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CHAPTER 4

The Collapse of the Middle

“Bring out your dead! Bring out your dead!”

—MONTY PYTHON AND THE HOLY GRAIL

The extent of disruption varies widely depending on the retail sectors in which you compete. Some pockets of retail are already dead (or dying). For example, you probably haven’t gone to a video rental store in quite some time. You likely have a lot fewer bookstores near you than ten years ago. Bankruptcies, store closings and relocations, new winners and losers are par for the course in retail.

The question isn’t whether physical retail is dead, whether malls are going away, or whether e-commerce is eating the world. Instead, ask yourself: how do these changes affect you, your organization, and your brand—and, most importantly, what are you going to do about it?

Instead of an apocalypse, some major consulting firms, various pundits, and many industry associations have said we are seeing a retail renaissance of sorts. Dozens of disruptive new concepts have been created, exciting technology is being applied across a spectrum of categories, and even some old dogs are learning new tricks. That’s clearly true.

As we take a closer look, however, we start to see what I first explored in a 2011 blog post as the “death of the middle.”⁸ Then, a couple of years later, I began referring to this phenomenon as “retail’s great bifurcation”⁹—a title later borrowed for an excellent Deloitte study, which I will discuss below.

Figure 4.1 Net Store Openings, 2015–2017 (Deloitte)

Source: Deloitte¹⁰

What we see, on the one hand, is that many retailers that are strongly focused on the value end of the spectrum—i.e., great prices, extensive merchandise assortments, and a highly convenient and efficient buying experience—are growing both sales and number of stores. At the other end of the spectrum, many brands that focus on offering unique products, more personalized service, and a more upscale and distinctive shopping experience are also gaining share and continuing to open more locations.

As the chart above illustrates, the problems in physical retail (and in troubled brands more broadly) are highly concentrated among those retailers trapped in what I call the boring, undifferentiated middle, or what Deloitte labels, somewhat charitably, “Balanced.” More recent research suggests just twenty retailers account for about 75 percent of 2019 closures.¹¹

The notion that physical retail is dead for the brands that consistently meet real customer needs through a compelling value offering—and execute well against it—is simply not the case. Ditto for many brands at the other end of the spectrum that deliver a more upscale and experiential experience for the right target consumers.

The differences between retail’s haves and have-nots are, however, clearly diverging. The market continues to bifurcate, and the collapse of the boring, mediocre, undifferentiated middle only seems to be accelerating.

Demographics Are (Often) Destiny

To get a better understanding of what’s driving change, it’s typically useful to unpack customer trends. Unfortunately, retail marketers often tend to rely too heavily on demographics to inform their strategies. Sweeping statements like “Millennials don’t like to own things” may have a ring of truth, but common sense tells you that Millennials are hardly all alike. Applying these general principles to marketing strategies can often cause a retailer to widely miss the mark.

Yet when we look at the ongoing collapse of the middle, certain demographic factors are important drivers, at least in the United States. In their 2018 study “The Great Retail Bifurcation,” Deloitte examined several root causes affecting the overall health of retail and other consumer sector outcomes. Big-picture indicators like GDP growth and stock market performance, along with broad consumer behaviors, point to a generally healthy outlook. Many retail categories are performing quite strongly, both off- and online.

The study features a deeper dive into shopping behavior based on examining consumers’ economic well-being. This look takes into account factors like total annual income, net worth, and discretionary cash. This more detailed and nuanced view paints a rather different picture—and one that helps explain the ongoing collapse of the middle. What Deloitte found was that high-income households have captured a disproportionate share of income growth in recent years. Indeed, the rich are getting richer, as the top 20 percent captured over 100 percent of income growth between 2007 and 2015.

How did they have over 100 percent income growth? You guessed it: everyone else had negative growth—that is, they lost ground. More recent data generally confirms that this trend continues.

For most Americans, however, the outcomes are quite different. They are downright depressing. For 80 percent of households, income growth has either declined or remained stagnant, while costs of non-discretionary expenses like healthcare, education, and other household essentials continue to increase, often markedly. For those with the lowest incomes in the study, non-discretionary expenses now exceed disposable income. Making matters worse, most lower-income households do not own stocks and often do not own their homes. As a result they have not benefited from the robust growth of the economy and the spike in asset values over recent years. For the majority, Deloitte called it “an abysmal decade.”

The implications for retail are significant. As both discretionary income and overall wealth have risen sharply for the affluent class, many are spending their gains on both products and services, often trading up to ever more expensive items. At the other end, for the other 80 percent who are getting squeezed harshly, total spending power has declined. As a result, their sensitivity to prices and stretching their dollars even further has greatly increased.

It’s easy to see how these diverging trends have directly affected the winners and losers in retail. Constrained spending power and price sensitivity among the lower 80 percent is driving spending strongly toward stores that offer more value. Many consumers that once preferred more expensive options are now, for all intents and purposes, forced to trade down to less expensive ones. This is a major contributor to the outsized growth being experienced by off-price retailers, warehouse clubs, discount mass merchants, or value-oriented grocers like Aldi and Lidl.

