Retailers Adapt to Secure Future Relevance

Store closings and reorgs are par for the course as retailers strive to reinvent themselves
April 13, 2017Allison Zisko

TargetreimaginedstoreTarget’s reimagined stores will include curved center aisles with merchandise displays.
By Allison Zisko

The flurry of retail announcements over the past six weeks—ranging from store closures to acquisition rumors to major capital investments—may have industry observers desperate for a scorecard and crystal ball, but some analysts say all of the paring down and right-sizing is par for the course.

Nonetheless, despite all the retail strategizing, it is still unclear who, if anyone, is best suited for omnichannel retailing success. True omnichannel retailing, which seamlessly integrates every possible selling platform, including physical stores, remains a distant goal for most players, according to retail experts. To recap:

After years of attempts to turn its business around, including a restructuring plan announced earlier this year that called for closing at least 150 Sears and Kmart stores, Sears Holdings’ executives told shareholders last month that there is “substantial doubt” it will be able to continue doing business. Target is investing more than $7 billion in capital over the next three years to increase sales, gain market share and keep up with consumers’ preferred ways to shop. The initiative includes digital as well as physical store changes and improvements, CEO Brian Cornell told investors in New York in late February. It also plans to introduce new exclusive brands and focus on everyday competitive pricing. Over the next three years, more than 600 locations will be “reimagined” and function differently to complement the digital sales experience. For example, storerooms will double as hyperlocal distribution centers. In June, Target will roll out new technology that allows employees to search inventory, take payment from a mobile point-of-sale system and arrange delivery from the sales floor. Earlier this year, Macy’s began to implement its 100-store closure plan, with plans to shut 68 locations this spring. New CEO Jeff Gennette, who last month succeeded Terry Lundgren, outlined a few test projects to investors at the Bank of America Merrill Lynch Consumer & Retail Technology Conference in New York last month. They include more dedicated areas of discounted merchandise; a shift toward more general couponing, such as “$10 off a $50 purchase,” to avoid discounting specific brands; more branded shop-in-shops; a bigger Bluemercury presence in stores; and self-service shoe departments. In February, J.C. Penney said it would close 130 to 140 stores over the next few months as it streamlines operations and seeks to meet the competitive challenges presented by online retailers. At the same time, J.C. Penney reported its first yearly profit since 2010, $1 million, coming off a $513 million net loss in its prior fiscal year. Meanwhile, after successfully launching major appliances in 500 of its stores last year, J.C. Penney announced plans in March to launch JCPenney Home Services—turn-key services for heating and cooling systems, bathroom remodeling, quick ship and installed blinds, whole home water solutions and awnings, and easy-to-install smart home devices—within the home departments of 100 stores this spring.

TargetreimaginedstoreTarget’s reimagined stores will include a dedicated order pickup counter
“There is a tremendous opportunity to capture additional revenue and minimize our dependence on apparel by catering our services to female homeowners who represent more than 70 percent of our loyal customer base,” said Chairman and CEO Marvin Ellison in a statement. “These are categories that J.C. Penney offered in its assortment many years ago, and we believe the timing is right to re-enter home services in order to acquire available market share and differentiate our business from our traditional competitors and pure e-commerce retailers.”

Meanwhile, Kevin Mansell, CEO of Kohl’s, which, like its retail brethren has experienced shrinking sales and store traffic, said he would rather make stores smaller (roughly 35,000 to 55,000 square feet) than close them. A $2 billion investment in new technologies enables the chain to do so, he told Fortune last month, by maintaining leaner and better planned inventories that require less space in stores, and by arming salespeople with handheld checkout devices that eliminate the need for big cash register spaces. Kohl’s will reduce the size of 200 more of its standard-sized stores this year, for a total of 500 small-format locations, Fortune reported.

