Tracy DeCicco discusses with Ken Hewes, founder and President of Mōd Advisors LLC, the past, present & future of the retail industry. Ken highlights how the retail industry has been changing shapes from 90s to the present and what may happen in the future. And also talks about the status of physical stores compared to Ecommerce & where they would stand in the future.
Tracy: Hi, there, and welcome to the first Retail Period podcast. We are so pleased to have Ken Hewes with us today. Ken Hewes runs a strategy consulting firm, Mod Advisors which he describes as a network of former fashion brand executives whose work has helped transform the specialty retail landscape.
Ken and his partners have helped dozens of well-known brands; navigate the current retail climate, help lesser known mid-sized retailers scale, and get startups launched. Ken recently authored the Robin Report article “Victoria’s Secret: On a Precipice or a Platform?” which I read, and I thought was fabulous, which, talks about the lingerie brand’s success, repositioning in the late ’90s while he was an executive at L Brands, and the very considerable challenges, and more limited strategic options that businesses now face. Thank you so much for joining us today, Ken. I know we all have stories about what got us into retail, but I would love to hear more about you and what got you into retail.
Ken: Happy to be here, Tracy. After business school, I joined a top-tier strategy consulting firm and did projects in government, agribusiness, oil, and telecommunications, but then I moved to Columbus, Ohio as a traveling spouse in 1991 and got into what seems to be the city’s main industry; national chain retailing.
I joined the retail strategy consulting arm of PwC and had a great non-Columbus list of clients including Kroger, NIKE, and Ann Taylor. Then in 1998, I joined L Brands when CEO, Les Wexner decided to form a corporate strategy group. He formed that group to help grow his portfolio of 10-plus business units.
I left about six years later when he decided to get rid of all his apparel businesses and disband the strategy group. That’s when I went on to my own and formed my own consulting firm. That was back in 2003.
Tracy: You’ve been in business for a long time. Retail has changed a lot during your career of course. In this podcast, we’re going to be talking about all the various retail periods. Tell us what has changed during your career.
Ken: wow. Back in 1991, the fastest modem was I think it was the 14.4 kilobits per second.
Tracy: I remember that.
Ken: yeah, right. Just to contrast, I think today’s broadband access is like 3 to 4,000 times faster. It’s night and day. You may remember this; the only E-commerce was the Home Shopping Network and QVC. We called it electronic – TV/ shopping.
Tracy: Yup, I remember as well.
Ken: Amazon wasn’t invented yet. They started, I think it was like 1994 or something, and they just sold books throughout the rest of that decade. From the 1970s to the early ’90s, the regional mall was really retail’s primary growth engine. Department stores were these anchors that really drove traffic to the mall and you could still sell hardlines, home, music, video, books in the malls and it was a model that really worked for quite a while.
Then beginning in the ’90s maybe even the late ’80s you had big box retailers. The generalists like Walmart and Target, and the specialists like; Best Buy, OfficeMax, Sports Authority, Barnes & Noble, etcetera. They started to grow very rapidly, and really, they sucked out a lot of these categories out from the mall and into power centers.
There was a lot of evolution going on during that time. At the same time, malls were still able to keep growing, and the reason they were is that the department store anchors, they shifted their assortments more towards fashion and beauty. They got out of the less profitable hardlines categories. This was also when malls experienced the rise of these national chains that were [providers of] lifestyle specialty brands, such as Ralph Lauren and Anne Klein.
Brands went to market targeting different demographics, e.g., Abercrombie, PacSun, EXPRESS, GAP and Banana for the younger demographic, all the way up to Talbots and Coldwater Creek, targeting the older clientele. You had all these specialty brands just filling all the different shopping segments you might imagine.
The malls became places though for very curated, aspirational consumption and focused on fashion and beauty. During that time, mall traffic surged, but power centers also became destinations for those hardlines that we talked about, where you could offer vast selection at not too high a rent, and offer a good value to the customer.
Tracy: It makes me a bit sad what’s happened to malls, but I guess that’s not like all malls, right? For example, I live in Denver, Colorado and the Cherry Creek Mall is doing fantastic. I’m sure the Short Hills Mall in New Jersey is doing great, so a lot has happened, and a lot has gone on. Tell us what has happened, and what will happen.
Ken: To your first point, Tracy, there still will be this evolution that’s been happening. There’s still going to be between 100 and 200 very good profitable malls. It’s kind of the balance of the next 600 that aren’t going to do so well.
Tracy: The mid-tier mall, maybe the lower malls.
