Retail Rundown – Feb 10, 2020 – with guests Brandon Rael and Carl Boutet

Justin White:
Today we’re joined by Carl Boutet and Brandon Rael. Carl is the Chief Retail Strategist for Canada’s Studio RX. Brandon is a Director at Alvarez and Marsal’s consumer and retail practice. Carl, Brandon, thank you both for joining us today.

Brandon Rael:
Pleasure to be here.

Justin White:
So Macy’s is officially downsizing its fleet of department stores and the retailer released a restructuring plan designed to stabilize profitability and position the company for growth last week, which includes closing 125 of its underperforming stores and its Cincinnati headquarters as well. Macy’s will also move its e-commerce HQ from SF to NYC, and it will also scale down its story concept by 50%.

Justin White:
While the department store will be shutting shuttering scores of its traditional stores, Macy’s is planning to cut some ribbons too, and the retailer is currently testing a new store format called Market by Macy’s, which is a smaller format off-mall shop that features curated merchandise and local goods as well as F&B and special events. And the first Market by Macy’s opened in Dallas last Thursday with plans to open more in the near future. So is Macy’s plan to close underperforming stores while focusing on flagships and its off-mall brand, the smart move forward? Open fire.

Brandon Rael:
Yeah. So yeah, first of all, when you hear these kind of announcements, it’s very unfortunate news. It’s an iconic brand, very historical, it’s been around well over a century. Macy’s represents a lot of things to a lot of people. So we wish the people who are impacted by this, the store associates, the managers, the directors, the corporate associates were impacted by the moves, the best of luck. And thankfully the retail environment is doing well overall, so there should be opportunities out there for them.

Brandon Rael:
Before we get into the details, a little bit of historical context. Macy’s as it stands today is really a conglomeration of the acquisitions that federated Macy’s with the May company in Dayton, they were a distinct brands out there like [inaudible 00:05:01] by Marshay, Marshall Fields, and others that were rebranded into Macy’s over the last 15, 20 years. So these regional department stores have a lot of brand recognition and very loyal following in these local markets when they rebranded as Macy’s, it wasn’t that brand recognition or that loyalty at a typical Macy’s store would have. They were also in an underperforming markets as well. So, that’s a little bit of context.

Brandon Rael:
But from a transmission perspective, they’re never easy. A major component of a transformation is the cost-cutting initiatives and store closures and resource reductions. The good news from that, there will be capital available for upgrades and to resize the store fleet and establish new store concept. It will be challenging, especially in today’s environment. How can Macy’s reimagined the department store to really fit the needs in the modern day customer? It’s promising to see the smaller format stores are being positioned, and that’s really where the customer is headed in today’s environment.

Brandon Rael:
So as they go forward in the next couple of years, the innovation strategy should be centered 100% on the customer experience and retaining their base and really aggressively going after the newer customers, especially in the smaller format stores. So while they are departing underperforming malls, there are opportunities in close to the towns and communities and really environments that will resonate the modern customers. So challenging times ahead for Macy’s for sure, but there are chances to reignite the brand next couple of years. So we’ll see where this goes.

Carl Boutet:
Yeah, let’s start with the good news. So, going on this self-imposed, pretty strict diet of CapEx is the play, everybody’s trying to downsize and right size and reallocate their resources more strategically into spaces like this new format, and hats off to the team there for pushing that. That’s a pretty drastic move for a brand like Macy’s to downsize at that level. Hopefully one that will inspire others to probably think a little more aggressively around the changes that they need to confer. But that said, I think, as Brandon was saying, I think there’s some tough times as well ahead, and the fact that the model is broken, the department store, what created that legacy has … the conditions economically and socially and the way people wanted to engage with their time and money has drastically changed. So is this cut, is this reformat drastic enough?

Carl Boutet:
And I’m not insinuating anything beyond saying, well, this is all about e-commerce versus in store. It’s not, that’s part of the dynamic, but it’s not the whole dynamic. Department store, the model for, not just for Macy’s but for many others, even the ones that are even more exclusive like Nordstrom’s and less exclusive, more so for JC Penny, these are all … they’re all facing the same dynamics.

