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GP12Jan05: Wal-Low Versus The Waterfall Hotel Pall at the Mall. The merchants were disappointed. According to one survey, December retail sales in the U.S. only inched ahead 0.7% (www.shoppertrak.com/news) from last year. The Christmas season is, in fact, make-it-or break-it time in the retail trade, and this finale was not a cause for joy. With some extra effort, some chains just made their numbers (see “A Little Retail Hustle Paid off in Holiday Sales,” New York Times, January 6, 2005). We’ve been out to the malls since to take a look around, and things are mighty quiet, even with some handsome markdowns. All is too quiet on the retail front. A number of factors are at work. People have tapped out their credit cards, and others, who have been cashing in their investment gains, realize they had better keep a lid on their savings accounts. There’s still a sizable lump of people (5% or better) out of work, and many of those have been out of a job for a good long time. We are, of course, now a very over-stored society, so there’s a slew of retailers out there peddling what the nation does not need. But we think the real killer is the price of gasoline, which we chart in this letter every week. At $2.02, it’s still well over the tab a year ago, and that was bad enough. This is a nation addicted to cheap energy, and it ain’t cheap no more. That’s why we talked about energy last week in “Electric Power and Staying Power.” What’s Going On. Nobody exactly knows what’s happening on the retail scene, but we suspect it mirrors the basic changes that are taking place in the architecture of the whole economy, driven by globalization and feckless governance at both the national and international level. Luxury sales and online revenues are soaring (i.e., the upper and techno classes are doing pretty well), and there’s some healthy growth in other pockets, a few of which we will comment on below. The dollar stores (Dollar General and the like) are racking up hefty market share gains, taking a bite out of the discounters such as Wal-Mart and Costco. General merchandisers are in more shock than they care to confess. The demographics of the U.S. market and that of other developed countries are changing in all sorts of ways that are altering the face of retailing. Throughout the developed world, especially Japan, we are growing older fast and that’s leading to empty nest, pension fund frugality. There are a lot more single-parent families out there, and there are women, notably in Japan, who are simply electing not to get married. Healthcare in a number of nations is siphoning off a disproportionate amount of national treasure. Hispanics, to include Latinos, as well as other ethnic groups, now demonstrate buoyant buying power, but mainstream marketing has just begun to touch them. As well, traditional channels for reaching the consumer—mass advertising on the TV networks and the still proliferating malls—have become dated or worse. Retail visionary Paco Underhill thinks the shopping mall is through, passé, ancient history, and there are some who think malls have only multiplied up to now because of the distortions in our tax code. We talk these days about the power of big box stores, and yet we ourselves wonder if stores of any size might not become increasingly irrelevant if manufacturers learn how to forge tight virtual connections with agile consumers. Wal-Low. In any event, no discussion about retailing today gets to the heart of retailing’s impasse if it does not look hard at Wal-Mart, the world’s most important business. For a host of reasons, we follow Wal-Mart with care, and you can see a few of our notes on Watching Wal-Mart. This goliath has crushed retail competitors of all sizes here and abroad with the relentless extension of its low-cost strategy, a thrust it pursues with a single-mindedness that brushes aside other business practices and normal retailing values. It buys the product and sucks it through the distribution chain, relentlessly taking big chunks of cost out of every step of the process. One should congratulate it for this focus, since too much of the wrong inventory in-transit has been the single weakest aspect of almost every economic system up to now, and Wal-Mart has beavered away at the problem. This is the supply-chain company, and we must salute its spectacular mastery of the distribution process. It alone is the single most important force behind the extension of RFID (radio frequency) tags that will further cut excess inventory, even though a more interesting German retailer named Metro has really led the way in actually putting RFID to work. “Low cost” is so much its mantra that it could easily be called Wal-Low. Its implementation of this approach is awesome, but the giant is vulnerable, nonetheless. We have been at some pains to investigate the brickbats that Wal-Mart’s critics throw at a it. In fact, there’s more than a little truth in each complaint, “low cost” having pushed every other