IADS Exclusive Articles
IADS Exclusive - All you need to know about Buy Now Pay Later
IADS Exclusive - All you need to know about Buy Now Pay Later
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
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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.,
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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,
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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.
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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)
IADS Exclusive - What should we do with our stores? Close some and change others
IADS Exclusive - What should we do with our stores? Close some and change others
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.
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:
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)
IADS Exclusive - Retail Review #3: luxury concept stores
IADS Exclusive - Retail Review #3: luxury concept stores
Keeping markets under close watch, IADS collected innovative concepts related to key topics such as luxury experience, contemporary models, and reinvention.
Check out what luxury stores are thinking up to capture customers' attention in the third edition of the Retail Review.
Louis Vuitton, Tokyo
Inspired by reflections of water expressed through the building’s rippling exterior, the luxury retailer’s Tokyo flagship location has been completely transformed by Jun Aoki and Peter Marino. The store offers a full range of collections with upper levels dedicated to VIP clients.
Hermès, Tokyo
As Hermès reopened one of its Paris locations, it also opened a new flagship store in Tokyo inside one of Omotesando’s most notable buildings. Upon entering, customers can peruse silk, jewellery, beauty, perfume, leather, and equestrian collections for both men and women.
Hermès, Paris
Hermès’ beautiful flagship on Rue de Sèvres in Paris has undergone a year-long renovation with its central striking feature of three huts made from ash wood, which the VIP lounge overlooks. The store has been fully reorganized to house evolving product lines, including its recently launched colour cosmetics collection.
Browns, London
The London store is the newest manifestation of Farfetch’s Store of the Future, blending digital and physical experiences by using an app that connects with interactive mirrors to give recommendations and provide product details.
More on Browns’ new boutique in London
Kith, Paris
In Paris, visitors are presented with a restored Carrara marble staircase that falls under a chandelier-adorned ceiling crafted with resin-cast Nike Air Max 1s. The space presents Sadelle’s restaurant in the courtyard and a basement level used as a rotating gallery space.
Swarovski, Paris
Moving away from the accessibly-priced space, a crystal Willy Wonka factory concept appeals to a wider audience to showcase the brand’s shift into luxury. As customers sit on a sofa surrounded by walls of colourful jewellery, salespeople bring the products on trays for a personalised experience.
Diesel Hub, Shanghai
In an effort to converge living, dining, working, and shopping, Diesel has partnered with RTG Consulting and Muse Group to unveil a new concept for the brand called “Diesel Hub” in Shanghai. The 900 sqm retail space offers a Diesel Brave Bar that proposes food, beer, and specially developed spirits.
IADS Exclusive - Sustainability series #5: GOTS
IADS Exclusive - Sustainability series #5: GOTS
What: A certification with strict environmental and social criteria for operations along the entire textile supply chain.
Why is it important: The recognition of the GOTS certification across consumers and business channels has grown incrementally year over year and has a direct impact on purchasing and partnership decisions.
Textiles have proven to be an important good in the past year as COVID-19 has called upon many industries to shift their supply chains to answer the increasing demand for masks and medical supplies needed around the world. To continue the sustainability series, we will explore one specific certification that addresses organic textile production: the GOTS certification. As consumer interests in the transparency of the supply chain connected to their fashion brands continue to rise, department stores need to promote their GOTS products and partnerships and ensure that there are sufficient organic products available for these environmentally aware consumers.
What it is
The GOTS (Global Organic Textile Standard) is the world’s leading textile processing standard for organic fibers. The standards were developed by the certifying bodies IVN (International Association Natural Textile Industry), JOCA (Japan Organic Cotton Association), Soil Association, and OTA (Organic Trade Association). GOTS enables textile manufacturers to qualify their organic fabrics and garments with one certificate accepted in all major world markets. This is an important step towards the harmonization and transparency of textile labels.
A GOTS certification is an assurance that the product meets the global standards for the processing and manufacturing of organic textiles. The standard covers the entire post-harvest processing including spinning, knitting, weaving, dyeing, and manufacturing of apparel and home textiles made with certified organic cotton and wool and includes both social and environmental criteria. GOTS is a key certification to ensure the authenticity of organic fiber and its safety.
How it works
GOTS sets the standard by creating requirements for the production of organic textiles to make sure every step of the supply chain is covered from harvesting and sewing to packaging. The requirements are based on environmental and social criteria to guarantee that the textile is produced in an eco-friendly manner. It also certifies that laborers and workers are protected and treated with fair trade norms during the process.
Some of the key features of GOTS is that it prohibits the use of harmful chemicals in the production of organic textiles, it covers the entire production process from plant growth to packaging materials, and the textile must have 70% organic fiber at minimum. If chemicals are used, they must adhere to strict environmental and toxicological guidelines. All textiles must meet a certain level of criteria and quality to be certified and the product is tested and appraised at every stage of the process by an experienced certifier. All processors and textile manufacturers are expected to meet strict social criteria to ensure fair trade practices and safe working environments. Yearly audits and surprise checks are conducted to verify that there is a continuance of correct practices.
GOTS is not the only standard that exists in the cotton and textile space. The OCS (Organic Content Standard) is used to verify organically grown raw materials from farms to the final product to increase organic agriculture production. OCS has seen record growth with a 48% increase of certified facilities in 2019. Another noteworthy certification is Oeko-Tex which qualifies that textiles are free of harmful chemicals and safe for human use. While GOTS only covers organic textiles, Oeko-Tex includes certifications associated with organic and non-organic textiles.
Why is it important
Until 2003, the sale of organic cotton items in the United States relied predominantly on e-commerce, mail order catalogues, natural and health food stores, and small specialized eco-textiles shops or boutiques. Today, department stores like Nordstrom and brand stores like American Apparel, Levi’s, Nike, and Timberland also have organic cotton items for sale.
The trend of using organic cotton has expanded a lot from the United States to Europe in the past few years. Typically, brands have found that outsourcing their eco-textile and organic cotton items to Turkey, China, India, and Pakistan can reduce costs and increase economic efficiency. American Apparel, on the other hand, uses GOTS-certified cotton to process sweatshop-free t-shirts made 100% in the United States in downtown Los Angeles. The company’s turnover has increased 50% per year since 2002 and the brand has expanded to Europe through its success.
In Europe, Germany and Switzerland are the top two markets for organic cotton textiles. The French market for fair trade products is also growing rapidly. With the involvement of large brands and retailers, the number of points of sale for organic cotton and GOTS-certified items has exponentially increased and can be found in regular sale channels like department stores and supermarkets.
The concept of organic cotton is successfully being marketed to brands and retailers in the fashion industry as being part of their policies for CSR (corporate social responsibility). The involvement of large fashion brands and retailers that are using organic cotton has generated a lot of attention from other parts of the textile industry, from designers and the media. This has further strengthened the interest of consumers in organic cotton textiles and clothing as well as their willingness to purchase.
Limits and Criticism
In 2019, 40,645 metric tons of organic cotton were sourced from Xinjiang, China, a province with allegations of forced labor, prison labor, child labor, and serious human rights infringements. The region produces one-sixth of the world’s global organic cotton. Credible reports of forced labor involving the Uyghur and the Kazakh ethnic groups in China have caused some countries, such as the United States, to ban the import of both raw cotton and goods containing cotton from the province.
There are eight GOTS-certified facilities in Xinjiang, yet GOTS has failed to comment on the implications or impacts of this revelation of harsh labor environments on the future of these facilities or their certification. GOTS’ silence around the issue is a bit alarming as China has the fifth-largest amount of GOTS-certified facilities in the world.
As the region produces such a large portion of the world’s cotton, the traceability of the cotton from Xinjiang can become easily blurred as it moves through various supply chains and gets mixed with other textiles around the world. Traceability can be a difficult topic, but GOTS was ranked best in the “Traceability of Clothing with Textile Seals” by the German consumer product testing organization Stiftung Warentest. They concluded that GOTS offered full transparency and traceability while complying with strict social and ecological criteria through all stages of production.
GOTS: The latest fashion trend
GOTS-certified textiles have created quite the buzz in the fashion industry from consumer demands. The Organic Industry Survey conducted by Organic Report reveals that savvy customers seek out companies of integrity through the achievement of GOTS certification. It seems to have become the standard that the market expects on a global scale. In 2019 alone, the number of GOTS-certified facilities grew globally by 35% from 5,760 to 7,765 located in 70 different countries. The growth has been seen in both production and consuming regions.
Retailers do not need to be GOTS certified unless they are involved with a business-to-business trade activity where they sell to other retailers or they repack and relabel the GOTS products. The benefits of certification include streamlined processes when adding a product to the certification or getting label approvals throughout the year, a license number that will help keep trade secrets confidential, and access and membership to the GOTS public database which receives over 2,000 hits a week in the United States.
Though retailers and department stores do not need to be GOTS certified, it is important that they are transparent about their affiliation, if claimed. While the GOTS logo can be used on websites or labeling, retailers need to make sure not to give the impression that all products are GOTS certified. If the GOTS logo is used in general to show that GOTS goods are sold among others, each GOTS product must show the logo with its license number, label grade, and certifier reference. The GOTS organization audits and investigates any unauthorized or misleading use of the trademark and will take legal or public action if needed to safeguard the credibility of the program and labeling system.
With COVID-19 increasing the demand for masks and medical gowns to be manufactured, being GOTS certified has helped some United States companies win state and federal contracts because of their proven traceability systems. This raises a few interesting questions to think about. Does this mean that GOTS certification can bring a competitive advantage not only with consumers but also in the business-to-business world? Can affiliation with GOTS certification open doors to other business opportunities? On the consumer side, should department stores ensure that there is a certain percentage of GOTS-certified merchandise offered to meet the rising customer demands?
Credits: IADS (Mary Jane Shea)
Read Also: Textile Exchange Organic Cotton Market Report 2020
Read Also: GOTS label guidelines
IADS Exclusive - Department stores selling books and culture
IADS Exclusive - Department stores selling books and culture
Department stores today rarely offer books, music, films and other “cultural” goods. These have reverted to specialists, chains and online retailers. However, the chains have consolidated and are doing less well; and the digital retailers appear to have peaked, while smaller, local booksellers are gaining in popularity. Is it possible that department stores could once again find a place for these goods in their local offer which has gained in popularity during the covid pandemic?
In the beginning was the word
One of the earliest US department stores, Marshall Field’s in Chicago, was famous for its customer service (“give the lady what she wants”), its revolving credit and for the use of escalators. But in terms of assortment, it was notable among other things for its legendary book department which introduced the idea of “book signing”. Its book department is now long gone (the store trades as Macy’s) as indeed book departments in so many department stores have disappeared.
These book departments were often paired with music (vinyls, cassettes, CDs) and films (VHS, DVDs) which have undergone such a revolution, both technological and commercial, that they quickly became the exclusive domain of specialist retailers which have now more or less completely gone digital.
But what happened to books? Department stores were the victims first of the growth of specialised
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. These included in the US, Bookstop (1982) acquired by Barnes and Noble; Borders Books (1971) taken over by Kmart and eventually liquidated in 2011; Crown Books (1977) liquidated in 2001; Waldenbooks (1962) merged by Kmart with Borders and liquidated in 2011; B Dalton founded by Dayton Hudson department stores (1966) acquired by Barnes and Noble in 1987 and operated until liquidation of the last 50 stores in 2109.
In the UK, a similar growth and consolidation movement was taking place with Dillon’s, Ottakar’s, Books Etc (part of Borders), and the 115-year-old Foyles gradually becoming part of Waterstone’s.
“You’ve got mail”
This growth of book chains was portrayed in the 1998 movie You’ve got Mail about the giant book chain threatening the local bookstore business. According to Experian, the number of UK bookshops fell between 2005 and 2012 from 4000 to 1878.
However, neither of the two book giants Barnes and Noble nor Waterstones is currently finding life easy, not least because of the entry onto the market of Amazon, starting slowly in 1994 to digitise the book business first through online selling of paper books, then through digital book sales.
While the sale of e-books was growing, that of physical books continued to fall, for example from from
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. However, others claim that the decline of bookshops has now significantly slowed, and furthermore, that the number of independent bookshops grew by 35%
https://www.iads.org/files/pmedia/public/r6676_9_why_the_number_of_independent_bookstore...pdf
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. E-book sales have recently been fairly static and subscription services modelled on Netflix or Pandora have struggled while the resilience of paper books have proved a boon to independent booksellers
https://www.iads.org/files/pmedia/public/r6678_9_the_plot_twist__e-book_sales_slip_and_...pdf
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. E-book titles have been declining generally, including for example Italy where they fell by 5.4% in 2019 after falls of 17.2% and 15.9% the two previous years.
The rebirth of independents
Waterstones, which appeared to be in deep trouble ten years ago, is reinventing itself under James Daunt of the ex-independent bookshop on Marylebone High Street in London, Daunt’s bookshop (now part of Waterstones). Elliott Management, Waterstone’s owner, agreed in 2019 to buy US Barnes and Noble in a $ 683 m deal. James Daunt will move to New York and attempt to work his magic on the 627 US stores at the same time as continuing to lead Waterstones. He claims that in the book trade, Amazon has probably reached the peak of its influence and that there are limits to the online experience.
One of his strategies at Waterstones’ 280 shops has been to devolve power to local managers particularly over purchasing. This contributes to a more efficient management of stock, reducing the costs and time involved in handling returns, books bulk ordered by head office with little regard for differences in regional reading habits.
One of the competitors which Barnes and Noble will be facing is, of course, Amazon itself whose 20 or so shops around the country are benefitting from the data that Amazon collects on the market. Publishers on their side are suffering under the brutal negotiating techniques of Amazon which is threatening publishing as it has already music and films. On the other hand, of course Amazon has opened the world of books and enabled publishers to reach a wider market.
The local offer for the local department store
Notable bookshops around the world include Daunt’s in London or Lello in Porto representing an almost caricatural but striking model of traditional bookshop architecture; The Strand in New York with its reported “18 miles of books” and its passion for everything written including banned books; Shakespeare and Co in Paris, the archetypal writers bookshop with its rich history of famous patrons (which is suffering badly during the current pandemic); Livreria Cultura in Sao Paolo serving as a spacious and comfortable meeting place in modern design style; Starfield in Seoul with its truly breath-taking height of bookshelves. All of these demonstrate the importance of branding, each one immediately recognisable in ways that the chains cannot match with their “cookie-cutter” formats, however innovative they may seem at first.
They also all know their customers and have made deliberate choices. A more recent version of this is the local focus of the kiosk formats emerging in Barcelona which cater to local customers and offer targeted press, magazines, coffee, and some seating.
Some department stores have not abandoned books. Indeed, Harrods entrusted its book department to Waterstones for 20 years until 2011 (when it switched to WHSmith). De Bijenkorf in Amsterdam has handed its book department over to AKO, part of Audex, in their words a partner who is able to target the Bijenkorf customer. In a similar vein, Manor in Switzerland has recently signed a partnership with French international Fnac group to provide books, audio, video and electronics. Fnac has the same deal in Andorra with Pyrenées department store. Printemps in Paris has a collaboration with the emblematic Gibert bookstore. The BHV store in Paris offers a book selection which is tailored to its customers, as does the Bon Marche. KaDeWe has a selection of books and art on the fifth floor, Selfridges offers a selection, while Ludwig Beck in Munich still offers books alongside its famous and very substantial music department.
Whether or not these examples are profitable, they may nevertheless constitute efforts at generating traffic, which department stores are sorely in need of currently. They might achieve this through the local appeal of their offer, through the theatrical experience they generate, and through the contribution to the value of the retail brand, just as the book department at Marshall Field did in its early days in Chicago.
So what about department stores
If, as seems to be the case, there is a continuing market for physical books (and perhaps other cultural goods), department stores might consider regenerating their offer to customers in some form or other.
The offer might be centred around convenience (guides, reference books, magazines…) which is what Harrods appears to be opting for with WHSmith rather than Waterstones; or it could consist of inviting a local notable shop to open a branch in the store just as so many have invited fashionable restaurant formats into the store.
This raises the question of whether the culture offer should be own-run, an arguably costly solution, or whether it could be entrusted to a specialist as has been the case in Bijenkorf.
Whatever is decided, a book or cultural goods offer opens the potential of a collateral offer of stationery, writing, cards which can all be personalised, and which potentially may be more profitable.
Some department stores see books and more as part of a “gift” offer such as the Galeries Lafayette “System Bookstore”, the design department at Rinascente, or local museum shops, for example. Some books are published quite explicitly as gifts or coffee-table books, and books in general as gifts are traditionally seen as less personal than jewellery, but they say more about the giver. Amazon has a category explicitly allowing purchasers to send books as gifts.
Finally, books and indeed other cultural goods need not be grouped in a specific department but may be scattered around the store to create a lifestyle feel, just as Selfridges may sell cookery books in one of its restaurants, or fashion books in various departments.
Credits: IADS (Dr Christopher Knee)
IADS Exclusive - Sustainability series #4: Amfori
IADS Exclusive - Sustainability series #4: Amfori
What: A global non-profit business association promoting open and sustainable trade.
Why is it important: The association empowers members with a network of producers and suppliers that are aware of the concerns department stores face and can simplify retail supply chain operations through audit standards.
In today’s world, organizations are held accountable not only by the government but even more so by consumers. It is becoming necessary for businesses, especially the fashion industry, to become transparent about the impacts that their supply chain has on workers and the environment and that they take responsibility for instances that happen in each part of the operation. Many businesses have turned to audits such as Amfori to create a channel of ethical transparency for all stakeholders.