Carl Boutet:
Here in Canada, 10 years ago we had 5 different department store chains. We’re basically down to, let’s call it two if we’re being generous, but really one. So I think that’s … things have sort of accelerated here because we’re a smaller market. The US market, obviously the demographics are probably a bit better. There’s some more growth there. But the fundamental changes is how you position yourself to create value in the market, and I think that the shift that’s happening in the department store sector is going to be more and more one of real estate, and you’re going to see them behaving more and more like realtors where they’re going to be space allocators more than they’re going to be brand allocators, and then let the brands come to them and carve out the space and use the traffic that they can generate to justify having those brands invest in those spaces.

Carl Boutet:
So we’re talking about how brands are investing right now in commercial environments, while we’re obviously looking at a lot more than just goods, we’re looking at a lot of food concepts like this new format is exploring, entertainment, hospitality, all these things are going to have to blur and department stores are going to have to get away from this model of sales per square foot and just be basically product centric retailing and expand the offering to really keep driving traffic into their buildings. Which in Macy’s case is fortunate because they have fantastic real estate. If they didn’t have that, they would already be closed.

Justin White:
So in the spirit of the aforementioned polarization, we will move into a different story of expansion. So beauty retailer Sephora is making serious moves on the retail landscape, and the LVMH owned retailer announced last week that it plans to open 100 new brick and mortar stores this year, marking Sephora’s biggest expansion to date. They’ll focus on opening off mall stores in smaller US cities such as Charlotte, North Carolina, and Nashville, Tennessee.

Justin White:
And on the digital front, Sephora is working with social media platforms like Facebook Messenger where customers can book salon services directly through the Facebook app and incorporating technologies like skin tone scanners in its stores. So what can other retailers take away from Sephora’s success?

Carl Boutet:
So we just finished with the Macy’s story, we’ll go right into Sephora and how different they are. Yet think about Macy’s and how they really drove beauty and cosmetics and that’s a lot of department stores, that was sort of the key entry point. They were delivering a very similar experience, but breaking down the brand separately and having each brand sort of position itself. Sephora pulled that all underneath this roof and is just running away with it right now.

Carl Boutet:
I’m not so sure about why the announcement at this time, why they need to come out and say 100, maybe they’re just trying to take a … it’s an opportunistic time to say that while others are struggling and LVMH stock is doing great. But that said, I mean, they’re clearly the champions right now in the cosmetic sector, even for a Goliath like LVMH, and driving a lot of their growth in a market that’s otherwise pretty soft. I think they’re the poster child for a lot of us retail pundits around this integration of digital and physical that we’ve all been yammering about for years. But the fact is, is they’re really executing on it and they seem to have a very, very solid grasp on what those levers are between the two and how one influences the other.

Carl Boutet:
So even within this announcement they spent a lot of time talking about how they were going to also increase their investments in social media and online engagement and creating new digital tools that both their associates and their clients could use. So listen, hats off to support Sephora, and glad to have the positive stories obviously. But my concern sometimes when these organizations get a little overenthusiastic and make these kind of announcements is they might be setting themselves up to overshoot the runway a bit, and yes, they have a very successful, a very profitable model, but just let’s take it in steps and hope they get those 100 and then more. But let’s not …

Carl Boutet:
The other interesting part about that announcement is they made it clear that it was out of mall, so they wanted to make that clear, which I’m sure a lot of real estate developers aren’t so happy to hear that specific piece of the puzzle. But again, good for them too to keep pushing ahead.

Carl Boutet:
So when you say take it in step, do you think 100 is too ambitious of a number, of an opening? I don’t know. Is it too … I mean, they’ve done their homework, they’ve looked at markets, they brought up a half dozen including Nashville, which I’m not sure why it’s considered a small market, but anyways, I mean smaller markets, and it’s obviously smaller than New York city, but it’s just going more regional, smaller footprint was also something they mentioned. So is it 100, is a 200, is it 50, is it 10?

