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CHAPTER 1

An Epic Revolution

“Like art, revolutions come from combining what exists into what has never existed before.”

—GLORIA STEINEM

Physical retail isn’t dead. Boring retail is. You have likely read the stories about how online retail is taking over the world. And it’s true that the ability to have virtually any product delivered digitally has largely eliminated the need for stores that were once piled high with merchandise, their shelves lined with cardboard sleeves, cellophane, and plastic: books, CDs, DVDs, game cartridges. . . . Let’s take a brief moment to mourn Borders, Blockbuster, and all the others that faced the brutal reckoning of digital disruption during the past decade or so.

You might have heard that cheap money fueled two decades of overzealous expansion of commercial retail real estate. This rampant over-building is now experiencing a major, long-overdue correction. And anyone can plainly see that the once-great regional shopping mall is evolving, in many cases dramatically.

Yet it turns out, despite the clickbait headlines of a “retail apocalypse,” many overwhelmingly dominant brick-and-mortar retail brands are not only opening stores, they are posting strong overall growth and profits. So-called digitally native vertical brands (DNVBs) that once raised gobs of venture capital by eschewing those pesky and expensive annoyances called stores are now seeing most of their growth derived from the opening of physical locations. Apple and Amazon, two of the three most valuable retail brands in the world, clearly see their future success tied in some part to physical retail.

Yet a profound seismic shift is taking place. This shift is far more revolutionary than the evolution that has characterized retail for the past several decades.

The power in retail has shifted to the consumer. What was once scarce no longer is. We no longer go online, we live online. In most categories, digital channels (and, more and more, that means mobile) are central to the consumer’s shopping journey. Shopping channels are blurring. An abundance of choice, a veritable tsunami of information, an ever-more-cluttered world, and an increasingly distracted customer make it nearly impossible for a brand to be a clear and compelling signal, standing out and commanding attention amid all the noise.

The differences between the retail haves and have-nots are becoming far more pronounced. This great bifurcation started long before the ascendancy of e-commerce. For several years now, success has been found mostly at either end of a spectrum. At one end, brands that focus on low prices, dominant assortments, convenient access, and quick and easy purchasing continue to gain share. At the other end of the continuum, upscale, experiential, and more narrowly customer-focused retailers, along with a host of well-honed specialty concepts, are also enjoying improving fortunes.

Stuck in no-man’s-land, swimming in a sea of sameness, are those retailers that offer decent prices, but not the best; an okay shopping experience, but nothing really special; some sales help, but not anything particularly useful. The fact is, even before e-commerce began its rise to prominence, the Sears and JCPenneys of the world were struggling mightily. Their misfortunes were exacerbated by the long-term decline affecting most regional malls.

While it’s easy to blame Amazon for their woes, the reality is that most of their revenue has gone elsewhere: to off-price retailers, discount mass merchants, or dollar stores that offered stronger value and more convenient locations, or to more upscale alternatives that offered a more relevant and differentiated experience.

Sadly, quite a few retailers picked an especially bad time to be boring.

Today’s retail landscape looks a whole lot different than it did three decades ago. In many cases it looks quite different than it did three years ago. In fact, much of the retail industry of the very near future will be almost entirely unrecognizable.

A Brief History of Retail

Civilization may have started out with an emphasis on hunting and gathering, but it wasn’t long before bartering entered the picture. The marketplaces (Roman or otherwise) that were created long ago were no Amazon or Tmall, but they did the job. Just a couple of centuries ago, retail slowly started to become more organized and modern familiar forms of commerce were introduced.

The shift from bartering to the various forms of shopkeeper (the butcher, baker, and candlestick maker) took quite some time. In the nineteenth century, aspects of retail started to become more professionalized, as both specialty stores and department stores made their debut in many major cities in the US, Europe, Japan, and a few other regions.

The end of the century saw the advent of the mail-order catalog, which held the promise of bringing big-city shopping to small towns and rural areas. Sears, JCPenney, and Montgomery Ward were the early pioneers, becoming large, iconic brands in subsequent decades.

Various formats evolved and expanded during the first half of the twentieth century, but as the post–World War II economic boom took hold, more and more consumers headed to the suburbs to pursue the American Dream. Regional malls started to be built all over the country, and the once-dominant mail-order retailers (and a handful of more upscale department stores) became their anchor tenants. Within two decades, malls had become the predominant retail format for many shoppers, and Sears was the king of the hill, becoming one of the ten most valuable companies in America in the 1970s.

