More Big Box Blues

I know my ranting about the pending demise of the big box retail format sounds crazy, but the facts are getting harder and harder to ignore.

The National Retail Federation just released the preliminary results of a survey where 8,500 respondents where asked about the customer service provided by retailers.

The retailer with the best service? Amazon. In fact, 7 of the top ten retailers don’t even have stores.

Details, such as they are, are here:

http://www.thestreet.com/story/10627227/1/amazon-kohls-top-for-customer-service.html?cm_ven=GOOGLEFI

None of the top ten are big box stores and I don’t yet know where they fall on the list, the full results won’t be released until January.

So just how important is customer service?

The top two retailers on the list, Amazon and Kohls, both posted great third quarter results in what may be the worst retail environment of the modern era. Amazon had a 69% increase in profits while sales rose 28%. Kohls posted a 20% increase third quarter profits and a 2.4% increase in same store sales.

Meanwhile, back in the big box, Lowe’s saw a 30% decrease in profits, Home depot was down 8.9%, Target held on with an 18% gain and Wal-Mart answered back by pledging to cut prices, yet gain, on 60 hot selling items for the holidays.

Holidays which, by the way, have started even earlier than ever. Black Friday sales started this week, a week before Black Friday, in Wal-Mart and Sears. Other big boxers are expected to follow suit.

What will the effect of this increase in price cutting have on future earnings? We’ll have to wait and see, but it just can’t be good.

KKR takes Dollar General public and I feel validated!

Just once I’d like to be right and rich!

Late last month I highlighted the growth of the “Super Discounters” and noted that one of the largest, Dollar General, had been taken private by KKR.

Well, this Friday Dollar General is slated to go public again and the buzz behind the offering is strong. The details are in this WSJ article titled: Dollar General Dresses Up for Its Debut, Deal is one of the year’s signature IPOs

http://online.wsj.com/article/SB125772559135637369.html?mod=WSJ_hps_sections_markets

Naturally, I agree with the WSJ’s assessment when they agree with me.

I think they got it right when they talk about the company’s upside potential. But I had to laugh when an analyst stated in the article that he thinks consumers who traded down to the Super Discounters will return to shopping at Wal-Mart once the economy begins improving. His rational was "we contend that when consumers have more money in their pockets, they are less likely to shop in those channels (meaning stores like Dollar General) because the experience isn't as pleasant as in more moderate and higher-priced channels”.

Really??

The shopping experience is pleasant at Wal-Mart?

I’ve shopped Dollar General and I can tell you personally that it beats the stuffing out of shopping at a Big Box.

The store is easy to navigate, not dirty or run down, and it has everything you usually need for cheap. While not a day at the beach, the experience of shopping in a Dollar General was way better than at Wal-Mart if for no other reason than it saved me a half hour of wandering. I got what I needed and got out, with no one in line in front of me.

If you believe in the wisdom of “following the money”, then you have to take note that KKR is going public with Dollar General. Combined with the other factors affecting consumer behavior during this recession, the growth of this model of retail is a big reason why I think the days are numbered for your typical big box outlet.

The guys at KKR guys are very rich, because they are most often right.

Now, where’s my payday?

The Death Of Retail ?

Retail, as we understand it today, is undergoing a remarkable and fundamental change. Most in the industry don’t yet realize how dramatically different the retail environment will be in just a few short years.

Most are still talking about the current economic uncertainty as the cause for the changes in the industry. What they fail to realize is that the current state of retail is more than a simple temporary slowdown. It’s a fundamental shift being driven by several trends in the way America shops that are coming together to provide the “perfect storm” for the death of retail as we know it today.

Strong words I know.

Every time the American Consumer takes a break from the unprecedented 30 year spending frenzy they have been on, one pundit or the other calls for the end of retail as we know it.

In 1981- 1982 the stock market suffered one of its worst years in decades. Fortunes were lost and the warnings began that Americans were racking up debts that had reached unsustainable levels. I thought for sure that this would cause an adjustment to retail purchasing, but still the American consumer kept on spending.

On October 19^th, 1987 the stock market suffered what was up until then the single largest point drop in history. “Black Monday” saw the market loose 22% of its value in a single day. I went to the local mall to see how the stores were faring, and I couldn’t find a parking space.

Sept. 11, 2001, the day that America’s very way of life came under attack, did little to change the way America spends. After a brief time to morn, retail spending actually increased as President Bush reminded us that shopping was a patriotic duty.

Even the burst of the dot com bubble later in 2001-2002 did nothing to stop spending. Somehow, even though everybody knew it could not happen, the American consumer just kept buying at a torrid pace.