Carl Boutet:
I mean, the number is almost sort of irrelevant too because it depends on the footprints. If they’re going to open 100 kiosks, which they don’t really do, but let’s just say for argument’s sake that they would, what’s the impact of that? Versus, is it 10 flagships or is it 20 community stores? Is it 100 … so I mean it’s a number. It’s a nice number. It’s a round number. It communicates nicely. Well, look at what we’re doing right now. It gives them one more reason for us to talk about them, which good for them.

Brandon Rael:
Yeah. I think any publicity is good publicity, especially when you’re taking a really aggressive stance of opening new stores. So again, hats off to LVMH and Sephora. I think one of the driving motivating factors here is that Ulta, one of their main direct competitors is very aggressive with its store openings and they’re always releasing PR statements about opening 100 stores in this market and that market. So Sephora is going head to head up against Ulta, and it’s the clear statement of their direction going forward.

Brandon Rael:
They’re really a shining example of a company that knows their customers. They talk endlessly about personalization and connecting digital and physical together. They are one of a few retailers that can really truly execute it, so I couldn’t agree more with Carl. So the store openings, it’s encouraging. They’re going to be very much inclusive and accessible, centered in local communities, town centers, main streets and less of dependency on malls, and especially all the co-tenants that are now go bankrupt or are facing financial troubles. It really puts Sephora in the driver’s seat of where they can open and really helps to revitalize some of these downtown cities in North America.

Brandon Rael:
Another encouraging sign is Sephora stepping up to the plate, especially with the very positive trends around wellness and health and beauty. Sephora is very well positioned to continue to grow in this space, and it’s definitely one of the shining examples of companies that are doing quite well in this environment.

Justin White:
So now we will move to a little bit tougher end of the spectrum and talk a little bit about Forever 21. Struggling apparel retailer Forever 21 announced last week that it had reached $81 million deal to sell its retail business to a group that includes its landlord, Simon Property Group, as well as Brookfield Property Managers and Authentic Brands. And Forever 21 made headlines last September when it filed for bankruptcy and announced plans close up to 178 stores in the US, obviously the aforementioned valuation pales in comparison to its valuation just a few short years ago. And unless another bid comes through, Forever 21 aims to close a deal this week.

Justin White:
So with Forever 21’s target demographic being more interested in niche categories and sustainable brands, will this fast fashion retailer be able to make a successful comeback?

Brandon Rael:
Yeah, I think it’s a classic case of co-dependencies where the mall owners just signing authentic brands have stepped in to prevent mass vacancies in their properties. We’ve seen it before with the acquisition of some of the [inaudible 00:24:19] properties, just to keep a presence in the mall. It’s not so simple, unfortunately, for Forever 21. They’ve had 5 to 10 years of a down cycling business as a trend. That really changed significantly in the market. Their core customer has migrated over to fast fashion but also to a more sustainable fashion or are abandoning the brand completely. So there’s been a lack of customer interest, underperforming stores, assortments that simply don’t resonate.

Brandon Rael:
I really view this as a short term gapfill. It will keep the brand, sustain the brand for a while and keep a presence in the malls, but they’re really longer-term fundamental business strategic misdirections that really need to be resolved in order to turn the brand around. So it will require quite an investment by multiple owners who now have a lot of business stake within the brand that has been declining for years. So it’s going to take a concerted effort to do another transformation, and really try and find ways to appeal to a customer that has abandoned the brand. So I’m not too optimistic about their prospects moving forward to be honest.

Carl Boutet:
Yeah, I think this is, going back to our last story about announcing 100 openings and are they overshooting the runway? I think it’s a cautionary tale of how Forever 21 overshot the runway. They were doing very well, as Brandon pointed out, five plus years ago and just thought they could just keep replicating that and replicating it and surfing this wave of malls and mall traffic and building on that, and just really went way too big, way too fast. That hopefully is now lessons that that can be learned elsewhere.

