Retail Rundown – Dec 16, 2019 – with guests Paula Rosenblum and Brandon Rael

Julia Raymond:
Our guests today include Paula Rosenblum and Brandon Rael. Paula is a top retail industry analyst and managing partner and co-founder at Retail Systems Research. Paula also serves on the RETHINK Retail advisory council. Brandon is an experienced retail strategy and operations expert and the Director of A&M’s Consumer and Retail practice. Brandon, Paula, thank you both for joining today.

Paula Rosenblum:
My pleasure.

Brandon Rael:
My pleasure to be here. Thanks for having me.

Julia Raymond:
It’s great to have you. This week is all about brand partnerships. Some interesting bits of news have come out in the coming weeks, so Rent the Runway, they’re partnering with Marriott. They want to make sure you never have to pack again, so to speak. So the high end clothing subscription service partnered with Marriott W hotels to bring what they’re calling its “Closet Concierge” to your next vacation or cross-country conference. They launched in select W hotels in Aspen, South Beach, DC, and Hollywood. And guests who book a room in advance are sent an offer to choose from four outfits from their Unlimited closet collection.

Julia Raymond:
So the cost of a four-day rental package is $69 and the hotel will send the choices to the hotel prior to your arrival. So the rented clothing is hung in the room by the hotel staff and later returned to Rent the Runway by the hotel. So all you have to do is check in, your clothes that you selected will be there, and then check out and leave the clothes in the room. Paula, what do you think of Rent the Run Rent the Runway’s vision of packing less travel. And do you see this concept becoming a new retail trend?

Paula Rosenblum:
Honestly, I kind of don’t. And the reason is the online return rate for apparel is North of 30%. And so the chances of the vacationer actually liking what’s dropped off is only about, let’s say 70%. So I mean if it’s a loyal Rent the Runway customer who’s familiar with the brands they sell and knows the fit and styling, et cetera, et cetera, then maybe there’s a better chance. But just as a naked concept, I think it’s risky.

Paula Rosenblum:
Plus, what if you change your mind? What if you break your leg and you have to have a cast. There are various things that make me think it’s niche at best. I mean I probably should go over to South Beach and ask them at the W how it’s running for them. But I don’t see it personally.

Julia Raymond:
Okay. So you’re a little apprehensive about the success. Brandon, are you on the same page with Paula or do you disagree?

Brandon Rael:
I somewhat disagree. I think it has the ability to scale and could be successful. Certainly in a niche, if you look in the markets, obviously they’re more tourist-centric and focused on a particular customer set that’s used to Rent the Runway and operations. But again, it comes down to execution and the right choices of the customer to, like Paula said, the return rates pretty high for online shopping. And it’s all about curating experiences and knowing the customer. So again, it requires a lot of analytics and insights and it all comes down to executing it properly to avoid any potential public relations hiccups, which Rent the Runway experienced with their own model I think about a month ago when their essential operations went down. So from a PR perspective, it definitely generates interest in the brand and shows it’s somewhat scalable in certain markets, but the success rate depends on the execution and the choices they provide their customers.

Paula Rosenblum:
You know, maybe if they added… Maybe if you’re going for four days and they sent you six outfits, then it would work because then you could pick the one that you liked the best as opposed to you want to keep it. In other words, you’d want to make it broader than the actual number of outfits they need. Then it might work.

Julia Raymond:
And I think there’s a number of applications. Maybe they have a more formal event and they don’t want to pack an expensive dress or suit, whatever it may be into a bag. So they have four options, but this $69 price point. I’m not sure if that’s for everyone, but it seems reasonable.

Paula Rosenblum:
If you’re staying at the W it’s certainly reasonable.

Julia Raymond:
Right.

Brandon Rael:
Exactly. It’s a very curated selection of hotels and locations which are really focused on the tourist traveler. So I think again, it will resonate with the right customers if it comes down to maybe perhaps additional choices and the right selection of products and execution and avoiding again any social media backlash like what happened last time with Rent the Runway.

Julia Raymond:
I think there’s also an opportunity here for influencer marketing. Influencers tend to travel a lot. Brands could maybe work with Rent the Runway to get [inaudible 00:04:56] sent to influencers on location for photoshoots and things like that.

Brandon Rael:
I think it’s always room for growth in the influencer space and they have a really good positive effect if it goes well for Rent the Runway for Marriott and their brand. And [inaudible 00:05:14] cross-marketing opportunities for hotel companies. So I think if the execution’s right and the branding goes well and customers are happy with it, it could be a good extension of the Marriott brand. And they can roll it out and scale it beyond these four markets.