Ken: Yeah. Exactly, but anyway, the shift started to occur with The Great Recession. Shoppers started reducing buying and when they did shop they only bought on sale. They shopped more off the mall at discounts stores, the off-price retailers, the dollar stores and outlet malls. Then, of course, there was this thing called the World Wide Web where you could easily compare prices and get a good deal. To convert shoppers into buyers, mall retailers became places to routinely buy stuff at 40% off. Right, we’ve all experienced that phenomenon.
Online retailers began offering free shipping and returns. First of all, online there’s a ceiling on how much you can charge because comparison pricing is so prevalent. Then they added on free shipping on returns. That was all to generate transactions to increase conversion.
I really think that the iPhone and the proliferation of Smartphones was a huge factor in starting to get people to shop on the web and keeping them on the web. You think the first iPhone wasn’t released until 2007. It’s hard to think that it wasn’t always attached to our hands.
Tracy: So true, and I remember the day and the month it launched. I think many of us do.
Ken: Because we became so accustomed to having a supercomputer in our hands, it became a real utility, and shopping by computer, and then Tablet, and Smartphone became just the very natural thing to do.
I was doing some research for a client and found that in 2009, E-commerce retailing was just 4% of total retail sales in the US, and now, it’s 10%. Amazon was just 25 billion in retail sales in 2009, and of course, this year they’re forecast to be a quarter of a trillion dollars.
There’s been this huge shift in shopping behavior; price shopping, buying on sale, buying online, getting free shipping. The result has been really crappy economics in this industry as a whole. There’s also because of the decline of brick and mortar, there’s been a lot of over-capacity in most of the US malls and shopping centers.
The whole retail economy has been suffering. This time the malls are not able to adapt as much because they’ve developed this monoculture of fashion concepts; the ones we talked about earlier and traffic has declined over 50% since 2011.
Apparel and footwear, the spending there continues to drop as an overall percentage of consumer spending. Again, this is from research from a client that I worked for and looked at these numbers just recently. It declined from 7% in 1970s. In other words, 7% of all of our spending was on apparel and footwear in the 1970s. Throughout the 1970s it was stable. It’s declined to less than 3% of our spending this year.
Tracy: Then I suppose the trending around fast fashion, right, so apparel may be on the downside, but you have a lot of trends or trending around fast fashion. I’m not sure if you have any thoughts on the fast fashion market. I know there’s a lot of sustainability issues in that market.
Ken: You bring up a very good point. While spending had declined, the number of units we buy has not. A lot of that, in fact, is, us buying fast fashion; the less expensive, fast fashion. In fact, consumer electronics and apparel are the two categories where inflation has been negative over an extended period of time, so yeah, fast fashion… Walmart has had a big impact, but also Forever 21 and H&M have also…
Tracy: The other thing you mentioned too which I’m not sure people realize, and I know your background is in economics and finance related to retail is that what you mentioned is the “Crappy economics” regarding some of the aspects of online. I’m not sure people realize that all this free shipping obviously comes at a cost to the retailer. Do you have any thoughts on the impacts that all this free shipping and the related costs have on retailers, whether it’s Walmart, or Amazon, or whomever?
Ken: Exactly. The beauty of Amazon’s model is that they’re now collecting $120 from every prime member. That defrays some of the cost, but clearly not all of it. The magic of course, around Amazon’s model is that the shareholders aren’t demanding any profit, so they’re able to invest their money quite a bit more cheaply than the rest of the industry, which angers a lot of my clients.
Tracy: We’ve talked about a few bleak times, but it seems like retail is doing a bit better this year. Tell us maybe a bit more about that.
Ken: I’m just painting a pretty bleak picture, but this year things are looking up for a lot of those retailers who are still left. Consumer spending is growing this year and last, consumer confidence is up, the stock market is up, unemployment is the lowest it’s been in decades, middle-class wages are seeing positive momentum. It’s all a very good economic picture.
Plus, a lot of the retailers I alluded to earlier, there were more than 7,000 retail doors closed in 2017, and so the surviving retailers are – they have less competition and they’re seeing positive comps in the first time in many years. Then of course, they’re getting their tax cuts. The tax cuts are helping their P&L and their earnings per share.
Tracy: Just the other day I saw Mike Ullman speak, who is now the chairman of Starbucks and didn’t realize he had been a board member for Bernard Arnault at LVMH, so he has a pretty long history actually with luxury. He was talking about how luxury trends and forces seem not to have been as much in decline. Any thoughts, Ken, on the luxury segment?
Ken: The 1% continues to do quite well and the recent tax cuts are reinforcing, are really helping in all the growth that we’ve seen in the last few years is really helping the consumers shop luxury, and also the expansion of China, and Russia, and the other places where there are other millionaires and billionaires. They will continue to support that market.
Tracy: Hopefully the future’s bright. Tell us more about what you see in the future for retail.