The seeds of big change, however, had begun germinating a few years earlier. During the 1960s, Walmart, Kmart, Zayre, Woolco, and others started opening their twist on general merchandise stores. Located off the mall, with lower prices and less service, these rapidly expanding brands offered a more convenient and more value-oriented alternative that many shoppers found appealing.

Eventually came the emergence of so-called category killers. Similarly offering off-the-mall convenience coupled with a strong value orientation, Toys “R” Us, The Home Depot, PetSmart, Staples, Circuit City, and dozens of others started to open thousands of stores with huge assortments focused on more particular shopping occasions.

By the 1990s, retail offerings became more diverse and targeted. There were variations at one end of the value spectrum (off-price, outlet stores, dollar stores, warehouse clubs) as well as the other (Neiman Marcus, Bloomingdale’s, all manner of high-end designer boutiques). Niche players in organic grocery, cosmetics, fashion, and home furnishings became more plentiful and joined the common tenant mix in power centers and lifestyle malls across the country. Home shopping (Home Shopping Network and QVC) became a phenomenon.

Most of these started to take a big bite out of the once-dominant regional mall-based department stores. In particular, the growth of fast-fashion and off-price retail stole significant share from moderate department stores during the decade, as did the emergence of off-the-mall home stores like Bed Bath & Beyond and Linens ’n Things and beauty-focused concepts like Ulta and Sephora, among others.

As we approached the new century, forces were gathering that would lead to profound and unprecedented disruption. Jeff Bezos, Steve Jobs, and a cadre of venture capitalists started to see how technology could completely change the face of retail. While the initial wave led to some really dumb and unsustainable business models (anybody remember Pets.com?), large companies such as Nordstrom and Williams-Sonoma saw the potential and began investing in e-commerce and digital technology. Amazon began diversifying away from its original books-and-music offerings. Intrepid investors began getting excited about a second wave of online shopping businesses.

Assume the Brace Position

Retail has always been dynamic, but what’s transpired during the past decade is particularly astounding. What will happen during the next five years will shake many brands to their core.

Take a look at the top ten retailers by decade in the chart below and it’s easy to see why Walmart CEO Doug McMillon is said to keep a copy of this with him on his phone to help remind him of how quickly retailer fortunes can change.

Figure 1.1 Top Ten Retailers by Decade

Image: Becky Quick/CNBC¹

The rising wave of e-commerce now represents 10 to 20 percent of all shopping in most major countries and is generally growing four to five times as fast as physical sales. Amazon has become the most valuable retailer in the world and continues to grow at impressive and scary rates. Digital channels influence well over half of all physical store transactions in nearly every category. Once-iconic retailers—some more than a century old—are dead, dying, or in serious trouble. Dozens of so-called DNVBs are gobbling up market share and putting pressure on industry-wide margins. More and more products can be delivered to your door in less than two hours. In a growing number of new stores (most notably Amazon Go) you don’t even need to check out. And retail is just beginning to scratch the surface of artificial intelligence, virtual reality, robotics, the Internet of Things, and many other emergent technologies.

To say this is a frightening and confusing time for all but the most successful companies is probably an understatement. In fact, one survey of retail CEOs found that fully one-third of them feared that their company could be out of business within the next three years.²

You say you want a revolution? Congratulations, we’ve got one. Big time.

Unrecognizable

You might have been working in retail for a decade or more but, paraphrasing Forrester Research’s Brendan Witcher, only the last few years count.³ Why? Because the revolution is here, and the years before that represent the end of the last era, not the beginning of this one. Because so much of what was useful and important in the past not only doesn’t serve us very well right now but in many cases may even lead us down the completely wrong path.

“We cannot solve our problems with the same level of thinking that created them.”

—Albert Einstein

A mere 25 years ago, Amazon was a tiny start-up selling only books over the internet from a warehouse in Seattle. Today they are a retail behemoth, growing rapidly and establishing large positions in most developed and developing countries and virtually every product category of any size. Similarly, Alibaba, the disruptive Chinese shopping platform, and Mercado Libre, South America’s leading online marketplace, are just over twenty years old. Flipkart, the top online brand based in India, went live just in 2007.

Remember, too, that the iPhone was first launched in 2007, and that smartphones have only become ubiquitous in the last few years. Cashier-less check out, voice commerce, “buy online, pick up in store” (BOPIS), “buy online, return in store” (BORIS), and many other technologies and practices that are likely to be commonplace within a few years still have low penetration in many major markets throughout the world.

