Retail Rundown – Jan 13, 2020 – with guests Mina Fader and Sucharita Kodali

Julia Raymond:

Today we’re joined by Mina Fader and Sucharita Kodali. Mina is the managing director of the Baker Retailing Center of the Wharton School of the University of Pennsylvania. Sucharita is a retail analyst at Forrester Research where she is an expert on e-commerce, omnichannel retail, consumer behavior and trends in the online shopping space. Mina, Sucharita, thank you for joining.

Mina Fader:

Thank you.

Sucharita Kodali:

Thank you.

Julia Raymond:

To kick off, our first topic is about Amazon and the waves it’s making in India. So it’s starting off the new decade by widening its global reach and its new partnership with leading Indian retail group Future Retail. Amazon will work with the groups hundreds of hypermarkets to bring groceries, fashion, footwear and household items to customers in Delhi, Mumbai, Bengaluru and Hyderabad.

The deal with future retail will make Amazon the official online channel for India’s biggest hypermarket, Big Bizarre, as it brings its two hour prime now delivery to the nation, which is currently the second largest population in the world. In fact, India is predicted to take over the number one spot from China within the next 40 years. Sucharita, I’d like to pass this to you first and ask, how do you foresee future retail’s partnership with Amazon changing the current retail landscape in India?

Sucharita Kodali:

Well, like so many markets around the world, the e-commerce is growing in India is no exception. But that said, I think that there are a number of things to unpack here. One is there has been a lot of investment from American companies, in particular Amazon and Walmart in India, and I think a lot of it is very speculative and it’s based on assumptions that are kind of placed as a result of the size of the Chinese e-commerce market. India and China are often considered similar because of their size, but the truth is that they are extremely different and everything from the socioeconomic demographics to the retail landscape to the purchasing power of the middle-class are very, very different. I think that there’s even, in my mind, a question as to really what is the addressable market opportunity?

Is it really a trillion dollars? Will e-commerce become a $100 billion market in India? We’ve done some estimates at Forrester, and we really don’t think that the addressable e-commerce market in India is larger than one of the secondary European markets like Spain or Italy, which would make it substantially smaller than I think a lot of the estimates that are out there.

Now then there’s the question of Amazon and Future Retail and what happens there. This is a relationship that’s an online, offline hybrid that, to me, almost hearkens back to the early 2000s in the United States when Amazon cut deals with, you may recall, Circuit City and with Target and Borders Books where it was the fulfillment partner for a lot of traditional retail stores.

That was a series of relationships that actually did not end well. It’s a little bit of deja vu to that where it seems like there are companies that are late movers to the internet and they are desperate to have some presence. There’s some pressure because in India you have this relationship with Walmart and Flipkart that is also looming on the horizon of retail there. It may be creating some strange bedfellows as a result. So I think that it’ll be interesting to see what happens, but really nobody should be able to say we didn’t tell you so when things don’t end up what they were expected to turn out to me.

Julia Raymond:

You gave a bit of context around the situation, and you said a lot of companies are comparing the market to the Chinese market even though there’s a lot of differences, so the assumptions might not be based on realities, which is a very interesting perspective. It sounds like you’re hesitant to say that this will be super successful, at least in the short term, it sounds like. Mina, are you in agreement with Sucharita?

Mina Fader:

Yes, in a lot of different ways. There’s no doubt India is so different. We’re talking about a country where they have two official languages, Hindi and English. Yet they have so many other languages and thousands of dialects. I hear from people who go to India and who live in India that you go from one town to the next and it’s like being in a different country. To have that many people in one location, and think of them as being the same is I think a little shortsighted in terms of understanding their culture.

Amazon has done a lot to try and get into this business. They just opened up a very large headquarters, I guess office in Hyderabad. They have 50 fulfillment centers over there and hundreds of delivery stations all over through the country saying that they can now deliver within a short time period to most of the zip codes within India.

All that’s great. I don’t think that they will be as successful over there as they have been in the United States. I think that the country, India as a whole, is working closely with their own retailers and their own marketplaces over there. I know that Geomark has started over there, and that’s owned by McKesson Bonnie’s Reliance Retail organization. They’d been pulling their products from Amazon and Walmart and reaching out to the smaller suppliers themselves within India. There are these regulatory challenges that are being implemented in India that are not favorable towards these foreign companies coming into the country.

I think it’s a pretty big uphill battle, and no doubt Amazon and Walmart are putting a lot of investments into a country where I think it’s a gamble at this point. So I agree. I don’t see this as necessarily being a slam dunk. I think it is a win/win situation for Future Retail in Amazon right now from the standpoint of the online and offline benefits of either accompany that way, but I’m not clear that that’s going to be a winning strategy longterm.