The warnings issued over the years were based on solid reasoning. Consumers in 2007 were spending more than they made. The savings rate in this country had actually fallen to a negative number. With consumer buying making up over 70% of the nation’s Gross Domestic Product, there were strong indications that it could not continue. It’s because of these worrying trends that whenever the economy hit a rough patch, the calls for the death of retail rose in volume.

I had been though every one of these major economic upheavals and I had seen the consumer spend its way out each and every time.

So when the “Credit Crunch”, or the “Housing Bubble” or the “Economic Meltdown” or whatever nomenclature sticks, happened on Sept. 29^th, 2008, I went where I always go to see how the economy is faring, I went to the store.

What I found stopped me dead in my tracks.

For weeks, the aisles were empty. Almost nobody was shopping and nobody was planning to shop. Even those who were shopping were only spending what they absolutely had to.

For a full year, the American Consumer has stayed out of the big box retail shops in record numbers. It’s not a simple correction; it’s a big change in the American Consumer's buying attitude. One that may make the way retailers are operating today obsolete.

The trends driving the change coming to retail include:

The rise of frugality

• Unemployment
• Savings rate
• Garage sale chic

Going green

• Sustainability
• Buying local
• safety

Consumer intelligence

• Lessons learned
• The internet
• New Options

These trends will not be going away when the economy ”recovers”. I say that with some qualification, because it is very possible that the economy will never “recover” in the sense that things go back to the way they were.

It’s a whole new ballgame out there where increases in the stock value of large retailers will not be predicated on growth, where new shoppers don’t exist and where brands have no more importance than either outlet or price.

Institutional Intelligence

I just attended a sales training seminar which focused on how to do a better job of pushing products for the company.

I’m old. Really, really old. And I have been selling, in one form or another, for most of my adult life. I’ve had more than my fair share of “training”.

Selling, as my experience has shown me, is nothing more than solving problems…at a profit.

First you need to find out what the problem is, figure out how what you’re selling can solve the problem, and then determine to what degree the customer wants the problem solved, meaning how much money are they willing to spend to make the problem go away.

Now you have just been taught in one paragraph what it took a trainer half a day to teach.

I think they make these training seminars painful so that you’ll actually look forward to going back to work.

As a rule, I try to take any opportunity to learn. What I learned today is that my company has no idea how to teach product knowledge or selling skills.

It was amazing to learn how ill informed the salespeople at the training were. At best they had no idea about how to answer customer questions and at worst they have been giving customers simply dead wrong answers, sometimes for years.

The poor trainer may have been the most clueless of all. She had very little institutional intelligence she could shed on the training beyond having us open the book and watch the video.

So how, exactly, are you supposed to get the product knowledge that customers expect?

In the two years I have been with the company, this was my first training seminar. Sure, they show you video’s and make you take competency tests before you wander out onto the sales floor after orientation, but none of that training has anything to do with what happens in the real world. You are basically swinging without a net.

If you don’t come into the business with some knowledge about what you are selling, then you are forced to learn it on your own or hope that someone else in the department has an idea about how to answer customer questions.

As a Home Improvement Warehouse, our employees are supposed to be a font of knowledge for the customers who wander in. At least that’s what the TV ads all say.

Customers expect me to know which wood flooring is best for a dog that can’t stop peeing in the house, which products will protect ceramic tile from a cat that can’t stop throwing up, and the best way to get bleach stains out of the carpet.

Here’s an idea; train the dog, shoot the cat and don’t be stupid enough to mess with bleach while standing on the carpet.

I know that’s a little rough for you cat lovers, so if you’d like, you can shoot the dog or the dumb bastard that spilled the bleach, your choice.

So unless you are old like me and have come into contact with more than your share of dog pee, cat puke and bleach stains, you have no way of knowing how to respond to these, all too common, customer questions.

It can be frustrating for new employees which helps explain the huge percentage, in some cases 90%, of employees leaving within the first 30 days. Nobody wants to feel dumb, and you certainly don’t what to take abuse for being dumb from a complete stranger.

So you are left with using your free time to search out information on your own so you can become a better employee…at a salary of $11.50 and hour, or you have to depend on the senior people in your department, if there are any, to point the way.

That’s why nobody knows anything.

The information they get on their own may or may not be correct and the history handed down from the elders may be just plain crap. Either way, there is no real way to become smart about what you sell unless you do the work on your own.

Imagine a fireman that picks up his skills on the internet, or a doctor who reads a few brochures before an operation. I know those are extreme examples, but if you spent anytime with my customers you’d know that they do expect me to constantly pull their butts out of fires and to do brain surgery.

And the worst part is that the company, and store management, expects it too.

