

Pandemic has served to blur the lines between work and free time, and there is a rising acceptance of comfortable wear in previously more formal contexts. With fashion brands entering this segment, sporting goods players need to leverage their innovation abilities and market knowledge.

1. Physical-activity gap, an opportunity to put healthy lifestyles within reach of all.

COVID-19 has triggered significant shifts in physical-activity levels. Around 40% of people are less active, while around 30% are more active. The sporting goods industry should embrace a multistakeholder approach to tackle physical inertia, particularly in the communities left behind.

1. Sustainability, the COVID-19-accelerated next normal.

The onus is on companies to secure sustainable supply chains. Since recycling is likely to be a bottleneck, brands need to engage with innovative concepts, such as direct-to-consumer circularity.

1. Digital-enabled fitness and exercise communities take centre stage.

Digital fitness won’t fully replace traditional sports and exercise but rather will enhance them in a “bionic” hybrid model. Digital workouts will continue to be a hot trend particularly when they offer an engaging and inspiring element and allow remote exercising in a simulated community setting.

1. Leap forward in online, an accelerating business-model shift to direct to consumer.

With online penetration expected to stabilize at around 25% in 2021, brands need to put digital commerce at the centre and accelerate direct to consumer, and retailers need to deliver seamless and integrated omnichannel experiences.

1. Marketing shift from assets to influencers, an opportunity to make digital pay.

To build awareness, credibility, and engagement, brands need to increasingly work directly with individual athletes as influencers, who have a much longer reach than events or associations.

1. Retail under pressure, but a critical part of the future channel mix.

To attract consumers back to stores, retail needs to find new purpose, new experiences, and new levels of convenience that cannot be offered digitally.

1. Supply chains, the flexibility imperative and a raised bar on agility.

In a post-COVID-19 world characterized by shorter demand cycles, e-commerce, and closer direct-to-consumer relationships, they will be table stakes in some markets. Amid persistent uncertainty, it will make sense to both build stronger supply-chain partnerships and explore alternatives such as near-shoring.

State of the sporting goods 2021 summary

State of the sporting goods 2021 full report

What: Non-fungible tokens (NFTs) are trending and could have long lasting implications for luxury fashion.

Why it is important: NFTs allow luxury brands a chance to be more creative and connect with their customers in virtual worlds.

Every day NFTs are seeing new use cases and record sales. Fashion brands are trying to study the world of blockchain and its creative business possibilities to get in on the profits. Luxury brands like Gucci have expressed that It is “only a matter of time” before luxury brands start releasing NFTs of their own.

Luxury brands fell behind on the e-commerce trend, so there is a willingness to experiment with new technologies like blockchain. NFTs could be the next evolution of digital fashion skins, which have already been embraces by luxury fashion brands. The fact that NFTs are scarce and have the ability to accrue value can bring digital fashion closer to real fashion.

Companies are competing to create clean, beautiful, and premium experiences for NFT fashion. These applications would allow customers to try on luxury clothes or to wear them in gaming realms. NFTs give brands the chance to think beyond physical items, using the virtual world as a way to push the limits with elements that are not as easily achieved in reality.

Luxury fashion brands poised to join the NFT party

What it is: A report from IMD on the main tasks of the Chief Transformation Officer

Why it is important: The pace of digital disruption is increasing, and executives are feeling its impact more acutely. How can change be harnessed to deliver positive outcomes?

The IMD business school examines the increase in the number of appointments of CTOs (Chief Transformation Officers) in C-suite roles. They are hired to drive change and growth in a context characterised by digital disruption across all industries. The role is particularly useful in complex organisations with cost structures and value chains from a previous era.

The report looks at 8 key tasks:

• Customer journey mapping
• Business model design
• Business architecture
• Capability assessment
• Communications and training
• Incubation and scaling platforms
• Internal venture funding
• Agile ways of working

Given this range, it is obvious that a CTO should be able to develop productive relations with division and functional leaders.

Meet the Chief Transformation Officer

What : Alix Partners’ report analyses the key driving shifts following the reopening of the UK after many months of total lockdown

Why it is important :  In addition to the expected need to go fully omnichannel, the results of the polls show that, in order to re-create a close relationship with customers, retailers will need to answer their primary needs, which will be, due to a rising anxiety, to reassure them.

Alix Partner reports that the UK is particularly optimistic, when compared to the rest of the world, regarding the vaccine roll-out and it is expected to positively impact retail as a whole. However, even though ¾ of polled customers are feeling positive, half of them also declare that they will stick to the habits formed during the lockdown, and rely on e-commerce to do shopping. This is obviously a hint for retailers to muscle up their omnichannel capabilities.

Another strong element that is mentioned in the report is that 20% of polled customers mentioned to  be ‘health concerned’, 7% were ‘budget constrained’ and 32% defined themselves as the «’most anxious’.

Consumer anxieties are driving shifts in buying behaviours, which will force retailers to invest in customers analytics, to fully understand and address said anxieties: health concerns, demand for sustainability and transparency, security. Making sure that retailers reconnect after having been so distant from customers during so many months forces them to clearly demonstrate a superior ability to listen to shoppers.

Alix Partner report

What it is: Two reports from McKinsey. A sort of checklist for CTOs of questions they should ask themselves

Why it is important: How CTOs can stop themselves from becoming overwhelmed, ineffective or tokenised.

The report by McKinsey looks at the capabilities of the CTO as well as some things which may undermine their role. A CTO should above all remain evidence-based. This stops them from taking sides. It is also important that a CTO should have wide-ranging skills across a number of areas. The best CTOs also are able to ignite passion and leverage efforts, and also have the means of rewarding outperformance.

On the other hand, poor governance can undermine the role. For example, if they are treated as just another member of the corporate staff and have no power to call upon leaders (including the CEO) to attend meetings for example, then they will be unlikely to make a difference. Similarly, if employees fail to see the urgent need to change, then their role will be an uphill struggle.