Julia Raymond:

Mina, you mentioned that they have two official languages. There are extreme sometimes differences within the country, even from town to town, and Amazon is making huge investments. You mentioned they have a new office. They have hundreds of delivery stations so it will be interesting to see if it plays out. It sounds like you both are on the same page with the outlook there. So not to be too negative, but I do have another topic and it is Pier 1, which is a US-based retailer. They just made a huge announcement. They are closing 450 of it’s 942 locations. So this is following nine consecutive quarter sales decline, looming fears of bankruptcy, and a spokesperson for the company, which is 58 years old, said it plans to close distribution centers and trim staff at corporate.

Pier 1 said its lower sales were in part due to fewer customer visits to their brick and mortar locations. Mina, do you think with the affordable home furnishing sector becoming more saturated each year that a turnaround is likely for Pier 1?

Mina Fader:

So to answer that question directly, I’d say not likely. They’ve had troubles for several years. They’ve seen declines in consumer outreach over the last several years. There’s been rumors of bankruptcy for a while. We’ve seen this happen with Sears. We’ve seen it with JC Penney’s, we’ve seen it a bit with Lord and Taylor. Traffic is being reduced. Online retailers like Wayfair and Amazon had become successful in this business in terms of gaining customers. Even the mass merchandisers like Target and Walmart have gone into the furniture business successfully. And while all that has been going on, Pier 1 has really stood still in terms of their product offerings. They had done very little, that I can see, to address the changing consumer needs and the preferences that they have. And so beyond the profits being down and revenue going down and traffic going down, they have a significant amount of debt that’s sitting out there, and much of it is coming due in the very near future.

So they’ve got to cut costs, not only to make them more profitable, but then also to pay back the debt. Typically I have seen that in this kind of situation you do need to cut costs, but probably at least as important, and maybe more so, is the need to go ahead and provide some more interesting product offerings and making sure that they’re providing a customer experience that is appealing to their new targeted younger customers that they need to acquire. And at the same time doing that in order for them to retain their core customers that they’ve had for all of these other years. I just don’t think that they’ve been focusing on that. I’m not sure that an operational move exclusively is something that can get them out of this, and it may be too little too late.

Julia Raymond:

It may be, and I also wanted to ask Sucharita, I saw a JHA report release and they claimed the off price space is the new department store, and with the rise of TJ Maxx and HomeGoods and the success they’re seeing, do you agree with this sentiment?

Sucharita Kodali:

Well, I think that what’s embedded there is that there are certain store formats that seem to be doing okay. Certainly the off-price sector, the physical off-price sector is doing okay. Certainly not the flash sale world online, but definitely the TJ Maxx’s of the world. We’re seeing the dollar channel doing particularly well. Of course you have pure play online retailers doing well too.

The challenges with Pier 1, in addition to all of the things that Mina said that were so true, are also the fact that when you look at the psychographics of home furnishings and furniture buying, or even just any type of home decor issues, it’s a very personal decision. People often have very, very specific needs and tastes and there are increasingly a variety of products that are available online on sites like Wayfair or Amazon or eBay or Etsy that all serve those purposes.

That makes it incredibly challenging for companies like Pier 1 that have limited assortment and haven’t invested as much in their digital efforts to compete. So you have, in addition to the fact that they’ve been challenged to run well, they just have so much in just so much challenging competition in other parts of their business as well. On the low end, on top of that, you have hypermarkets like Ikea as well, which are kind of eating away at them, at the low end, with very high quality merchandise or at least merchandise that’s of comparable quality to Pier 1 I should say, often for lower prices.

Julia Raymond:

Sure. It sounds like both of you agreed Pier 1 maybe has a lower investment than they should have in hindsight in their digital channels, and the limited assortment can be challenging. Just a personal story, I was really surprised. I was searching for a couch recently. I bought one at Macy’s, but as I was in the search phase, I was on Wayfair, and I was surprised to see how many people purchase their couch from Wayfair and they posted pictures of it in their living room. It was really surprising because I don’t think we would have seen that a decade ago. Also, after I decided on Macy’s, they offered an augmented reality in-app experience so you could see the couch in your living room. It actually functioned surprisingly well. So there’s a lot of really interesting things. I don’t know if that’s the ticket, but there’s interesting things other retailers are doing that both of you have mentioned that will make it definitely hard for Pier 1 to rise above the costs that they’re going to need to continue cutting.

Sucharita Kodali:

Right.