consideration aside. Business leaders across the country have shared their private concerns about it with us. When it does come to town, it does wipe out large portions of local business, particularly in the center of an urban area. Its pay and its health benefits are stingy. The managers we have met traditionally radiate a fair degree of arrogance, even though it is trying to soften this image now. Its treatment of its suppliers over cost and terms is iron-fisted, though it does enjoy a good reputation for paying its bills in a timely manner. Since it accounts for a gargantuan share of our imports from China, it is appropriate to call it the Middle Kingdom’s outlet in the United States, and, perhaps, the biggest exporter of U.S. manufacturing jobs abroad. For our purposes these shortcomings are not something to wail about, just a fact of life that arises from “low cost at any cost” which we must understand. On the one hand, it exposes a failure of government at the national level that has allowed this unalloyed strategy to badly distort and weaken our national economy. Our academics, particularly our economists, have been very wooly headed about this problem: they are lemmings all as they extol all that it and its massive imports have done for the American consumer. But for retailers, more importantly, it exposes all sorts of strategic vulnerabilities which they can exploit competitively if they can update their own thinking. Wal-Mart has demonstrated some weakness lately. It had to do a tap dance to make its December numbers since its middle-America consumers are in trouble. And it is quietly juggling some personnel, most recently bringing in its store head from Mexico to head U.S. Wal-Mart, perhaps to get a better handle on the Hispanic market but also to repair some softness in U.S. operations. We wonder if he won’t have to do something about its atrocious service and quality. We constantly check out Sam’s, its warehouse operation, which has caught the flu several times over the last few years. In general, financial analysts have ignored the fact that Sam’s has really never been run correctly. We can’t bear to go into actual Wal-Marts, which we find excessively ugly (fortunately, our colleagues check out the operations we don’t like). As one craftsman from Alabama has said to us, it’s not worth buying tools at Sam’s, because he can get similar low quality products cheaper elsewhere. For more than 10 years, we have seen every higher quality product we once found at Sam’s disappear from its shelves. In general, one should only buy certain perishables and consumables there, and those only selectively. The pressure Wal-Mart buyers apply to its suppliers probably forces them to take quality out of their products to meet its price demands. Service quality is about the same. Department heads do not call us back as promised. Express check-out lines, once to be found at Sam’s, seem to have disappeared, even though Sam’s would like to be the supplier of choice for rushed small businesspeople. When we tried to find some products that were traditionally on the shelves at Sam’s, we were referred to a district manager who then called the store manager on a walkie talkie: the store manager never appeared, and then everybody disappeared. Sam’s does not offer a computer database one can access to find products (an innovation urged by one of the editors of Forbes magazine), so many patrons waste time looking for items and then give up in despair, the aisles being very poorly marked. Turnarounds. There are several encouraging things happening in retailing, and they make Wal-Mart look less than daunting, since they occur even in the face of its antics. Product and service quality must be at the heart of any comeback a faltering retailer wants to stage against any of the discounters, since this is their central weakness. Some recognize this. J. Crew is back. As the New York Times (December 9, 2004, p. C7) says, there’s “New Life for a Preppy,” its name for J. Crew, and it got there because CEO Millard S. Drexler, one-time head of the Gap, raised product quality and ratcheted up prices, though inventory was still very patchy when we checked just after Christmas. Likewise, “Nordstrom” has regained “its luster” (see Wall Street Journal, August 19, 2004, p. B2). It seems to have improved its technology, aimed at a younger group (25 to 64 instead of just middle-aged and senior consumers), buttressed sales per square foot as well as upgrading old spaces, and got a little more splash in its merchandising—bringing it a 9% sales jump with balance between luxury and affordability. Saks Fifth Avenue, which had long had an ill-conceived, also-ran outlet store next to the airport in Raleigh-Durham, has finally made a mark putting a small, highly selective boutique store in Raleigh which has quickly become the top women’s purveyor in the region (see “Saks Fifth First”): high-end stores are best at the high end, and they have to think carefully before they try to play in the low-price game. Manufacturing