An updated version of the report notes that “companies today have no one on the executive team who owns the responsibility for navigating these shifts”. Along with this role of monitoring the external environment for significant and relevant new technologies, the CTO must be able to ensure their effective deployment within the organization.

The role of the Chief Transformation Officer

Why you need a CTO and how to make her successful

What: IADS’ Partner GDR quarterly report on innovation in retail.

Why it is important: a series of retail examples gathered by GDR from all segments and categories.

GDR identifies 5 trends this quarter: Culture Club retail, The online arms race, Category-busting for Gen Z, Life in the Metaverse and Designed with Data.

Culture Club Retail: how to get omnichannel customers spending time in physical stores:

• With a clubhouse approach, such as Diesel with a bar and restaurant, Kith Paris, Browns, Miele and a kitchen to be rented, cycling brand Ribble and a museum/showroom, Old Spice and a barber,
• By emphasizing art, wellness, nature and culture: Hyundai Seoul mall, Rituals concept store, Chinese bookstore Zhongshuge, L’Occitane, Louis Vuitton, Green Pea,
• By providing tech: Vans, Japanese telecoms company KDDI, Gentle Monster.

The online arms race : how to incrementally use tech to improve the overall experience and services provided to customers:

• By being speedy and convenient: Walmart’s smart box for home delivery, german Gorillas delivery company with 10 mn delivery delay, Inpost and label-free returns, Amazon smart shelf,
• By providing superior services: Harper concierge or Toshi’s ‘you try we wait’ service, La Moda’s logistical fleet, Louis Vuitton itinerant store, Amazon Prime wardrobe service, Breitling’s rental platform, Walmart’s shoppable cooking videos,
• By using tech to improve sustainability: skincare Ace of Air’s rented packaging, vegan sneakers and fashion, Ulta circular packaging, slow fashion initiatives.

Category-busting for Gen-Z: rethink the offer and experience to better suit their needs:

• By rebranding: CO by Colgate, Singular society by H&M, Neon Zebra by Pepsico,
• By emphasizing sustainability: JOI’s plant milk, non-alcohol bars, Touchland’s fashion hand sanitiser,
• By emphasizing wellness: Pejoy’s beauty snacks, Xiaoxiandun’s collagen ice creams, Mountain Dew, Siggi’s yogurts, Molson Coors’ non alcoholic mood boosting beverages,
• By providing new services: Coca Cola vending machines subscription.

Life in the metaverse : how to preempt the virtual world ?

• By building bridges between worlds: DressX overlays digital garments onto photos,
• By using tech: Nike’s use of blockchain, Microsoft’s holoportation,
• By going full speed: RTFKT’s premium digital fashion for virtual worlds, Decentraland’s virtual casinos, Buffalo’s digital only sneakers, virtual furniture.

Designed with data : how to use this resource to create products and optimise production:

• Preorders: Amazon build it, Bosch’s or Reebok’s crowdsourcing initiatives,
• Special stores designed to collect data: Indian beauty store Myglamm in Mymbai, Kayak’s first physical store,
• Special apps designed to use consumer imputs to design products: Finesse, Vizit, Algorithmic Perfumery, Beiersdorf’s made to measure cosmetics O.W.N.

GIR 78

What: Marketplaces are handy for retailers as they allow to increase reach and assortment variety

Why it is important:  most of IADS members are engaging in that strategy. Marketplaces can be efficient tools, however, they should not cannibalize the retailer’s reputation for curation and brand selection. Above all, such solutions provide new approaches and tools to retailers, where marketplaces are efficient ways for retailers to understand the potential of new brands, and they onboard them on a wholesale basis.

Marketplaces are expanding fast, as they are considered to be one of the most adequate answers to customers’ needs: wide (almost infinite) assortment, reaching more consumers. Mirakl, a marketplace engineering company, signed with a    s many customers in 2020 than in 2018 and 2019 combined, including an airport.

However, marketplaces might not be a silver bullet for retail:

• Sellers have less control of their brand experience, with sometimes poor presentation,
• Being present on several marketplaces implies the risk to dilute the image or cannibalize sales,
• From the marketplace point of view, any bad experience in the shipping will fall on its operator whereas the responsibility is in the first place the brand’s (which explains why department stores such as El Corte Inglés also develop their own logistical solutions for their marketplace offers). From a broader perspective, the question of knowing who ‘owns’ the customer is still very  much here.

Among recommendations and good practices for brands doing business with marketplaces:

• Communicate constantly and transparently with retailers on any change and conditions,
• Consider hybrid approach: sell some products on marketplaces and wholesale others,
• Make the most of product bundlings,
• Encourage customers to leave feedback

Hudson’s Bay transformed its e-commerce site into a marketplace last March, with  new categories (pet suppliers, books, health, gourmet food, electronics, second hand) and a new business model: commission based on sales and a monthly fee. According to Iain Nairn, president and CEO, this model is extremely efficient in terms of brand onboarding leadtime: a week, vs. six to seven months in the normal wholesale process.

Mounting Marketplaces: Gamechangers but no slam dunk 

What is it: The NFT craze has entered the fashion world.

Why it is important: Fashion brands need to decide how to respond as the fast-moving market for digital collectibles offers people a new way to communicate status in their increasing digital lives.

Leading fashion brands are examining the NFT space trying to understand the opportunities it could bring. But NFTs and cryptocurrencies are heavily hyped and are seen as risky and volatile.

Beneath the hype, there are signs that NFTs could have staying power. People have long assigned emotional and social value to physical objects like art and fashion goods. People tend to link designer handbags and fashion pieces to their creative identities. As we lead more and more of our lives online through social media and video games, the concept of collecting and displaying digital objects seems likely to grow.

Many fashion brands want to wait and see how the technology plays out in the space, but others are leading the way in application and use cases. LVMH understands the implications of the technology either through allowing their customers to bring their favorite products to the digital world, or through blockchain’s ability to combat counterfeit and bring light to the second-hand marketplace.

