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Posted 5 years ago

Our Thoughts on the Future of Retail


Recently I have been thinking a lot about innovations in the retail landscape and how they will impact Luxury Recruit’s candidates and clients – I want to share my thoughts on the way I feel the retail industry is heading and some personal musings on the relevance of these innovations to retail industry professionals.

Innovation in retail is big news, and whether overhyped or not, rarely a day goes by when I don’t hear or read about a new brand disrupting traditional retailing models in some way or other, whether through a vertically integrated production model or a new approach to online selling: buzzwords are aplenty, ‘AR/VR’, ‘Digitally Native Brand’, ‘Community Driven Commerce’ – we’ve heard them all. Recently I have also taken note of the number of requests we receive at Luxury Recruit from established retailers to identify talent for a new breed of retail management roles, which has so far included role descriptions such as ‘chief catalyst’, ‘head of innovation’ and even ‘head of disruption’. It feels like innovation, or at least change, is on everyone’s mind. Are we entering a phase significant change, with everything going ‘online only’ and ‘digital everything’?
It wasn’t so long ago that the death of ‘bricks and mortar’ retail was foretold by such luminaries as Marc Andreesen, the creator of Netscape and a partner at Andreessen Horowitz, the noted Silicon Valley investment firm. Andreessen, one of the world’s most admired and followed technology investors, has on multiple occasions in the past announced that retail stores will die off, and e-commerce will be the only way we shop in the future.

Certainly, if you compare the health of the British high street and the number of British companies that have been put into administration in recent years against the staggering growth that pure-play online retailers such as Amazon have enjoyed, it would seem like Andreessen hit the nail on the head. Amazon is dominating the entire retail industry and this year accounted for $0.51 of every $1 of growth in online retail in the United States. I know where I would (and should) have put my money. Whilst LVMH’s decision not to form a strategic partnership with Amazon made a few blink, Amazon’s highly energised moves into apparel retailing has got the mass retail sector scared witless – Amazon is now the top seller of clothes online in the States, and it is crushing traditional clothing retailers like Macy’s, Nordstrom, and Kohl’s, with the retailer’s apparel sales last year totalling $16.3 billion, which is more than the online sales of Macy’s, Nordstrom, Kohl’s, Gap, and Victoria’s Secret parent L Brands combined. Amazon is the second largest retailer of apparel in the United States now (Walmart is number one) and the new breed of white label goods it is bring to market, such as the recent ‘Buttoned-Down’ offering of men’s shirts, shows a move towards a vertically integrated home-brand push, which rather than being presented as a ‘budget’ choice, is actually being marketed as a direct competitor to the established premium brands such as Brooks Brothers which dominate the US apparel landscape.

Meanwhile in the luxury sector, pure-play online is still grabbing headlines. Early this year the newly formed Yoox Net-a-Porter Group announced its five-year plan to growth of 17 percent to 20 percent every year for the next five, while boosting its operating profit margin by 11 percent to 13 percent in 2020, compared with an 8 percent lift in 2015. Compare this to the wider luxury market, which is in a tough spot right now thanks to decreased tourism, a downturn in China, declines in department store traffic and shifting consumer behaviour, with a total market growth expectation of only 2 percent year on year until 2020 according to a recent 2016, luxury report from Bain & Company.

So, the question is, are those of us who are in the business of ‘store’ driven retail in big trouble? Am I going to start advising all my retail management and sales candidates to go back to college to learn computer science, programming and User Experience design? I think not.

Firstly, the top line numbers for traditional retail aren’t quite as bleak as the headlines might suggest. Whilst Brexit, immigration turmoil and slow-downs in tourism in Europe and uncertainty in American politics have, according to Bain, had a knock on effect which has dampened growth in the luxury retail sector in these territories to just 1%, the bigger international picture still remains promising: all eyes are again on Mainland China, which is the key to unlocking recovery around the world and which has seen significant growth uptick over the last 3 months. South East Asia and the Middle East is also showing signs of maturing into a significant market across all industry sectors (where as it was previously weighted towards the very high-end, due to international purchasing contributions of a minority elite). I was recently in Beijing and Hong Kong and I am glad to say that I saw people spending and spending big, across all categories in retail, luxury and jewellery.