What it is
Amfori was founded in 1977 as the Foreign Trade Association (FTA) to represent the foreign trade interests of European retailers, brands, and importers to European and international institutions.
Over the last 40 years, the company has rebranded and expanded its scope to social and environmental responsibilities to assure that goods sourced worldwide are coming from supply chains that respect workers and the environment. Amfori provides companies with a system to improve their social compliance within their supply chain on a global scale.
Amfori membership has grown in the past decade from 23 members in 2004 to over 2,451 in 2020. It has a combined annual turnover of over $1.5 trillion, making Amfori the largest social compliance initiative.
Vision 2030
In 2017, when Amfori celebrated its 40th anniversary, the association launched Vision 2030 which is a strategy to address the challenges that technological advancements and changes in political thinking could bring for sustainable trade. Vision 2030 is centered around 5 objectives: build the organization to be fit for the future, support the members through insight, expertise, and influence, inspire action around the world, grow high-performing people to become the leaders of a sustainable tomorrow, and prosper by contributing to the SDGs (Sustainable Development Goals) to increase human prosperity for all.
Through the guidance of the United Nations’ SDGs, the association hopes to make a social, environmental, and economic impact. Amfori promotes compliance and improvements within global supply chains leading to important discussions about social issues. The organization supports companies by increasing the supply chain visibility which helps address pressing environmental changes. Amfori’s objectives protect and improve international trade interests which is crucial to sustainable development, inclusive economic growth, and human prosperity.
How it works
The association offers three different products: Amfori BSCI, Amfori BEPI, and Amfori Advocacy. Through these product lines, Amfori hopes to enable businesses to succeed by providing world-class services and tools that allow them to trade openly and sustainably while helping shape the right policy environment for open and sustainable trade to flourish.
The Amfori BSCI (Business Social Compliance Initiative) platform provides a single place for all supply chain performance information which helps members make decisions about suppliers and measure improvements. It aims to improve social performance in the increasingly complex global supply chains. An audit to ensure compliance involves a thorough on-site assessment of supplier facilities by professional social auditors which are executed every two years. Though Amfori BSCI does not provide a formal certificate, the factory profiles and audit results are kept in a database that members can use to make decisions on which suppliers to use.
The Amfori BEPI (Business Environmental Performance Initiative) platform provides data on environmental performance in supplying factories and farms worldwide. BEPI provides a practical framework that can support all product sectors in all countries to reduce their environmental impact, business risks, and costs through improved environmental practices. While no certification is awarded, the BEPI process is designed to give members a fair representation of their international supply chain performance and allow producers to improve their performance. With the help of a professional environmental consultant, the producer is coached on the production areas that need to be improved.
The Amfori Advocacy offering helps members shape a political, legal, and social landscape where they can drive equitable trade and advance human prosperity. The advocacy team works with a range of stakeholders to ensure trade is responsible, sustainable, and benefits everyone involved. Advocacy helps members satisfy customers’ expectations while helping them maintain their competitive edge. The service provides members with a network of local representatives, country-specific information, political, social, and legal insights, and expertise to be able to make informed decisions.
Why is it important
Amfori provides department stores with a database of producers and suppliers that accept and assume principles of ethical commitment. When the supply chain for retail is coming from various countries with differing labor laws and operational regulations, it can be hard to perform the proper due diligence of each region while meeting the demands of the consumer. Through Amfori, department stores can feel at ease by choosing to partner with providers that are connected through the same responsible vision towards the future of retail.
Amfori is attempting to address the chaos and unnecessary duplication of auditing efforts by providing a common code of conduct and a single implementation system. This will enable all companies that source products from various regions to collectively solve complex labor problems in the retail supply chain. As Amfori compliance is recognized by all participants, manufacturers do not need to repeat the inspection thus reducing workload and management overhead.
Amfori has a better understanding of the issues that department stores face and has even backed the Fashion Industry Charter Communique. This initiative is focused on driving the fashion industry to net-zero Greenhouse Gas Emissions by 2050. The Communique calls for cross-sector collaboration within the fashion industry and focuses on the role policy environments play in accelerating climate action both in fashion production and consumption countries. Members recognize that current business models are insufficient and support the adoption of systematic changes to achieve the goals of the Paris Agreement. The members are trying to make the fashion industry a model for other sectors to follow. Any company that is professionally engaged in the fashion sector can sign the letter of commitment to join in on the initiative.
Limits and Criticism
In September 2019, the Clean Clothes Campaign criticized the social audit industry in a report alleging that it prioritizes brands’ reputations and profits and fails to meet its mission of protecting workers’ safety and improving working conditions in global garment supply chains. The organization claims that there were auditing failures in the deadly 2012 Ali Enterprises factory fire in Pakistan and the 2013 Rana Plaza factory collapse in Bangladesh. In both situations, there were Amfori audits done by the testing service provider, TÜV Rheinland, that deemed the facilities safe just weeks or months before the incidents. In the report, German retailer, Adler, confirms that Amfori BSCI members rely on the database to make supplier decisions and that Adler had accepted products from a factory in Rana Plaza because the factory was able to prove BSCI compliance.
Though TÜV Rheinland remains on the approved list of Amfori’s audit vendors, in Amfori’s 2020 Year in Review report, they announced the Audit Assurance Programme as a priority in 2021, which is meant to implement trust and quality back into the audits.
The best choice for European department stores
Amfori’s members come from 45 different countries with 89% of the members having their headquarters in Europe. The majority of the members are importers which represent 66% of the members, with brands and retailers following at 19% and 11% respectively. The two major sectors of members are general merchandising and garment and textiles. Therefore, Amfori can benefit department stores in Europe by sharing best practices and market knowledge around sustainability and social responsibility.
Amfori has also helped members navigate the global pandemic by releasing a report called “Responsible Purchasing Practices in times of COVID-19” to help guide its members through the tough situations that lie ahead.
Though the Amfori audit may not replace other certifications, it reduces the chaos associated with sustainability standards by connecting the garment industry. Through its various members, initiatives, and involvement, Amfori might be the best option for European department stores to focus their efforts concerning sustainability standards.
Credits: IADS (Mary Jane Shea)
IADS Exclusive - Business Case #5: Macy’s & Nordstrom abandon new concepts
IADS Exclusive - Business Case #5: Macy’s & Nordstrom abandon new concepts
Two significant US department store groups, Macy’s and Nordstrom, acquired small innovative formats, respectively Story and Jeffrey, and abandoned them in 2020, perhaps not entirely because of the Covid pandemic. What explains their failure to use these opportunities, and what lessons can be learnt by department stores searching for a new lease of life?
Even before the pandemic,
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involving substantial cost savings, the closing of over 125 stores and the cutting of up to 4000 jobs. CEO Jeff Genette said: “We know we will be a smaller company in the foreseeable future”. These measures went hand in hand with a new strategy called “new North Star” meant to turn around the country’s largest department store group. Among those leaving the company since the pandemic is
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, who arrived when
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in 2018 and created a post just for her called “brand experience officer”. At the time the move seemed to usher in an era of reinvention for the department store group, together with the investment in start-up b8ta.
The same year 2020 saw
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, which Nordstrom had acquired in 2005. Jeffrey’s success, particularly in the Meatpacking District which contributed in no small part to the gentrification of that area of Manhattan, was seen at the time as an effort on the part of the upscale department store to renew itself and help modernise its fashion appeal. After the Nordstrom acquisition, Kalinsky worked in a variety of executive roles at the department store company while still running Jeffrey in New York, Atlanta and Palo Alto. It has now been announced that the stand-alone stores would also close (as well as 16 full-line department stores).
Two examples of well-established department stores acquiring successful and innovative concepts, as well as acquiring the founders’ expertise, in an avowed effort to rejuvenate the department store concept, then abandoning the project (admittedly in a covid year) with little to show for it. Why does it appear to be so difficult for a traditional department store to learn from a radically different but very successful retail format?
Who is Jeffrey?
The Nordstrom connection with Jeffrey is perhaps the least surprising of the two: indeed, department stores, especially higher-end ones, are expected to offer curated assortments, the latest in new fashion brands. This was exactly what Jeffrey Kalinsky had built his reputation on for many years before Nordstrom got interested. In a similar vein, the Maria Luisa space in the Printemps department store in Paris was intended to offer customers the same fashion know-how and selection that the boutique founded in the 1980s became known for. If viewed as a shop-in-shop offering a specific assortment, then Jeffrey and Maria Luisa could conceivably exist simply as another outlet for the concept alongside the boutiques. An example of such a strategy would be that of 10 Corso Como which was looking for expansion possibilities and trialled openings in department stores such as SKP or Lotte and is able to retain independence and flexibility.
However, this was clearly not the case with Jeffrey at Nordstrom since he joined the company and served in several roles, ostensibly to train or influence existing buyers to up the game of the company as a whole in terms of brands and assortment at the very least. He maintained his credibility not by opening a concept in the store but by continuing to operate the Jeffrey stores separately.
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. For several years, this category has been underperforming in department stores. It was perhaps to strengthen this category that the store took on the Jeffrey fashion icon. It should be remembered also that Nordstrom had been planning to open in New York for some time, where Jeffrey had made such a splash among the fashionistas. The Jeffrey image could do no harm to the Nordstrom brand. It was the apparel offer in the full-line stores which needed attention, since the Nordstrom Rack outlets have been performing better.
A good Story
The Story connection with Macy’s is more recent since it was acquired in 2018. Story was a single store operation which attracted much media attention since its launch in 2011. The founder was frequently invited to explain the concept, a constantly changing store and offer according to the “story” of the moment like a gallery whose aim is just as much to sell experience as it is to sell products. The narrative-driven retail concept shop is intended to bring to life an editorial approach around themes such as colour, for example.
Here again, the image advantage derived from this acquisition by Macy’s placed the latter firmly in the camp of department stores seeking to “reinvent” themselves. It also invited founder Rachel Shechtman to join Macy’s as “brand experience officer” signalling its commitment to bringing a fresh perspective to the department store and to retail. Macy’s had been in need of a fresh approach for some time since its uniqueness had been diluted and indeed drowned by its size and standardised model. The promise of Story was expertise in experience; collaboration with a number of other brands; working with small businesses and authentic products with special stories; and running a dynamic event schedule. All more like a magazine editorial role than a classic retailer. Once again, this was touted not as a shop-in-shop, but as a starting point for a major overhaul.
Goodbye Jeffrey, it’s the end of the Story
Whether the formats in question were appropriate to carry the future hopes of large department store groups is, of course, debatable. What is clear is that both department stores were probably seduced by the dynamic impact Jeffrey and Story were having on customers, the media and indeed consultants and retail commentators. Small concepts, linked to strong personalities will behave in certain ways: they will be agile and flexible, they will have minimal organisation structure, they will be subject to the whim and creativity of the founders, they will test and make mistakes, and sometimes they will be totally unsuitable for growth.
Acquiring the founder with the concept does not solve the problem. In fact, the chance of a new concept founder fitting into a large classic organisation structure is arguably quite low. Start-up founders hired by department stores have often left, frustrated at the immobility and slowness of the department stores’ structure as well as their incapacity to cut across the internal siloes.
Scaling is also a significant obstacle to success. In both cases (Story operated one store, Jeffrey three) the shift from operating on a small scale, selecting the assortment or the theme, signing collaborations and managing marketing, to making a difference in very large structures, is an almost insurmountable challenge, unless the expected impact is very clearly articulated and organised. The influence of
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was diffuse, and
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in large classical department stores.
To buy or not to buy…
As was discussed in the IADS Exclusive: Dealing with Disruption, a radical innovation in any business requires commitment and investment, sometimes at the expense of the established business. The onboarding of Jeffrey resulted apparently in no more than a star consultant let loose in the buying department; the ideals of Story were transformed into rather inadequate and sad gift shops. According to Doug Stephens who apparently had advised Macy’s to acquire Story, “Macy's squandered a golden opportunity to reinvent — not just the Macy's experience but the entire revenue model of department stores generally… but instead of taking a whole Macy's store and moving it over to the Story business model ... they chose instead to treat it as a bauble, a fanciful little concept inside the same horribly boring Macy's store”. Strong words indeed. It is certainly the case that
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with these acquisitions but as one commentator has written, was it perhaps “
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”.
These two cases raise an important question: how should department stores think about their revival and innovation in general? Acquisitions of small concepts or start-ups may help with the importing of skills and know-how. There is no doubt for example that the acquisition of the UK arm of buy.com helped John Lewis develop its own online business. But this was approached as a tool for the job and within a year, buy.com had been disbanded and totally absorbed into the mainstream business. Almost the same thing happened at Walmart when it acquired jet.com in 2016 for over $3bn and folded it into walmart.com to help it compete with Amazon. Current online Walmart development would appear to confirm the success of that move. On the other hand, with its acquisition of Bonobos, it was clear that Walmart was buying a brand alongside many others (Bonobos founder who joined Walmart has coincidentally left the company in 2020).
Department stores are not bad at innovation as the small Bloomies format or the Nordstrom Local shops testify. Even acquisitions can benefit a department store business as the
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now being moved into Nordstrom stores illustrates. But this has not been taken on with the hope of transforming the business model of the company. For the moment, the two stores remain much as they were with
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probably assured after yet more cost savings, while
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and relying increasingly on its off-price chain.
Perhaps with department stores, business model innovation or new formats need to be developed in-house. Otherwise, an acquisition should serve as a tool for a specific task.
Credits: IADS (Dr Christopher Knee)
IADS Exclusive - Business case #4: Debenhams and Topshop buyouts
IADS Exclusive - Business case #4: Debenhams and Topshop buyouts
Who doesn’t remember a trip to Oxford Street to check on the competition or just feel the consumption frenzy? Well, the Oxford Street and the high street we used to know will not be the same anymore. Debenhams and Topshop collapses are a brutal reminder of department stores and clothing chains struggle, private equity mismanagement, lack of strategy and then Covid-19 dramatically speeding up the process. Even though the brick-and-mortar shutdowns trend is global and rampant, we might find ourselves at a turning point, especially in the United Kingdom, with Boohoo and Asos buying bits of Debenhams and Topshop.
What has happened to the famous British retailers? What are Boohoo and Asos’s buying strategies aiming at? Are Debenhams and Topshop buyouts specific business cases? Is there a new pattern to be observed?
The high street fiasco
Debenhams and Topshop have been sharing history for a long time. They were both part of the Burton Group in the 1980s and 1990s. Their economic issues go back to before Covid-19 hit the world and the UK last year and they are collapsing at the exact same time.
Founded in 1778, Debenhams was once one of the largest retailers in the UK.
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when a private equity consortium (CVC, Texas Pacific and Merrill Lynch) acquired the department store for GBP 600 million. Three years later, the company returned to the stock market for GBP 1,2 billion. The consortium also took out more than GBP 1 billion from selling the company’s real estate and leasing it back. At that point, Debenhams was loaded with heavy debt and tied to very expensive leases. It was too late to remodel the strategy and there was not enough money left for investments such as the much-needed digital ones. Even recruiting Sergio Bucher coming from Amazon was no help. Reducing the store portfolio could also have been a smart, if not a lifesaving move: but while online shopping was expanding, Debenhams was still opening stores in 2017. Moving forward, it went from bad to worse until 1 December 2020, when Debenhams went into administration.
What about Topshop? When Debenhams exited the Burton Group, the remaining part of it became Arcadia Group and was acquired by Sir Philip Green’s family. Arcadia Group’s brand portfolio (Topshop, Topman, Miss Selfridge, HIIT, Dorothy Perkins, Evans and Burton) used to be led by Topshop for more than a decade, with years of thriving business, top models and billion dividends. At that time, there were still plenty of seats left at the digital table, but
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to force Topshop into the online-shopping era and failed to position the brand as one of its leaders. The Nordstrom deal was also probably too little to allow Topshop to really break into the US market. In the meantime, Topshop product offer diluted as competition became fierce, with both brick-and-mortar retailers and online players. In 2018, Sir Philip was also caught up in abusive sexual behaviour scandals, adding more mistrust towards him. Finally, on 30 November 2020, the group entered administration, just 24 hours before Debenhams did.
Get a move on
Going deeper into Boohoo and Asos’ moves, what do we know so far? They are both wunderkind British-born e-tailers chasing Millennials and Gen Z consumers for more than 15 years. Boohoo was first to acquire companies with Karen Millen and Coast in August 2019, then with Oasis and Warehouse in June 2020. In January 2021,
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for GBP 55 million (USD 75.4 million): website, private label brands and customer data. As of now, the website still attracts 300 million visitors a year. Boohoo also bought four fashion private labels that are appealing to the older generation (Maine, Mantaray, Principles and Faith). Thanks to Debenhams’ strong position on the cosmetics and perfume market, Boohoo is acquiring the 1.4 million Beauty Club members. The deal does not include the 130 brick-and-mortar stores and the 12 000 jobs involved. Premium locations such as Oxford Street, the ones that were fought for not that long ago, are not considered. A few days later, Boohoo acquired Burton, Dorothy Perkins and Wallis, all “mature brands” and the last remains of Arcadia Group. It’s a GBP 25.2 million (USD 34.7 million) deal and, once more, it does not include the 216 stores and the countless jobs involved. While only 10% of Debenhams’ customers are also buying from Boohoo, this demonstrates a strong will to grow outside of its existing 20-something business and to target new segments of the market such as cosmetics or older male and female clientele. The company said it’s a “significant opportunity to grow Boohoo's market share across a broader demographic”.