Mina Fader:

There were a lot of newer companies, I mean the Wayfair is a new company, but newer, smaller companies. There’s a lot of startups out there in the couch business. And whoever thought that you would purchase a couch online? But they all, a lot of these companies now are even offering however many days free trials and free returns, and all of those other things that are just making it really convenient for the consumer not to go into the store or else you need to give them a very compelling reason for them to get into the store to go there at this point.

Julia Raymond:

Certainly, and white glove delivery, and all of the service add-ons like you talked about. It’s a lot of competition and it’s so surprising that people are buying their couch online, but who knows? People are buying their cars online now too.

Mina Fader:

I did it.

Julia Raymond:

You did? Oh really?

Mina Fader:

I had to do it. Yes, I did.

Julia Raymond:

Oh, how’d you like it?

Mina Fader:

I did not like that … It wasn’t for me. There was an issue. It was actually for my son, and it wasn’t for him, and they made the return process really easy.

Julia Raymond:

Oh wow.

Mina Fader:

I can’t believe how good it was all around.

Julia Raymond:

Wow. That’s surprising to hear because that’s one thing I was hesitant about. Actually, someone on our team purchased her car online and they delivered it, and she said, “Yeah, there’s a seven day test drive period where you can return it.” And I thought to myself, “Well, can you really return it? Do they make it difficult?” So to hear you had an experience where it was really easy is surprising to me. Absolutely.

So the last topic I’d like to go over with you two, as experts in the retail space, are some of the 2020 predictions we’ve been hearing with the start of the new year. So foot traffic analytics from placer.ai named CVS, Target, Ulta, and somewhat interestingly, Bed Bath and Beyond as the likely winners of retail this year. Target for one solid robust sales during the holiday season, and Ulta saw a 300% increase in traffic above their baseline for Black Friday 2019. That’s up 9% from 2018, so they’re doing really well.

CVS is reporting more prescriptions filled, more in-store visits, and they’re attributing this to its HealthHUB clinic concept. They plan to roll out 1500 health hubs within the next two years. So that covers Target, Ulta and CVS. The last one, Bed Bath and Beyond, their shares jumped 5% last week after they completed a sale lease back transaction netting 250 million in proceeds. So their new CEO and former Target exec, Mark Tritton says the move marks the first step toward unlocking valuable capital. Suterita, do you agree with placer.ai’s predictions for 2020, and are there any brands that you anticipate making the greatest impact this year?

Sucharita Kodali:

I think that Bed Bath and Beyond is going to have a lot of the same issues that Pier 1 has, which is that, okay, so maybe you make a little bit of money because you’ve sold off some of your real estate, but the truth is that how far is that going to really take you and is it going to be enough to make all of the investments that you need to make that you should have been making over the last decade? So in addition to catching up, there is also the matter of investing in these things, like augmented reality or whatever new technology is necessary to just kind of stay in accordance with customer needs and demands. I think that that’s what a lot of these companies that are financially distressed are … that these are the challenges that they’re facing, is will they have enough capital to really continue to deliver against a great customer experience?

I’m not sure that this is the answer for them. If anything, it’s just sort of prolonging the agony of what’s essentially going to likely be a shakeout of that particular store. Again, I’m not, not to say that they couldn’t do it or that the news about foot traffic isn’t positive. I think that this is all optimistic, but at the end of the day you have these major shifts at where consumers are purchasing, and other channels. There’s so much competition, and simply investing more in inventory and leaning into fewer stores where nothing else in the store has changed that much or is going to change, that’s not going to necessarily be the formula for future success. That’s why I say it’s sort of prolonging the inevitable, not really transforming a business.

Julia Raymond:

For the interesting one, Bed Bath and Beyond, Mina, are you in agreement with Sucharita?

Mina Fader:

Yeah, I do think that the sale leaseback, they may give them a little bit more runway, but it doesn’t change the ultimate or the real root of the issues that’s out there. So I think it might help them in the short term, but it’s not going to solve their bigger issues. It’s interesting because I look at the other companies, CVS, Target, Ulta, I consider each of those three to be traditional companies. So it’s not that traditional companies can’t make it work, but other companies have done things differently and have embraced the change and the change in consumer in a way that Pier 1 and Bed Bath and Beyond has not.

I think that really is the difference. Unlike Pier 1 and Bed Bath and Beyond, Target has gone to this smaller format. They’ve done a lot on the digital side. CVS and I think the whole healthcare pharma industry is an interesting one because I think there’s going to be so much more vertical integration in healthcare and retailization of the healthcare pharma world and integrating the data analytics, the customer and patient data. Putting that all together is really a game changer in the industry.