Secondly, and perhaps more importantly to retail professionals, the same Bain study identified that the primary drivers of growth will come from the so called Generation Y, often termed ‘Millennials’, who, it is argued, expect a shopping and purchasing experience that provides multiple touch points with the brand and a holistic level of service and experience across all channels, whether physical or digital. Bain proposes that to thrive retailers should orientate their service provision and operations towards the expectations of the Millennial generation and in doing so they will achieve margin optimisations and efficiencies that they wouldn’t be able to reach as a either a pureplay online or bricks retailer. More over, the Bain study argues that the missing piece of the puzzle that pureplay online retailers cannot provide (and which traditional retailers have always provided themselves on) is in store experience. The winners will be the brands that can straddle online and offline seamlessly. A number of brands I have come across recently can be said to bridge ‘Bricks’ and ‘Online’ providing the best of both and are therefore, it is argued by Bain at least (and in my opinion), well positioned for growth. I want to talk about a few of these ‘hybrid model’ brands to pick out some features of how they operate and what the wider retail industry can take from them.

The founder of Bonobos, a hugely successful menswear retailer in the States which started out as pureplay online brand, Andy Dunn once famously said that his retail effort, which commenced 2007, was predicated on the idea that men don’t enjoy shopping and that all menswear would eventually be sold online. He, like Mr. Andreesen, predicted the end of bricks retail. Since then though the company has opened close to 40 “guideshops” across the States where shoppers can try on clothes to help them decide what to buy. Bonobos has also expanded its partnerships with other retailers, and recently said it has plans to open 100 stores of its own by 2020. Mr. Dunn is part of the new generation of retail leaders who are building their companies ‘digitally native’, meaning that rather than seeing E-Commerce as a channel for sales, the business is built from the ground up to function online. Mr. Dunn has published his shifting views on the future of retail on many occasions and most recently he has advocated a blended approach to retail employing stockless showrooms carrying only example pieces for customer engagement, with all sales then coming through the website with off-site fulfilment.

Mr. Dunn has said his ‘guideshop’ idea stemmed from customers’ requests to try on items before a purchase, saying that customers were often ordering multiple sizes and that this didn’t fit with the ethos of good service he wanted. “Clicking on six sizes and having them shipped to me is not a great experience,” he has said.

Mr. Dunn has also gone on to point out that the apparent cost savings in moving away from ‘brick’ retail and the associated infrastructure cost is not always as much of a ‘no brainer’ as it would seem as “the cost of marketing a Web site and the cost of free shipping both ways was approximating a store expense,” he has said. This showroom based, or hybrid, approach to retail has of course been used by other sectors of industry for years – premium car dealerships have relied on the strategy since time immortal and so has the home appliance sector. Nevertheless the hybrid ‘digital native’ approach to retail is making waves in the industry and a number of brands are employing a similar approach.

Sneakerboy, an Australia based retailer of high-end sneakers does not keep any purchasable stock on site, instead relying on a range of samples for fitting and display processes. All sales are processed online through the company’s web platform, and the product is then shipped from a delivery centre in Hong Kong (which crucially also facilitates quick delivery to China!). This ‘stockless’ model also means that Sneakerboy’s sales productivity per square foot, a significant metric for ‘bricks’ retailers, is much higher than traditional stores, as Sneakerboy doesn’t need to carry inventory as stock off the shop floor.