Why is there so little time or money allocated to continuing education for employees?

Why does the company put so much emphasis in their marketing about having well trained employees and then tells those employees, by their lack of commitment to any substantial training program, that they aren’t worth the time and effort to train?

The company believes that its employees are their most important asset. They just don’t think that you, as one of those employees, is all that important.

This is just another symptom of the emerging trends that will hasten the down hill slide of big box retailers. If you don’t invest in your people, then you loose a big part of the value you should be delivering to your customers. If your employees can’t give them the information they need, then they will find it someplace else, and that someplace else where be will they spend their money.

Here’s a new slogan for you;

“Let’s build something together…with you doing most of the work”

The Rise of the “Super Discounters”- Part II

I’ve blogged about how super low price retailers and a new class of “non-retailers” are threatening the dominance of Big Box stores.

So why are more and more consumers bypassing Wal-Mart? Is it simply because of the zeal to find the lowest prices? In my case it was that and a chance to get even with the brainiacs at Texas Instruments.

The story goes like this.

Late on Saturday our daughter informs us that she needs a graphing calculator for her high school freshman AP math class by Monday.

We knew this was coming. The calculator was on the list of school supplies we knew she would need back in August. But we had put off buying the calculator because the cheapest one we could find that fit the requirements cost $150.00. Some were retailing for upwards of $180.00.

So here we were, late into the weekend having to scramble to make a purchase that we really didn’t want to make. Being unwilling to risk our daughters’ acceptance into Berkeley over a lousy $150.00, I figured we were going to have to pony up the money.

We had a problem with the concept of spending that kind of dough for a variety of reasons.

My wife had a problem with spending the money because she didn’t see why a class in high school should require such an expensive piece of equipment.

I put off buying it because I simply refused to pay $150.00 for technology that Texas Instruments first introduced in the late 70’s.

Today’s $150.00 TI-89 bears a remarkable resemblance to the TI-58 launched by the company in 1977. I remember having to buy this calculator for my college classes, it cost about the same in 1983 as it does now. It was an ungainly piece of technology and I never did learn exactly how to use it.

My thinking was that if the cost of computers can drop from something like a million dollars in the 70’s to around $200 today, why is this piece of technology still being sold at 1970’s prices? I mean, my first cell phone cost me just north of a grand, but today I can pick one up for $29.00, not to mention that I don’t think my 1989 suitcase phone could take pictures.

Perusing the features listed on the packaging, I don’t think the TI-89 performs one iota better that the TI-58 did. And that brought back all of the painful memories of struggling with that damn calculator through statistics class. I was determined not to give those bastards at TI another $150.00 to be completely humiliated…again!

“Thank God for Craigslist”, were my wife’s exact words. She bypassed the usual retail channels and found a slightly used TI-83, which is the same as the TI-89 (and the TI-58 for that matter) being sold on Craigslist for a mere $50.00.

So late on Sunday, I take a trip to the local mall, not to go into the mall mind you, but to meet the owner of the TI-83 in the parking lot.

After a brief introduction and a quick review of the product, I handed the man $50.00 and drove home with our prize. I was happy to have gotten the calculator my daughter needed, but I was even happier about the fact that I had pulled one over on the jerks at Texas Instruments.

Who are these guys that think they have no need to adjust the prices of their beloved calculators to match the real world reduction in the costs of producing electronic devices?

And with that, a $150.00 in revenue is lost to the retail industry. It’s that type of transaction, which is happening everyday, that is speeding the demise of what we think of as retailers.

Wal-Mart may be able to offer the TI-89 at some reduced price, but even they can’t sell it for $50.00 and make $50.00 in profit like the man from Craigslist did.

This is a radical idea among most of the people in the industry that still talk to me. I have found that telling people how everything they think about retail is completely wrong doesn’t get you a great many returned phone calls.

Recently I tried to put the growth of this phenomenon into some kind of numerical perspective. I am attempting to correlate the trend towards these outlets with the movement of stock prices, more on that later, but here’s what I have so far.

The growth of the Super Discounters has been impressive, but is still in its infancy. The companies that provide numbers give some idea of the scale:

Company # stores Revenue

Family Dollar 6,500 $7.4 B

Dollar Tree 3,450 $4.6 B

Dollar General 8,414 Taken Private by KKR

99¢ Stores 279 $1.3 B

So no big threat here… until you consider that the segment is growing at a rate above 6%, during a time when most retailers are struggling to keep from shrinking out of existence.

It’s also telling that the biggest player has been taken private by KKR. Those are the folks who started the consolidation frenzy in the supermarket industry in the early 1990’s that drove company valuations through the roof.

