Many blame Amazon’s dominance in the retail market for unimpressive earnings by big-box-stores; that they’ve created a culture of window shoppers. An empire too large with which to compete.
Now, the latest alleged victim is Toys ‘R’ Us as they have announced the shut down, or sell off, of its 735 stores in the United States behind $5 billion in debt from a buyout in 2005.
According to Clavis Insight, an ecommerce research firm, online toy sales have increased by more than 55 percent in the past two years to $17 billion in the United States alone. What was Toys ‘R’ Us’s share? Prior to the holiday shopping season in 2017, Statista published an infographic detailing where consumers are buying their toys:
This speaks to a larger problem in the current competitive retail environment. This isn’t an Amazon vs Toys R Us issue. This isn’t even an Amazon versus [insert any retailer name here] problem. This is a core business failure we’re seeing at a very large scale.
We will dig into this larger problem but first let’s look at the data behind all retail for some added perspective.
Retail Growth by the Numbers (U.S.)
Morgan Stanley forecasted that Amazon would drive half of all retail growth from 2016 to 2018. For perspective, retailers reported $3.52 trillion in sales in 2017 (up 3.9% from 2016).
The National Retail Federation expects overall retail sales to grow between 3.8% and 4.4% in 2018 resulting in between $3.68 trillion and $3.67 trillion. Don’t let those decimal points fool you; that .01 trillion stands for $10,000,000,000 USD.
If the forecasting of both the National Retail Federation and Morgan Stanley prove to be true, that equates to Amazon’s share of growth in 2018 to be $80 billion alone.
“The rise of ecommerce outlets like Amazon (NASDAQ:AMZN) has made it harder for traditional retailers to attract customers to their stores and forced companies to change their sales strategies. Many companies have turned to sales promotions and increased digital efforts to lure shoppers while shutting down brick-and-mortar locations.” – Retail Apocalypse: 23 big retailers closing stores – Fox Business
The Real Problem in Failing Retail
While it’s true that Amazon has drastically impacted the traditional retail space the framing around the discussion is skewed toward Amazon and not the failing businesses that close each year. Amazon does not make the business decisions for other organizations. Their leadership does.
Leadership is tasked with assessing the market place, analyzing competitors, and steering the strategic ship toward success both short-term and long-term. It’s a complicated task with an endless amount of moving parts and requires a full team effort all the way from the board, c-suite, directors, managers, department leads, sales teams, customer service reps, third party vendors, and everyone in between. Decisions to change strategy aren’t done likely and involve expensive assessments by professionals in their field. Decisions require review and sign-off before being implemented. I think you get the point.
At what point did these failing business not look to their customers for feedback?
Have you ever watched an episode of ABC’s Shark Tank? The show where product inventors and business owners pitch their companies to successful investors in an effort to help them scale production, sales, product quality, reduce cost, and get into major retailers [quick note: why isn’t Amazon involved in this]?
They ask real questions that every business owner should be able to answer. I’m going to focus on three specifically:
- Revenue: Revenue over the last year, last quarter, and what are your projections moving forward? Gross and net profits. How much cash are you burning through monthly and where does it go?
- Customers: How are you obtaining new customers? How long do they stay customers (churn rate)? What is the lifetime value of a customer? How much does it cost to obtain a new customer on average?
- Competition: Who is your competition? How are you providing something better?
Those are the pillars of every successful business. The maturity of your business is predicated on how well you collect and manage that data.
My background is in consumer behavioral analysis. Forming a hypothesis based on limited data and then collecting data attempting to invalidate that assumption. The availability of this data is astounding. It doesn’t need to be an expensive drawn-out endeavor to be valuable. Data is information. Information is a necessity to legitimate decision making.
The behavior trend that I have seen is blatant and simple: consumers make decisions based on convenience.
Convenience is the business model
Unsurprisingly, we have convenience stores that are able to charge you more money for common items because it saves you time. Customers purchase staples like milk, eggs, and bread there because driving down the road to a grocery store takes too long or seems like too much effort. Besides, you’re already here for gas anyway. Why not grab a few items and head home?
Fast food is based on consistent convenience. You don’t need to prepare. You don’t even need to get out of your vehicle to place an order, pick up the order, and eat your meal. You know what you will get each time.