Other ‘digitally native’ brands which have employed a similar ‘showrooming’ strategy include Blank Label (a custom shirt company), Ministry of Supply (active-wear as business apparel) and Indochino (custom menswear). Interestingly, ‘male’ focused brands seem to have been quicker to adopt the hybrid strategy than womenswear – perhaps men don’t hate shopping in stores so much after all. Examples in womenswear tend to focus more on intimate apparel and products which benefit through standardisation – ThirdLove is doing very exciting things in the ladies underwear and lingerie space, combining innovative fitting technology with a multi-channel retailing platform. The big daddy of digitally native brands, or at least the one which has had the most written about it, is arguably Warby Parker, which has disrupted the multibillion dollar eyewear market. Through its combination of online convenience and in-store experience (or vice versa, depending on one’s point of view) the company is changing an entire industry, and Luxottica, the world’s largest eyewear manufacturer, can’t touch it.

According to a report from business intelligence firm L2, physical stores and malls continue to experience growth in sales per square foot, at least at the high end. L2 contends not only that brick and mortar retail isn’t going anyway rick-and-mortar is not going away anytime soon but that ultimately there will soon be no such thing as “pure-play e-commerce” because successful e-retailers will eventually have to open physical stores. That’s being proven even by the world’s biggest e-commerce company, Amazon, which is making a series of moves into opening physical stores, including bookstores, pop-ups and grocery stores. However, converting the existing brick and mortar structure to this model might prove costly for traditional retailers. The tides of change are slow to come on-shore when it comes to retail and many of us will be aware of the challenges faced by retailers when it comes to updating even the most, seemingly, simple of processes (such as integrating an eCommerce store front to an existing ERP system), but many people, including senior leaders at many leading global retail brands, believe that adjusting operations and service provision to meet the expectations of the digitally-savvy Millennial generation is the only way brands can thrive today.

eCommerce is still ultimately a winner takes all game, dominated by a few key players with huge operating and marketing budgets. Just four retailers—Amazon, Apple, Walmart, and Staples—accounted for more than 40% of U.S. e-commerce sales last year, and just 50 accounted for almost 75%. But the recent innovations of the hybrid ‘digitally native’ brands have made in-roads to helping our industry find a comfortable place between the data and information driven benefits of the eCommerce behemoths and the personal touch that for so many decades (centuries even) has been the stalwart of bricks and mortar retail.
So the question remains, what should today’s retail managers and in-store sales professionals do to future-proof themselves (and the brands they represent) against the inevitable tides of change. Firstly, my observations are merely that – just observations and musings – the retail scene is moving so fast that no one knows where we will be tomorrow, and these ‘hybrid’ and ‘digitally native’ brands are still young and unproven. Secondly, as much as I am fascinated by the innovations at Bonobos, Warby Parker, Amazon and the rest, the majority of business coming to Luxury Recruit towers remains equally split between ‘traditional’ retail management roles (store-side sales and brand management) and digital and eCommerce roles on the other. Whilst we are, as mentioned previously, getting more and more enquiries about ‘chief innovators’ and the rest, for the next few years I do not think the retail talent pool needs to be overly concerned that they don’t have a degree in computer science to future proof themselves. The industry is moving fast but the key concerns remain the same: quality of product, amazing customer service and a fantastic shopping experience – these will always be key. What I would say however is that innovation and optimisation is a topic on everyone’s mind and every brand I have spoken to recently is looking to capture a wider share of the international, Millennial marketplace and wants to behave a bit more like the digitally-native, sophisticated companies we read about every day.

To this end, I advise my candidates to read-up on the new wave of retail brands that are changing our industry, show awareness and a willingness to adapt, but never forget the core tenants of successful retailing – as much as we may be fascinated by, or fear, the new face of retail, the established methods of high quality, personalised customer facing service will remain the same for the time being. Companies like Bonobos and Warby Parker may be changing the way things are done, but it is going to be a while before the LVMH’s and Kerings of the world have caught up, which they no doubt will eventually, but until then they will continue to do what they have already done best: sell a high quality products, that people want, through aspirational and engaging marketing and personalised customer service.

For further reading I recommend the following articles:

New York times article on eCommerce meets Bricks & Mortar

Andy Dunn on Digitally Native Brands

Intelligence Report on the movement away from Pureplay Retail

Fashion Weekly on the changing landscape of Bricks & Mortar

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