Maybe they know something?

I’m just saying.

The second part of the argument is a bit harder to quantify. “Non-retailers” don’t report annual numbers. Craigslist has no clue how much of the stuff offered for sale is actually bought and nobody reports the profits from their garage sale, don’t take my word for it, ask the IRS.

There is some anecdotal evidence however.

The National Association of Resale and Thrift Shops (yes, this proves that there is a group for everybody) takes the pulse of the industry thought a series of surveys.

The latest NARTS results show that over the second quarter of this year the growth rate of the industry accelerated from a 5% annual figure to 7%. 64% of those responding had an average increase in sales of 31% and a 77% increase in new customers. 65% saw an increase in inventory offerings that averaged 28%. Most of the members reported that the inventory offerings increased in quality over previous years.

When was the last time you saw any big box retailer with double digit sales and customer traffic increases?

New stores, new customers and a new “Frugalista” mentality (the trend towards selling off your old stuff to buy new stuff) feeds into the future growth of this type of retail…at the expense of the status quo.

Nobody at Wal-Mart is afraid of these guys today, but I remember when nobody in the retail industry was afraid of Wal-Mart. These things have a way of creeping up on you.

Stay Tuned!

The Rise of The “Super Discounters”

Say what you want about Wal-Mart, everybody has. They are either the best thing to happen to capitalism since the creation of the stock option or a heartless cancer destroying the Global economy. Love it or hate it, Wal-Mart has had a significant impact on how retail operates.

They have also changed they way consumers shop.

This may ultimately be their downfall.

Their newest slogan, “Save Money, Live Better”, is a far cry from the original; “We Sell For Less”. It’s part of an overall attempt, the success of which is still undermined, to put the Low Price Genie back into the bottle. Wal-Mart has taught a generation of consumers that the most important thing in making a buying decision is finding the lowest price. It’s a strategy that has served them well, but it has given ammunition to the latest retailing trend designed to knock them off of their throne as the king of all retail.

Low prices are a powerful consumer motivator, but once your sales growth slows, along with increases in your stock price, you need to manage for profit. That’s why Wal-Mart is trying to wean it’s customers off of the low price addiction. Wal-Mart’s return to investors over the last 5 years is somewhere in the negative 25% range. A far cry from their heyday where the stock price was doubling ever five years and Sam was dancing on the floor of the NY stock exchange in a grass skirt.

The problem is that Wal-Mart has no customers. All they have is legions of shoppers looking for the lowest possible price. The average Wal-Mart shopper is loyal to only one thing, spending as little money as possible when buying the things they need to live a modest modern life.

Enter the Super Discounters.

These retail operators, some of which are not retailers at all, are re-defining low prices by driving down operational costs and offering just about anything they can get their hands on at prices dependant on factors other than volume. As an example, look at the genre known as the 99¢ store.

These operators set up shop in declining strip malls where overhead is as low as you can get without violating local zoning laws. The stores are small and minimally merchandised. They offer any merchandise they can buy, or rather scrounge, for less than a dollar. The merchandise mix will include products with mistakes in the packaging, products originally developed for export and what can only be described as rejects or from other retailers. Think of the Island Of Misfit Toys on steroids. For a great example of their merchandise mix, just watch Jay Leno. He has a famous bit where he goes shopping in a local 99¢ store and brings his more hilarious finds back to the studio.

But the proliferation of these types of stores is no laughing matter. They are positioned both geographically and pricewise to capture what has traditionally been the bread and butter customer for Wal-Mart. The shopper interested in nothing but low prices. Due to their reliance on cheap real estate, they tend to closer to where these shoppers live and their prices can not be beat using the traditional method of driving down costs by using huge volume.

They don’t rely on volume to get lower costs, they use opportunistic buying. This is a skill that Wal-Mart and other traditional retailers can’t copy. Their volume precludes buying what in the parlance of the business are known as “odd lots”. On the other hand, most of the operational advantages that helped Wal-Mart grow, such as computerized demand management and tight inventory controls are now standard in the industry and available to everybody at a fraction of the cost Wal-Mart incurred to develop them from scratch.

Then there are the non-retailers, the Good Will shops, thrift stores and the largest online non-retailers out there, E-bay and Craig’s List. These non retailers are taking money from Wal-Mart consumers in record numbers as the American population takes frugality to the level of sainthood. Garage Sale Chic is the new black. It’s hip to display how much you save rather than how much you spent.

And these retailers pay nothing for the merchandise they sell, it’s mostly donated. The workers? Well a majority of them are volunteers. How do you compete against a retailer who has no inventory or employee costs?