Asos, on a larger scale than Boohoo, aims to become the world’s number one destination for young fashion addicts thanks to its huge, varied and inclusive product offer. The company’s latest move will certainly serve that mission and will strengthen its strategy. As an existing wholesale partner to the brands,
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and sister brands Topman, Miss Selfridge and HIIT for GBP 295 million (USD 411 million). In 2020, Asos increased its sales by 19%, growing from GBP 2.7 billion to GBP 3.17 billion and could count on 22.2 million active customers. Asos said in a statement: “The Board believes this would represent a compelling opportunity to acquire strong brands that resonate well with its customer base.” An Exane BNP Paribas survey states that 40% of Topshop’s shoppers are also buying from Asos. Like Boohoo, Asos does not include Topshop’s 168 stores and 13 000 retail jobs in the deal.
While Boohoo is moving into markets outside of its current core business, Asos is strengthening its position in order to take the lead in its segment. While these are different strategies, both companies will grow their online footprint in the very near future.
Is it to say that Topshop or Debenhams stores will all permanently disappear? It remains to be seen, but one can guess that these digital brands in the making will find themselves in need of a physical approach to the business at some point (as other e-tailers have done). Whether it’s to have a brand billboard, a service touchpoint, a community hub or offer immersive entertainment to customers, stores should remain a key part of the business. Asos’ CEO Nick Beighton hasn’t ruled out the idea of taking over Topshop’s Oxford Street crown jewel “if it becomes financially attractive and we can find a partner to work with on that, never say never”.
Are we all British?
Unfortunately, Brexit will have a major impact on such decisions. What will be the point of running stores when visitors from abroad might not consider UK as a shopping destination any longer? In fact, there is no more tax refund for foreign tourists from 1 January 2021. In 2019, they spent GBP 3 billion on fashion and luxury goods in the UK. “We are now the only country in Europe offering no VAT rebate, so why would tourists not go to Paris instead?” says Paul Barnes, the CEO of Association of International Retail.
Going further, is there a specific British pattern to be observed? What makes Debenhams and Arcadia bankruptcies and acquisitions specific? While the European economy was declining, it was no secret there were too many department stores and clothing chain options on the British high street. Besides and more importantly, British online consumption was increasing rapidly, thanks to (among others) Asos and Boohoo. According to an Office for National Statistics study, British online monthly consumption went from GBP 854 million in January 2016 to GBP 1.386 billion in January 2020. For the month of November 2020, just when both Debenhams and Arcadia were going into administration, ecommerce hit a record GBP 3.250 billion turnover, accounting for 36% of British total retail sales for the month. In this turmoil, winners are the ecommerce moguls for sure, but what is unprecedented is to witness their breaking and entering the British department stores scene.
While British retail and department stores might suffer more than others in the near future, we assume that the ones that are (and will be) surviving through numerous crises, are the ones adjusting to online demand, streamlining their operations and adapting their store portfolio.
One of the many learnings in Debenhams and Topshop’s disasters is also about differentiation, hence branding. Both -as brands- were once magnets to customers. They were attracting them thanks to the values, difference, uniqueness or zeitgeist they were claiming to carry. Whatever you name it, it has been lost at some point of the journey.
The branding question is more than ever a critical question for department stores. It will infuse all of the challenges ahead whether it’s about enhancing and transforming customer experience, growing digital capabilities or providing products appealing to an ever-evolving shopper.
Credits: IADS (Christine Montard)
IADS Exclusive - Remote working: what can department stores learn from the great RW experiment?
IADS Exclusive - Remote working: what can department stores learn from the great RW experiment?
Companies have been exploring the possibilities of remote working for many years. In fact, remote work has even, in some cases, been implemented then abandoned. Department stores have been forced into remote work by the current pandemic. Or at least some of the department store functions have been. Is this likely to become a permanent feature of our retail businesses? If so, what might it look like in more detail? Remote working has raised major issues for HR departments, as well as for management. If the practice becomes widespread, remote work will also have implications for city life and consumer spending more broadly, and therefore on department store customers.
A breath of clean air blowing through the cities
The silence and clean air of recent lockdowns in major cities have been partly due to a significant number of employees working from home.
With the coming of a (hopefully) viable vaccine, is it likely that remote work will continue? According to McKinsey international surveys of different jobs, some 20% of the workforce could work as effectively from home as from the office, 3 to 5 days a week. This would mean
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. Research from S&P Global Market Intelligence claims that 80% of organisations have implemented or expanded work from home policies and 67% expected these measures to stay in place permanently or for the long term (Candezent, Covid-19 and the retail industry, December 2020).
The effect on urban economics, transport, and consumer spending would be significant. Before Covid, around 5-7% of the workforce worked from home. A shift to 20% would, for example, lower the number of commuters with consequences for transport, petrol/gas sales, auto sales, restaurants and retail. Figures for office vacancy in the US would shift from 16.8% currently to 19.4% in 2021 and 20.2% in 2022. As an example, the sports retailer REI has already decided to sell its new headquarters in Washington before even moving in. It has decided instead
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across Seattle. (Washington Post) Some argue that
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on politics also.
The battle for the office
There are two extreme views of office work:
a) It is a place of pressure, constant interruptions, sometimes harassment, and often low productivity; against which home working is seen as autonomous, happy and in many cases more productive.
b) The office is a place of human contact, creativity, cooperation, empathy and an equaliser. Home working in contrast is an unwelcome and unmanageable merger of public and private, to the detriment of both, added to which it has none of the facilities which make office work efficient.
Some companies have tried and rejected distance working. For example, Yahoo abandoned it in 2013, citing the damage to company culture. IBM abandoned it the same year. Facebook has recently signed a new lease on a big office in Manhattan; and Bloomberg is reportedly offering an extra £ 55 a day to get its workers back to its building in London.
On the other hand, like REI mentioned above, Pinterest has paid out $ 90 m to end a new lease obligation on office space in San Francisco to create "a more distributed workforce". (see The Economist articles:
r6494_9_the_economist_the_future_of_the_office_-_covid-19_has...pdf
and
r6495_9_the_economist_the_future_of_work_-_is_the_office_finished____leaders.pdf
).
The classic office is pretty much a relic of the 19th Century, designed for control and surveillance, and dominated by the clock and the time employees sell to their companies. Changes in the office have broadly been limited to a choice between separate offices or open space. And the choice has been largely dictated by economic and cost factors rather than by efficiency or effectiveness criteria. (The same can be said of "hot desking".) Whatever happens, it is clear that the "office" as it exists today is in need of serious reform; and this means more than just ping pong tables, bean bags and unlimited fruit juice. Arguably, even ApplePark and Googleplex, which are used to lure talent to their office worlds, are merely more sophisticated versions of the same thing (see for example, the novel The Circle by Dave Eggers, and the movie). The Vitra CEO illustrated this view at a conference attended by IADS last September, by opposing cost & control-focused companies (where the work environment is not that important) to creativity-focused companies (where she sees an opportunity for her design company to improve the workspace).
The great divide at work
r6485_9_mit_four_principles_to_ensure_hybrid_work_is_productive_work.pdf
(mixing both remote work and physical presence)**. It is the case not only that some industries are more suited to remote work than others, or that some companies have decided one way or another for strategic reasons, but that different functions may be able to adopt distant practices more easily than others within the same industry or company.
Amid a great deal of uncertainty and differences of opinion, it remains that within retail, and department stores in particular, there is clearly a face-to-face function involved in selling which has to remain mostly physical (even though an increasing number of sales jobs are being advertised as remote – see <https://www.flexjobs.com/jobs/telecommuting-jobs-at-neiman_marcus>) or Container Store (repeatedly voted one of the "best places to work"). The fact that many surveys consider retail to be one of the least likely industries to shift to remote work is undoubtedly because the figures are skewed by smaller independent retailers. Chains and indeed department stores
r6493_9_facttank_working_from_home_was_mostly_an_option_...pdf
.
Other jobs in retail that require physical presence may include fulfilment, and warehouse tasks. It was suggested by the last IADS Academy, that the finance function in department stores is probably the one that could most easily be carried out at a distance. In fact, according to
https://www.iads.org/files/pmedia/public/r6491_9_mckinsey_gi-whats-next-for-remote-work-v3.pdf
r6491_9_mckinsey_gi-whats-next-for-remote-work-v3.pdf
amenable to distance working, retail would include elements at both extremes such as handling data at the remote end of the continuum, and handling goods at the other end where physical presence is necessary. The
https://www.iads.org/files/pmedia/public/r6570_9_retail_week_retail_and_future_of_work_report_.pdf
r6570_9_retail_week_retail_and_future_of_work_report_.pdf
has been highlighted by the current pandemic. And the future of this group
https://www.iads.org/files/pmedia/public/r6492_9_korn-ferry-whats-next-for-sales-talent.pdf
r6492_9_korn-ferry-whats-next-for-sales-talent.pdf
.
However, such a situation divides a workforce, for example into those who work from home, all the time or perhaps several days a week, and those who make a regular commute to the office or the warehouse or the store. It means, within a retail company, a division between those who commute and those who don’t; those who are under classic physical supervision, those who are monitored digitally and those who have more autonomy. For the present it also means between those who are exposed to the virus and those who are not. At both Walmart and Amazon, warehouse and DC workers
r6490_9_wwd_walmart_amazon_workers_seek_pandemic_hazard_pay.pdf
. This is the kind of challenge faced by HR and management in our companies.
Big challenges for department stores
There are many challenges for companies which shift into the "hybrid-remote" world.
- Hybrid workforce: as illustrated above, some groups of employees will not have the option of working from home. This may create resentments over what may be perceived as a perk for some but not others even if they see their company saving on real estate and office equipment and utilities while remote employees are picking up extra costs for these items themselves. (Several companies including Twitter and Slack are
https://www.iads.org/files/pmedia/public/r6488_9_wired_silicon_valley_rethinks_the_home_office.pdf
r6488_9_wired_silicon_valley_rethinks_the_home_office.pdf
after
r6489_9_the_conversation_remote_work__employers_are_taking_over_our_living_spaces_and_passing_on_costs.pdf
.)
- Shift in work culture: there is no doubt that remote working is a very different experience from daily presence in an office. A company or team culture needs to be built digitally as many companies have experienced when hiring and onboarding virtually during a lockdown. Not only does this require a different type of leadership, but it also requires every employee to build a "digital identity", in the same way that employees construct a physical identity in face-to-face contact in an office.
- Management, communication and autonomy: employees are likely no longer to be paid on the basis of the time they spend in the company but on the tasks they accomplish. It is perfectly legitimate to take a break to get lunch for the kids while working from home as long as the job gets done. Performance evaluation and compensation therefore need to take this on board. Also, the whole set of skills which were appropriate for communication in an office may no longer be so at a distance. Informal communication needs to be created anew. Communication through meetings takes place both synchronously and asynchronously, in particular if meetings are conducted online and with distant geographies.
https://www.iads.org/files/pmedia/public/r6487_9_steven_furnell_home_working_and_cyber_security.pdf
r6487_9_steven_furnell_home_working_and_cyber_security.pdf
r6485_9_mit_four_principles_to_ensure_hybrid_work_is_productive_work.pdf
r6486_9_mckinsey_how_companies_can_make_remote_working_a_success.pdf
.
r6484_9_the_atlantic_the_workforce_is_about_to_change_dramatically.pdf
https://www.iads.org/files/pmedia/public/r6483_9_the_great_dispersion_galloway.pdf
r6483_9_the_great_dispersion_galloway.pdf
?
Conclusion: get ready for a hybrid work future
https://www.iads.org/files/pmedia/public/r6569_9_hbr_work_from_anywhere.pdf
r6569_9_hbr_work_from_anywhere.pdf
In general, it would appear that once employees are engaged with the idea,
r6481_9_hybrid_working_calls_for_patience_and_ingenuity___financial_times.pdf
. However, department stores need to be able to cater for both sides and be prepared to go hybrid. Just as we have had to integrate different channels selling to our customers, we may need to learn how to integrate remote and present workforces to produce a seamless working environment which answers the demands of the future company.
Credits: IADS (Dr Christopher Knee)
IADS Exclusive - Retail Review #2: sustainability & community
IADS Exclusive - Retail Review #2: sustainability & community
Keeping markets under a close watch, IADS has gathered innovative concepts related to key topics such as sustainability, local retail and community, and multichannel experiences.
Discover the selection of our second retail review below:
![2021 Retail Review #2 green pea
Green Pea, Turin
A mixed-use centre gathering under one roof fashion, food, culture and leisure with one common motive: sustainability. The project is carried out by Oscar Farinetti, the business man who created famous food chain Eataly.
![2021 Retail Review #2 nike unite
Nike Unite
The latest concept from the sports retailer, focusing on the physical and digital shopping experience for local customers. Throughout the space, the store highlights its staff, local partnerships and the story of the community by including local landmarks and hometown athletes; it is designed in such a way that the local residents feel represented.
![2021 Retail Review #2 orefici 11
OREFICI 11, Milan
U.S. retail group VF Corp has opened a multi-brand space in Milan featuring three brands from the group’ portfolio: Timberland, Napapijri, and The North Face. The space successfully mixes physical and digital experiences, showcasing new ways to do retail in the covid world.
![2021 Retail Review #2 moncler
Moncler, Paris
The luxury winterwear brand opened it biggest store worldwide on the avenue des Champs-Elysées in Paris. The store has been imagined like a Parisian flat, with a corridor leading to several rooms, and was designed using noble material such as marble, wooden floor and moulding ceilings.
![2021 Retail Review #2 foot locker
Foot Locker Community Power Store, Vancouver
A concept dubbed Community Power Store debuted in 2019, that expands to Canada. The three-floor retail experience includes an activation space where events can be hosted for the local community with key brand partners.
more on Foot Locker Community Power store
![2021 Retail Review #2 alhambra
Alhambra, Berlin
It is a multi-concept space where local brands and artists showcase their work. The store provides a full-service amplification kit for emerging brands by offering a space, a built-in social media campaign, impressive staging, as well as professional salespersons and event managers. The space will open during spring 2021.
IADS Exclusive - Business Case #3: Subscription retail
IADS Exclusive - Business Case #3: Subscription retail
Space productivity is, by essence, a hot topic for Department Stores, but the year 2020 literally made it incandescent: in a Covid-19 world where customers are afraid of germs and crowds, how do you make sure they come at all to your store, and, more importantly, come back? Also, in a context when rental, resale and other circular initiatives are being increasingly successful among customers jaded with owning “things”, how do you cope with simply selling products? Some industries found a way to break away from the one-off selling model, and by doing so found out that it also allowed them to increase both their margin and customers’ loyalty. Subscription retail is now expanding across several sectors, and might very well be an option for department stores not only to enlarge their services range, but also pocket extra bucks by doing so, while maximizing their existing assets and structures.
What: The subscription retail model across the industry
Why is it important: it could very well be an option for department stores
Introduction – from selling service to renting content, the example of Netflix
Netflix was founded in 1998 with a seemingly simple idea: a mail service of physical copies of movies & shows to be selected from a website. Apart from convenience, its specific angles were:
- Value for money: an unlimited plan with a fixed monthly fee,
- Selection: an advanced recommendation engine focused only on available copies, diverting the demand from only newly released movies, and increasing immediate customer satisfaction.
With the combination of both angles, Netflix became able to orientate subscribers’ choices, therefore freeing itself from the studios’ power. With time, it acquired a good understanding of its subscribers’ tastes, which led to overriding studios and producing its own content. When you know what your customers want, why would you share the margin?
They pivoted from renting a movie (whatever its support) to renting a service (entertainment through stories designed exactly according to the customers’ expectations). On top of this, the low monthly fee, perceived as a bargain by the customer, has great chances to become a permanent part of the household economy precisely due to its low price.
How does this relate to department stores? As of today, they sell a product, with the hope that the store name, experience, or service quality, will lead customers to return, just like when Netflix used to send DVDs. At the same time, department stores have a great customer knowledge (in terms of tastes and behaviour offline and sometimes online), and for most of them, manage a content, be it via a “unique” & “curated” selection, or, more prosaically, via their private labels, in a similar way to Netflix’s own productions.
In the hope to systematise customers’ trips to department stores, is there a way to use existing assets, i.e. customer knowledge & content creation, in a pivotal way such as Netflix? Is “subscription retail” an option to increase sales and productivity? What can we learn from other markets and channels?
Subscription retail as a paying members’ club
A first form of subscription retail embraces the notion of exclusive member’s clubs, accessible with a fee. This enhances the club’s perceived value while financing the exclusive services provided (in theory). For instance, when applying to Prime, Amazon customers buy the ability to know exactly when they will receive their order, shipped for free. With this system, even if it is reported to be unprofitable, Amazon significantly increases its 150m Prime members’ loyalty. As an additional free perk, they also get access to Amazon Video and Music, which helps Amazon to improve its algorithms.
Another example is the REI Co-op membership programme. Not only do members have access to exclusive events, sales, limited-edition members-only products, lowered rental fees and specific activities, but they also receive an annual dividend on REI’s profits. The customer is buying a creed: it is possible to share values and beliefs (REI advocates for topics such as sustainability, etc..), be part of an entrepreneurial adventure (many customers
r6560_9_reis_crunchy_business_model_is_crushing_retail_competitors___news__analysis___bof.pdf
) and receive dividends for loyalty. REI operates 165 stores across the US and distributed to its 19 m members USD 211 m dividends in 2020.