Julia Raymond:
So it sounds like Brandon, you said it all depends on execution and the choice, the market selection where they implement this program. And Paula, you said the rate of online returns is very high.

Paula Rosenblum:
Yeah. But if you think about it and you gave them more choices, assuming you could do that profitably, it might work.

Julia Raymond:
And I did read… It’s interesting just Rent the Runway in general, I know they’ve had a couple of hiccups here and there this year, but their partnership with Nordstrom seems to be expanding. That happened last month and now there are actually drop off boxes for rental returns in almost 25% of Nordstrom’s full-price stores nationwide.

Brandon Rael:
Yeah. I think for Nordstrom, it’s a win-win proposition. It draws more traffic into the store, that partnership really is going to help both brands out, both from a strategy and fulfillment perspective. So I think it could really [inaudible 00:06:40] in the right markets so Nordstrom is making the right moves in the marketplace right now.

Paula Rosenblum:
Yeah, I agree.

Julia Raymond:
It’ll be interesting to see what happens. The next odd but sensical partnership is with Old Navy and Postmates. So they’re teaming up to help meet the consumer demand this holiday season for fast and free shipping. So it’s a limited time from December 21st to the 23rd, you will be able to order online from Old Navy and have Postmates deliver the items same-day for free. And this offer will be in more than 4,000 US cities where Postmates operates and they will continue to work with Old Navy through the end of January for a fee for $8.99. So a spokesperson for the carrier said that they’re exploring the longer-term opportunities with the retailer. And Brandon, I just wanted to ask you, do you foresee same-day delivery with these other services bringing in a surge of last minute holiday shoppers that Old Navy is trying to attract?

Brandon Rael:
It could potentially bring in… I think retailers are really seeking any competitive advantage during the short holiday season. And essentially the fulfillment wars I call it have become the Holy Grail for retailers where they continue to use their stores as a potential way to fulfill products the same day. So obviously with things like buy online pickup in the store, otherwise known as BOPIS, is becoming an industry standard. And I think Old Navy is playing catch up here with their partnership with Postmates.

Brandon Rael:
So it certainly will draw some interest in perhaps incremental traffic to build stores. But the bottom line is Old Navy needs to continue to drive the proper assortments, the pricing, the value that customers are looking for. Again, execution is part of the strategy here, so everything has to play in concert with each other. And I think same-day delivery is becoming the industry standard of buy online, pickup in the store. But again it has to be a seamless shopping experience online and you could have in the store to offer the right products, the right place, right time, the right value. It could potentially be an opportunity in the longterm to grow for Old Navy.

Julia Raymond:
So pretty positive then about the idea that Old Navy might be able to have some success come out of this. What about you Paula?

Paula Rosenblum:
Yeah, I do. I mean Postmates is an interesting choice because they are in some ways the runt of the litter when it comes to restaurant delivery, but they’re also relatively unique in that they’ve actually worked with other kinds of retailers before. I was in Brooklyn about a year ago I think, and I was getting a cold and for me I panicked because I need to take zinc right away as soon as I get there. And I was in some hotel under the Brooklyn Bridge and there was no place to find it and sure enough Postmates was able to deliver. So they’re actually used to delivering things besides clothes. The challenges I see is Old Navy’s going in position is 50% off. So adding more cost to their products as opposed to more cost of goods sold is kind of a problem for them.

Paula Rosenblum:
The other advantage, forgetting about same day or not same day, I don’t know if you’ve ever seen Old Navy when they start one of those sales, but the place is a zoo. And so if a customer can avoid going to that zoo, that’s great for the customer, whether it’s same day or next day. But on the flip side, given how zoo-ish it does become, will the shopper be actually able to find what the customer was looking for and deliver it successfully?

Paula Rosenblum:
So they’re going to have to probably either increase or stash some inventory for this purpose and it’s going to be challenging year one to make it right. Year two, I expect will be better than year one. But I like it in concept not because of… I think same day delivery is really niche. I always have. I kind of always will. But the notion of just this is what I want, I don’t want to deal with the store, and I’m afraid or whatever reason, I don’t want to have the package sitting outside my house. With Postmates, you get a lot better communication around when they’re coming and what time, etc., etc.