The Scorecard

TargetreimaginedstoreTarget’s reimagined stores will include a grab-and-go section
Target is spending incremental money to spruce up its stores, and “For Brian [Cornell] to say, ‘Our stores are tired’ is kind of scary,” Charlie O’Shea, lead retail analyst for Moody’s Investors Service, told HFN. Target got caught in the promotion game after its credit card breach a few years ago and never got out of it, he added. Its revised strategy to compete with Walmart only in certain product categories and then upsell customers on Target chic makes sense, he added.

Macy’s rightfully assessed the marketplace in its store closures, O’Shea said, but it must continue to weigh the benefits of leaving stores open to maintain its identity and support its online business.

Steve Goldberg, president of The Grayson Company, a retail consulting firm, applauded J.C. Penney’s shift back to its customer base and return to categories where it once had strength and leadership, such as home furnishings. Ellison told CNBC, “I spent 12 years of my life running a business that looks a lot like the services space that we’re going into. And if you go back on the timeline, J.C. Penney actually served a lot of these products and services at one time in our history.”

“Every single company has to try new things. If you are just going to sit there and be an apparel company the entire time you’re not going to capture the new demographic, the new customers,” retail analyst Dana Telsey, CEO of Telsey Advisory Group, said in an interview on CNBC last month regarding J.C. Penney’s new initiative. “I see them [J.C. Penney] taking actions to enhance the operations, whether it’s closing stores, whether it’s investing in systems, whether it’s taking a look at the national brands and the private brands,” she said. “Staying the same doesn’t help you move forward. Making change does.”

Shuttering Stores

Store closings are not new, according to analysts. “Over the course of time we see retailers come and go,” said Goldberg. Every retailer tends to have underperforming stores and it makes sense for them to go. “What we are reading in the headlines are adjustments, ” he added.

O’Shea said he understands the strategy of closing underperforming stores, but does not think across-the-board closures are the solution. Whenever a retailer closes a location, online sales in that zip code go down because retail identity is lost (a fact Kohl’s Mansell reiterated), and customers like to return online purchases to the physical store, he said.

Retailers are not failing as much as they are adapting, O’Shea said, and that does not happen overnight. Currently, “there is no such thing as omnichannel retailing—it implies an integrated model,” O’Shea told HFN. “Nobody is there yet.”

“Inventory levels will reduce as retailers become more adept at utilizing one supply chain to handle both online and brick-and-mortar sales; right now, no one is there,” O’Shea said. As efficiencies are generated, you will see SG&A [selling, general and administrative] expenses start to go down, he added.

Furthermore, there has to be a redeployment of services away from the sales floor to make best use of the physical store, O’Shea said. Online orders can be shipped from the store instead of a warehouse; in crowded retail markets where several stores exist, O’Shea recommends reducing the sales space in a few of them and using it as a storeroom or shipping hub.

Goldberg disagreed with that strategy. Most stores lack the infrastructure to make such a switch and it is not feasible to convert one floor of a department store into a distribution center, he said. Instead, retailers should be looking for ways to lure customers to the store and get them to stay. “When you have an appealing, multicategory experience—a restaurant, a cafe, a bakery–[customers] stay in the store longer.” Tommy Bahama, Ralph Lauren and Urban Outfitters have lately been successful in this area. “There’s no reason why any format can’t do that,” Goldberg said. “It’s an opportunity to reinvent. Stores always need to reinvent themselves.” Mall operators need to do the same, Goldberg added.

Allison ZiskoAllison Zisko | Managing Editor/Tabletop Editor
azisko@hfnmag.com

After 15 years of covering the tabletop industry, Allison Zisko is still as enthusiastic as ever about the dinnerware, glassware and flatware categories. An in-depth analysis of how the category works intrigues her just as much as the latest fashion trends. As managing editor, Allison oversees the daily e-newsletter and works behind the scenes to help produce the print issue each month. She also directs HFN’s housewares coverage and covers the cutlery category. An avid reader, Allison is eager to talk to anyone and everyone about the latest book they are reading.

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