This model is ideal to capture customers, feed their loyalty (as another example, Retail Restoration Hardware in the US proposes a club with a USD 100 yearly fee: 95% of its turnover is made through members) and generate additional revenue: in 2020, the Amazon Prime program is estimated to have generated a revenue of USD 6,57 6.57 bn.
Is it possible to adapt this model to department stores?
- Membership programmes with qualifying amount spent already exist – it would be difficult to pivot to an upfront payment model,
r6561_9_tokyo_club_a_new_way_to_shop_-_the_new_york_times.pdf
) and this would come on top of digital investments or stores refurbishment, a non-credible option in 2021.
- Execution must be perfect, which is why Target dropped its "subscribe and save"service after 7 years, due to poor execution and lack of appeal for customers.
H&M has recently launched a new brand, Singular Society, with a membership fee model (EUR 9.95 a month) which gives access to collections sold at cost price. H&M claims to try a new business model, relying on the monthly subscription to make a living and not the product margin. However, from the department store point of view, this option is somehow radical, and will also require a significant investment to build the brand equity necessary to be appealing to customers, not to mention that it is currently not applicable to the existing businesses.
If the paying fee is seemingly not an option, what else can be learnt from other industries?
From Saas to subscription boxes
Tech companies were the first to deploy subscription models: rather than selling a software, prone to copies and hacks, why not diffuse it on a free basis, allow trials, and then propose only a subscription? This is what Adobe successfully did in the past years, transitioning from a software catalogue sold on a one-shot basis to a monthly fee granting access to selected plans, to the point of generating 86% of their revenue in 2018. Microsoft, as documented in the IADS article on disruption, achieved more than half of their turnover following the same path.
How can this be applied to physical products?
Subscription boxes are an answer. Varying in costs and frequency, the types of promises are the same across categories: discover with a relative low risk and cost new products (Birchbox), ease customer’s life by automatically reordering, especially in Fashion (Stitchfix), or save money (The Dollar Shaving Club). McKinsey values the US Box market alone at USD 12 to 15 bn.
Surprise customers with an exciting offer: the box business is a savoir-faire mastered by retailers. This is why larger brands and retailers also launched boxes: Urban Outfitter with Nuuly, Macy’s and Bloomingdale’s with beauty boxes (based on a discovery and low price claim) or Nike with the Nike Adventure Club (targeting kids).
However, it requires building from scratch a new activity (from product sourcing to community building and animation, through logistics and invoicing) which is difficult for department stores at a moment when they look to increase the productivity of their existing assets.
Another option could be to add a layer of recurring revenue to an already existing activity: the ‘rundle’.
Ready to rundle?
The term was coined after ”recurring revenue” and ”bundle”, by Stern School of Business professor Scott Galloway. Three types of bundles have proven valuable on the long run:
- A bundle of different products increases its value through the perceived discount,
- A pack including a less popular product is a way to get rid of worst sellers,
- A pack including a new product is a way to have customers try while mitigating risks.
Coupling this approach with a recurring revenue model is efficient, thanks to the perceived low monthly fee (liberating customers from the urge to use the rundle at its maximum: only 18% of gym club members hit the club consistently, translating into a significant revenue / cost of acquisition ratio improvement on the long run for the gym company).
The Amazon Prime Video and Music addition is a perfect example of rundle based on introducing a new product coupled to best seller (free delivery). Apple TV new move to bundle Apple Music, Icloud, Care, Pay… is, on the contrary, a good example of rundling in a single offer a seemingly good value-for-money proposition, looking more interesting than cumulating the various services without the package.
Have we seen an equivalent model in retail? For Christmas 2020, Westfield London has opened popups with Christmas trees, decoration and tableware bundles available to rent for the period of Christmas, to be returned within 10 January. Going further, Ikea has announced a recurring revenue model, which is based on renting furniture. However, after a 1.5 year-long teaser, the service is still nowhere to be found on internet, including on the Swedish website. John Lewis, on their side, have announced a similar furniture rental model through a partnership with Fat Llama. Interestingly enough, this partnership is nowhere visible on the John Lewis website, and not even consistently advertised as a John Lewis offer on the Fat Llama website.
Innovating and limiting risks
Subscription is not equal to renting or leasing:
- A renting/leasing solution involves a down payment, usually not refundable. A subscription down payment is smaller and fully refundable,
- A renting/leasing model has a fixed contract, not the subscription model,
- A renting/leasing model involves penalties if the offer is modified, not the subscription model.
This is why subscription model for cars (Carro), rundle hotels offers (such as Citizen M, proposing a credit of 29 nights at EUR 50 to be used in whatever location of the chain), or even shoes subscriptions by On Running shoes are so disruptive: they are literally non committing, cheap and highly addictive.
Perhaps a way for department stores to explore rundles without taking too many risks would be in F&B, enticing customers to come spend time. As an example, the Pret a Manger initiative proposes, for GBP 20 a month, up to 5 coffees a day, in a non-committing, auto-renewable contract. By following a similar initiative from Panera (coffee subscription for USD 8,99), they exceeded their sales target on the first day by a factor of 5. The catch? The customers cost of acquisition is the production cost of an Espresso. If the rate of active customers is the same as the one for gym clubs, then, the department store is creating recurring revenue even when customers are not active. When they are active, the job is to make sure they buy additional products, just like how Monoprix seems to have built its Place Publique in their new store, with a very efficient merchandising approach.
Space productivity is a crucial topic for department stores. Questions about stores’ ROI and KPI are on everybody’s lips, and the topics of many IADS meetings (IADS Space Productivity Meeting). There is space for new ideas that do not require significant capex and investments other than the courage of proposing smart new options to customers.
Credits: IADS (Selvane Mohandas)
Read also
IADS Exclusive - Virtual stores: the future of retail?
IADS Exclusive - Virtual stores: the future of retail?
With the pandemic, the past year brought its share of new initiatives and the year ahead is going to be no different. Retailers in the world, which endured many weeks of closure in 2020 (up to 30% of total opening time) and are still threatened by further lockdowns in 2021, had to reinvent themselves to reach out to customers directly in their homes.
Remote shopping played a significant part in retailers’ survival via new or upgraded digital tools, such as virtual stores. This new channel provides a more inviting shopping experience than a simple ecommerce and safer than physical shopping. For instance, on a webstore the customer scrolls and browses through a series of pages showing one article next to the other. By contrast, a virtual store is an immersive experience supported by interactive elements allowing customers to actually be in the store; which these are sometimes a perfect replica of the physical spaces. Customers navigate the store and see the products on the shelves, almost as if they were in the physical space. It is a mix between a webstore and a virtual reality experience.
Virtual stores can go from augmented reality try-on to a 3D digital space to navigate. They do not require any material other than a mobile phone, a tablet or a computer to be accessible, and a broadband Internet connection.
Why use virtual stores
As shown with ventures such as SKP-S and Showfields, experiential retail was booming before the health crisis, so in order to provide a similar experience with the pandemic-induced constraints, retailers had to find a way to do it differently, safely and remotely.
E-commerce has exploded with the pandemic. As stores were closed, retailers had no other options than to look for the customer in his home directly, through social media and webstores. Virtual stores complete this offer and bring another experience, different than the ones provided by the other channels.
The immersive experience allows customers to walk around the store in an immersive way, able to see and learn about the products, and potentially make a purchase. According to Obsess, a virtual stores designing company, “on average, customers spend almost as much time on one virtual store page as they do on all the pages in the rest of an e-commerce site combined. The more people engage, the more they purchase.”
Virtual stores have the capacity to recreate the being-in-physical-store experience by using features such as music, augmented-reality try-ons and interactions with experts. It is also a way to share more information about a brand, its heritage and its commitments that sometimes cannot be exhibited as much as they would like in a physical environment, due to lack of space for example.
Just like physical stores, virtual stores also have the possibility to adapt to the season and change scenery and features according to the time of the year, making them even more realistic. For instance, during the Holidays, some virtual stores were decorated with Christmas ornaments and played Christmas music.
It is difficult to measure the importance of virtual stores at the moment as the concept is recent, especially for the ones that emerged with the pandemic; and still remains a minor part of retail. It seems that it is a relevant option for retailers in fashion, beauty and home for example, for whom visual elements are important to secure a potential purchase (contrary to a grocery store). It is also another way to stay connected with the customers and the community, in addition to ensuring a social media presence.
There are several reasons a brand would use the virtual stores:
For Ralph Lauren, it was a way to introduce new customers to the brand’s retail experience even after physical stores re-opened. They recreated the Beverly Hills flagship store and added some music, to make the tour even more realistic. It is also linked directly to the webstore.
![Exclu - virtual stores ralph lauren
Via its virtual store, French beauty brand Clarins introduced the look planned for some new shops in 2021. Showcasing this new concept in the virtual store before physical stores is an opportunity to test it. The experience also offers interactive activities such as a skin diagnosis, virtual make-up testing and the possibility to book appointments with beauty experts. Plus, it highlights features such as an eco-bar filled with beauty water and oil, and points out at which physical stores customers can find it.
![Exclu - virtual stores clarins
Charlotte Tilbury’s avatar greets its customers on the eponymous brand’s recently-launched virtual store, in an attempt to bring humanity inside the digital experience. The store offers the possibility to book video consultations and the convenience of being able to save an item in the ”shopping basket” directly from the virtual store, without having to search for it on the e-shop.
![Exclu - virtual stores charlotte tilbury
It is a way to make their world accessible to everybody. During the first wave of lockdowns, Dior was one of the first retailers to introduce a virtual visit of its Champs-Elysées store in April 2020. The brand gave the possibility to customers to discover the store without visiting Paris. The virtual store is a replica of the physical space and is directly connected to the online store to encourage purchase. The biggest downside however is that it is definitely not convenient for a perfume store to be virtual when you cannot actually smell anything.
Recently opened OREFICI 11, the VF Corp. multi-brand concept in Milan, launched both the physical store and the flagship’s virtual tour at the same time. Opening a physical store in the current context is risky, and VF Corp is using the virtual tour of the store as a back-up in case Italy experiences further lockdowns. The tour does not allow for customers to purchase directly from the virtual store, which is not very convenient, but provides information on the store and on the brands’ engagements.
![Exclu - virtual stores orefici 11
One of the biggest strengths of the virtual stores is that they are accessible to anybody (within the limit of the national restrictions that are sometimes imposed). Physical flagships are generally located in capitals or big cities, preventing many customers from visiting them if they are not able to travel. The technology definitely comes as a complement to the webstore, as it acts as a point of entry to e-commerce. But no matter how convenient virtual stores may be, they cannot recreate the touch-and-feel of instore shopping, nor can the virtual assistant replace an actual store associate.
Virtual stores and department stores
So far it appears that virtual stores are a good options for brands, and biggest retailers have not gone for it yet. NYC-based Showfields rapidly set up virtual tours of the store, during which a store associate walks around the store while talking to the customer via a videocall. The experience is a bandage and a way to stay in touch with an audience, but cannot be truly compared to what other brands have done in terms of virtual experiences.
Virtual stores could be a one-time option for retailers, and department stores, to support the business or a time-limited event. That’s what John Lewis did by launching a virtual Christmas shop last fall. Just like for e-commerce websites, virtual store does not necessarily need to cover the full range of a department store. It seems unrealistic and not very user-friendly to virtualise a five or six-storey department store.
Instead, it could focus on one particular category such as home and lifestyle, which has been booming since the beginning of the pandemic; or advertise a special collection, collaboration, or event. It could also focus on a specific market which is what Lancôme did when launching a virtual pop-up exclusively for Singapore. For the ones who are known to be a destination, it could also be an efficient way to transfer to distant customers the look and feel even though they might not be able to travel or to enter the country (Harrods or Liberty could appear natural candidates to this move).
Conclusion
Virtual stores are not completely new, but they multiplied with the pandemic. The first attempts at virtual stores from a few years ago required customers to use particular equipment, such as augmented reality headsets. The new generation of virtual stores are accessible directly on mobile or on computer, making them more user-friendly and visible to more people.
But it has its limits: a video, and even very smart artificial intelligence, won’t measure up to a live interaction with an actual human being. Virtual stores also have a cost, in terms of development and design, and in terms of technology used to support the system. It also needs a team to make it work and requires a good bandwidth to be experienced.
The virtual store will not replace the physical space. However it comes as a short-term, much-needed support to the physical and online store during this pandemic; and the trend might last beyond the health crisis. The covid-19 virus might be defeated at some point, but it will have changed the world and many habits for ever. Who knows when we will be able to travel again, or walk inside a store without a mask and a regulated traffic flow. A customer may wonder why she would need to get on a car or bus to go a store to shop when she can do that conveniently from home. Furthermore, after the crisis a virtual store will continue to attract and serve the people that can’t go to the physical store. These experiences could take their real place in a brand’s business activity at the same level as the online store.
However, partner at consulting firm Bain & Co. Mikey Vu warns that all virtual stores won’t necessary be successful: "Not every virtual store will succeed. As more companies test the concept, they’ll need to better personalise the experience for visitors, make it easier to discover products and make it a fun experience."
Retail consultant Doug Stephens said: "With virtual reality technology, online shopping could look more like physical stores or completely different environments. […] For instance, if a retailer sells outdoor products, it could design an interactive website that looks like an outdoor environment."
Just like for the physical experience, retailers will have to distinguish themselves from the competition to stand out virtually.
Credits: IADS (Louise Ancora)
IADS Exclusive - Sustainability series #6 Ecocert
IADS Exclusive - Sustainability series #6 Ecocert
What: The number one certifying body of France, and a standard that ensures that a range of products are ecologically produced and sourced.
Why is it important: The certification can be internationally recognized across various sections of department stores from apparel to cosmetics.
As more and more sustainability certifications and labels enter the textile and cosmetics industries, the worldwide adoption and recognition of these standards can become easily blurred or even lost. So, why not turn to the label that started it all? Ecocert was the first certification body to develop standards for natural and organic products and has created a globally recognized standard to provide certified environmentally-friendly products.
What it is
The Ecocert organization was established in 1991 and is a control and certification body that is approved by the French Institut National de l'Origine et de la Qualité (National Institute for Origin and Quality), and accredited by the Comité Français d’Accréditation (the French Committee for Accreditation; COFRAC). It is France’s number one certifying body and has been a reference for 30 years for the certification of ecological products. The brand is widely recognized by consumers and has an international presence in major producing countries.
Ecocert is acknowledged for its expertise in matters related to the environment and to sustainable development. The organization is a global leader in certification in organic farming and organic cosmetics and relies on an international network of 30 branches with more than 800 employees operating in over 110 countries. Ecocert is also a recognized player in the certification of environmental management systems and fair trade and sets demanding standards to encourage economic players across all sectors to adopt more responsible practices. Its range of expertise also covers environmental consulting and applies a rigorous environmental policy to all of its activities.
Ecocert supports more than 1,000 companies in their certification process and has dedicated offices worldwide to be able to service their customers regionally in North America, South America, Africa, Europe, and Asia. With 60% of Ecocert’s workforce internationally located, the organization can work closely with regional regulations and standards to be able to offer recognized certifications for the various locations. For example, in order to sell, label, or represent organic products in the United States, your products must be certified by a USDA (United States Department of Agriculture) accredited certification agency, such as Ecocert.
While France’s institutions created the origin of the standard, Ecocert adapts its standards to meet country-specific qualifications and labels. As each country defines its levels of transparency and material associations with labels, Ecocert partners with local associations such as the USDA to communicate and certify. In 2020, Ecocert acquired “Des Enjeux et des Hommes”, a leading CSR (Corporate Social Responsibility) strategy and change management consultancy business in France that will enhance the company's ability to work internationally by helping companies transition to sustainable models within their ecosystem.
There are 197 Ecocert-certified clients in the United States and 1,162 in Europe ranging from recognized supermarkets like Naturalia to internationally known cosmetics brands like L'Oréal. Not all items produced by these organizations are Ecocert certified, but they do share a level of commitment to environmentally friendly and socially conscious practices. As Ecocert regulates the end-to-end product cycle and beyond, the certification can be obtained by all players in the textile, cosmetics, or eco-product sectors from farmers, to producers, and even to brands.
How it works
Ecocert’s Greenlife business, which attributed to 18.9% of the organization’s turnover in 2019, regulates textiles, cosmetics, detergents, and home perfumes to confirm that they comply with the specifications for cultivation, packaging, quality, origin procedures, and traceability. The standard requires the use of ingredients derived from renewable resources that are manufactured by environmentally friendly processes. There must be no GMOs, parabens, phenoxyethanol, nanoparticles, silicon, polyethylene glycol, synthetic perfumes, dyes, or animal-derived ingredients (unless naturally produced like milk or honey). Also, all packaging must be biodegradable or recyclable.
Within the Greenlife business, Ecocert’s Ecological Recycled Textile Standard (ERTS) label promotes production practices and conditions in the clothing and textile industry that respect the environment and people. It outlines the minimum environmental and social requirements necessary to define the ecological status by covering the product’s design stages, raw material production, manufacturing up to completion, distribution, use, and end of life of the finished product.
To be labeled under the ERTS, the finished product should be made partially or entirely of natural fibers, synthetic fibers, regenerated cellulose fibers, mineral fibers, fibers from renewable materials, or recycled natural or man-made fibers. The finished product must be made up of 50% natural materials or materials from renewable or recycled materials to have an Ecocert label of “Made with X% sustainable material” and contain 70% minimum for the “Ecological textile” or “Ecological & recycled textile” label.