NFT strategies anchored in physical goods could be the key to unlocking the greatest value for the sector.

NFTs for Fashion Fad or Opportunity

What: the nature of work is changing.

Why it is important: offers a different perspective around the concept of a “workforce ecosystem” which remains integrated without the rigidities of a traditonal work culture.

Workforce Ecosystems

What: It is difficult for the apparel industry to choose the best or most recognized eco-label.

Why it is important: The overwhelming number of eco-labels are puzzling customers and too expensive and time-consuming for manufacturers. But solutions are emerging as the sustainability certification sector evolves.

In a survey including shoppers from the U.S., Britain, France, Italy, and Germany commissioned by the Changing Markets Foundation, 67% found it difficult to know if brands were meeting environmental standards. Retailers feel like eco-labels have become so confusing because of the politics involved.

Recognizing that sustainability sells, brands want to emphasize every little thing that they are doing, and they want to make a label for it. When some stakeholders – either industry or NGOs- want a criteria included and others disagree, the result is two different labels that cater to their specific interests.

Some brands can become so obsessed with reaching one label, that they cause more damage than good. Sometimes by making a product out of recycled materials actually uses more energy and water than using nonrecycled ingredients.

Sustainability is becoming more complex with everything considered from materials, chemical use, logistics, and working conditions over the whole life cycle of a product. This complicates labeling even further.

Some people believe that having governments set up an all-encompassing eco-label would be best, but this has proven to face a lot of criticism. Others prefer to self-regulate through eco-label aggregators like Good on You which ranks eco-labels. Zalando, on the other hand, is betting on the Higgs Index by using it as a standard across its site.

What will eco-labeling look like in the future?

As people become more informed, they will make their own decisions about the credibility of labels and only a few will remain in use. Companies will also become more transparent on their own which may negate the need for so many different labels. There could be a natural convergence to a single standard in each sector. Getting certified is time consuming and expensive, so there is a lot of pressure on eco-labels to harmonize through mergers and agreements.

Too Many, Too Confusing - What Does the Future Hold for Eco-Labels

An article in The Economist looks at the cost of e-commerce for fast fashion retailers using the example of Inditex. Basically, the store model is described as a “giant bundle of fixed costs” including rent and staff and which turns profitable only when enough merchandise is sold through them. Websites and warehouses cost less to run but because the retailer pays for each delivery, the more is sold, the more the variable costs increase. On paper, the shift online looks appealing, if only because the online channel has significantly lower wages and rent expenses. However, if more customers choose to shop online rather than in store, then the retailer incurs higher variable costs while still having to cover the fixed costs of stores.

Inditex has been reducing store numbers and has set itself a target of raising the share of online sales from 14% in 2019 to 25% by 2022. It has apparently managed to keep operating margins at 17%, while those of, for example, Fast Retailing, parent of Uniqlo the only rival to match Inditex’s sales growth, is a third lower. Considerable investment is being made to allow stores and website to work seamlessly together, in particular with technology such as RFID to locate inventory and fulfil orders either from stores or from a warehouse.

Another troublesome cost of online sales is the high return rate which can be as high as 30%. However, encouraging customers to return orders to stores reduces that cost as well as opening up the possibility of further sales. The item also has a higher chance of being sold again when returned to a store. In the case of Zara, at least, a lower number of stores will mean less visibility for a brand which spends practically nothing on advertising.

For the sustainable shopper, what should be the choice between bricks and clicks? A piece in the Financial Times looks for answers at analysis by fund manager General Investment Management. It makes the point that, as retailers make the last mile delivery more efficient, online will gain the edge. However, this is not guaranteed. Indeed, remembering the economies of scale for stores mentioned above, while store shopping would normally generate higher emissions than online, the emissions per item generated by a larger store shopping trip would fall below those online. Customer transport emissions can vary tremendously according to whether the trip is made by car, on foot or public transport, for example.

Still, online shopping will generally be a greener option than driving to the store for just a couple of items. Somebody who does that three times a week could save about 2kg of carbon a week even by switching to an averagely efficient e-retailer.  The article concludes that “bundling orders, minimising returns and avoiding rush shipments would all make a difference. As, of course, would buying less”.

Imagine that, during the recent pandemic, retailers offered customers to shop in store remotely using selling associates, then sent the purchases within the day by personalised delivery (or even organised kerbside pickup by the customer travelling to the store by car), and probably had to deal with a higher return rate than normal for a store sale, then those retailers were accumulating all the most costly options both in terms of their own expenses and in terms of emissions and damage to the environment.

How Inditex is refashioning its business model (The Economist)

Carbon counter delivery van vs shopping trip (Financial Times)

What:  Analysts are weighing the environmental impact of e-commerce compared to going to the store.

Why it is important:  So far, brick & mortar remains the most viable option, as shown by the unrealistic hypotheses taken in the “best case” scenario for e-commerce.

There are questions on the actual environmental impact of e-commerce and deliveries, compared to simply driving to the store. While Amazon claimed in 2019 to be more carbon efficient than going to the store, other studies show that the impact of online retail is double compared to brick & mortar.

A more recent study by Generation Investment Management aims at measuring this impact taking into account the latest technologies and improvement in the retail & logistical sectors. The study shows that, according to the hypotheses taken, e-commerce can represent either half of the emissions due to brick & mortar, or 3 times more.

It is telling that the best case for e-commerce taken into account in this study assumes that electric vehicles are used for the last mile, data centres are powered with renewable energy, and products are not shipped in single-use packaging (these conditions are rarely met together so far).

IADS perspective - Carbon counter: delivery van vs shopping trip 

Carbon counter delivery van vs shopping trip (Financial times)

PRINTABLE VERSION HERE

The IADS office is launching an observatory of 100 department store companies around the world for members’ information and to keep track of changes in the format. The companies are not selected by size since the list includes small businesses which may nevertheless be representative of the format in their country. The list is a subjective sample which expresses the diversity of the format, both as it exists today and as it has transformed itself since its beginnings in the 19th Century. The list will be updated and act as a tracker of the format around the world. The very diversity of department stores revealed by the list is an asset when companies share their particular strengths in a group such as the IADS.