Traditional retailers can’t easily compete with the super discounters and the non-retail retailers without incurring huge operational expenses. They have to sit back as the Frankenstein monster that they created, known as the price conscious consumer, slowly bleeds out of their sales base. Trying to upgrade Wal-Mart is a herculean task that history has shown is highly likely to be a failure. Think of Kressge, Ames, the original K-mart and Woolworths, Once the customer gets it in his head that low prices is all that matters, they are difficult to un-educate.

With stores closing across the country, there is a nearly unlimited supply of “B” grade retail locations that can easily support a Family Dollar, Dollar General or 99¢ store. Some of them directly in the backyard of huge Wal-Mart’s, since they are the skeletons of the very retailers Wal-Mart put out of business. To the best of my knowledge, no one is organizing to keep a retailer from taking over a vacant building on the grounds that it will disturb the local area.

Add to that the fact that these stores can be run with no more than three employees at a time, some of which draw no salary and that they sell products picked up for pennies on the dollar, or given to them for free as donations, and you a have a recipe that is sure to give Wal-Mart nightmares.

Ricochet Recession

There is no doubt that things are beginning to improve in the retail environment.

This Labor Day I saw a huge increase in sales in my store. It kind of reminded everyone of the good old days when consumers spent more than they made and used their homes like ATM machines.

But it’s not the good old days; it’s still the bad current days. A reduction in the rate of decline in unemployment is just not the same as an increase in employment.

Sales have continued to be strong this past week and with any luck we should hit budget for the first time in close to a year, but it’s not time to pull out the Champagne.

Continued good news on the economic front is reason for hope, and I for one would love to see some life step back into the retail marketplace, it’s just that things will never be like they were because…well mostly because, they never are.

What we are witnessing now is the release of a great deal of pent up demand on the part of those 85% of consumers who have not lost their jobs, who have not had their homes foreclosed on and who did not loose a bundle in the stock market.

People can only put off spending for so long, some because they really need things like water heaters and washing machines, and others because the habit of spending is so addictive that they have been jonesing for a fix since January.

So while sales have improved and the pundits will soon start cautiously calling for an end to the recession, don’t be too quick to believe the next round of hype. Things are going to dip again real soon and the level of dip will depend on how strung out consumers get living it up on this pseudo-recovery spike in good economic news.

Anyone who has every driven the 405 in Orange County California knows about “Ricochet Accidents”. They are as common to the daily commuter as the infamous “SigAlert”.

As rush hour traffic, (or any hour traffic since the 405 through Orange County is always heavy) slows to a crawl, you will inevitably see people craning their heads out of car windows to see where the accident is. As people approach the accident, they instinctively slow down to look at it. In Orange County the rubberneckers are not just looking for gory details, they honestly think it might be somebody famous who is crying over the crumpled front end of the Escalade stuck sideways in the fourth of the seven lanes.

As soon as they clear the accident site, Cali drivers immediately accelerate to 85 MPH to make up for the time they lost seeing if Brittney would be appearing on the cover of People with a neck brace. Since everybody is going 85 MPH and changing lanes like Hollywood couples change spouses, there is sure to be another traffic accident no less than one and a half miles down the road. Hence the name “Ricochet Accident”.

That’s what we are about to experience in retail sales, a “Ricochet Recession”. Anyone who builds up inventory or adds too much staff right now will be in a world of hurt by the end of the year. This surge in spending might make it into the beginning of the holiday season and it will be hard to determine exactly if lower Christmas sales are result of the drop in pent up demand or of lackluster holiday performance, but the fundamentals of the recession are still too strong to allow for any real recovery until the second quarter of 2010.

This is not the end of the recession, not even close. Things are going to get bad again before they get better. The only question is how bad and for how long. The answer will vary from retailer to retailer depending on how individual retailers react to the current economic uptick and how well they prepare for the “Ricochet Recession”. Any attempt to back off of aggressive pricing and marketing to regain valuable margin dollars will be met with disastrous results.

In fact, I don’t see how big name retailers are ever going to get back the margins they have lost. I also don’t know how they are going to keep shareholders from revolting. I don’t see how the current model of big box retail can hope to increase shareholder value in a slow-grow to no-grow economic environment.

In addition, we can’t loose sight of the fact that consumers are going to school right now. They are learning exactly just how far retailers are willing to go to get sales in tough economic times. Just because they may start coming back into the stores after the first quarter of 2010 doesn’t mean that they will accept businesses going back to 2004 practices.

It’s going to be a whole new ball game when the economy “recovers”. The old way of retailing is entering an age of decline and new retailing models are rising from the economic ashes to challenge everything current retail mavens believe about how to make money.

It’s going to be very, very interesting.