Why is it important
Though clothing and textile products tend to make up the majority of department store inventory, there are also dedicated sections, and even full floors, to other items such as cosmetics and home goods. The Ecocert label goes beyond textiles and is also reputable for efforts in cosmetics.
The COSMOS (COSMetic Organic and Natural Standard) was formed by Ecocert and four other organic and natural cosmetics companies from across Europe including France, Germany, Italy, and the U.K. to standardize beauty certification on a global level. This label guarantees that a product is certified by five international organizations and makes use of the principles in the Ecocert standard.
With Ecocert’s network, range of sectors, and international recognition, it could be the best label for department stores offering a variety of goods to ensure a uniform label throughout the establishment that consumers can recognize across the various offerings. Ecocert has affiliations worldwide which gives the label a broader impact and recognition among consumers.
Limits and Criticism
On the other hand, as Ecocert offers such a wide variety of labels and services, it can bring confusion as to what the label actually means. Consumers have struggled with differentiating between natural and organic products within the label. The launch of COSMOS was meant to provide a uniform standard for natural and organic personal care products, however, critics argue that it has just added to the confusion because now it associates products with five separate labels rather than the individualized labels that once distinguished natural, organic, or made with organic products. Critics of the Ecocert label believe that there should be a uniform logo with a simple and effective message that can be understood across various countries and regions.
Such confusion has led Ecocert to release various clarifications between Ecocert and the COSMOS labels. In a document released by Ecocert, the group warns about three misleading provisions encompassing natural ingredient certification, the use of petrochemical substances, and the calculation of natural and organic origin indexes that may lead to fallacious information about the product. Ecocert has understood the complicated nature of having various labels and associations and is working on creating a clearer message so consumers do not feel deceived.
Ecocert: the one-stop-shop
A lot of natural and organic standards have been introduced around the globe in recent years, but they typically are only adopted on a national level. While noteworthy standards exist in countries like Brazil and Australia, most of the world looks to the United States and Europe in regards to which standards are the most trustworthy. Labels in North America appear to be more fixed while Europe is home to many different certifying bodies and organizations with similar causes. This can make it difficult to compare the labels and objectives internationally.
A recent trend coming from this has been the attempts to form regional and international groupings based on the harmonization of various national standards. COSMOS is an example of one of these international harmonization efforts that bring together Ecocert Greenlife, COSMEBIO, BDIH (Association of German Industries and Trading Firms), ICEA (Environmental and Ethical Certification Institute), and Soil Association. Though the collective approach brings some confusion, the outcome has brought the unification of expertise across countries with an overall objective to use materials that are safe for the environment and human health.
Overall, labeling and certification have become increasingly complex, so becoming Ecocert certified can be an enticing way to wrap many different labels under one umbrella. Ecocert as a whole covers a wide range of items beyond clothing which could be found in department stores. It can be seen as one universal label that is globally recognized by consumers shopping in various sections of the department store.
Credits: IADS (Mary Jane Shea)
IADS Exclusive - NFTs: the missing link between physical and digital retail
IADS Exclusive - NFTs: the missing link between physical and digital retail
What: NFTs are an application of blockchain that is entering and changing the fashion industry as we know it.
Why it is important: Brands such as LVMH and Nike are leading the way, innovatively implementing NFTs into their business models for the long run.
The global pandemic has accelerated trends, especially in terms of technology and transparency. Although many buzzwords are being thrown around, it is not very easy to understand how blockchain technologies, cryptocurrencies, and NFTs (non-fungible tokens) could impact the way businesses offer their products to consumers. The big question that arises now is do we need to act fast, or can we ride out this latest tech wave until it passes? In order to answer that, we first need to understand what exactly the technology offers and what opportunities have arisen since its inception.
What are NFTs?
NFTs (Non-Fungible Tokens) are an application of blockchain technology that is said to be the future. A blockchain is an open and distributed ledger that captures transaction data between two parties in a permanent and verifiable way without using a central point of authority. In the example of a supply chain, the blockchain would capture all information pertaining to each stakeholder from a raw material supplier to producer to wholesaler to retailer. At each stage of the journey, a new block of information is created and cannot be altered. Blockchain enables the existence of cryptocurrencies and other mediums of exchange, like NFTs.
NFTs are individual tokens that are part of the Ethereum blockchain. What makes them different from cryptocurrency is that its tokens contain extra information, including ownership history, allowing art, music, and videos to be sold in the form of JPGS, MP3s, videos, GIFs, and more. Because they hold value, they can be bought and sold just like any other types of art with the price being largely dictated by demand.
Just like a physical piece of art, there can be copies of the original item put up for sale by the creator, but the original will hold the most value on the market. Although downloading these digital items for free can be easily done, the value of ownership lies in the information held in the Ethereum blockchain. Each item is unique and cannot be copied, which is what makes NFTs so valuable.
NFTs are making waves as in-game purchases across different video games that can be bought and sold by players, and include assets like unique swords, skins, clothes, or avatars. This has opened up the NFT world with new players entering the NFT marketplace every day. The big leap is to take this concept from tech circles to more mainstream consumer audiences, gaining acceptance among brands and influencers.
What’s in it for retailers?
Retailers and brands have tried to enter the market with the hope of understanding how they can turn the trend into a marketing opportunity. NFT use cases are still in their infancy, especially for fashion. Their entirely digital nature puts them at odds with fashion being historically all about physical products. Currently, NFTs in fashion are art rather than utilities, but this is shifting quickly. The present-day application of NFTs of GIFs and digital clothing to be used in virtual realms might not be the right fit for fashion brands. Future implications of using the technology to track and authenticate high-end luxury goods are more likely to have long-term benefits in the fashion and retail space.
Nike is among the companies dabbling with NFTs, but they have taken its application a step further. Nike is using NFTs as a patent for its footwear through its NFT, Cryptokick, which removes the barriers between the physical and digital world. The NFT of the shoe is linked to its physical counterpart. When a customer buys a physical shoe, a digital version of the shoe will be made available in their “virtual locker” and can be used in video games, thus extending Nike’s brand in the virtual realm. If the owner of the shoe were to sell their physical shoe, the sale would be mirrored in the digital realm as well. This application of NFTs is novel as it gives retailers additional avenues to connect with their customers.
LVMH has also understood the future implications of the information that blockchain technology can provide for luxury goods. The idea has brought together competitors in the space such as Prada Group and Cartier, among others, to develop a blockchain platform created specifically for the luxury industry to verify and authenticate goods. The result is the nonprofit Aura Blockchain Consortium, built by Consensys and Microsoft, which is open to any luxury brand to track and trace products with a unique digital identity based on an NFT. Brands pay licensing fees and a fixed fee per product, but they also get full access and control over their data (brand and client data are kept private) and contribute to the blockchain governance and strategy.
This application of the NFT technology has also been implemented by Arianee, an open-sourced traceability solutions provider which closed USD 9.5 million in seed funding in March 2021. The platform’s technology establishes digital passports of products to authenticate and track them throughout the supply chain, using NFTs to ascertain the online value of goods. While Aura was built to allow brands to control their processes and data without a third party, Arianee focuses more on transparency and engaging customers after a sale or resale. The platform attaches digital IDs to its timepieces and uses them to offer special promotions to owners while allowing the customer’s identity to remain anonymous. The Consortium also has a non-profit association, including Richemont, Ba&Sh, Breitling, Audemars Piguet, Verlan, Satoshi studio, and Manufacture Royale.
NFTs are hot…. and so is their impact on the climate.
The resale industry, especially as consumers become more environmentally aware, has boomed in the past few years with 62% of consumers saying that they are willing to purchase second-hand luxury goods. According to Statista, the luxury resale market was valued at around EUR 28 billion in 2020, seeing a 65% increase over the past 5 years.
Establishing an industry-wide blockchain system would bring the needed governance and oversight to secondhand fashion. Resale’s rise has spurred more brands to get involved in the space with Stella McCartney, Gucci, and Alexander McQueen all partnering on second-hand marketplace initiatives. This is a major shift in the luxury market that has been put off for a long time in fear of the impact that resale could have on brand value. This means that the stakes have been raised for brands and platforms to be able to verify the authenticity of resold items. Consistent blockchain use could eventually allow consumers to track the raw materials that their items have come from, ensuring it did not come from a labor camp, for example. This would give consumers the transparency that the fashion sector has not been able to easily provide, to understand the product's total sustainable impact from energy to worker’s rights.
On the other hand, minting NFTs requires a lot of energy consumption. Ethereum has been working on shifting to a less carbon-intensive form of security called proof-of-stake, but it is still in the works with no clear deadline. Some alternative blockchain marketplaces are already using proof-of-stake, but these are less established and potentially less permanent. The Guardian estimated that the sale of 303 editions of Earth, an NFT produced by the musician and artist Grimes, “used the same electrical power as the average EU resident would in 33 years, and produced 70 tons of CO2 emissions.” With impacts like these, the fashion industry needs to consider all implications when choosing their digital platform and understanding their overall digital footprint.
Cashing out on crypto
At the moment, only about 1% of luxury consumers use cryptocurrencies, according to data from Forrester. Although it is not going to be a mainstream payment instrument, it should not be ignored. Cryptocurrencies can be used by brands as a way to connect with and reward their customers. Lolli is a marketplace that allows shoppers to earn up to 30 per cent back in Bitcoin from purchases that they make at participating retailers. Lolli currently works with over 1,000 retailers including Nike, Sephora, Ulta, Bloomingdale’s, Saks, and StockX.
Plutus, which advertises itself as ‘better than a bank’, is a decentralized fintech firm that has partnered with Nike. Customers that shopped at Nike via Plutus received back 10% of the value of the sneakers bought in Bitcoin. Plutus has around 25,000 users, with most being under the age of 35. This shows that millennials and Gen Z have a different view on life regarding sustainability and governance, with trends related to these topics to continue gaining traction.
In this regard, should retailers and brands start accepting cryptocurrencies as a method of payment? It could be a great strategy in terms of how they can take advantage of existing disposable income. It is basically like introducing a new asset class. Companies like Microsoft and Tesla are already allowing customers to pay in Bitcoin. Microsoft directly converts the Bitcoin payments to fiat currency, while Tesla is betting on NFTs and retains the cryptocurrency. But, there are some risks as cryptocurrencies are speculative assets that are volatile and can potentially be lost.
For the moment, cryptocurrencies exist outside of the traditional global financial system and aren’t considered legal tender like cash issued by governments. But China has become the first country to create its own digital currency controlled by its central bank. The digital yuan is going to be positioned for international use and will be untethered to the global financial system where the U.S. dollar reigns king. This project has caused the United States to make the digitization of the dollar a high-priority consideration. With regulated sectors looking to introduce digitized currencies, NFTs could be a natural addition to the markets of tomorrow.
But wait, there is more
As NFTs originally gained popularity in gaming worlds, there is still a large community and marketplace for this type of use case. As the application of NFTs is virtually unlimited, the retail experience could be fully reimagined. There are already virtual worlds, like Decentraland, where you can buy virtual real estate and even create a business with a virtual storefront where you hire real humans to interact with customers.
Decentraland, also powered by the Ethereum blockchain, is set to open museums where people can display their NFTs, with the next move into retail and virtual shops. This will allow companies to buy virtual real estate to set up virtual storefronts where merchandise could be sold. This virtual store would be yet another channel that brands could reach their target audience and extend their image.
Virtual real-estate is yet another application of NFTs whose future implications, if any, are hard to comprehend. Virtual lands could bring in additional possibilities of what can be done using the land in the future like building art studios, doing advertisements, or renting it out for others to build on. As of February 2021, there have already been 116,943 transactions in virtual land totalling USD 40,814,665 on Decentraland. There are users building casinos with big retailers that are exploring possibilities to open shops in virtual land. As many stores are starting to offer virtual reality shopping, virtual stores could be the final piece that brings together the physical and virtual shopping experiences.
NFTs: powering the future of commerce?
NFTs are still in their infancy, but there is no doubt that they have already made a big impact in financial sectors with implications in the fashion industry. NFTs reduce friction in transactions and offer greater transparency and decentralization. The issues that remain with NFTs are that there is no single common network or agreed upon platform, there are various cryptocurrencies and tokens that exist in the space, and there are no regulations or legal frameworks in place yet. But all of this will be sorted out in due time as countries, like China, connect digital currencies to their central banks.
Just because there remain a few things that need to be worked out, NFTs still have the potential to be a valuable extension of a brand as they can connect and extend a consumer’s physical experience to the virtual one. Luxury houses especially need to stay alert so as not to miss the chance to connect with consumers on this new channel, as seen with LVMH’s Aura platform. Whether or not NFTs are here to stay, they have certainly piqued the interest of the rich, and there is money to be made and opportunities to be developed. The high prices of sales indicate that it is a real part of the future of art, fashion, and collectables in general. But, this does not mean that NFTs are a one-size-fits-all for retail or the fashion industry.
For the younger generation, cryptocurrency seems like a brave new world that they are excited about exploring. But before launching a full NFT summer collection, brands and retailers need to understand their current customer base and the customers they want to attract. Diving too deep into NFTs and cryptocurrencies too quickly could scare away loyal paying customers. Although this technology should definitely not be brushed under the rug as something that will pass with time, implementing and adopting it into a brand strategy should be done with a lot of thought and consideration. The risks just might outweigh the opportunities.
With this in mind, how should NFTs be approached by brands and retailers? Although future applications will arise, issuing NFTs that are linked to physical products to extend their value is currently the most strategic application of NFTs facing the fashion world. This allows brands to maintain visibility of their products, even as they go through the resale market. Blockchain technology also has the ability to grant royalties to the original creators of NFTs for each transaction in the secondhand market. This provides an additional revenue stream for brands that are normally uncapturable. As the application of NFTs is still being discovered and experimented with, retailers and brands would be wise to partner with those who understand its capabilities whether that be to hire someone internally to manage the integration, join a consortium like Aura, or offer products on marketplaces like Lolli that offer consumers rewards in cryptocurrencies.
As the global pandemic has led consumers to demand transparency from all industries, especially related to sustainability and supply chains, this kind of technology is exactly what is needed to bring some light to areas that have historically been blurred. The discovery of NFT use cases is far from over as this technology offers benefits both to brands and their consumers. Although some applications of NFTs will fade, others seem to be here to stay.
Credits: IADS (Mary Jane Shea)
IADS Exclusive - Business case: Frasers Group
IADS Exclusive - Business case: Frasers Group
Frasers Group, ex Sports-Direct group, is a UK-based retail group led by CEO Mike Ashley. It has been expanding its fashion and luxury portfolio over the past few years, trying to shift away from the sports tag toward a luxury brand. It starts in 2017 with the acquisition of Flannels, then with the buyout of then-bankrupt British department store chain House of Fraser in 2018 with the ambition to elevate it to the luxury market. With several additional buyout and acquisitions –Frasers Group also has stakes in Mulberry and Hugo Boss since 2020– the group appears to be trying to establish itself as a lifestyle and luxury retailer.
What retail model is the group following and is it viable? United Kingdom is living dark days as both the pandemic and the Brexit are putting huge pressure on the country’s economy, and the retail sector has not been spared.
I. THE GROUP
Sports Direct was launched by Mike Ashley in 1982, as a sports and ski shop. The business was a success and by 1990 he had opened 100 stores across the United Kingdom. It was in the late 90s that Ashley started to acquire brands, often from financially struggling companies. Sports Direct continued to grow as a brand and a retailing company, and even expanded internationally with about 100 stores in Europe and acquisitions in the U.S. After acquiring House of Fraser, the company was rebranded Frasers in December 2019.
The Group is currently structured across five business segments:
- UK Sports Retail, with notably Sports Direct and DW Sports (sports and gym business)
- Premium Lifestyle, with House of Fraser and Flannels among others
- European Retail, includes operations in European local markets
- Rest of World Retail, includes physical stores in the U.S. and online stores in Asia
- Wholesale & Licensing, for the brands it owns or has shares in
Frasers Group’s annual financial report, issued last September for the period running from 29 April 2019 to 26 April 2020, shows an increase in revenue and stable EBITDA (for a year which included 5 weeks of lockdown). UK Sports Retail was the best performing segments, with a GBP 2,187.3 million* revenue.
However, the real impact of the current crisis on the results will more likely show in the half-year report to be released later this month.
Diving deeper into its most notable businesses
a. House of Fraser
House of Fraser London
The British department store has been through quite extraordinary changes throughout its history. HoF was established in Scotland in 1849 as a drapery shop. The business rapidly expanding and diversified, buying brands and opening branches throughout the country. The company went public in 1948 and even acquired the Harrods group in late 50s. It was acquired by the Al Fayed family in the 80s, then went public again before being bought by an Icelandic bank in 2006 and to be sold to Chinese Sanpower group in 2014. It finally was acquired by Mike Ashley’s Sport Direct group in 2018 as it collapsed into administration.
Ashley rescued HoF with the ambition to elevate the department store to luxury, turning it into the ”Harrods of the high street” in Mike Ashley’s words. But House of Fraser was in bad shape when Sports Direct (now Frasers Group) bought it, and turning it around seems to be more difficult than expected: a year after the buyout, the group said: "If we had the gift of hindsight we might have made a different decision in August 2018.”
Ashley had the ambition to rebrand the 150 year-old department store into “Frasers” and redesign the stores, but not much has been done since August 2018. The Covid crisis was another setback.