The following is a commentary on the list which is a work in progress.

The “creation myth”

Just as cultures through time and around the globe have developed their own creation myths to explain the origins of the world, the planets and stars, and human beings, so too department stores have their own. Some see the origins of the department store in middle eastern markets, others favour 17th century Japanese kimono shops while still others maintain that the expansion of European drapers holds the key to the original idea of the department store. The most widely cited case of the first “modern” department store is probably the Parisian Bon Marché in 1852, described by Emile Zola in his novel Au Bonheur des Dames (1882), held up as a typical department store as well as symbolising the social, economic and technological changes which were both improving society as well as ravaging it (see H. Pasdermadjian, The Department Store, Newman Books, 1954).

Department stores today have become an extraordinarily diverse format. They mostly still adhere to the earliest characteristics which include free entry, fixed price, no bargaining, a certain size (the most common figure quoted is at least 2500 m²), divided into multiple departments selling a wide range of goods. Their original target was the growing middle class emerging with economic development and industrialisation. Over the last one and a half centuries, the format originally based on efficiency has become increasingly complex, making it less efficient and indeed layering on levels of complicatedness (See Yves Morieux, TED Talk). However, arguably, the mixed parenting of so many department stores has given the format extra resilience which, in spite of a decline in market share, has guaranteed its persistence in new and different forms in the retail landscape.

Around the world in 100 stores

At a regional level, the IADS 100 List includes 17 companies from the Americas; 39 from Asia; 34 from Europe; and 10 from the Middle East and Africa, Australia and New Zealand. There are some broad differences in the models operating across continents:

• In Asia, there is a marked preference for the concession model, in which department stores host brands/suppliers. This model is in some cases very close to the shopping mall model. In most Asian markets, the emphasis is on growth.
• In the Americas, and particularly North America, there is a dominance of the wholesale model in which department stores purchase and take responsibility for the merchandise they sell.
• In Europe the model is mixed with some stores favouring the wholesale model, and others operating more closely to the concession model. The emphasis in Europe is on profitability rather than growth.

It should be pointed out that none of these models are totally dominant on any continent. Furthermore, we can observe a series of shifts over time: the Asian companies are searching for competitive advantage in a crowded and competitive market and will be attracted to the exclusivity of own brands or partnerships. At the same time, Americans, while also exploring partnerships for exclusivity, will invite formats into their stores which may increase the proportion of concessions. In the multiple smaller markets of Europe, where the situation is already mixed, concessions are seen as reducing risk, but also as reducing the uniqueness of the offer.

It has often been remarked that department stores do not travel well. Large markets will therefore tend to breed larger companies. It is certainly the case that the US has produced a number of giant department store companies which result from consolidations over a long period of time in a huge market. Macy’s has swallowed and absorbed well over 20 different store companies. However, it has kept Bloomingdale’s as a separate division.

In department store terms, the Asian continent has traditionally been dominated by Japanese companies which have opened (and often closed) in many other countries (where their names sometimes subsist). They have also consolidated, in pairs, in their own market. However, China is a huge market which now has a significant number of players in the format which are growing in large part thanks to the expansion of the Chinese middle class which has historically been the motor of the department store format. It should be noted that Korea is also an important player with one of the largest market shares of total retail by department stores.

In Europe, the average size of department store companies is significantly smaller than on other continents, in part because consolidations have taken place within smaller countries rather than across the continent. There are some large companies such as El Corte Ingles in Spain, the only one left in its market. Germany has lived through consolidations for many years; and the UK’s wide variety of department stores has started shrinking with the recent loss of BHS, Debenhams and many House of Fraser. In the last 30 years, France has gone from over 12 department store companies to just three in 30 years, with a market share estimated at under 1%. The historically small market share of the format in Italy can be explained by a historic dominance of small independent retailers in fashion.

The importance of omnichannel business to the format also varies considerably. It ranges per company from almost nil to around 60% (or more during the Covid pandemic). In general, online business as a proportion of the total retail market is largest in China and the US, in part because of the giant dot.com pure players and marketplaces. It is hardly worth their while for a Chinese department store to attempt to compete with an Alibaba online marketplace, whereas in the US omnichannel has been growing in department stores (and indeed in other formats).

The proportion of global online sales is currently estimated at 18% of global retail sales, forecast to rise to 22% by 2023. Several department stores were above that before covid and we expect a “50% club” to emerge (those department stores registering over 50% of sales from online) already including John Lewis, with Nordstrom and Falabella knocking on the door and others not far behind.

What does diversity look like?

It is clear that even given the lowest size limit mentioned above, there still exists a huge variation in size among department stores. Some of the giants most often mentioned today are the Centum City, Busan, store of Shinsegae (293 000 m²), the SKP stores such as the Beijing one at some 200 000 m², or even Macy’s in Herald square New York, claiming to weigh in at 200 000 m² GLA. It is clear that operating such a business requires different skills from those needed to run one of the smaller stores (under 5000 m²) of the important Swiss chain Manor. An appropriate management structure including regional directors overseeing several smaller stores, or floor directors responsible for one or more floors of a large structure, is often created. The size of overall companies may also vary considerably in our list (see Liberty of London compared to Falabella of Chile, for example).

The composition of the department store portfolio of a company may consist at one extreme of a number of stores which are fairly well balanced in terms of size and revenue (such as the late Debenhams in the UK which could properly be described as a chain), or of a large flagship with a “long tail” of smaller stores capitalising on the flagship brand (which was the case of Galeries Lafayette before it put a number of its smaller stores out to franchise). Clearly an unbalanced portfolio of stores can make the retail operation extremely complex in terms of assortments, contracts with suppliers etc.

