Retail Resurrection: A Rosy Outlook for 2019?

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Wharton's Barbara Kahn and Columbia's Mark A. Cohen discuss what's ahead for retail in 2019.

For many U.S. retailers, 2018 turned out to be a very good year. Buoyed by a strong economy and low unemployment, total holiday retail sales rose 5.1% to $850 billion, the best showing in six years, according to Mastercard SpendingPulse. Bricks-and-mortar stores found ways to integrate their physical and online experiences, while digital newcomers continued to disrupt the status quo by reducing friction for consumers.

Matthew Shay, president and CEO of the National Retail Federation, called 2018 “one of the best years for the retail industry in a decade,” adding that predictions of a “retail apocalypse” have abated. “Certainly, there are things that are out of our control,” he said in a blog. “But if we avoid self-inflicted wounds, we can have another fabulous year in 2019.”

Global consulting firm Deloitte has a more tempered outlook. According to its 2019 retail outlook report, retailers face an inflection point this year as the strong economy begins to show some cracks and digital disruption continues pounding incumbents. But those who can navigate these headwinds successfully will thrive. Retailers “may need to make bold moves if they want to set themselves up for success in the future,” the report said.

As part of a series titled “2019: A Look Ahead,” the Knowledge@Wharton radio show on SiriusXM invited two experts to discuss how retail will fare in the coming year. Barbara Kahn is a marketing professor at Wharton, and Mark A. Cohen is director of retail studies at Columbia Business School.

Following are five key takeaways from their conversation. (Listen to the complete podcast at the top of this page.)

Retailers Will Up Their Game

Last year’s bankruptcy filings of major retailers — including Sears, Brookstone, David’s Bridal, Mattress Firm, Nine West and Rockport — prove that the challenges in the sector are far from over. But survivors that continue to pivot smartly in this new retail environment will reap the rewards.

“I think what you’re seeing is that the ones who get it are going to win, and the ones who don’t get it are going to lose,” Kahn said. “I personally think 2019 will be an exciting year for smart retailers, and we’re going to see some really creative stuff.”

She pointed to the following innovations as proof that retail is becoming more creative: Amazon Go stores that let customers skip long checkout lines; Nordstrom’s showroom stores that carry no inventory; and the seamless integration of technology into automobiles that let people shop while they commute.

Smart retailers will know when and where to open and close brick-and-mortar locations. “People are talking about the death of retail, but look at these great new beautiful stores that are opening up in New York,” Kahn said. “So, no, retail is not dead. Good retail is live and creative. And bad retail — rest in peace.”

“Retail is not dead. Good retail is live and creative. And bad retail — rest in peace.” –Barbara Kahn

Cohen agreed, saying there’s “no weakness” in retail per se because there are plenty of customers with healthy disposable incomes — and they love to shop.

“Human beings have an encoded behavior that results in them seeking out things that are new and exciting, with vigor,” Cohen noted. “And they do that in the retail marketplace, whether it’s a physical store or it’s online, or some combination of the two. So, I think the business up top is fine. It’s going to continue to thrive. But within the businesses, the breakage is going to continue.”

Subscription Fatigue?

Both professors expect e-commerce activity to increase as more companies transition to omnichannel retailing and incorporate business models geared toward online shopping behavior, such as showrooms and curbside pickup.

Cohen predicts double-digit growth for digital. “It will vary by category, but it’s certainly something that consumers have adopted worldwide, and there’s absolutely no reason in the world why that trend would abate,” he said. “The legacy brick-and-mortar players who don’t … get it, or who don’t get enough of it, are dead. They’re going to continue to lose share.”

Cohen expressed concern, however, for showroom-only stores and for subscription-based retailers such as meal kits and pet products. Experience shows that customers who are initially excited about receiving a new box of stuff every month eventually get fatigued, he said. The company is forced to chase new customers to replace outgoing ones, driving up the cost of acquisition.

“Subscription models [have] been around for a very, very long time. They kind of come and go as they become more fashionable, and right now, they are very fashionable for many customers,” Cohen said. “But my prediction is that most of these new subscription models will have relatively short lives.”

Kahn countered with examples of subscription successes that rely on customer data mining to refine the selection. She mentioned clothing subscription Stitch Fix, which also offers flexibility because customers can order as frequently or infrequently as they like.

“If you get the data, you’re going to maximize the offering to that customer so that you are more likely to get four purchases a year, which is what you expected from a department store,” she said.

‘Super-Regional’ Malls Will Thrive

Across America, some malls are slowly dying while others are flourishing. It’s a perplexing contradiction for most consumers, so Cohen explained it: There are about 1,400 malls in the United States. About 250 of them are triple-A or ‘super-regional’ malls, which means they have four to six anchor stores and are ringed in by communities that won’t let them grow any larger. The remaining 1,150 or so malls are characterized as B, C or D-level malls. They have two or three anchor stores that are dying, such as Sears, J.C. Penney or Macy’s. Specialty tenants have either gone bankrupt or exercised their right to exit because the anchor store that was part of their lease agreement has left.

“They’re referred to by many as zombie malls, because they look more dead than alive,” Cohen added.

“The business up top is fine. It’s going to continue to thrive. But within the businesses, the breakage is going to continue.” –Mark Cohen

He believes these problematic places will shutter, while super-regional malls will be fine because they are fully tenanted with sufficient traffic. “And many, many, many customers will always want to touch, feel, try and experience something physically. That behavior is not going to disappear.”

Kahn noted the trend in malls is to make them more multi-use and experiential, with lots of restaurants, movie theaters and even co-working sites like WeWork.

“You need to have this mixed use,” she said. “People are still looking to go out and have a fun time, and the mall can be it, but it’s got to change.”

For Sears, the End Seems Near

One of the biggest business headlines in 2018 was the bankruptcy filing of Sears. The 126-year-old retailer, which owns Kmart, seemed to be on course for liquidation. But on Jan. 16, Chairman Edward Lampert’s hedge fund won a bankruptcy auction of the firm with a bid of more than $5 billion, according to Bloomberg. The deal still needs approval by the bankruptcy court.

Cohen, who was the former chairman and CEO of Sears Canada, said the operation strategy of Sears – not its debt – was the underlying problem. It had lost its connection with customers. “There’s no leadership in the company, there’s no strategy in place that demonstrates any viability for the future. So, the sad news, which is certainly to me not a surprise, is that this incredible American — if not international — icon is about to disappear.”

According to Kahn, that lost connection is one of the most unfortunate aspects of Sears’ failure because the legacy retailer once had the kind of customer loyalty that other retailers covet. “[You] can find tons of people who grew up on Sears and are seriously upset that Sears is out of the market. You can’t buy that kind of brand loyalty and legacy,” she said. “It was pure lack of leadership. For whatever reason … they just didn’t take an amazing asset and grow with the retail world.”

Data Privacy Will Gain Importance

Data mining is like gold for retailers who want to hone in on customer preferences, reduce friction and disrupt old business models. But as 2018 showed, the protection of that data became an increasingly important issue, one that has caught the attention of lawmakers.

Most consumers ignore the fact that their personal data is being monetized without direct benefit to them, Cohen said, but that could change in the coming year. “It’s possible that the pendulum is going to swing very, very sharply over to the other side of this issue, which [would mean] very restricted use of data.”

Kahn agreed, saying access to data is not a predictor of retail success; it’s what retail does with the data that matters. “You’ve got to turn it into information. You’ve got to turn it into action,” she said. “You still need human insight. You still need that little magic of the smart merchant to put all those things together. It’s not just a data solution.”

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