The former House of Fraser store at Meadowhall shopping centre in Sheffield will be the first to experience the rebranding and to become Frasers, with a more premium lifestyle offer. The plan, released in January 2020, was to open in two phases. Frasers department store is supposed to open this winter 2020 and Flannels is to open in Spring 2021, within the Frasers store. But the pandemic and the new restrictions and lockdowns across UK seem to have delayed the project.
Recent news this summer announced that House of Fraser store located at the Westfield London White City shopping centre will turn approximately two third of its surface into a co-working space.
One can wonder where that leaves the department store and, if after the bankruptcies, the buyouts and the plans, it can survive. Competition is fierce in the United Kingdom, with many formats of department stores on a small territory. Plus the crisis has put the market under huge difficulties and pressure.
b. Sports Direct
Sports Direct Portsmouth
Sports Direct was a small store before becoming a big retailing group it is today. And the original sports concept Sports Directs still exists and operates stores. Last month the group unveiled a new Sports Direct concept-store in Portsmouth, with a new multi brand format [all brands are owned by Frasers Group].
The store not only carries the traditional sports brands like Under Armour, adidas, Asics and more, but also incorporates retail space for Flannels and British retailer USC. The USC streetwear and fashion section brings brands such as Champion, Levis, or Lacoste, while Flannels houses designer labels. The two-storey, 4 645sqm store also includes retail floorspace for Evans Cycles, specialising in bicycles, and Game, a destination for gaming offering an extensive range of games, consoles, phones, PC components and more. The Portsmouth store is the first to feature Sports Direct’s inclusive mannequins (like Nike did in its Paris House of Innovation) and a sustainability feature wall highlighting the current range of eco-friendly products on offer.
With this new format, Frasers Group takes a step away from the traditional sports store, presenting its customers with a wider offer that goes beyond just sports and that extends to fashion and lifestyle. It is a smart move in these times of pandemic, when casual, comfortable clothing are is in demand, and when the fashionable sweatpants are trending (see IADS Exclusive article: Adapting to new consuming habits).
With this concept, Mike Ashley once again confirms his will to turn his business into a luxury lifestyle reference. “Head of elevation” for Frasers Group Michael Murray said: “Our next-generation stores offer customers the biggest brands in sportswear, sports equipment and fashion, all under one roof […] This is a major part of Sports Direct’s brand elevation strategy that will see a huge investment in a number of new stores, while upgrading and improving existing ones across the UK.”
The new Sports Direct format is being upgraded to a lifestyle destination to cater to sports lovers but also to a more fashionable crowd. We can wonder if this concept will survive long-term when somewhat similar business Citadium, owned by Printemps, just announced it would be closing stores in France in an attempt to reduce cost structure.
II. THE OPPORTUNITIES
a. Flannels
Flannels London
Flannels started in 1976 as a menswear store in northern England. It was acquired by Frasers Group in 2017, which has since turned the brand into a curated luxury designer clothing and accessories store for men and women. Nowadays Flannels counts almost 40 locations.
A big move for Frasers Group was the opening of Flannels flagship store in London in September 2019, that shows off what Mike Ashley initially envisioned to be the future of high-end department store House of Fraser. The store can be considered as a sort of luxury department store for younger customers. The store spans four floors and houses a curated mix of men’s and women’s luxury designer clothing and accessories, featuring catwalk collections to the latest streetwear drops, from emerging designers and luxury’s biggest names such as Balenciaga, Off-White, Balmain or Canada Goose. The store offers different services and experiences such as customisation, personal shopping service, and click-and-collect. The building has no windows and features big interactive digital screens. As Gen Zs are extra connected and digital savvy, it is just another way to reach out to them.
The bold and most surprising move was to open a luxury retailer on Oxford Street, known for its high street offer with outposts from retailers such as Primark, Zara, and Topshop to name a few. We can speculate that Flannels does not cater for the needs of the traditional luxury shopper, and its strategy is to reach out to a broader clientele.
Indeed, the store has many outposts on secondary markets, where the competition in the luxury field is less intense and where it is easier to reach out to younger customers with this type of concepts, compared to the London crowd. Establishing itself on secondary markets is also interesting financially speaking, as rents are lower and as the local public need to be addressed directly -not everybody can travel to London or Paris anymore to get their hands on fashion. Most recently in October 2020, a Flannels store opened in Birmingham, and the group announced the opening of more outposts.
Still in Paris, Printemps opened Le Market corner, which caters to Millennials and features designer clothing.
What is also striking about Flannels is that, despite being a quite small business within the full group operations, Ashley is betting on it and helping it grow by implementing it inside other concepts, such as he did with HoF and Sports Direct. House of Fraser giving space to Flannels is a demonstration of the retailer’s will to differentiate its offer in order to cater to a younger crowd, but within the department store -like Rinascente did in Milan with its Annex store, where a curated offer caters to Millennials and Gen Zs.
Flannels Birmingham
b. GAME
GAME started in 1992 as a gaming and electronics store. The company expanded, and even extended operations internationally. After experiencing changes in ownership and financial issues, it filed for bankruptcy in 2012 before being bought by OpCapita. It went public and was listed on the London Stock Exchange in 2014. Frasers Group (then called Sports Direct) started invested in the brand in 2017 and eventually completed the acquisition of the brand this year, inheriting 256 destination-for-gaming stores.
Following the takeover, stores were closed and others opened as part of the Group’s strategy to move the GAME stores into the new elevated stores -in the newest Sports Direct in Portsmouth and in London’s House of Fraser. It is one of the group’s biggest brand in terms of number of stores (242), especially compared to Flannels (37 locations) and HoF (48 locations).
It is interesting that Mike Ashley decided to invest in the gaming sector, as it is becoming the latest way to do fashion, often referred to as the Gamification of Fashion. That fact that people are spending more time at home this year across the globe has accelerated digital trends, and it will force changes in how business will be done during and after this crisis. Online gaming is on the verge of entering a new phase where it could have big implications for the fashion industry. Indeed, several brands lately have been using gaming to showcase their fashion work, especially since the Covid break-out. Balenciaga announced it would release a video game called Afterworld: The Age of Tomorrow in which it will present its Fall 2021 collection. Several brands have partnered with Nintendo’s Animal Crossing (including Valentino and Highsnobiety, and extending to the Getty Museum and even fast-food chain KFC) to showcase their work.
III. THE RISKS
a. House of Fraser
As explained above, House of Fraser has had quite a history. Mike Ashley purchased it as it was already declining, with the ambition to turn it around and elevate it. However, such work will require a huge investment. So far, the group’s Premium Lifestyle business segment (the one HoF is attached to) is not the best performing one: GBP 732.9 million* versus GBP 2,187.3 million* for the UK Sports Retail’s segment.
Therefore, we may wonder if Ashley will make the necessary investments to upgrade it, especially in these uncertain times. Frasers Group’s rival retail group Arcadia fell into administration on 30th November, which had consequences on its long-term landlord, Debenhams, which is set to enter liquidation after failing to exit bankruptcy. These closings are another blow in the UK retail sector and we can’t help but fear that House of Fraser will suffer the same fate.
b. International business
Another concern lies within the group’s international businesses (Europe and World). European Retail accounts for GBP 599.8 million* and Rest of the world Retail for GBP 215.9 million*. What will happen to these businesses, especially the European operations, once Brexit will definitely be official and implemented on 1 January 2021? This will surely change a lot of thing in terms of revenues. Expect an increase in shipping costs for importing and exporting goods, new taxes and less flexibility among many new regulations and setbacks. For instance, John Lewis has already announced that it would stop selling and shipping items internationally effective this month, as the costs are too high.
c. JD Sport
Frasers Group biggest rival is JD Sport in UK. The British sports-fashion retail company posted a GBP 6,110.8 million** revenue in its latest financial report for the period running from 2 February 2019 to 1 February 2020. Frasers saw a group revenue of GBP 3,957.4 million* for the year ( April 2019 to April 2020). Obviously these results will significantly change and next year’s revenue will likely be impacted by the pandemic that forced stores to close for several months.
JD Sport was close to resembling Frasers Group as it was well-placed to acquire bankrupt chain Debenhams, therefore also becoming the owner of a department store. However the group pulled out of Debenhams takeover, leaving the chain with no other choice than to enter into liquidation. The fact that Arcadia group filed for bankruptcy significantly impacted JD Sport’s decision, as it was the largest concession holder at Debenhams.
Conclusion: Frasers Group, a viable business model?
Mike Ashley is aggressively entering the luxury scene, elevating its current portfolio and investing in brands. Rumours are that his group might eventually buy Mulberry. He made a bid to acquire bankrupt UK department store chain Debenhams but was kicked out of the race after failing to match the price tag demanded by the group’s advisers. The Same thing happen when he bid for Woollen Mill Group’s owned Jaeger early November. Now it has offered to rescue the Arcadia group for GBP 50 million. Qualified as a "lifeline" loan, it was rejected by Arcadia’s owner Philip Green.
Yet, between investing in luxury, elevating existing businesses and expanding its acquisitions, the global strategy of the group remains opaque. With its brands portfolio, and instead of opening several multi brand spaces under multiple labels (Flannels, Sports Direct, …), the group could just use House of Fraser to house all of its concepts, optimising the synergy between the brands and saving the department store at the same time -or at least try.
After all, given the collapse of Arcadia, some opportunities might open up for Mike Ashley. The question is: is he going to use them to invest in his existing businesses, or to invest in buyouts?
Credits: IADS (Louise Ancora)
IADS Exclusive - Can we afford online retail?
IADS Exclusive - Can we afford online retail?
For some years department stores have been contemplating a less profitable future as costs increase and as they depend more every year on online retail. The Covid-19 pandemic has exacerbated the problem by accelerating our dependence on the online part of our business. In fact, we have been putting in place a number of channels and services for customers which we know are less profitable, and in some cases, loss-makers. So, the search for future profitability has become even more urgent.
The unstoppable growth of digital retail
For years now, bricks-and-mortar retailers have been battling with the issue of how to make the online part of their business profitable. Now, with the online share of business growing in the omnichannel mix, department stores are facing a future of less profitable retail – which they can ill afford. According to the World Economic Forum, e-commerce sales are expected to reach 40% of total revenue in the next seven or eight years. How can we remain viable when the fastest-growing channel is the least profitable? Is there anything we can do to prevent already thin margins being shaved further by demands for ever-speedier fulfilment, unrealistically broad assortment, and easy free returns?
The situation has become dramatic recently with the Covid-19 pandemic accelerating the development of online retail, the only channel left to many department stores to make any sales at all. These have not compensated for the loss of sales in stores, in spite of some very inventive solutions and admirable efforts to serve customers. Even efforts to concentrate on local customers and to use stores in novel ways as fulfilment hubs, for example, still leave stores with no better than 90% of “normal” sales. “Normal” being the level of sales required to keep afloat with the existing department store model. Needless to say, a future based on this level of sales will be short.
Online today is generally less profitable
Interestingly, the problem is not limited to department stores. Walmart, the subject of a recent IADS Exclusive, with its huge investments and the development of Walmart+, is actively trying to reverse the tide in its struggle with Amazon through the development of new models. But, according to some, it’s still far behind Amazon, and there are developing tensions inside Walmart. Last year, the company was apparently projecting losses of more than USD 1 billion for its US e-commerce division, on revenue of between USD 21 billion and USD 22 billion. Walmart does not disclose these figures publicly and declined to comment.
According to Forbes, TheRealReal, the marketplace, increased its previous year’s loss in spite of revenue up 51%. The digitally native fashion retailer Revolve, also announced a loss against revenue exceeding all expectations. Farfetch reported larger than expected losses despite a record revenue growth of 44%. “These results mirror a familiar pattern for retailers: improving year-over-year revenue while profits decline. Often these slides in profitability correspond to an outsized increase in e-commerce sales, highlighting the unfortunate truth that it’s very difficult to operate a profitable e-commerce business. And it’s only getting harder”.
And the issue is not confined to fashion or apparel retail. Indeed, as reported in the Financial Times, grocery shopping is also losing money online. A cited Bain consulting report estimates that grocers around the world are typically suffering a negative operating margin of about 15% on online orders. Even a USD 7 delivery fee does not lift that number into positive territory. The only operation which appears to be mastering the issue is Ocado which claims to have a list of one million people waiting to become customers once it has the capacity to serve them. And that is likely to come about since it is estimated (by UBS and Bain) that a majority of shoppers will increase their use of online shopping after the Covid-19 situation improves. Ocado sees itself less as a retailer than as an online service provider to retailers through huge investments in automation, robotics and technology.
What can department stores do?
On a positive note, a number of department stores are vigorously addressing the problem. Indeed, it has been at the centre of their strategies for some who have been acting decisively to transform themselves. One example is Falabella which now describes itself as “a digital retailer with stores”. It has been analysing online costs for some time, attempting to balance value to the customer, value to the store, and net operating cost of different solutions such as DC to customer, DC to store, and click & collect from store inventory.
Theoretically, the costs of fulfilment, for example, of DC to store will be lower than home delivery, which would be less than pick from store which would in turn be lower than ship from store. However, in reality, results may vary depending on the individual efficiencies of each process such as the incremental use of store labour, the efficiency of fulfilment centre pick-pack operations, the cost of real estate of click & collect counters, store pick efficiencies and much more. It is these variables which have to be analysed and in fact tailored to the operation in question and properly integrated. “A lot of these online channels were added as an afterthought to the brick-and-mortar channel”.
In general terms, whereas the physical store costs may be dominated by real estate and labour, those of online retail would be made up to a larger extent of marketing (in particular customer acquisition costs) and fulfilment. As the Harvard Business Review puts it, retailers need to find a way of creating a “digital-physical fusion” which will catch up with customer expectations, and importantly create a viable business model. “The greatest barrier to adopting fusion strategies is not skepticism about their promise but inexperience with their execution.”
What are the priorities in this process for department stores?
- There has been much debate about whether department stores should offer their entire assortment online, or a subgroup, or even in some cases extra items not available in store. Clearly fulfilment costs should play a major part in this decision: items that have difficult logistics and return logistics should be the first to come under scrutiny.
- For the rest, supply chain optimisation is crucial. For the average retailer, fulfilment costs have increased 12% over the last 12 months before Covid-19. Even Amazon saw shipping costs jump 23% at the end of 2018, reaching a record USD 9 billion. This is multiplied by the fact that customers are increasingly expecting free and fast delivery. On the other hand, there is evidence that customers are willing to pick up in store to avoid shipping charges.
- Linked to this is the pricing and promotion strategy: any difference between online and store price will be picked up immediately by customers. In this area, technology is almost indispensable (dynamic pricing and markdown optimisation).
- Technology in the form of either AI and machine learning, or robotic automation is also becoming standard. The Ocado example mentioned above is highly dependent on technology to offer affordable services. So much so that it is now building DCs for other retailers. There is some evidence that cost-conscious retailers are being pennywise and pound foolish when it comes to IT modernisation. However, research from Publicis Sapient revealed that IT infrastructure investments can pay back in 2-3 years while continuing to create long term value through increased conversion, affinity and loyalty.
- Finally, AI can also help with customer response and customer acquisition. Lifetime Customer Value (LCV) is sometimes used as an excuse to cultivate unprofitable customers. Technology can help us distinguish and cherish our best customers. Customer acquisition is generally acknowledged to be one of the big costs of online business. Targeting and reducing this cost can significantly contribute to profitability.
Conclusion
Foot traffic to stores continues to fall, while online retail has grown many times in the last ten years alone and has been boosted by the Covid-19 pandemic, probably with lasting consequences.
Many retailers must adjust their physical footprint to accommodate these changes. In today’s landscape, the strategy to open as many stores as possible is neither viable nor practical. Instead, retailers must focus on having effective stores. This may mean downsizing to smaller stores, moving to different, high-traffic, convenient locations, or reformatting to better accommodate in-store pickups. The measure is a difficult one since it means reducing the proportion of the traditionally more profitable part of the business. Recent examples of closures include Le Printemps, and John Lewis.
Therefore, in parallel, we need to consider each and every way in which to truly integrate our existing channels as well as ways of evaluating the true costs of what we are offering customers. The current pandemic has led to a innovative but unprofitable solutions for customers. How can we readjust, rebalance and integrate our physical and digital formats to recover a profitable department store model for tomorrow?
This is one of the tasks which will be set for the IADS Academy 2021: proposing a P&L for a truly integrated omnichannel business, and the related KPIs with which to measure omnichannel performance. It is a practical case of department stores dealing with disruption as discussed in the IADS Exclusive: responding to disruption in which How to shift in a company from the Incubation to the Transformation Zone. It can be done, but it requires strong leadership and purpose.
Credits: IADS (Dr Christopher Knee)
IADS Exclusive - How far should the responsibility of department stores go?
IADS Exclusive - How far should the responsibility of department stores go?
For some years we have seen the beginnings of a shift from shareholder to stakeholder capitalism. Actions taken during the Covid19 pandemic and analysed in the IADS White Paper would seem to echo the new “stakeholder” purpose of companies. What they probably signal is in fact a rethink of the department store model in terms of its offer, its structure, its relation to other businesses, and its adaptation to new market realities.
The IADS has published a White Paper reviewing its members’ actions during and after the Covid-19 lockdown and draws key lessons to prepare for new crises and to address the future of the department store industry, at a moment when some regions are facing new episodes of lockdown: “Global pandemic and local department stores”.