Some of the complications of running a multiple department store business may come from a history of consolidation. Frasers group in the UK, for example, over time acquired and, in some cases, consolidated over 20 different names. In each case this means merging company cultures internally, and communicating brand meaning to customers (there were street demonstrations in Chicago when Macy’s changed the name of Marshall Fields to its own in 2006). Macy’s, the world’s largest department store company in terms of revenue, probably has managed also the greatest number of takeovers of rival department store names. In Japan, several pairs of department stores have joined forces over the last decades such as Hanshin and Hankyu, Isetan and Mitsukoshi, or Daimaru and Matsuzakaya. However, it is sometimes complicated to understand exactly what that means in operational terms.

Indeed, in some places, one department store company has risen to the top and exercises a quasi-monopoly in the department store market after acquisition of its rivals. This is the case, for example, of El Corte Ingles in Spain which acquired its only rival Galerias Preciados in 1996. However, all countries are not characterised by one dominant department store company and a litter of smaller niche companies. Countries where department stores hold the largest market share in terms of the share of total retail trade, are often characterised by several strongly competing companies. This is the case in South Korea, for example, with companies Lotte, Shinsegae, Hyundai and Galleria accounting for perhaps over 5% market share. The same situation obtains in Chile with Falabella, Paris and Ripley waging war in an unforgivingly competitive retail market.

The degree of rivalry also depends on the market positioning of the department store companies. Some have chosen to remain or shift towards the luxury end of the market such as Breuninger in Germany, or Bon Marché, part of the LVMH group. Just as society is supposed to be polarising along income and wealth lines with significant shifts in Gini coefficients, so retail and department stores are finding it increasingly difficult to maintain profitability catering to a shrinking middle-class market. The degree of dependence on the tourist trade will also impact some but not other companies. Large flagships in world capitals will be operating a different business from those stores serving a more local clientele.

The situation can vary in markets where the format is older compared to markets where department stores are relatively recent creations. In the former, the emphasis will be more on precision retailing and maintaining profitability, whilst in newer department store markets, the emphasis will be on development and growth (as it was indeed when the format was created in Europe or the US). Thus, SM in the Philippines has, until Covid slowed us all down, seen a remarkable organic growth rate in terms of numbers of stores and centres around the islands of the country. Similarly, with Hong Kong and plans at Sogo of the Lifestyle Group, although recent political events have complicated matters. The outstanding example, in this regard at the moment is, of course, China where SKP is planning to open giant stores across the country in the next two or three years. In Thailand, The Mall Group is continuing its considerable investment programme, while Central Retail Group has been acquiring famous department stores in Europe such as Rinascente in Italy, KaDeWe in Germany, Illum in Denmark, and most recently Globus in Switzerland.

The perspective on development, investment and growth will depend to a significant extent on whether a department store company is privately held or public. Privately owned companies are expected to adopt a more long-term perspective than public companies. However, while this may be true to a large extent for family-owned companies, it is certainly not the case for equity investors who may take a company private after a takeover. The case of the Canadian company Hudson’s Bay which took over Lord & Taylor and Saks Fifth Avenue under US investor Richard Baker is an example of the latter case, Lord & Taylor having been sold and closed down.

This huge diversity within the same format translates into a considerable stock of collective experience to be shared in an organisation such as the IADS: the early development of e-commerce or marketplaces; concession management; private label development; fulfilment options; the adoption and integration of various softwares and technologies; organisation structures and HR management; supply chain strategies; marketing innovations and visual merchandising standards; store design… These are but some examples which may be expressed quite differently (or indeed at different moments in time) across the range of department stores, but which are nevertheless applied within a common format. The learnings are potentially huge.

Die another day

Just as we started with the department store creation myth, we need to end with an “apocalypse myth”. The end of department stores has been forecast for a long time. Every time a new retail format emerges, it is said to be another nail in the coffin of department stores. Thus hypermarkets, big box discounters, fast fashion chains, and, of course, online retailers have all been named at different times as factors hastening the doomsday of department stores. The most recent predictions have been related to death by covid, which is supposed to have accelerated an already active process of decline (see NYTimes piece).

The IADS believes to the contrary that those department stores which have survived, and in some cases thrived, will find the resilience to develop and be born again, perhaps with a modified business model. Visions of apocalypse are usually a reflection of our fears at any given moment. Those fears are real but can be harnessed and put to work to create a new version of the format using its diversity as a strength.

The IADS 100 List is intended to chart aspects of the format as it copes with the latest challenge (and perhaps future ones).

Note: How to read (and how not to read) the IADS 100 list

Is department store data available and comparable? While department store diversity can be a strength when shared, it also makes comparisons difficult. It is clear, for example, that data concerning revenue, profits, selling space etc. will often not be available from privately held companies. If the IADS obtains such data privately and confidentially, we will not publish it.

Standards between companies and between countries will vary sometimes quite considerably, because of history, accepted practices or indeed accounting standards and legislation. For example, in some companies, reported revenue will cover only sales of goods owned by the store and not the sales made through concessions operating within the store and paying a commission. This is the case for example with Harrods of London which officially reported a latest-year revenue of £607 m but unofficially a “gross merchandise revenue” (goods sold through the store) of £ 1 041 m. Some companies in Asia generate revenue mainly from concessions.

Profitability is also reported differently (when it is reported at all): it may be operating profit, EBIT, EBITDA, or net (attributable) profit. These are sometimes defined differently from one company to another. They can also give very different pictures of a company. For example, although some companies have been clearly still operationally profitable even during covid, they may still suffer an overall loss. The main interest of the IADS will be to evaluate operating profitability. We will however report overall department store, company or group profits where available.