Conversely, affluent consumers are driving growth and profits in the premium echelon of stores, some of which is clearly being taken from more moderately priced retailers. The growth of specialty beauty players like Ulta and Sephora is a prime example, as is the continued strength in the luxury sector. This trading-up phenomenon contributes to the troubles among the boring, undifferentiated middle.

The chart below illustrates how both revenue growth has been strong among retailers at either end of the spectrum, yet has failed to keep pace with inflation among those in the middle.

Figure 4.2 Revenue Growth of Different Types of Retailers, 2015–2017 (Deloitte)

Source: Deloitte¹²

The Fault in Our Stores

Long-term trends, demographic, technological, and otherwise, have clearly exacerbated the issues for those retailers that find themselves stuck in the middle. But we shouldn’t lose sight of the fact that many troubled retailers are suffering from wounds that were largely self-inflicted over a period of many, many years.

Far too much of retail is still filled with tired old ideas and an abject failure to pursue innovation. Many of the retailers filing for bankruptcy or closing large numbers of stores have barely changed in over a decade. The same old mistakes, particularly an over-reliance on deep discounting, are repeated over and over again. Tour most regional malls or drive through a typical suburban shopping area, and you’ll find all the usual suspects and a veritable epidemic of boring, a maelstrom of mediocre.

During my career—and particularly during the past few years as a keynote speaker and consultant—I have traveled around the world and been exposed to a wide variety of different markets and retail concepts. One finding that is consistent, whether I am in New York, Los Angeles, Beijing, Sydney, Tokyo, Mumbai, or Dubai, is that an awful lot of retail looks and feels pretty similar. Virtually identical storefronts and websites. Look-alike promotional signs. One-size-fits-all marketing campaigns. Merchandise presented in an uninspiring way on a sea of racks and tables. Lackluster customer service, if there is any service to speak of at all. And as for product offerings, they’re often all the familiar name brands with wide distribution, plus quite a few obvious knockoffs.

Department stores in particular have been swimming in a sea of sameness for decades. Now they are drowning.

The retailers that are struggling typically have both strategic and executional issues. From a business design standpoint they often sit in the middle of the price spectrum, offering neither great product value and convenience nor anything unique from a product, experience, or service standpoint. They sell fairly average “safe” products to the great masses of the population. A little bit of everything for everybody, nothing that special—or remarkable—for anybody.

Even worse, they are often deeply invested in real estate that may have been the right decision ten or twenty years ago, but today their portfolio is typically littered with many poorly performing locations. These stores are usually too big for the digital age and their design and layouts are anything but contemporary and attractive. The tired, outdated visual design of the average Macy’s or Dillard’s stands in stark contrast to the looks of fashion brands like H&M, Zara, or Supreme or newer beauty brands like Bluemercury or Glossier. The amount of money that needs to be invested to update and reposition a weak brand’s physical assets is more than a little bit daunting.

Making matters worse, basic execution—housekeeping, staffing, keeping inventory in stock, and so on—is also lacking at many challenged retailers. Devoid of anything remarkable, their sales productivity and profitability are poor. Rather than trying to innovate, the most common reaction to dealing with lagging store performance is to engage in a series of cost-cutting moves—which tend to make an already untenable situation go from bad to awful.

Retail’s Museums of Disappointment

I recently visited a once-vibrant regional mall in an affluent suburb of a major Texas city. While the center features an up-to-date Nordstrom and a handful of compelling specialty stores, it also boasts an uninspiring Dillard’s, one of the most poorly merchandised and maintained JCPenney stores I’ve ever seen, and a now-empty Sears store. Among the specialty stores are dozens of tired old concepts and an old-time food court featuring the usual suspects. The overall experience was incredibly depressing. The good news is it’s really easy to get a parking space, and if you want a free sample of teriyaki chicken you will not leave disappointed.

Sadly, this scene is repeated over and over, in city after city, country after country. Shopping centers, anchor tenants, and specialty stores that once served as shining examples of all that was good in retail now sit, largely empty or rundown, relics of a glorious past. Many small-town Main Streets look very much the same.

Demographic forces are beyond the control of any given retailer, big or small. No mega-corporation or mom-and-pop is responsible for stagnant wage growth or the policies that distort income and wealth inequality. Nor can most retail organizations possibly anticipate or respond to every technological change. Not every retailer is in a position to make wholesale changes or totally reinvent their business. But plenty of brands, big and small, have evolved considerably—and plenty still can. What’s required is an unwavering commitment to change, a willingness to take risks, and a robust plan to guide the journey.

The Increasingly Useless Middleman

Traditional retail, at its core, relies largely on being a middleman. The typical multi-brand retailer sits between the manufacturing community and its target consumers, performing valuable intermediary tasks like selecting the right products for the markets it serves, carrying local inventory, owning and creating attractive environments to sell the product, and so on. Alas, it’s precisely this other part of the middle that is now being squeezed.