One of the observations of the survey has been that IADS department stores were driven by agility, commitment and responsibility. Notwithstanding their size and complex organisations, department stores were surprisingly agile in addressing the pandemic issues, without losing focus on their social role and responsibility. All IADS CEOs swiftly adjusted their strategy to protect staff and customers, accede to government requirements, maintain and nourish relationships with customers and suppliers, while defending their businesses and preserving cash. This translated into a remarkably fast and coherent shift from all IADS members towards their stakeholders: customers, staff, suppliers, community, and shareholders.
In 2019, we saw the US Business Roundtable redefine the purpose of a corporation as serving these five groups of stakeholders, and this was followed by the Davos Manifesto of 2020 which shifted away from shareholder capitalism towards a business responsibility to “society at large”. We should remember that this was seen by many as a significant shift away from the principle of shareholder capitalism, which has been more or less dominant since the 1970s with Milton Friedman arguing that the primary aim of a company is to maximise value created for its shareholders. Doing anything else was described as spending “someone else’s money for a general social interest”.
It would appear then that the Covid-19 pandemic has renewed interest in this conversation about the purpose of a business. No company, to our knowledge, has questioned the appropriateness of taking on these broader interests in spite of the fact that most of them are struggling to keep their head above water in terms of sales and, even more so, profits. Such declarations of solidarity with all five stakeholder groups come at a time when issues such as climate change, diversity and inequality are all being aired and are apparently of concern both to our customers, and to our employees (in a survey, 70% of workers said their CEO should take a stand on climate, diversity and inequality).
So, stakeholder capitalism demands that companies should save the planet, increase diversity, ensure the right standards along the whole of the supply chain, get rid of the gender pay gap, take responsibility for its employees’ health (physical, mental and financial), as well as conduct a profitable retail business through a series of rolling lockdowns. Is this a reasonable expectation?
Furthermore, some of these issues are perhaps ones over which there may be shades of opinion among managers in a company. What happens if not everyone is on the same side in the “culture war”?
A provocative piece in the Financial Times argues that the burden may be too heavy for companies to carry alone. Indeed, it argues, “the social welfare of individuals is more a matter for their families, friends and state-funded community services….the physical health of the population is a matter for public health services, while issues such as climate change are a matter for governments to rule on”. It reminds us that companies pay taxes so that others do such stuff.
What it forgets, however, is that the sophisticated operations of department stores (and indeed other retailers) puts them in a privileged position regarding knowledge of what members of the population think and need, that the health services of many countries have been overwhelmed due to long-term underinvestment, and that they are already often playing an important community role which has not abandoned sustainability even in the face of serious cost overruns.
Whether this balance between business, politics and society is a desirable state of affairs or not, it remains that without the cooperation of businesses, and department stores among others, the situation on the ground would have been significantly more unpleasant for a large proportion of the population in many countries.
The fact that it also makes sense from a business perspective and increases customer and employee loyalty does not diminish the contributions of department stores which have stepped into the breach as detailed in the IADS White Paper.
It may or may not be part of a shift towards stakeholder capitalism, but the actions undertaken have redefined the sense of purpose of department store companies, given them a new lease of life and injected new meaning into the daily activities of many employees. Coupled with innovative adaptations and practices such as remote working, we are perhaps witnessing something special which may yet have positive consequences, with department stores taking back the initiative.
Credits: IADS (Dr Christopher Knee)
IADS Exclusive - IADS Academy 2020 exclusive report
IADS Exclusive - IADS Academy 2020 exclusive report
Following a truly innovative process this year due to the worldwide pandemic, the IADS Academy was conducted in full digital mode, and looked at immediate consequences of lockdowns for IADS member organisations. A number of suggestions were made by the 2020 IADS Academy who presented some answers to the question “What next?” at the General Assembly of CEOs on 30 October 2020. Their answers covered customer behaviour, convenience, private labels, and store networks, as well as organisation structure and skills for the future. They caused some important questions to be raised relating to organisations, profitability and store real estate.
The Covid-19 pandemic has affected all our businesses, and indeed has also impacted the IADS activities. This is the reason why, this year, the 2020 IADS Academy was asked to go very operational in its data collection and thinking process, to address the pandemic-related questions: what have we, as department stores, been doing in relation to Covid? and what next at this stage of the pandemic?
The outcome of the work has been a White Paper, titled “Global pandemic, local department stores, learning from the pandemic and addressing the future for the industry”, to be released soon, which covers in detail the context in which we have been operating and a whole series of innovative and speedy actions. In addition, participants in the 2020 IADS Academy were asked to go further into scenario-planning, which led to a presentation to IADS CEOs at their General Assembly on 30 October 2020 (see summary and slides here).
The Academy considered several scenarios for the immediate future. These could be described as best, middling and worst, or short-term, medium-term and long-term (up to 24 months ahead). Scenarios used for the simulations were the following:
- First scenario: another lockdown within 8 months (the 2020 IADS Academy work was finalised before the second round of lockdowns and curfews across Europe)
- Second scenario: full recovery within 14 months in Asia and US thanks to a vaccine but leading to “travel bubbles” and regional closures in the meantime
- Third scenario: painful global recovery within 24 months and adaptation to a “new normal”, including “stop and go” local approaches leading to a permanent state of economic crisis and customer insecurity.
Each scenario was aiming at constructing possible actions and strategies under three main headings:
- The department store context: cities, flagships, and local retail
- The department store offer: services and assortment
- The department store organisation: structure and roles
The matrix below synthesises their analysis:
The priorities overall are fairly clear:
- emphasise local retail
- prioritise safety and stability
- develop digital and online operations
- innovate in services, sometimes quite radically
- upgrade and develop private labels
- shift to an agile organisation structure and leadership
- and, even further, to an ecosystem characterised by autonomous structures and empowerment
The value in this work comes not only from the suggestions but also from the structured thinking which we need more than ever for crisis management, including the scenario-planning approach we advocate at IADS.
As with all good research, its value lies also in what questions it raises for further investigation. Three such big questions should be mentioned:
I. What is involved in shifting towards a flatter more agile organisation structure?
…especially as future structures are likely to mean fewer people, as well as fewer layers. From a practical standpoint, outsourcing tasks to teams means defining those tasks very precisely since the teams will not necessarily be involved in other parts of the business: a “division of labour” approach reminiscent of early scientific management. And yet, according to many accounts, we are also moving in an opposite direction where the skills we will need for the future are analytical thinking and innovation, active learning, complex problem-solving, critical thinking and analysis, and creativity, originality and initiative (see Future of Jobs Survey, World Economic Forum, 2020). These latter are more general and pose a real challenge to HR departments to find the right profiles.
Some of our members are already tackling these issues such as Falabella’s “delayering” projects. In general, agility as it has manifested itself during Covid, as was mentioned by the Academy, is more an accumulation of small decisions taken with speed. The question is: have we managed during Covid to speed things up which normally would take longer?
According to some, the ideal command structure in the army is not a rigid hierarchy but a sphere, where the core sets the culture, and those at the edge of the sphere use their initiatives and take decisions as the situation demands. Only this allows an organisation to cope with VUCA (volatility, uncertainty, complexity and ambiguity); (see The Economist, 24 October 2020, p.58). Others suggest that one of the best ways to achieve resilience is through the establishment of routines or simple rules known as heuristics (see HBR, Building Organizational Resistance, November-December 2020).
II. Shifts cost money: how to find necessary investments?
This is particularly important since much store-based retail was already dealing with a lower-profit retail future even before the pandemic. Can we find resources through development or through charging for services?
For example, delivery from stores was initiated by Manor to respond to customers’ needs. And it was indeed welcomed. But it was also a terribly expensive service for the store. Is it worth the cost? It might be that responding to customers’ needs is always the right thing to do and that ways will be found or developed to make it profitable in the future. Should we simply act and modify and fine-tune as we go? It is perceived as a considerable risk. Are there any examples from the past of such a risky action eventually turning a profit? What does appear to be true is that the new “remote work” is often more productive than work performed at the office (this point was raised by the Academy also). This means that at least some costs should be saved by a new structure. Best practices in remote working are only recently beginning to emerge.
This strain on investments was illustrated in part by a discussion of Geoffrey Moore’s theory of “zoning” and how to bring new ideas into the mainline business. (see IADS Exclusive article: Responding to disruption)
III. What part in the business is online retail likely to play in the future?
This is probably an impossible question to answer since, increasingly, department stores are no longer separating their online and physical businesses. Indeed, in some cases they are no longer able to do so. However, it remains an important question for its implications for the real estate assets of the business, sometimes quite considerable. A number of businesses are facing the possibility of closing down less profitable stores and/or using them for other purposes such as fulfilment centres (as hinted by El Corte Ingles and already realised by Macy’s and Lotte). John Lewis has recently revealed plans to convert part of its business and real estate to other formats including residential.
In the present circumstances, the question of flagships is also raised, especially if they relied significantly on the tourist trade. Local, smaller stores were initially neglected but appear now to be nearer to the centre of department stores’ attention. Some, such as Magasin du Nord, are asking whether the value of smaller stores may have increased from the real estate point of view because of the crisis. A number of companies, as is well known, have been developing smaller, local stores for some time, such as Nordstrom Local.
Following the General Assembly held in October, elements of these questions have been incorporated into the IADS programme for the coming year as topics for meetings, exchanges, and indeed future Academy investigation. This renewed approach aims at bringing elements of answers to complex CEO questions and help our members to address their future.
Credits: IADS (Dr Christopher Knee)
IADS Exclusive - Retail Review #1: experience, digital & curation
IADS Exclusive - Retail Review #1: experience, digital & curation
Keeping markets under a close watch, IADS detects innovative concepts related to key topics such as experience, new models, digital, and curation.
In the first selection from our Retail Review series discover:
Self-proclaimed "the most interesting store in the world", Showfields opened a 1300sqm, four-storey space in New York City’s NoHo neighborhood in December 2018. In this new concept, a mix of curated DNVB and brick and mortar brands are housed in a most theatrical environment. It is a place for online brands, such as Nuria (beauty), Wet (swimsuit) and Paneros (clothing) to get a glimpse at physical retail and get a new customer baseline.
The store allows for offline and online worlds to collide as customers can both touch the products and use touchscreens to explore additional items or make purchases.
What makes Showfields different from other retailers, which function somehow similarly: curated brands and rotating assortments, like Joyce (HK), Galeries Lafayette Champs-Elysées (Paris) or Neighborhood Goods, Dover Street Market (US) and SKP-S (Beijing)? Or like b8ta (US), which also houses Direct-To-Consumer brands for their first dive in physical retail? The answer: theatre.
It is immersive
At Showfields brands get to showcase their products in a totally immersive décor. Where multi-brand stores install a brand next to the other, Showfields goes deeper as each brand corner features an environment relevant to its items. Think bathtub and mirrors for beauty products, and sofas and beds for quilts and pillows. Brands configure their space online via a six-step process; it will then be fitted out and staffed by Showfields. All the tech comes as part of the deal, including mobile POS and data sensors which provide real-time data to each brand inside the store, using heat mapping to show what products customers are touching, picking up and lingering in front of. Brands can rent a space on a monthly basis, with a four-month commitment minimum. Note that Showfields does not make money out of product sales, only on renting spaces.
But Showfields is not alone on that segment since other retailers worldwide also offer immersive experience to the customers. Korean eyewear brand Gentle Monster is very well known for its physical locations which vary a lot from one place to another. Each time it offers an immersive experience in a meticulous décor inspired by the environment and the city the store it is located in.
American designer Blaine Holvorson does the same with his Madeworn brand. His Los Angeles showroom, accessible upon appointment, is divided into three spaces staging three decors, three stories.
More recently, winter clothes brand Canada Goose opened The Journey: a Canada Goose experience in Toronto. The inventory-free concept store pushes the boundaries of e-commerce and retail. The top feature is the Cold Room, where products can be tested in temperature set at -12 degrees Celsius, while being surrounded by floor-to-ceiling Arctic landscapes and real snow. However, you cannot purchase merchandise in the store, you will have to order them online (via instore screens).
Some brands, with a specific immersive décor, manage to recreate the experience offered in their standalone store in a department store corner -for instance French cosmetics brand L’Officine Buly with its apothecary counters or American label Urban Outfitters with brass pipes and furniture- but not all brands’ corners in department stores are immersive, contrary to House of Showfields as the full store offers complete immersion.
Last summer the retailer launched House of Showfields, a 30-minute sensory theater production featuring six brands and designed for customers to touch, smell and taste the products. The experience, and the whole store for that matter, is not staffed with salespeople, but with actual actors who are trained to tell the story of the brands. Customers get caught in a brand’s story, without feeling pushed to buy. What’s more theatrical than that? Yet, it is reported that L’Officine Buly also staff its stores with actors instead of salesperson, to give even more storytelling to the brand.
The opening of the House of Showfields show draw a 33% gross in traffic, and a 50% sales increase (as of last fall).
It is “instagrammable”
Another asset that comes with having an immersive space is that, in a time where social media account for a big part of people’s exchange, it makes the place highly instagrammable. Influencers are the new fashion models and brands ambassadors, and the new generation of customers Gen Z are fond of short video media Tik Tok, pictures platform Instagram and other social networks.
Once again Showfields is not the only retailer to offer unforgettable pictures for your social accounts. Beauty brand Glossier, who’s brand identity already shows well in its product recognisable packaging (imitating paint tubes or coloured in a pink blush), showcases its items in clean, immersive decors. For example the Los Angeles store imagines a drive through the desert and even replicates Arizona’s Antelope Canyon in a separate room.
Museum of Ice Cream (MOIC) started as a colourful, pop-up museum playground highly instagrammable. It even had an actual pool of ice cream sprinkle, where Beyonce and Jay-Z took a dive. The experience eventually turned into a brand and opened an ice cream store in NYC, The Pint Shop, just as much as intagrammable as their itinerant museum.
It is exclusive
The House of Showfields could relate to the notion of ‘incubators’ has it bets on lesser-known DNVBs that need physical exposure to gain customers. In the light of the recent demonstrations across the U.S.A., the store has dedicated an entire section to Black-owned business brands. Adding to all that the fact that items are showcased within a time-limited frame, it makes them all new each time you come back, exclusive, and desirable.
In that, Neighborhood Goods is similar has its offer regularly rotates, and varies from one store to another, reinforcing the sentiment of exclusivity.
Many retailers have understood the importance of exclusivity and already take advantage of that, especially department stores which host pop-ups and collaborations, with items made exclusively for the store event; through exhibitions at Le Bon Marché (ex: Los Angeles Rive Gauche, Let’s Go Logo) or collab at Selfridges (ex: The Co.Lab in partnership with Highsnobiety)
The difference with Showfields is that it is an exclusive show all year-round. Department stores with all-year dedicated pop-up spaces can offer a similar level of exclusivity.
It is a gallery
Imagined kind of like a museum, customers wander from one brand to another and discover a new universe each time. At the end of the journey, they step into The Lab, which is like the gift shop at the exit of an exhibition or a tourist attraction. All items previously experienced in the store can be purchased in The Lab. We can make a parallel with furniture giant Ikea, which also offers an immersive experience where you wonder inside the store, passing from rooms to rooms to finally pick up items at the end of the visit. A formula that seems to be working as the turnover of the group has only been increasing since 2004 (from EUR 12,9bn in 2004 to EUR 38,8bn in 2018 according to Statista).
In the end, Showfields does not force any purchase on customers, but offers actual experience to have people coming back and eventually buying items. Bringing people inside through events in hope to turn their visit into a shopping trip. Isn’t it what Selfridges is doing with its instore movie theatre? Or what IADS member Galeries Lafayette did with a glass walkway in its Haussmann flagship to attract instagrammers? Or any other department stores with dining experiences or beauty services for that matter? Not to mention the Dubai’s Mall of the Emirates that offers access to a ski slope inside a mall.
So what’s more to Showfields?
As demonstrated above, Showfields is not completely revolutionising retail as we know it. Other brands and other retailers offer similar experiences and features in their locations. The retailer features a large assortment to reach out to a variety of customer range: from dog food to beauty products and digital items, it is a store for anybody.
But the real strength of House of Showfields can be that it is all at the same time: it is a store, it is a gallery, it is an experience, it is instagrammable, it is digitally enabled. Plus, there is a slide to go down from the third to second floor.
We can compare the attraction of Showfields to the one of Story when it first opened in NYC. But now that the concept has been bought by Macy’s and that founder Rachel Shechtman has left, it has somehow lost its appeal. Will Showfields experience the same decline and what will be left of it once/if the novelty has passed?
Showfields is funded by several ventures, and, as of this date, turnover information has not been released.
How about experiential retail in the Covid-19 era
How a store, that is all about the immersive physical experience, deals with the Covid-19 pandemic when people are reluctant to spend much time outside of their safe environment? As a response to the health measures, House of Showfields launched an App called ‘Magic Wand’. While inside the store, customers use their phone to tap or scan a display object, and the app will provide additional information on it. The app also allows customers to get prices, add items to a digital cart, and check out without interacting with a store associate. They can pick up a bag full of sanitized products on their way out.
Originally not a response to any sanitary crisis, but a desire to offer customers the experience they choose, Nike has a similar option in its latest House of Innovation in Paris. While instore, you can order an item through the Nike app and have it delivered directly to you in the store. Try it and buy it at one of the self-checkout stations, without interacting with any sales associates if that is your wish.
Inside Showfields, additionally to the basic safety measures such as mandatory masks, social distancing and hand-sanitising stations, the retailer has decided to focus on brands that guarantee a safe experience, and brands such as Play Doh (kids modelling clay) were removed.