Ken: The macroeconomic environment is excellent right now, but both the recovery and the bull market are getting quite long in the tooth. These markets have been going on for quite a while and people are nervous about the impact of the Trump tariffs and the trade renegotiations introducing a lot of uncertainty. I ran into the head of sourcing of a major chain the other day and she said, “I’m going crazy. I’m trying to get out of China.” It’s like…
Tracy: Getting out of China?
Ken: Getting out of China, right.
Tracy: Not something you hear a lot, and of course, now with all the impacts of I guess the concept there of the impact of the tariffs.
Ken: Right, and also if you think about it, if the economy takes a downturn, the federal government has already enacted its tax cuts. They’ve already increased the deficit spending, so it begs the question, what can the government do when the next recession hits? Interest rates are still at very low levels, so even the fed can’t inject much stimulus in the economy. It’s concerning.
The economy’s a little concerning right now even though we’ve had this great run. We still also have tremendous income inequality, and consumer and corporate debt remain huge issues, so our long-run economic health; I’m a little bit nervous.
Tracy: I think it does sound a little bit nerve-racking to look at and see how we might provide a stimulus if something were to happen. Let’s say in 2020. Where would this stimulus come from? Now, obviously, from the standpoint of E-commerce, I would imagine that you may be relatively bullish on it. Tell us about E-commerce and where you see it continuing to grow…
Ken: I think it’s inevitable that it continues to grow relative to the rest of retail. Let’s just take a look at apparel statistics, for example, overall 10% of E-commerce is online, but apparel is actually 20%. A lot of the GAFO categories; those that department stores used to carry. They’re in the 20 to 25 to 30% penetration of online.
The forecast is that by 2025, over a third of all spending is going to be online. In fact, I have a colleague who preaches 50/50 retail. Said, “Even though it’s not 50 today it’s going to be, and retailers need to start preparing for that future.” There’s that aspect of it.
Also, E-commerce just is not as profitable as stores. There have been a couple of studies, really hitting that home. If you think about it, the barriers to entry are very low. There was a lot of competition. It’s way too easy to compare prices. There are always going to be profitable segments online, but if you think about categories where shipping costs, return rates, and customer acquisition costs are high, it is very hard to make money.
There’s this huge tension from multi-channel retailers to try to make that economic model work. There was a recent study published and I forget where it was published, but it showed that companies getting into multi-channel retail in a big way, they’re suffering declining return on investment capital. That’s just the way it is.
Tracy: A lot of people probably think, and wonder will there be stores someday? Will everything be online? Any thoughts on the future of the store?
Ken: I think there will always be a future of a store and evidence of that is that all your pure play E-commerce concepts are opening stores and some of them are opening a lot of stores. Warby Parker is opening what, 40 to 50 this year or over the next 12 months.
Tracy: As well as Amazon.
Ken: Right. It’s just a question of what they’ll offer versus the online proposition and we’re helping retailers try to figure that out today.
Tracy: With all, we’ve discussed here, what should a retailer do? There’s a lot of stuff going on. A lot of market forces. What should a retailer be doing in terms of these trends?
Ken: That’s the multi-billion-dollar question, of course. My firm only charges hundreds of thousands of dollars to solve that. Anyway, but I will offer some free advice.
If you’re a new business or an established retailer starting a new business, it’s best to try to find a unique space. The biggest reason why Lululemon and Apple are the most productive concepts on the mall is that when they started they had no competition. Also, there’s another brand of retailer that tends to do well, and it’s those that break the consumer compromise.
I mean this is a long concept that’s very old, but if you think about shoppers typically have to make that tradeoff between low-cost, high-quality, and high-convenience. They can’t have all three, but Warby Parker, Caspar, Rent the Runway, those are three concepts that they sell traditionally very expensive high-quality stuff, but they offer it at far more accessible prices. You’ll see them really have outsize returns.
Amazon is a low-cost and high-convenience king; one-click ordering, free shipping, less and less delivery time. Those four are examples of those who have been able to break the consumer compromise, basically. They really own their spaces.
Another dimension of creating a business that’s going to work in the future is there are business models that work, and you need to try to engineer them from the beginning. Many startups don’t understand, and I think I mentioned this before, that if you’re going to be selling a commodity with free shipping that has inherently high returns and higher marketing costs; you’re going to lose money all day long. The challenge is to find a combination that will make money at scale.
For existing and more mature businesses, your options – they’re very related. You need to re-engineer your current business model to run profitably and I talked about that. You might as well envision a scenario where it’s 50/50 retail. It’s sneaking up. The catchphrase these days is, “Unified retail.”
You really want to try to maximize the synergies across the channels. If you think about a company that’s been doing that well, recently, Nordstrom, they’re stock is up about 20% just in the past month because it seems like they’ve been able to demonstrate that they get it.