Carl Boutet:
In this case as well, I think there was a loss of focus, which can happen too when you grow very quickly, and maybe the operational discipline isn’t where it needs to be. I would say also, the allotment, the merchandising seems to be a key piece of this. Not my area of expertise, but something that I keep hearing coming back, and I know we discussed the last time I was on the show when the announcement had come out, and what these changes were due to, and we also talked about sustainability and changing values. I still don’t think that was necessarily at the core here. I think that’s going to come out more and more as we move forward, and I certainly hope it does.

Carl Boutet:
But this, as Brandon points out, is a stop gap. It’s not something that is going to solve many problems. If anything, it’s probably just going to reimpose more debt on a struggling, even if it’s a thinned out, slimmer version and less stored version of itself, unless they really have a new way of approaching the consumer with an offering that resonates at a much higher level than it has in the last couple of years, then they’re just delaying the unavoidable. Then they’ll just make the cost of that that much higher.

Carl Boutet:
It is interesting though to see these mall operators getting more and more invested into these retailers. It’s something we’ve seen in other markets as well where traditionally these real estate operators are now getting their hands dirty a bit and trying to get invested directly into retail. We’re seeing even some cases where these mall operators are working more off of revenue than they are off of rent. Which is a fascinating dynamic where they have a lot more skin in the game, let’s say.

Carl Boutet:
But I don’t know. In terms of Forever 21, I don’t think this is going to be that the experiment that pays off, but it’s going to make the mall operators a lot more sensitive to the dynamics of retail and the concerns really, and help them be maybe a little bit closer than they’d been in the past to what the struggles are so that they can create properties that will hopefully better serve the retailers in agreements with those retailers that are more in cooperation and almost partnerships than just being senior retailers, a customer that, one goes another one will take his place, which was historically the way the industry was seen. We know that’s no longer the case, and again, I don’t think Forever 21 is going to change that dynamic either.

Justin White:
So I’m wondering if we can go into the history books a little bit and maybe talk about a comeback from a even peripherally similar situation. I mean, I remember Gap’s turn around and probably a decade and a half ago was pretty remarkable, or any more that might come to mind that are a little bit more similar.

Carl Boutet:
I think Kering Group’s doing a really good job, and we were talking about polarization earlier, but when we think about how luxury has regained. So we talked [inaudible 00:29:41] about LVMH and with the Sephora example, but think about the Kering Group and with brands like Gucci and this really high end, and probably doesn’t resonate with a lot of us because we’re not necessarily typical Gucci buyers. But I think that’s a good example. And how it’s influencing others to move back up, like Ralph Lauren and some others, Michael Kors, and they’re trying to kind of regain that upscale market. Maybe not as upscale as Gucci, but still, I think those are brands and they have so much legacy in brand equity that they can leverage. So, that’s for them to regain.

Carl Boutet:
The ones that have a brand legacy or equity tied to mid-market are going to find it a much, much more difficult … That Gap example is probably not the easiest one to think about because of just how they’re struggling right now. But yeah, I mean there’s cycles too, right? I mean, I think one of the temptations in [inaudible 00:30:41] with these markets has been to again replicate and grow in volume, in mass as quickly as possible and lose some of that exclusivity in that edge that made you special in the first place. So any brand that’s right now trying to regain that is probably becoming a little more exclusive, a little more disciplined and less all encompassing and trying to speak to a more specific target market are probably in a better position.

Brandon Rael:
Yeah, great points, Carl. I think another couple segments that are doing outstandingly well are they direct to consumer market with companies like Nike, Lego, and Alay and other brands that are really taking their product and services and offerings direct to consumer via showrooms, otherwise known as retail stores, and owning the brand, owning the messaging, owning the relationship, and avoiding the middleman or the department store. Anything set around the wellness and health and lifestyle is going to continue to do outstandingly well. Sephora’s kind of on the fringe of that, but I’m probably speaking more to the Patagonia’s and the Lululemons of the world who are experiencing significant growth just with that messaging and their branding and their inspiring stories that are really translating to a tight relationship with customers and very close bonds that last few years.