The majority of great retailers in history achieved their success by building great stores, assembling a compelling mix of merchandise, presenting it in interesting ways, and providing service that meets or exceeds the customer’s expectations. A Saks Fifth Avenue or a Harrods, even if they carry a healthy percentage of their own private brands, still sells a wide assortment of other vendors’ stuff. But this aspect of their strategic advantage is increasingly being eroded.

Even before the significant growth of e-commerce, many manufacturers came to realize the value of selling directly to the consumer. Many did this because they wanted to control the distribution of excess merchandise and reach a more cash-strapped customer. Thus the era of the factory outlet store, and the malls that host them, was born. The first waves of these stores were not particularly glamorous, and most major outlet centers were located far from urban centers. Over time, outlet malls located themselves closer to (or within) major metropolitan areas and upscaled their designs, amenities, and tenant rosters. For some manufacturers, their own factory and outlet stores became major contributors to their overall corporate bottom lines.

Opportunities for their full-price business were pursued as well. Iconic luxury brand owners have long had flagship stores on the great boulevards of Paris, Shanghai, and New York. But in a bid to grow and showcase their brands even more powerfully, these (mostly higher-end) brands have accelerated the opening of their own stores around the world. Today, brands like Louis Vuitton and Gucci each have more than 500 stores globally, with more on the way. These same companies, along with quite a few others that once shunned e-commerce, are now (at long last) investing heavily in all things digital. Less elite brands, from Michael Kors to The North Face, have all dramatically expanded their “owned” stores and online shopping presence while still maintaining their traditional wholesale businesses.

Manufacturers and owners of well-known brands have seized the reins of control in other ways as well. The power of the internet, married with shifting consumer preferences, now allows these vendors to have a direct one-on-one relationship with the end consumer. This shift is dramatic on many levels. First, manufacturer brands can now glean greater and greater consumer insights without having to rely solely on expensive primary research studies or the hope that their retail distribution partners will share their data. Second, this allows these companies to become direct marketers in ways they never could before. They can now build sizable customer databases through in-store clienteling and online direct-to-customer sales. For the most part, until fairly recently, a manufacturer’s ultimate consumer was largely anonymous and its wholesale retail partners owned the relationship. Now these brands can reach consumers directly—and generally cost-effectively—bypassing the once all-powerful intermediaries.

The underlying business model and economic shifts are seismic as well. Brick-and-mortar retail is, for the most part, a fixed-cost business. Retailers are saddled with lease, inventory, and a number of other operating-related costs that change very little or not at all once a store is open, irrespective of actual volume. As many traditional retailers struggle in the face of competition from online-only players, more powerful national and local competition, as well as their own suppliers, a small loss in volume can have strongly negative impacts on store economics. This is a key factor in the decision to close so many stores. As manufacturer brands lose volume with their traditional wholesale partners, they are pushed to make up for it through other channels. This, along with the potentially superior economics of going direct to consumer (either via e-commerce or through their own stores), is pushing more and more brands to open and invest behind their own direct sales channels.

Nike is a great example of a company that has doubled down on going direct to consumer. Starting (in public at least) in 2017 and dubbed the “consumer direct offense,” Nike is greatly bolstering digital spending, upping its product innovation, localization, and personalization efforts, pulling investment dollars away from “mediocre” partners in favor of “differentiated” ones, and expanding new retail concepts like the House of Innovation, all in a bid to reach $16 billion in sales by fiscal 2020. So far results have been strong, with year-over-year direct-to-consumer growth in the low teens since inception and an e-commerce business that is on fire.

Traditional wholesale will not go away completely, but it will remain highly challenged. The pressure for the middlemen to demonstrate more value is becoming ever more intense. Here, too, good enough no longer is.

Dead Brands Walking

Before much longer the middle may be hollowed out completely. Until then retail’s great bifurcation is likely to continue unabated. Too much real estate is still chasing too few dollars. Many over-leveraged, under-capitalized retailers still offer weak value propositions and may soon face a real reckoning. The macroeconomic pressures driving trading-down behavior won’t end anytime soon, while the rich continue to get richer. The disruptive forces that are pushing down prices and, particularly in cases like next-day and same-day delivery, driving up the cost of business will squeeze margins to the point of no return for many poorly positioned retailers. The power the consumer holds will not allow many just-good-enough retailers to sustain market share, much less ever achieve adequate financial returns.

It’s a good time to be a bankruptcy lawyer or liquidation firm because, unfortunately, more brands will go over the precipice. We see this slow death playing out every day. These troubled brands continue to run their one-size-fits-all ad campaigns and their “Super Saturday” sales. Their promotional signs call out longingly in hues of chartreuse and yellow. They stack merchandise high and hope to watch it fly. Their email campaigns consist mostly of batch, blast, and hope. They apparently continue to cling to the hope that a slightly better version of mediocre will turn out to be a winning strategy.

These brands act like they are still in business. They think that some customers still really care whether they stay or they go.

I see dead brands. And they don’t even know they’re dead.