Retailers were so busy focusing on how to combat Amazon and showrooming that they didn’t even realize how valuable Amazon was to their own business model.
Life is stressful, sometimes chaotic, and requires time and energy to accomplish even the simplest tasks. What if those speed bumps were removed? What if you didn’t even need to leave the house to make a purchase? Done. Ecommerce is born. But what if you need something tomorrow? Perfect, Federal Express (FedEx) is born with a pioneering system to track packages and provide real time delivery status updates. But the cost of overnight shipping is too much. I’d rather make the trip to the store to get the product now and save the money…
Each consumer pain point has a business solution behind it that breaks down barriers to reduce friction between need and fulfillment.
Faster purchases. Less effort. Faster shipping. Cheaper delivery cost. Sounds like Amazon, right?
Retailers were faced with trying to compete against showrooming, the practice of visiting a store in order to examine a product before buying it online at a lower price, for years. They were so busy focusing on how to combat Amazon and showrooming that they didn’t even realize how valuable Amazon was to their own business model. Their assumed competitor was actually driving customers to their stores. Convincing customers to make the effort to come to your store is the hardest part of retail. If you’d like to learn about how retailers took risks to gain traction against showrooming check out Forbes’ article “Whatever happened to Showrooming“.
The problem then became availability by way of stock. Shopping in person is a serendipitous experience. Exploration. Adventure. It’s tactile and instantaneous. Then you find something that isn’t in your size or isn’t in stock and it unravels everything.
That isn’t the same mentality experienced for online shopping. Our expectation is immediate. We don’t want to explore an ecommerce site. We want to find our product, check out, and move on.
Where do we go from here?
It’s not as simple as reducing inventory to save cost. That can backfire with product trends due to the infrastructure we have in place. Retailers like Best Buy have attempted to alleviate this problem with free ship-to-store options from their website. That doesn’t solve the problem of convenience or address the needs of in-store buyers and may impact employee morale.
Even Amazon made this mistake after acquiring Whole Foods.
Stocking just enough products to fill shelves appears to often backfire, as delivery issues and excess demand can leave whole aisles bare since there’s no extra inventory. Out-of-stock products lead to missed sales and unhappy customers. Employees aren’t happy either, as the strict and high-stakes inventory checking tests have led many to stress, which could make them more distracted and create a worse shopping experience. – Daniel Keyes, Business Insider
I could go on and on saying “Listen to your own consumers. General data or industry feedback is great to formulate an idea of what the core problem is, but to make strategic decisions you need to collect your own. Best practices change. Consumer motivations change. Brand loyalty changes. Trends change. Today’s success does not guarantee tomorrow’s success.” and it would be true. But it’s so much simpler than that.
As a leader in business you need to look at your numbers. Look at your cost. Cut unnecessary spending. Split budgets between safe, probable, wins and riskier blue sky goals.
Case in point: ebooks and book sales.
Book covers looked very different a decade ago when the appearance of e-readers seemed to flummox a publishing industry reeling from the financial crisis and Amazon’s rampant colonisation of the market. Publishers responded to the threat of digitisation by making physical books that were as grey and forgettable as ebooks. It was an era of flimsy paperbacks and Photoshop covers, the publishers’ lack of confidence manifest in the shonkiness of the objects they were producing.
But after reaching a peak in 2014, sales of e-readers and ebooks have slowed and hardback sales have surged. The latest figures from the Publishing Association showed ebook sales falling 17% in 2016, with an 8% rise in their physical counterparts. At the same time, publishers’ production values have soared and bookshops have begun to fill up with books with covers of jewel-like beauty, often with gorgeously textured pages. As the great American cover designer Peter Mendelsund put it to me, books have “more cloth, more foil, more embossing, page staining, sewn bindings, deckled edges”. – Alex Preston, TheGuardian.com
Did you catch that? We talked about this earlier. Competitors focusing on the wrong detail. Production values soared. But, why? It’s reactive, extreme, positioning by way of fear of missing out. That’s how we fall into the ebb and flow trap of consumerism. Leadership has a myopic view of consumer interest and overcompensates, over-corrects, and creates their own edge cases in data which has a drastic impact on all others in the marketplace.
Is Amazon really the problem with retail or is it the leadership behind major retailers making frequently poor decisions?