PJ SOLOMON Presents

EP 05: Retail’s Survival of the Fittest in Real Time

June 16, 2020 PJ SOLOMON Season 1 Episode 5
PJ SOLOMON Presents
EP 05: Retail’s Survival of the Fittest in Real Time
Chapters
0:00
Sneak Peek
1:54
Five Years of Change in Three Months
3:36
Real Estate's Upended Supply & Demand
4:47
Is There Room for the Smaller Players?
8:50
The Future of the U.S. Department Store
13:34
Brands as Merchants
16:33
Restarting the Supply Chain
19:19
False Moment of Utopia
21:58
Prospering in the New Normal
PJ SOLOMON Presents
EP 05: Retail’s Survival of the Fittest in Real Time
Jun 16, 2020 Season 1 Episode 5
PJ SOLOMON

David Shiffman, Co-Head of Consumer Retail, speaks with PJ SOLOMON Senior Advisors and retailing luminaries Stephen Sadove and Matthew Rubel about the industry’s paradigm shift and what companies will need to navigate the new world order. 

Show Notes Transcript Chapter Markers

David Shiffman, Co-Head of Consumer Retail, speaks with PJ SOLOMON Senior Advisors and retailing luminaries Stephen Sadove and Matthew Rubel about the industry’s paradigm shift and what companies will need to navigate the new world order. 

Steve Sadove:

Five years of change have occurred in the last three months. There's going to be major winners and losers, and it's a whole new world that each of you are going to be competing in.

Matt Rubel:

You have to be at your game in observation and listening. So look, listen and learn. If you do that during this time of dynamic change, you'll end up on the other side a winner.

David Shiffman:

Thank you for joining PJ SOLOMON Presents. I'm David Shiffman, as co-head of our Consumer Retail Group I lead a team focused on providing strategic and financial advisory services to public and private companies. Today I'm joined by two longtime leaders in the retail industry. First, welcome to Steve Sadove, who has served as Chairman and CEO of Saks , Inc., President of Clairol and President of the National Retail Federation. He is a founding partner of private equity firm JW L evin and serves as a senior advisor to PJ SOLOMON as well as to Mastercard. My other guest, Matt Rubel, is Executive Chairman of toy a nd children's furniture maker KidKraft. He has extensive CEO and board experience, including currently serving as an Independent Director of Hudson's Bay Company and Treehouse foods, as well as Vice Chairman of the executive board of private equity fi rm M idOcean Partners. Matt is also a senior advisor to PJ SOLOMON . Why don't we jump right into it? 2020 has been an unbelievable year. So far as a result of coronavirus, who would have ever thought that stores nationwide would be shut down for many months? Let me turn it over to you, Steve, given what's going on in the marketplace, what are you seeing in retail and consumer?

Steve Sadove:

Well , thanks, David. And it's great to speak with you and Matt about what is an exciting and challenging and differentiating time in retail. My guess is you've seen about five years of change take place in three months. It's changed in terms of digital, malls, value, omni-channel and it's accelerated what I call the winners versus the losers. The shift online is probably doubled what it was in the past. So all of retail was let's say, 11, 12% digital, it's now gone to 25% digital. The consumer has gone towards more off price, discounting wants to needs. The mall has become less relevant. Consumers are fearful of whether they go into them or not. And finally, you're in a world where safety is most important. Matt, what do you think?

Matt Rubel:

I believe that while you moved into this need moment, I think you're still going to get into a desire moment down the road. The key drivers of purchase intent, the key drivers of why we buy things to define us, to engage in, in our homes to engage in our lives will continue. But there will be nuanced changes in how that's delivered and the digital world will take hold in doing that much more effectively, Steve, as you and I have talked about there's 660,000 restaurants in the United States and a million retail outlets. Of those 660,000 restaurants, more likely than not 100,000 of them will go away. Maybe more, especially in the casual space and in the, in the retail space, you're gonna lose at least a hundred to 150 thousand of those stores.

Steve Sadove:

Yeah, not to be harsh about it, Matt, but we've got three or four times as much retail per capita in the U S than let's say in Europe. For the first three months of this, it was about survival. It was about cashflow, furloughing, how do I restructure my balance sheet? How do I get through this mess? And it has been very, very difficult. You're now hitting on what the real issue is. What's the future going to be looking like? We're now where we've done that. They've they , lots of debt has been put out. A lot of equity has been issued. You've had a lot of companies that have really gone through some difficult times, but now the question that you're addressing is the right. One of what's the future going to be looking like, what is the next round or phase of retail? What does it mean if you're a manufacturer or if you're a retailer, what should you be selling? Is fashion going to come back? If you're an apparel retailer, what is going to be the future of luxury? My guess is it's not going to go exactly back to what it was before, but by the way, it's not going to be 180 degree different either.