Brandon Rael:
So these are the kinds of things that customers are looking for is inspiration, for joy, for something that’s going to help their lifestyle, their wellness and can sustain them for a long period of time. Luxury you mentioned, LVMHs, [inaudible 00:32:27], Kerings will continue to quite well, and their messaging is on point, the right price offerings and merchandise and strategies, the pricing, and overall the global economy is doing relatively well, so I think that will continue to resonate with the top earners in the globe. So it’s with the middle, we speak of the Gap and J.Crew and others where there will continue challenges, and we’ll see where things go.

Carl Boutet:
Yeah, if they build on the direct to consumer as a solution piece, I think we have to be careful in who we see, the brands, how they approach that and where they’re coming from. Because, Nike is a perfect example of when it’s been part of their DNA from the start almost, and they’re really regaining control over their channels and tightening the ship in the messaging and the way that the consumer sees them. There’s really some fascinating brands that have come rolling, like Brandon mentioned Alay and others. We have the Casper IPO that just happens.

Carl Boutet:
I mean, these are all pretty inspiring stories, but I would maybe create some caution around the D to C brands that came out of the last decade that were so hopped up on venture capital that skewed the numbers and skewed our perception around what their actual success was. But the idea of owning the channel, owning the relationship like Lululemon has done so well and creating community, these are all … make more than about the product. These are all lessons that every retailer, every brand has to really embrace and understand, because that’s the only way you’re going to be successful moving forward.

Justin White:
Hey, so guys, thank you so much for joining our podcast and we hope to have you guys back soon. And if there are any closing statements you guys might want to make about the juxtapositions we’ve talked about today or anything like that, please feel free before we wrap up.

Carl Boutet:
So I mean I think it’s just interesting when we’re talking about juxtapositions, polarization. Just look at the … right now, probably the two richest men, unfortunately, we have to talk about men, we can’t say women, but the two richest men are basically Arnault and Bezos. Bezos has obviously got a good lead, but Arnault is catching up quickly. So I think it really sort of speaks to what the market dynamic is. So, Amazon and LVMH and the two richest men, creating the two richest men in the world. So if there’s not a sort of a more indicative statement around where market is, I think, the market’s capitalization, I guess or the market’s reaction to these two phenomena seems pretty clear.

Brandon Rael:
Right. And let me add to that there is an element of, we’re seeing really two dichotomies is the inclusivity and community side and building relationships and then of the lifestyle brands, wellness brand, the direct to consumer brands, and the reimagined brick and mortar stores. Then also the other end of the spectrum is the exclusivity with LVMH and Arnault’s brand where it’s all about luxury and being exclusivity of the products, the prestige. So it’s definitely two ends of the spectrum. And it’s just the ones in the middle are the ones who are challenged to either they’re going to be aspirational luxury or has an element of exclusivity or they’re more tied to the community and building connections to the customers. So there’s certainly elements within those two spectrums, but it seems to be a paradigm shift over the last few years.

Carl Boutet:
Yeah. And maybe that paradigm can also be explained in exclusivity, making it all about exclusivity and uniqueness versus convenience and price, so that’s usually the way I paint it, but it’s community I think can maybe translate in both of those cases. But it’s still, it’s … regardless, you don’t want to be average in anything these days. You need to really choose your lane and just push really hard at it.

Brandon Rael:
Essentially, have the product available at the time and the place the customer wants to engage with your brand and regardless of what channel they want to engage with you in, make it easy for them. That’s one element is the operational efficiencies and get in and out of the store. There’s discovery, there’s the dwell time, and then there’s building community and connection to a brand. So I think it depends on the customer journey and what the customer is looking for, and it’s up to retailers to step up to the challenge and really set the stage for the next 5 to 10 years.

Justin White:
Brandon, Carl thank you for joinging us today.

Brandon Rael:
It was a pleasure. Thanks for having me, and great chatting with Carl, as always.