Boutiques. As interesting are highly branded stores that stock fashion all of their own making. Obviously Ralph Lauren has set the pace in this sphere. But Rose Marie Bravo has given Burberry life after death, extending the product line beyond raincoats, bringing in design talent (Christopher Bailey), and assembling a team that could revitalize the brand. (See Wall Street Journal, September 9, 2004, pp. B1 and B8.) Nicole Miller, once only a high-style designer of high-style dresses and men’s ties for specialty stores and selected department stores, now has extended into Bed, Bath, & Beyond with a line of linens. Instead of pushing her own stores, she is forging exclusive contracts around certain wares with a few selected retailers, to the benefit of both sides. Good revenues and superior profits can arise from superior branded products marketed in a very controlled retail environment with a true strategic partner. Museums and Retail. Rob Walker, who now writes regular consumer marketing columns for the New York Times Magazine, most recently has discussed the link between museums and stores. (See “Museum Quality,” New York Times Magazine, January 9, 2005, p. 25), telling how the Museum of Modern Art has now created a store within its store featuring goods from Muji, a company in Japan that is expanding in Europe and the U.S. Apparently this is all remarked upon in James B. Twitchell’s book Branded Nation. The retail activities of museums seem to be yet another extension of the idea of taking highly branded goods and offering them in a fine, highly controlled retail environment. In much the same manner, in years past, a Japanese manufacturer of high-end toilets offered them in a well designed showroom that simultaneously served as a toney coffee house for high-end consumers. China. Then too, another opportunity for sophisticated retailers and brandmakers has been to go where the money is. If the U.S. economy and U.S. retailing are somewhat stagnant, China is steaming ahead. “China retail sales rose 13% to … $640.37 billion … in 2004” (Dow Jones Newswires). The big box discounters (Carrefour-France, Wal-Mart-U.S., and Metro-Germany) are expanding there as fast as they can, although they are constrained by China’s government which is protecting its own giants (Shangai Bailian, Dalian Dashang, and Gome) and has its own thoughts about the role of these multinationals in its economy. (See Business Week, January 17, 2005, pp. 44-45.) Given the political atmosphere, we think high-end and one-off retailers can do very well there, indeed. In this vein, one should look at the luxury possibilities offered high-end travelers in sundry parts of China such as Hangzhou, Wuzhen, and Giulin ranging from a Waterfall Hotel to the exclusive The Cupola at Three Restaurant on the Shanghai Bund. See “How to Spend It,” Financial Times, Janaury 2005. In short, the China market offers all sorts of possibilities for retailers and hoteliers who have hit a brick wall in the West. For more about the China retail market, see http://retailindustry.about.com/b/a/121838.htm. Whither Retailing. With the advent of the big box discounters led by Wal-Mart, other clever retailers have generally gotten much more intense about their branding and pushed up market or, alternatively, tried to outflank the discounters with cheaper, remaindered goods (e.g, the dollar stores). Going “chic” or “cheap” does not exhaust the strategic possibilities for the smart retailing entrepreneur. What Wal-Mart did to Bentonville, Arkansas once upon a time, with good effect for isolated rural consumers, was to globalize the buying experience, putting standardized items at low cost from gosh knows where into the local agora. By and large, it and the other chains have placed a more or less uniform one-look, one-feel buying environment in Mexico City, Shanghai, or Wilmington. But the essence of Bentonville got lost in the process. To insure social, political, and economic stability, the problem for retailing and for the community and for the nation is to put the locale back in any one locality. Everybody has to be from somewhere, or we become a nation and world of rootless people. That’s the very subject we addressed in “Being There.” And occasionally you find a haberdasher here or a restaurateur there who’s neither chic nor cheap and who offers value and a sense of place at the same time. We thought of that most recently when we were eating at the New Shanghai Restaurant in Boston (21 Hudson Street, 617-338-6688) where the fish offered more variety and terroir than the high-powered dives frequented by Boston affluents. It is a success because it is of the place. In the same manner, the stunning window displays in the great stores of Paris add a dimension and value to retailing that Wal-Low will never capture. Global, cookie-cutter retailers never have and never will capture the sense of time and place that an inspired local merchant can bring to the retail experience.
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