So I am very positive about the CVSs of the world. This might be a little controversial, but it’s my perspective look at this. In terms of brands that I think that are going to make a difference in 2020, I think it’s going to be whichever department store Amazon chooses to buy and when that happens. I think they’ll have instant distribution centers, a true integration of offline and online. There’s been so many rumors going on about Amazon trying to buy a department store, and I think that could also be another game changer.

Julia Raymond:

I love that, Mina. That would be, that would definitely be a game changer. Sucharita, are you surprised at all by their picks, CVS, Target and Ulta, or are those traditional like Mina said and not as surprising?

Sucharita Kodali:

Yeah, no, I agree. I think that they’ve definitely … those are three companies that do seem to have evolved with the times and are looking for alternative just alternative ways to drive traffic, to generate excitement, and to generate success. They’ve all had different paths to it, right? I mean, you have CVS investing in completely new businesses. You have Target finally have opened its eyes to the possibilities of omni channel. It was internally kind of a long, long journey to even get to that level of buy in and significant changes in the executive team to get there.

Ulta has probably fared the best of the lot just because of the momentum of the category that it’s in. But also they’ve had some unique advantages. I mean, they relatively recently acquired the opportunities to sell Estee Lauder products. That was a really big win for both Estee Lauder and for Ulta. It’s an interesting and unique playbook in retail because there’re not a lot of brands like Estee Lauder. There are a few, like Nike, that have very selected distribution and their desired products, and they’ve chosen carefully where they’re going to curate their availability.

That has helped the companies that partner with those brands. Ulta is very lucky that there are brands like that in cosmetics because if Estee Lauder, which is a significant part of the prestige beauty space, had decided to Amazonify itself, like so many brands and other sectors have, Ulta may very well not be doing as well as it is doing. So I think that that’s an interesting component of the playbook too, is that how important controlling a supply is and choosing where you’re going to distribute your supply is. I think that there are a number of categories that just got out of control in sectors like consumer electronics or toys or consumer packaged goods, and they’re now paying the price for that lack of discipline.

Julia Raymond:

Very well said. Mina, did you want to add anything else to do the final topic?

Mina Fader:

No, I think it was really wonderful. I guess one other company I would like to think about, and they’re not on the places, or at least not on the ones that we’ve been talking about, is Costco. I think Costco has done an amazing job of being very measured about how they move forward, but had been progressive in this and so they’ve been a real huge success for many years, and you can see it in terms of the value that they’re providing today. So that will be another company that I think is doing fantastically well.

Julia Raymond:

Costco, one to watch this year for sure.

What are you most excited about, I’ll ask Sucharita first, for 2020 in the retail space or even the next decade, if we’re thinking about futuristic type of offerings?

Sucharita Kodali:

For me, I am curious to see how retailers evolve their business models beyond just selling product. And what happens in this world where so much product is commoditized and is broadly available online. What else can retailers do to drive revenue? You know, we have some hypotheses that maybe retailers become the new media companies, maybe they start integrating more advertising in their physical stores. Maybe they become kind of a new form of media.

We have consumer data that suggests that consumers are much more likely to actually respond to and tune into media and physical stores much more than they are to media on a search engine or on a social network. So that becomes really, really fascinating. It’s not surprising because we know that trade funds and slotting fees for bulk stacks and end caps and stores are incredibly effective. But are there new ways to digitize that? Are there new types of advertisers that could make sense in a physical store environment that could provide an alternative revenue stream for retailers? That could be one of a number of different experiments that we see retailers investing in and experimenting with in the future that could not only continue to make retailers exciting places to be, but also to help them with their financial predicaments as well.

Julia Raymond:

Beyond the product, absolutely. Mina, what’s your take?

Mina Fader:

I think a couple of things. One of them to me is the idea of how retailers share their authenticity and kind of how do you match the values of the company with the customers that you’re targeting and making sure that they’re aligned. I think that will lead to and generate more customers, more light customers, and will lead to a kind of mission generated revenue that I think can help.

The other side is on the technology side. I think there’s a lot that needs to happen both in terms of the data analytics and understanding who their customer is, and also technology to make things more convenient. I think that the attention span of our customers, as short as it is now, will become shorter and shorter. So trying to find a way to shorten that messaging process I think it will be something that I’m looking forward to as we move on.

Julia Raymond:

You said share more authenticity, mission generated revenue and technology to shorten the, or to capture customer’s attention quicker and remove friction.

Mina Fader:

Right.

Julia Raymond:

Absolutely. Mina and Sucharita, thank you so much for joining. I believe this is the first rundown where we’ve had two female guests on the show, so kicking off the year in a good way.

Sucharita Kodali:

Thank you for having us.

Mina Fader:

Thank you.