The IADS also focuses on department store operations, sometimes the only activity of a group, but in other cases only a small part of a group’s operations. Ideally, we would be able to report a group’s results as well as those of the department store division within it. This is not always possible, however. In some cases, the differences are minimal while in others they can be considerable. The Hanwha Group of Korea is a large business conglomerate covering aerospace, chemicals, energy, finance, construction, as well as leisure and lifestyle under which can be found hotels, resorts and the Galleria department stores, representing around 1% of total group business. Similarly, the Sogo Seibu stores of the Seven & I group of Japan represent under 8% of total activity.

International companies are also sometimes structured by country in which the results of department stores are not distinguished from those of other formats in that country such as supermarkets or DIY. This also can pose a problem for the extraction of the pure department store activity.

Finally, many, but not all, of the companies listed have some e-commerce activity. That activity may be local or international (such as Breuninger in Switzerland or Bijenkorf in France). It may sometimes but not always be listed separately from the brick & mortar store activity. Probably the most notable in this respect is John Lewis of the UK for which online represents over half of total activity.

The “elephant in the room” is, of course, the past year of covid lockdowns. Some of the figures include that period, others include some of that period and yet others only cover the period preceding covid. This naturally makes any comparison of the effects of covid impossible. With time, as the list evolves, this problem will disappear. However, it should be noted that financial years can be very different across companies, even within the same country.

The latest figures from Statista show the impact of covid on retail sales in different categories online. While supermarkets and sports equipment have clearly benefited from lockdowns, tourism, travel, fashion, and accessories (important to department stores) have suffered. Overall, retail sales are expected to be down 5.7% in 2020. So the figure is likely to be considerably higher for department stores.

Credits: IADS (Dr Christopher Knee)

 ASIA: Sample of 39 companies covering 12 countries. Total sales € 88 bn

EUROPE: Sample of 34 companies covering 18 countries. Total sales € 55.1 bn

AMERICAS: Sample of 17 companies covering 12 countries. Total sales € 66.9 bn

MIDDLE EAST, AFRICA, OCEANIA: 10 companies covering 6 countries. Total sales: € 7.6 bn

PRINTABLE VERSION HERE

Buy Now Pay Later (BNPL) financing solution is not new, and retailers already know for years such interest-free instalment plans. While basically being a loan, it is nowadays marketed as a convenient payment option and has steadily and quietly developed over the 2010’s. Covid-19 only accelerated its growth as both retailers and consumers found great interest in such a payment method.

According to Affirm fintech, BNPL is expected to triple over the next two years. Stating BNPL is rapidly growing is an understatement. According to

https://www.iads.org/files/pmedia/public/r6872_9_article_1_-_buy_now_pay_later_platforms_-_coherent_market_insights.pdf

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published in July 2020, the global market was valued at USD 7 320 million in 2019 and should reach USD 33 638 million by 2027. North America is currently the biggest market by volume and revenue and Asia Pacific is expected to be the fastest growing region in the future.

That said, what does BNPL have to offer? Should retailers bet on it and why? Should customers trust such a payment method? Is it a sustainable model or will it change in the future?

BNPL and retailers: a match made in heaven?

First, let’s see how it works from a financial point of view. Like most payment solutions, BNPL firms are paying full purchase amounts upfront while charging fees to retailers: they are usually coming as a flat fee along with a commission, both taken on each transaction. Depending on the countries and whether it’s Afterpay, Klarna or Affirm (some of the largest BNPL companies), fintechs charge retailers a flat fee of USD 0.3 to 1 (for processing the payment) and a commission of 3% to 6% depending on the purchase amount. These rates are higher than debit card (accounting for 0.5 to 1% per sale) or credit card ones representing up to 2% per transaction.

Retailers’ margins have been dramatically challenged over the past years. Discount periods and rates have only been rising, sometimes representing up to 10 months a year, especially in fashion, a crucial part of the business for most department stores, and for BNPL users. Acceleration in e-commerce has also been affecting margins with supply chain investments and customers’ expectations for free and fast deliveries. In this environment, BNPL solutions are efficient but they surely represent additional costs for retailers. Last, it’s worth knowing that, as Klarna states on its website, BNPL technology allows customers to set price alerts on saved items for them to “never pay full price again”. Not really a message merchants want to hear…

On the bright side now, numbers claimed by BNPL companies are like winning the lottery as the benefits in volume and recurring spending seem to be worth the high fees. Retailers, by offering a BNPL option, are creating a relationship with consumers that are keen to purchase. According to BNPL companies, shopping carts increase up to 30%, abandonment at checkout decreases up to 25%, repeat customers increase up to 20%, and return rate reduces. Affirm, Afterpay, and Klarna see average basket value rise 85%, 30%, and 45% respectively.

The magic in BNPL solutions also stands in their younger customer base. Afterpay claims that 73% of their shoppers are Millennials and Gen Z consumers. And merchants say that 30% or more of Afterpay customers are new to their brand. Macy’s (partnering with Klarna), said that 40% of shoppers using BNPL are new shoppers and 45% are under 40 years old. Only 25% of Macy’s existing customers are under 40.

Considering the challenges retailers are currently facing, proposing a BNPL payment option is worth it: sales volume will increase, customer base will grow and merchants might start long-term relationships with younger consumers they would not have been able to reach otherwise. Retailers will also benefit from additional and unprecedented visibility thanks to BNPL apps, designed to display brands and products in a seductive way. These new shopping apps are a complementary channel for retailers, and an important one as they are targeting younger generations.

Many younger customers are considering themselves as being part of a community. This is why word of mouth explains a fair part of the BNPL success, recommendations from friends or influencers working their magic. In 2020 in the U.S.,

https://www.iads.org/files/pmedia/public/r6873_9_article_2_-_buy_now_pay_later_services_growing_quickly_among_u.s._consumers_-_the_ascent.pdf

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shows 27% of BNPL users heard about it on social media and 18% through friends and family. In this environment, BNPL is appealing to younger generations facing difficulties in accessing credit cards or simply considering them old-school or untrustworthy.