Another thing we haven’t touched upon yet is to really build in speed and flexibility. That will help reduce your risk and markdowns. Consumers have much shorter attention spans than they used to, and it really behooves retailers to make more and smaller bets, basically.
Relating to that, there used to be a time when you could demonstrate a workable concept and test market in, say, Columbus, Ohio. Roll it out to 18 malls and then sit on your 99-year lease, but those days are really over. You really have to think about targeting smaller more narrowly drawn segments and expect that they’ll last for a shorter time. The timeline just isn’t as long as it used to be.
If you think about some of the innovation that’s going on, New York & Company, they’re announcing a name change with the success of their two celebrity labels, they’re going into the business of constantly creating new brands. Boot Barn it’s lesser known, but they were on Jim Cramer’s “Mad Money” last week. They’re a California-based Western work-wear brand. They maintain a portfolio of private brands so that they can lessen the competition from their own vendors and Amazon, who sell exactly the same product.
All this is hard, but the key is to create a business model where you can officially integrate new design, merchandising channels, and marketing within your business and then adapt it to, however, the market responds; however, your consumers respond. Then you repeat it again with the next brand, so you have to create these vertical value chains, and then you have to repeat it. It’s very interesting.
Boot Barn for example, has different websites for each of its private brands. If you think about – yeah, and they have to have separate marketing and all that, but so far, they’ve had tremendous success with it.
Tracy: It sounds like these small test pivots are pretty important too. You may remember famously, Ron Johnson, when he came into J.C. Penney he made some very large big bets and honestly, I do think he was a bit ahead of his time in terms of some of them with experiential retailing and some of the things he was going for. He had these big bets that he had just, taken to market and didn’t test. Any additional thoughts on smaller test pivots or testing and then taking out to market more iteratively?
Ken: I think all of us in the retail industry were cheering for Ron to succeed because the un-transparent pricing that was going on and just the constant promotion was killing us all, and wow, sanity. If one retailer could pull it off that would be great, but of course, you’re exactly right, he bet the whole farm on it and it was going to take longer than shareholders were going to give him.
Tracy: He really wasn’t necessarily testing things to take to market, because at Apple, of course, he didn’t have to.
Ken: No, you’re absolutely right. The whole test and learn is – I try to have clients build that into their standard operating procedures. It’s essential.
Tracy: Pretty important stuff. Give us your thoughts on what the future of retail will look like. We all would like to know.
Ken: I can see way far out, and way far out I can see the ability for us to scan the World-Wide inventory by just thinking about the item you want, and it can be instantly teleported to you, right?
Tracy: I love it.
Ken: That will replace the need for all 3D printing technologies, so don’t bother investing in that. Now, the problem with that future is that the corporation World Co., which was formed by the merger of Amazon, Google, and Alibaba, they’ll own all your data and [pretty much everything].
Tracy: More Amazon taking over the world, even into the future…
Ken: Exactly, but my sarcastic answer is, just because I have no idea what the future will hold. I mean I think if a trade war happens with China, if the stock market crashes if there’s a big energy price shock because of instability in the Middle East, “Gosh, that never happens,” it’s going to put a lot of these emerging business models in jeopardy. How much-individualized delivery can we afford if gasoline is at $5 a gallon, which isn’t at all seems like a stretch?
Tracy: I remember in our last recession of course, in 2008, the dollar stores were doing quite well, so we have these driving market forces, based on whatever retail time period that we’re in. Ken this has been so great. Thank you so much. If you want to follow-up on these topics with Ken, you can reach him through his website at www.modadvisors.com, or send him an email at email@example.com and we’ll put some of that connection information into our podcast notes.
This does wrap our first installment of the Retail Period Podcast. We are so appreciative of having had Ken Hewes today spend some time with us. See you on a future podcast and remember that every retail period is a good one. Until next time.
|Tracy DeCicco: Tracy DeCicco is a Vice President of Business Development at leading retail eCommerce services firm, Litmus7. She has 20 years experience in the retail industry and has experience in all facets of retail, from specialty to big-box retailers. She has a BA from Colorado State University and an MBA from Southern Methodist University.
Company Website Link: https://litmus7.com/
Email Id: firstname.lastname@example.org
LinkedIn Profile Link: https://www.linkedin.com/in/tracydecicco/
|Ken Hewes: Ken Hewes is a founder and President of Mōd Advisors LLC. Ken was formerly an executive of L Brands and has been consulting in the retail, fashion and consumer goods industries since 1991. Ken has a BA from Yale University and an MBA from The Wharton School.
Company Website Link: www.modadvisors.com
Email Id: email@example.com
LinkedIn Profile Link: https://www.linkedin.com/in/ken-hewes-94765/