Brandon Rael:
Yeah, I am in agreement with Paula. I think this partnership’s maybe a test and learning experience year one. And so they have this test and understand what the challenges are. The challenge is would it require extending assortments in store and essentially have the online catalog available at a majority of the larger stores so it can be available for the shoppers? But certainly it’s scalable, it could be successful in the long term. I think they’ll be able to learn and understand things and do a postmortem after the holidays to see how successful it was and what was the impact of their profitability and the bottom line of increasing their cost for shipping.

Julia Raymond:
And I think that’s key because you both made the point that Old Navy already sells a lot of their merchandise at a discount, a heavy discount. So they should stock up on inventory, like Paula said. I know I had a guest on the show the other day who mentioned speculative money retailers stocked up more on inventory this year because of the potential for the tariffs. So perhaps it will go well, but I know it’s only a three day-ish window when they’re offering the free Postmates, but $8.99 seems reasonable. And I’ll be interested to see if that price point stays the same throughout next year.

Paula Rosenblum:
Yeah, I mean listen, I know a lot of people including me who’d pay $8.99 even in the holiday season, not to have to go out to the store and to support other merchants besides the 900-pound gorillas.

Julia Raymond:
That’s a good point. And so our team looked up the number and actually the number of people who have ordered clothing items through Postmates grew 60% year over year. So it was pretty significant growth. So the consumer behavior is definitely driving this. I think people will use it. But like you guys said, price is always a concern. Retail is a business.

Paula Rosenblum:
Yeah. Yeah. I mean it’s not a charity and I wonder… I don’t know that because there’s been this big shift over at Gap most recently, I don’t know whose idea this was. And what they can do if it was let’s say the idea of the former CEO, set expectations nice and low with shareholders and then develop a plan to tee up for next year that really does help them drive both top and bottom-line results. They’ve got to get out of this 50% off thing. This is not healthy for anybody or anything. It’s training everybody badly.

Brandon Rael:
It sets the bar of expectations pretty low Paula, but going in there and you’re expecting really cheap value. They have to sell the quality, sell the experience, sell what the brand really means beyond 50% off.

Julia Raymond:
Absolutely. Absolutely. And the last partnership we’ll cover is the grocery. Focused on Kroger and Walgreens. To reduce supplier costs, Kroger and Walgreens are forming their own purchasing group. So the Kroger Walgreens Retail Procurement Alliance is what it’s called. And this will allow the retailers to determine which of their products overlap and then combine their orders. So the Alliance is paving a way for them to determine if Kroger and Walgreens can begin manufacturing products for each other in house, and they’re actually inviting other retailers to get in on the deal too. So last week their CFO Gary Millerchip told CNBC they hope other retailers will join in with their Alliance. Paula, are there any drawbacks facing these retailers as they’re forming this purchasing-

Paula Rosenblum:
If it’s branded goods, they’re not going to gain any efficiencies at all. There’s a law called the Robinson-Patman Act, and that says that anybody who can buy a truckload of product should be paying the same price as anybody else who can buy a truckload of product. Now, clearly in the Walmart slash Amazon era, we know that that law is not strongly enforced. However, one of the reasons why you see things packaged the way you do at Costco, for example, where there’s let’s say two boxes of ravioli sort of shrink wrapped together. That’s because it becomes a different SKU and they can sell it to Costco at a different price than they would sell it to a traditional retailer.

Paula Rosenblum:
So for branded product, that’s actually a real issue and I don’t see how they get any economies of scale. If the goal is to create a group private label, they get around the Robinson-Patman Act. But then the question becomes why is this better than some other product at some other company? Traditionally, particularly with chain drug, let’s say you buy generic allergy pills. They’re put in these torturous blister packs that are almost un-openable versus the brand. The only difference I can see between the brand of let’s say Allegra and the private label is that you need some kind of a sharp object to pop the Allegra out of the private label one. Right?

Paula Rosenblum:
So you have to create some level of interest in differentiation and then it becomes interesting. I mean I have bought Kirkland, which is Costco brand on Amazon. I don’t know if Costco’s doing that or if there’s a jobber in the middle, but they have to create brand equity.

Paula Rosenblum:
You don’t just snap your fingers. I think Walmart learned this the hard way six years ago or so when they decided to stop selling Hefty brand bags and some other brands and focus much more on their own private label. The problem was they hadn’t really created brand equity around that private label. And so customers revolted. On the flip side, you get somebody like Publix who spent the whole recession touting their private label and doing promotions like buy a national brand and get one of our brands for free. And they built a tremendous amount of brand equity around their private label. So that’s another challenge assuming that they really do create a private brand rather than a national brand. Rather than using a national brand, they’ve got to create some level of cachet around that brand and that’s going to cost money and increase costs for some period of time.