Furthermore, BNPL is about data. Becoming shopping destinations, BNPL apps are connecting customers to merchants thanks to an algorithm personalising brands, products and deals for each user. Needless to say, fintechs are gathering a huge number of information on shoppers while remaining very silent about the ownership of such data. Because of that, it’s hard to believe that ownership would go to retailers. So the question is key when entering a deal with a fintech. But retailers might learn a lot about their new customers anyhow, as they are collecting all information about the purchase itself.

IADS members have already embarked on BNPL business. Interestingly, The SM Store in Philippines has developed a partnership with 13 banks, not with a BNPL fintech. Started in January 2021, the department store offers to pay any item in 3, 6 or 12 interest-free instalments, depending on the purchase amount. Though they are not called BNPL, IADS members are offering -and have been offering for a while- instalment plans through their credit cards.

Pay later, but pay up

Whether it’s through Netflix or Amazon Prime, we are all living a part of our lives through subscriptions. Watching a movie at home has become a seamless experience as well as its payment thanks to monthly instalments. As a result, consumers are more and more used to frictionless and contactless payments solutions and Covid-19 has accelerated this trend.

When it comes to customers, BNPL promise is double. First, convenience. As applying for a classic instalment through a retailer’s credit card requires much information and sometimes frictions and delay, the BNPL registration process is supposed to be seamless and fast. The approval, relying on the shopper’s debit card, is occurring in real time and not affecting applicant’s credit score (assuming they pay on time).

The payment part is easy: shoppers just have to confirm instalment terms (number of payments, amount of each one) and total cost of the purchase. Payments due in three or four instalments are interest-free, while the interest rate goes from 15% to 24% for payments from five to six instalments or more. If BNPL option is not offered by the retailer, fintechs can instantly create a virtual one-time card number to be added to Apple or Google wallets.

Convenience is also a factor in budget management. A Cornerstone survey shows that most BNPL millennial customers in the U.S. don’t really need to postpone payments as they earn more than USD 75 000 a year and hold credit cards, but rather prefer paying in instalments to help their budgeting.

Second part of the promise: providing essential financial service. Given the current economic environment, it’s true that flexible financial options have proved necessary to some people. To appeal to them, Affirm motto is reassuring: “Pay at your own pace. When you buy with Affirm, you always know exactly what you’ll owe and when you’ll be done paying. There are no hidden fees—not even late fees.” BNPL solutions usually cover payments from USD 50 to USD 17 500 so they are now also used to pay for small daily expenses, bills, or even tuition fees.

Trouble in paradise?

One of the main interests for merchants using BNPL solutions is to access to younger customers and engage in long-term relationship with them. But it might come at a risk. A BNPL study conducted by The Ascent shows that only about 1 in 5 of consumers who use BNPL apps actually understand how they work. To some immature customers, an item will seem more affordable than it is if its payment is split in multiple months. If they end up paying important additional fees, who will the shopper blame, the BNPL company or the retailer? One can guess that the retailer will be seen as guilty, putting the customer relationship at risk for the future.

Whether it’s splurging or just paying for commodities, these payment options are often stretching consumer financial capacities beyond their real means, leading some of them to fall into debt. And this is currently the major factor limiting an even bigger increase of BNPL, as complaints regarding the late fees are increasing. For instance, Afterpay charges USD 10 for each missed payment and USD 7 if the instalment remains unpaid after a week. Users missing all the instalments are charged a late fee of USD 68. Considering most of the payments made using BNPL are under USD 500, these fees are relatively high.

According to a survey conducted in the U.S. in November 2020 by Credit Karma, nearly 40% of consumers who used BNPL missed more than one payment. Nevertheless, Klarna, which has partnerships with over 250 000 retailers, said credit losses have fallen across all major markets. Afterpay, also said that late fees from consumers accounted for less than 9% of company’s income in the 2020 last quarter.

What’s next for BNPL?

While BNPL business surged with the pandemic, and given the nature of its customer base, the question of responsible lending policies arose in some countries. In the U.K. for instance, where the BNPL market represents USD 3.7 billion, consumer groups asked for regulation. As a result, the U.K. Treasury announced BNPL companies will have to conduct affordability checks before lending to customers.

More responsibility could come through certification. Sezzle, a BNPL company has recently been “B Corp” certified. This certification concerns for-profit companies that are taking into account the community they are engaging with. In the case of Sezzle, “B Corp” certification has acknowledged a commitment to financial education and a support to young adults in their purchase needs.

But still, is BNPL a sustainable business model? Fintechs could be considered as an additional middle-person between consumers and retailers, a position usually only occupied by banks. This is where an interesting battle might happen. As a direct competition to banks, Affirm launched a debit card, showing BNPL companies are willing to gain on the banking industry. On the other hand,

https://www.iads.org/files/pmedia/public/r6874_9_article_3_-_how_banks_can_use_customer_data_to_compete_in_the_buy_now_pay_later_space_-_forbes.pdf

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knowing they are ideally positioned to enter the market. They are able to tailor BNPL solutions through their own debit or credit cards, additionally taking advantage of all the data they own as well as their capacities in terms of security. In that case, banks could eventually eat BNPL firms alive.

***

What about retailers? Even though BNPL might only be a fleeting trend led by younger generations, offering a BNPL payment option to customers is as profitable as it is necessary to gain additional shoppers and new sources of revenue. At least for the time being, even if BNPL solutions are a competition to retailers’ credit cards.

For tomorrow, the goal could be to transform these shoppers into store-branded card holders by evolving the credit card solutions to include BNPL options. The example of Macy’s is really of some interest. Besides offering Klarna’s BNPL options to customers, the department store has invested in the fintech, showing a first step and possible path to fully include BNPL in its offer.

Credits: IADS (Christine Montard)

PRINTABLE VERSION HERE

Many department store companies today are struggling with their physical store legacy. Stores may be too big, too many or unsuitable. Some big decisions are currently being considered in the light of the acceleration of trends provided by covid, the apparent disaffection of customers with stores and the declining profitability of the existing department store model. Some companies are closing stores, some are upgrading them, and others are considering different business models.