Showfields also offer curated virtual tours of their store, so customers can discover the products and enjoy the experience from the safety of their home.
However, be sure that the instore guided tours bring more than just an introduction on brands and description of products. They are led by actors portraying diverse characters such as scientists, artists, creators, and explorers, to give an even more narrative arc to the store visit and the brands featured.
Moreover, the store gives the possibility to book a guided tour with CEO Tal Zvi Nathanel himself. Has this ever been seen before?
Conclusion
Can department store become immersive experiential space? What can they learn from Showfields? And is experiential physical retail still relevant after a pandemic?
As to the question if department stores can offer immersive experience the answer is yes. Best example is IADS member SKP latest store in Beijing: SKP-S. Designed in partnership with Gentle Monster, the store offers an immersive experience on each of its floors through a purposefully ever-changing landscape. The entire experience is based on the theme Digital-Analog Future and the assumption that, in the distant future, technical leaps will allow the boundaries between human and digital to blur -think massive artificial intelligence. The concept of this new store differs completely from SKP flagship store, which resembles more the ‘traditional’ department store/mall model. The SKP-S store is even is considered a benchmark in forward-thinking retail by Retail Leisure News.
SKP-S follows the same theme and narrative through the entire store, while at Showfields one brand equals one story.
As to the relevancy, one can wonder if physical experience is still a viable option after the pandemic that left people afraid to go out, interact with one another and afraid to touch anything. According to Essential Retail, experience will be digital after Covid-19, even instore. But will it be enough? Is this the end of what was in pass to become the new way of making retail? Showfields manages to keep its experience intact through the crisis, but will it last?
Finally, what can department stores learn from Showfields that they do not already know? Bring experience not necessarily link with the idea of purchasing? Done at Selfridges. Offer an immersive décor? Done at SKP-S. At the end of the day department stores already have the answers and know what they need to do to gain customers. It is up to them to find the right formula that will suit their business best.
Credits: IADS (Louise Ancora)
IADS Exclusive - How SM Group implemented a new distribution channel
IADS Exclusive - How SM Group implemented a new distribution channel
INTRODUCTION: what is remarkable?
Covid-19 pandemic and the consequent lockdown strongly affected SM Group’s ability to operate both online and offline, due to the harsh regulations applied. This led the group into setting up a new way of selling and distributing its products, in a record time (deployment to 63 stores in 1 month), with significant & quantifiable results:
- Sales: average of 3,2K daily orders after lockdown (from scratch)
- Marketing: increase the reach by 31% while maintaining the CPC at an acceptable level
The “Call to Deliver” setup uses the existing instore resources (staff, assortment) to address the needs of the local clientele with a low-tech and simple procedure, while remaining in line with regulations and safety instructions.
Its success made SM Group identify a new channel opportunity, and this temporary solution has now become permanent, as it ideally addresses local communities’ needs & tightens ties between SM and those communities.
Benefits of the Call to Deliver setup
- Use of existing relationship with local customers to provide them with what they need, while reassuring about SM’s commitment and legal compliance
- From order processing to fulfilment, a low-tech setup, easy to implement, fast to deploy
- An internal cohesion tool: all teams were involved and contributed to find solutions
- Can be easily transposed to other IADS members setups
Key learnings
- In a crisis, grouping together to design a collective solution with clear accountability lines can be effective and quick
- The implication and cooperation of all teams from the beginning brings a pragmatic and down-to-earth implementation
- Low-tech and simplified procedures sometimes exceed more sophisticated operations
- By putting the customer experience at the centre a new retail channel was created and allowed to reach a new clientele
A harsh Covid-19 context
100 million Filipinos went into lockdown on 16th March 2020. Planned initially for a month, the lockdown ended up being one of the longest of the world, until June, and one of the harshest: total closure of the country and impossibility to travel, restriction on mass gatherings of more than 10 people, total closure of schools and “non-essential” businesses, “stay at home” orders and mandatory wearing of face mask outside, curfew from 8pm to 5am in Manila region (30% of the population, 27 million people), and other strict measures.
The release from lockdown end of June saw a rise in cases and led the Philippines to revert to a second lockdown early August, with a 24-hour notice to citizens and businesses. However, due to the impact on the economy and the lack of publicly funded social support, the lockdown measures were softened mid-August, sometimes creatively: at the time of writing, the Manila region is going through a rolling lockdown: one week open, one week closed.
As of 7th September, the Philippines is the first country most impacted in South East with close to 239.000 cases and 3.890 deaths, making it the 21St most impacted country in the world. Economically speaking, Q2 saw a GDP contraction of -16,5%, household consumption -15,5%, unemployment +17,7% and -6,4% revenue from the Filipino diaspora abroad. Overall, the country GDP is expected to contract by -7% and is now in recession, the first in 30 years.
IADS Member presentation: THE SM STORE
The retail arm of SM Investment Corporation is the largest and most diversified retail group in the Philippines: food (SM Market, Waltermart and Alfamart) and non-food (SM Stores and specialty stores). Its 2019 turnover was 6,3bn euros (+9% vs. LY), with a net income of 217m euros (+10% vs. LY).
Part of the SM Retail division, the IADS member, the SM STORE, has 64 stores nationwide, representing overall more than 807.000 sqm. of retail space, operated with 23,479 collaborators. Pre-crisis, SM has operated e-commerce since 2018: ShopSM, linked to the group’s loyalty programs and including a click & collect concept (buy online, pick up instore).
Reasons for implementing a new distribution channel
The impact of lockdown was immediate: deemed as “non-essential”, all 64 stores had to close from 16th of March till 18th of May. E-commerce operations were also stalled, with staff having difficulties to reach the fulfilment centre, and logistical difficulties abound.
This is why SM Store developed a new retail channel, adjacent to the e-commerce operations: “Call to deliver”. Simply put, use the existing instore resources (staff, assortment) to address the needs of the local clientele with a low-tech and simple procedure, while remaining in line with regulations and safety instructions.
Call to deliver program – the beginnings
The idea
No hard selling was allowed to anyone: the law about “non-essential retail” had to be respected. To comply with regulations while trying to find a business solution, senior store management contacted customers, either via email or social media, to “test the water”: gather some news & give comforting messages. Templates were circulated to make sure key messages from SM Stores HQ were carried, with a latitude given in the tone, allowing managers to express themselves in a natural manner.
Quickly, customers came back with questions about purchasing goods & SM identified opportunities:
- Kids (cater for their needs and entertain them)
- Working from home adults
- Keeping healthy and in good shape (from home)
E-commerce being itself crippled by the lockdown, it seemed natural to use stores resources and stocks.
How to onboard teams
Philippines is a fragmented country. Therefore, in addition to the lockdown measures and teams’ sickness*, the potential impossibility to travel due to the lack of transportation added to the difficulties.
SM assessed the local context surrounding each store and categorized teams according to their mobility:
A. can come to store, will not have problems with checkpoints
B. can reach the store, but might be difficult
C. impossible to move
This allowed the identification of resources to further contact customers.
*SM Store took care of all sick employees by providing them full support & equipment when blocked at home, in addition to the state support on pay.
The stock issue
E-commerce stock was not reachable and had a more limited choice than the stores themselves. It was therefore decided to use the store’s stocks. However, stores were still closed to the public as “non-essential” businesses.
At the beginning, customers were simply on the phone with a sales rep, who was going along aisles of closed stores to pick what the customer needed. This quickly proved inefficient and troublesome for everyone. It was then decided to gather a selection of items according to themes: “work from home essentials”, “stay at home essentials”… allowing compliance with regulations while expanding the number of skus available (this implied creating from scratch ad hoc catalogues).
How to deliver in a cost-effective way
Customers had 2 options: home delivery (thanks to the employees still able to freely move) or curb side pickup. In both cases, for the sake of simplicity, products were delivered into regular SM shopping bags from the store, and not the sophisticated e-commerce boxes. Interestingly enough, this contributed to tighten the link between stores and customers, by giving to the latter memories of what life was pre-lockdown.
Detailed organization of the Call to deliver process
CTD is organized into 5 simple steps, with clear lines of accountability:
- Ordering station – 2 positions:
- ‘CTD Shopper’: Order taken via phone/social media after engaging the customer.
- ‘Order controller’: checks the coherence of the order and accuracy of picking
- Picking station – 1 position: goes directly instore to pick the selection
- Packing station – 2 positions:
- Cashier
- Packer – checks the order slip, sends receipt to the customer and advise when orders are ready.
- Dispatching station: 2 positions
- Runner: takes the selection from packing station to dispatcher
- Dispatcher: monitors and updates delivery
- Delivery / pick up station: 2 options
- Employee rider (collects or processes payment)
- Delivery partner (for locations the employee rider could not get into)
Operation deployment and marketing
The rollout was quick and effective:
- 13-16 April: pilot in 3 stores
- 17 April: extension to 9 additional stores
- 65% of the network ready within 0,5 month
- 95% of the network ready within 1 month, mid-May (just before the reopening of stores)
No specific marketing campaign was carried during lockdown, however, since early June, SM carries monthly promotions including rebates or free delivery when ordering via CTD, on thematic “essentials” catalogues (Mother’s day, Father’s day, Independence Day).
Quantitative results: future of Call to Deliver
Call to deliver generated 212 K transactions during the course of 10 weeks, with an average of 23 K transactions per week, including a peak of 36K orders just before the end of the lockdown.
During the week of reopening, this channel generated 18K orders, and went back to 25K after 4 weeks.
On average, Call to deliver generated 4,9K daily orders during lockdown, and 3,2K daily orders after.
Measured digitally, CTD marketing generated in June a growth of +76% impressions, +31% reach and 75K clicks, at a CPC of 0.35 euros.
Going further, Call to Deliver is now a permanent option, along with store shopping and e-commerce: an app is available, logistics is handled by the e-commerce fulfilment partner. The articulation between e-commerce and CTD is quite down to earth:
- E-commerce is for people who have the time to browse and wait for the products, i.e. distant customers, content to have access to a selection of skus from the website
- Call to Deliver is for people wanting to order anything from the nearby department store. SM realized that this was a good option for quarantined people, especially the elderly.
CONCLUSION AND BENEFITS
SM identifies 6 key learnings from this implementation that will be rolled out to all operations:
- Simplicity of process for ease of execution
- Operations involvement for continuous improvement
- “The right person to staff the station”
- Digital advertisement is the best medium to quickly gain awareness
- The best endorsers are the most satisfied customers
- Sharing of best practices is key for common success
CTD’s execution also led SM to consider fulfilling e-commerce from its stores, and not from a central stock as it did before.
At IADS, we also consider this experience interesting for the following reasons:
- Contributing to solidify a team spirit within each store by trying to set up something new, together,
- Impressive speed of execution and deployment thanks to management and teams cooperation
- A good solution proving that getting back in touch with local clientele does not always imply complex setups
video: Click here for more information about the Call to Deliver program
Sources on general situation of Philippines:
nCOv2019.Live: Covid Worldwide statistics
Foreign Policy, 14/03/20, Coronavirus Lockdown Launches Manila Into Pandemonium
Flanders Trade, Coronavirus, the situation in Philippines
BBC News, 04/08/20, Coronavirus: Millions return to lockdown in Philippines
The Diplomat, 07/08/20, Philippines tightens lockdown measures as Covid-19 cases rise and economy plunges
The News Lens, 18/08/20, Philippines Lockdown Lifted, no Relief for Frontline Workers
Manila Bulleting, 03/09/20, Moody’s sees deeper economic contraction in PH
Credits: IADS (Selvane Mohandas du Ménil)
IADS Exclusive - The rebirth of local retail
IADS Exclusive - The rebirth of local retail
Department stores are being challenged to rediscover what it means to serve their local customers. Going local in retail has been a trend for some time but the Covid-19 pandemic has brought it into focus and perhaps accelerated the trend. What does this mean for department stores and their business model?
The trend to local
The current Covid-19 pandemic has all but put an end to international travel and tourism, and indeed put a serious dent in national travel and tourism too. The proud department store boast comparing their visitor numbers to those of the Eiffel Tower, the Colosseum, the Great Wall, the Statue of Liberty, now seems irrelevant. At least this is the case for the world’s flagship stores, some of which relied on foreign tourists for upward of 60% of their business.
Even at a local level, shoppers are tending to remain in their own areas of the city rather than travel to shop.
For those department store chains present at a local level in smaller national cities, the challenge of getting their customers back into their stores is already great, especially if many customers have been tempted to use online alternatives. For the large flagships, the challenge is acute. Indeed, our city-centre flagships have been privileging customer experience in an effort to convince visitors to browse, stay as long as possible, be inspired and “shop”, as opposed to enter, search, find, pay and leave.
With the fear of contagion, shoppers are more than ever interested in convenience, in a frictionless intuitive experience, which allows them complete control over their use of time and effort. Even in the luxury world, as the hospitality industry is keenly aware, convenience is a type of luxury. The luxury retail world needs to take this on board in terms of knowledgeable and sensitive staff, and maximum use of technology, including for payments or inventory search for example.
If we combine this with another trend, that concerned with global warming, diminishing carbon footprints, gas and particle emissions, energy use and environmental preservation generally, then localism becomes even more attractive, and addresses a younger demographic. To a certain extent, this has already taken root in parts of the food retail industry, and, for example, in department store Manor’s local produce traceability to nearby farmers; see also Whole Foods local sourcing.
Local city
Department stores have been at the centre of the life of cities since their invention in the 19th Century. A reassessment of cities is currently underway in the light of environmental, health and social considerations which concentrates, for example, on grouping inhabitants’ needs within a 15-minute radius by foot or bicycle. Work, home, shops, entertainment, education and healthcare should all be available within the same time a commuter might once have waited on a railway platform, according to Carlos Moreno of the Sorbonne.
The recent opening of the first full-line Nordstrom store in Manhattan has attracted a lot of attention. Perhaps the equally important openings of two Nordstrom Local stores in the city have been less commented. The first Nordstrom Local in Melrose, LA, was noticed but, like the Manhattan stores, the two further ones in LA were not. And yet these are efforts to cater to a local population in terms of service, assortment and of course convenience. "Whether it is our Nordstrom Local locations on the Upper East Side and in the West Village, our new flagship opening, or our Nordstrom Rack locations across the city, we want to bring the added convenience of services such as online order pick-up, fast and easy returns, alterations, styling and more as close to customers as possible," Nordstrom's president of stores Jamie Nordstrom said in a statement.
The combination, at least for the moment, of flagship global brand store with local outlet, appears to be replicated with Nike which has recently opened its third House of Innovation in Paris after New York and Shanghai, while simultaneously developing the Nike Live local concept in California (Melrose and Long Beach) as well as in Tokyo.
Local community
It has now been conclusively demonstrated that most of the traffic for online department store customers comes from the area near the bricks and mortar stores. So even if the store itself depends heavily on tourists, the online sales form a hub pattern around the store. When this channel took off during the pandemic, a number of stores concentrated on what they could do to help their local communities. John Lewis, for example, donated £1.4 m to around 3000 local charities during the lockdown.
John Lewis has also recently vastly increased its local reach in spite of plans to close stores by partnering with 500 Coop shops to serve as collection locations.
Technology plays a part in convenience and efficient service: Marks & Spencer has recently introduced a Mobile Pay Go facility in 310 stores. It is available through the app and linked to the loyalty programme, and for the moment targets convenience shoppers. The Japanese giant Lawson convenience store company is rolling out prefabricated stores to local communities in China and planning to develop them in Japan also.
Economies of scope
The advantages of a local perspective described so far are clear in terms of serving the changing needs of the market. It allows:
- Targeting and personal service (return on service investment)
- Increasing quality of offer and relationship (adaptation to market)
- Developing trust and loyalty (dependable and stable customer base)
- Supporting the local economy (earning good will/increasing intangible asset)
However, it also requires some costs. For example:
- Adjustments in marketing (local and social media)
- Adapting assortment (local merchandise team)
- Agile supply chain
- Upgrade in staff skills base
- Relative management autonomy
Traditionally, department stores have relied on economies of scale: centralised management and support departments have allowed larger companies to get better prices for volume from suppliers, to minimise supply chain costs per unit, to rationalise management processes to reduce the marginal cost of growth etc. And these might still be relevant, to some extent, for some businesses.
However, the current situation underlines the obsolescence of the traditional mass-market approach of department stores. Other industries (and in particular manufacturing which is where the original inspiration for department store management found its roots) have moved on.
Technology and new management practices today offer new or refined capabilities:
- Flexibility which allows variety of designs or offers
- Rapid response to changes in market demand
- Greater control and accuracy leading to better quality and reliability
- Reduced waste of goods as well as of training and maintenance
- Greater predictability from information and data reducing markdowns and personnel costs
- More speed from smart processes and AI
All of these points challenge the assumptions of economies of scale which the volume-based department stores have been wedded to since their inception. (Even the higher end “luxury” department stores have been following that same logic, but compensating for their higher costs through a higher gross margin justified by enhanced service, innovation in merchandise or “customer experience”.) Arguably, technology, processes and management today allow a shift towards economies of scope, and a vastly different model of the department store.
Could it be that the team of outsiders currently running the John Lewis Partnership in the UK is moving in the right direction? They are closing stores (even recently opened ones), considering new businesses (retail and non-retail), planning to move to 60% online sales, developing partnerships (and reducing central staff) to increase flexibility, and revisiting their technology offer through further partnerships. Only time will tell; and it will depend at least as much on the execution as on the strategy. But the challenge of local is real.
Credits: IADS (Dr Christopher Knee)