For most brands it is next to impossible to know what will be important and disruptive in five years’ time. Indeed, shift happens. It’s just happening faster and faster all the time.

The Bullet’s Already Been Fired

The bullets that killed RadioShack, Sports Authority, KB Toys, Sharper Image, and many others were fired long before their respective downward spirals of cost cutting and store closings began. They weren’t legislated out of existence. Consumer behavior didn’t change overnight. The superior brands that stole their market share and won over their formerly loyal customers mostly did it over a number of years.

And while it may make for a catchy headline, Amazon didn’t kill any of them all by itself.

The notion that disruption comes out of nowhere, catching once-powerful companies unaware, is rarely true. What’s far more common is that new brands catch fire slowly, consumer behavior shifts over many years, and most technologies take a while to grab a meaningful foothold.

If you work for a brand that is in trouble today, the forces most likely have been building for quite some time, and the underlying issue is this: leadership didn’t notice. Or maybe they were aware, but they didn’t accept that profound change was needed. Or maybe they knew what was coming, but they failed to act with urgency and decisiveness. Regardless, right now there is a pretty good chance a bullet is headed your way.

I have long been fascinated by management’s capacity to get stuck, the many ways executives craft a narrative in a vain attempt to avoid change, the stories they buy into as they hope to keep above the fray. Far too often, the power of denial seems endemic to individuals and organizations alike. Believe me, I’ve been part of such teams myself.

Go back to the ’80s and ’90s and recall how a slew of successful retailers mostly did nothing while The Home Depot, Best Buy, and a host of innovative discount mass merchandisers and category killers moved across the country, opening new stores and evolving their concepts to completely redefine industry segments. Somehow it took many years for the old regimes to realize what was going on and how much market share was being shed. For many, any acceptance and action came far too late (RIP Caldor, Montgomery Ward, among many others).

Witness how the digital delivery of books, music, and other forms of entertainment came into prominence while Blockbuster, Borders, and Barnes & Noble spent years doing nothing of any consequence. Two of them are now gone and one is holding on for dear life.

Similarly, Starbucks’s revolution of the coffee business hardly occurred overnight. But if you were a brand manager at Folgers or Maxwell House, you were apparently caught unaware.

Consider how consumer behavior has been shifting strongly toward online shopping and the utilization of shopping data through digital channels for well over a decade. Yet many companies are seemingly just now waking up to this profound change.

Lastly, examine how the elite players of the luxury industry have largely resisted embracing e-commerce—and most things digital—believing that somehow they were immune to the inexorable forces of consumer desires and preferences. Yet while they sat around and mostly watched, Neiman Marcus, my former employer, grew their online sales to more than 30 percent of their total business.

More often than we care to admit, the bullet’s been fired, it just hasn’t hit us yet.

The good news is that while the pace of change is increasing in retail, we have a lot more time to react than we do in a gunfight.

The bad news is that the impact can be just as deadly if we are not prepared and we do not act.

The harsh reality is that the time we have to respond is dwindling virtually every day.

When the Shift Hits the Fan

Think for a moment about all the radical shifts we are experiencing.

The shift from largely siloed experiences to those that are cross-channel and demand well-harmonized integration.

The shift from going online to living online.

The shift from traditional media consumption to a mostly digital-first model.

The shift from the best location being a well situated and designed brick-and-mortar store to it being wherever our customer happens to be with their smartphone.

The shift from being weapons of mass consumption and disposable fashion to more conscious consumerism.

The shift from highly intentional shopping to more spontaneous and impulsive buying.

The shift from isolated customer journeys to those that are deeply connected.

The shift from brands being in control to empowered consumers who are increasingly dictating their requirements.

The shift from merchandising strategies of piling it high and watching it fly to the endless aisle and more intelligent curation.

The shift from one-size-fits-all, batch, blast, and hope marketing to highly personalized interactions and precisely targeted offerings.

The shift from marketers’ push to consumers’ pull.

The shift from wanting ever more stuff to desiring memorable experiences.

The shift from getting by with merely good enough to the need to become truly remarkable.

And on and on.

Confronted with these profound shifts, the tendency of many organizations is to go on the defensive. Overwhelmed by the shifting tides—and afraid to take risks in a fast-moving and highly uncertain environment—they circle the wagons to fight the changes, defend the status quo, or develop plans to merely soften the blow.

But survival is not enough.