Stores vs online, and brand value

Figures from before the covid pandemic estimated the global share of online retail to be 18% in 2021. This is now probably a serious underestimate.

![What should we do with our stores? 1

The true figure has certainly leapt in some countries due to lockdowns, in some companies who had been resisting online investments, and indeed in those companies who were most advanced in omnichannel retailing who saw a real possibility of making up for losses from stores through the online route.

As the graph shows, the increase in the share of online retail was a trend before covid. It has likely been accelerated over the past year, which means that it will not return to its previous level but will continue to grow more steeply.

The negative impact on physical stores is a clear example of businesses suffering more from their own actions than from those of competitors. Indeed, the discussions about overstoring have been going on for some time. Even companies which have been aggressively growing their online business have often simultaneously been multiplying or expanding stores.

Some believe the most important asset of retailers lies in their brand value. The recent case in the UK of Boohoo.com acquiring Debenhams and Arcadia brands without the stores, and Asos buying Topshop, again while closing all their outlets, are cases in point. Barneys, once a famous luxury department store operation in the US, is now owned by Authentic Brands Group and licensed to Saks. The selling off of the physical real estate, often initially with a lease-back deal, may be an early sign of the end of the traditional model. The latest case is that of Stockmann in Finland which has recently sold off its Helsinki, Tallinn and Riga stores.

How does one determine whether a particular market has an excess of retail space?

According to Statista, the retail space per person in selected countries in 2018 was as follows:

![What should we do with our stores? 2

Another trend which arguably started well before covid was the “unmalling” of America and traditional store closures in many other markets too. But according to Coresight, in the year so far in the US there have been 2548 store closures and 3199 openings. The positive balance of openings, however, are often on a very different basis. For a start they have different, shorter and more flexible lease conditions, the rents are lower and/or adapted, and the stores themselves are often quite different (not least, smaller footprints). One commentator has only half-jokingly described stores for the new generation of retailers as a customer acquisition cost. The chart above shows different retail space densities across countries, showing both excesses and potentials.

What’s the use of selling space?

So how have department stores been reacting to this situation?

a)    Reducing or closing

As some department store companies have been failing, there has been something of a natural attrition of stores. This has been the case with Debenhams and BHS in the UK, for example. Some companies have been closing stores, starting with the least profitable ones such as Galeries Lafayette transferring part of its regional network to franchise operators, Macy’s or John Lewis. The John Lewis case is particularly interesting since it has long been expanding physical stores: between 2008 and 2016 (the last year it gave figures), it increased selling space by 40% at the same time that it was pushing online growth. It argued for the “halo effect” at the time, saying that £6 out of every £10 spent online was driven by the shops. That figure today is only £3. In the meantime, it is planning to reduce drastically its retail footprint in its Oxford Street store, converting the rest to offices. Something similar is being planned by Marks& Spencer at the Marble Arch end of Oxford Street which has applied to demolish the building and replace it with a smaller store topped with offices. Fenwick, an important store and real estate owner in New Bond Street is doing the same while simultaneously struggling to build an online presence.

b)    Changing or transforming

The fact that John Lewis is closing 16 out of 50 stores will free up investment funds allowing it to give the remaining stores a fighting chance. But the remaining stores will have to be different. Not only is John Lewis thinking of a totally different use of space such as housing or entertainment, but it is also apparently looking at other forms of retail such as garden centres. Other companies which own or have use of their store buildings are converting them to offices like Filene’s in Boston, into “dark stores” like El Corte Ingles in Eibar, or thinking of the department store as a mixed-use complex including hotel, shopping and restaurants like the yet to be opened Samaritaine of the LVMH group in Paris. What is clear is that the traditional department store format will not cut it at the moment, if only because it is not sufficiently profitable as a model to survive in current numbers. Other models have come into existence such as Showfields or Neighborhood Goods which would appear to be better adapted to consumers’ expectations. Or going further still, Amazon and Walmart, from opposite directions, seem to be thinking of physical stores as “satellites” in the retail ecosystem.

c)    Flagships plus local

While a number of smaller outlets are being reinvented as local stores with an emphasis on personalised service with agile and flexible structures adapted to the convenience of local customers (see IADS Exclusive on local), flagships are developing their USPs for the future and acting as brand carriers for their companies. Recently remodelled or even recently built stores will still have a significant role to play in the future as they stand as attractions in their city centres. Numerous examples prove this point such as Rinascente in Milan, El Corte Ingles in Madrid, Selfridges or Harrods in London and others. Most striking are those which have committed to major architectural creativity, starting with the 2003 Selfridges in Birmingham by System Design with Amanda Levete, and continuing in no specific order with the Galeries Lafayette Champs Elysées with BIG, their Foster designed Luxembourg store, the KaDeWe concept by India Mahdavi, the Breuninger Dusseldorf by Daniel Liebeskind, the Galleria Guanggyo, Korea, by OMA, the above mentioned Samaritaine by Sanaa of Japan, and many others. Architecture is not enough, however, and it will remain to be seen how successful these investments turn out to be in building the brand and attracting customers.

Department stores are dead, long live department stores

Department stores can be city landmarks where life and experiences are lived; they can also be convenient local places for shopping and picking up orders; and they have become the physical face of an omnichannel ecosystem which can take many forms. The nature of the stores themselves is shifting, as is the organisation structure behind them, and the profit model on which they are based. These shifts question the need for traditional store formats and organisation.

Many companies have reached a point where they appear to have too many physical stores and/or too much selling space. The examples above point to actions that have been taken by some companies faced with these problems. In some cases, they are surprising and reflect difficult choices. But they are also signs that department stores are resilient, adaptable and evolving. The need for innovation is greater than ever – and this means retail innovation. We need to remember that technology itself is only a tool (albeit a useful one) and not a substitute for new retail thinking.

Credits: IADS (Dr Christopher Knee)