Julia Raymond:
So brand equity definitely will be a challenge. And then like you said, there are some legal aspects to this. Brandon, what are your thoughts?

Brandon Rael:
Yeah, I think it’s like Paula said it’s going to be a challenge from a legal perspective. I think it’s going to be a challenge from an organizational perspective. I think two very large companies they’re really trying to compete and challenge now with Amazon dominating the marketplace. But also at Target, increasing their level of private labeling, labeled brands, and options they have out there. So this could potentially be successful if it’s focused and concentrated on the private labeling and brand equity through the synergies that form between the two brands. It’s maybe a store within a store concept. Within a Kroger, a mini Walgreens section or a Kroger-like environment within a Walgreens store with a mini popup or section. But any kind of cross-brand marketing of branding, it can certainly take advantage of that. But there will be an inherent cost and another consideration if they try to synergize it too quickly. I think if they focus purely on private labeling and try to come up with something unique and exclusive to the new brand, then it could be successful.

Julia Raymond:
So could they use the Walgreens nice brand and just start distributing those through Kroger or is that not possible with the-

Paula Rosenblum:
I don’t know why you would… If I was Kroger, I don’t know why I would do that.

Brandon Rael:
Yeah, they end up competing with themselves or cannibalizing their business that way. It’s just trying to understand this from the surface seems very reactionary concerning the marketplace right now, so I’m not seeing the upfront value of this. Maybe it’s going to be a longterm strategy here in play that we are not aware of.

Julia Raymond:
And do you think it’s-

Paula Rosenblum:
Like I said, the big challenge is you don’t build the brand in 15 minutes. I don’t know how much brand equity Walgreens private label brand actually has. I just don’t know long and the short of it.

Brandon Rael:
I think it all depends on the level of product innovation and the uniqueness that will come out of this collaboration. It has to be, again, the focus and the emphasis has to be on private label brands and that’s become the standard-bearer in the marketplace with Amazon and also Target and Walmart. So I think it is becoming increasingly prevalent. So perhaps this is the end game for these two companies.

Julia Raymond:
So you’re saying it could be a smart long play here.

Brandon Rael:
Potentially.

Julia Raymond:
Do you think it’s sincere when they say they hope other retailers will join the Alliance?

Paula Rosenblum:
Well, sure. If they’re trying to build a brand, why wouldn’t they be?

Julia Raymond:
And just speculating, who do you think it would make sense to join Kroger and Walgreens together?

Paula Rosenblum:
Well, did they specify what products they were going to be building? I didn’t see that anywhere.

Brandon Rael:
I did the research. And I don’t see what products or what they are going to be focusing on. They did reference both their private label brands and trying to meet the evolving needs of the customer in the industry. So some of that’s the initial strategy going into this.

Julia Raymond:
Yeah, I didn’t see any specific categories of products mentioned.

Brandon Rael:
Correct.

Paula Rosenblum:
So then I don’t know how long the road is. You know what I mean? I just don’t know. It’s too soon to tell as far as I can see.

Brandon Rael:
Well, I’ll take a wait and see approach as far as I’m concerned.

Paula Rosenblum:
Yeah, exactly. I mean like I said, you don’t build a brand in five minutes, that’s for sure. Now if they take the Kroger brand and they put it in Walgreens, they take the Walgreens brand and they put it in Kroger, does that add excitement? I don’t know.

Brandon Rael:
At that point, I think the key to success here is really to market and brand the heck out of this so the customer has an awareness of what’s actually happening. And it’s something new and exciting, exclusive to those brands. And it could make an impact, whether it’s their social channels or traditional advertising or in-store signage, but something has to be out there beyond just a PR statement that this is actually happening and here’s the advantages to you, the customer, and here’s the excitement around this, and the exclusive products you get in this partnership. And it could work. But we’ll wait and see.

Julia Raymond:
Wait and see, a new Alliance. Well, Brandon and Paula, thank you both for joining and commenting on the partnerships that we talked about today. It was really good to hear your insights.

Paula Rosenblum:
Oh my pleasure.

Brandon Rael:
My pleasure. And happy holidays. Thanks for having me again.

Paula Rosenblum:
Yeah.

Julia Raymond:
Thanks for joining. Happy holidays.