David Shiffman:

So Steve, we couldn't agree with you more. You touched on fortress-like balance sheets , size and scale matters. Is there a room for the small player here? What happens in the future?

Matt Rubel:

I think that the small player needs to know their niche better and needs to find the tools that they can use that will enable them to have the effectiveness and efficiency of data and consumer connection that the larger companies have with scale. And so there will be a continued growth of tools in the digital and data world that they will need to embrace so that they can be more effective and efficient, and that's going to be a tough transition. So there will be a moment where the small businesses are in fact disadvantaged to grow without those kinds of tools.

Steve Sadove:

This has been a period of the big, got bigger, and a lot of the small are going away. And a lot of the online pickup in store, curbside pickup, contactless payments, all of these digital type of new technology tools, the big players have been investing in and had the capabilities. A lot of the smaller players are going to have to do some real catch up and some of them aren't going to be able to do it. So you're going to see more consolidation, more closures as Matt's talking about. And those that do play are going to have to have made those kinds of investments in technology and they're really going to have to have a point of differentiation that makes them unique. The consumer wants to support small, but boy, go back to the safety, go back to all the expectations of behavior, whether it , again, it's going to be, they want product anywhere, anytime they want to get it. They want to have all the features and functionality that an Amazon delivers. And some of the small guys are going to have a hard time doing that.

Matt Rubel:

It comes down to community, Steve too. And kind of, how do you define your community set? You know, whether it's a geographic thing or whether it's a, you know, behaviors thing, making sure that you as a retailer, you do that. Also the use of the word retail is somewhat pejorative. Implied in that is four walls. Well, guess what? We have to stop thinking about omni-channel retail. Just say retail is selling stuff to people. It's having an engagement in a relationship, whether it's buy online, drop off...

Steve Sadove:

Oh, it's exactly. It's going to be social commerce. It's going to be all of these things.

Matt Rubel:

That's a big takeaway here. We've had a ton of Zoom calls, you know, you and I have seen each other more in the last three months than we've seen each other in the last three years. I was listening to somebody who was talking about the reinvention of their four walls, and what's it going to be, they're going to have fewer of those places. They're going to have broadcast or kind of studio space to engage in what you want to do with social media and things like that. And then they're going to have the place where you can touch, try on and get other services. At the high end, you're going to end up with luxury services because you know what, 15% of the customers probably do 85% of the business anyway. When you get down into the mass, you're going to have to kind of figure out how to move a ton of people through your store, but give them the option to use the digital world, to shop prior and then make their shopping more effective and more efficient. So those changes about convenience are redefined. Those things around loyalty are redefined.

Steve Sadove:

All different kinds of marketplaces that are geared towards, let's say the luxury market or other marketplaces and other things are going to emerge. So its marketplaces, you're going to see more of the resale. You're going to see more of the rental. All of this goes back to what are you defining as retail? Because it's not just the brick and mortar, all these different forms. Coming out of the last recession you had new forms, like the Gilts of the world that came about. This time around it's going to be the consumer again, the consumer is king or queen, and all these new formats are going to take place. I think that things like Shopify have created the opportunity for everybody to become a retailer .

David Shiffman:

So Steve, based on that, let's drill down. Both of you have in the past about you can't over-generalize about retail, that it's very sector dependent within retail by category. Let me ask you, when you talk about marketplaces is the department store the marketplace of old? What's the future of the department store in America?

Steve Sadove:

Even when you say department store, you got to break it down. What do you define? Is Saks, Neiman's or department stores at one price point Macy's is another kind of department store. Are we defining a Kohl's or a TJ Maxx as a department store? So there are so many different segments. The real issue is that the department store does what the mall used to do. The reality is the future of wholesale is going to change. And if you say a department store in Europe, for example, 60, 70% of it is concession. Japan, 90% of its concession. Maybe the future of the department store is going to be as a real estate play, where brands showcase their wares and it's a place that has other things going on, like a mall and department store plays like a mall and people rent space. The traditional department store, as we know it today, is going to have to evolve.

Matt Rubel:

I'm going to jump in on that. When a department store was at its best, it created aggregated services and aggregated convenience and aggregated value that then they assorted department by department that, which was a reflection of what society needed at that moment in time to provide that, to enable loyalty and the best distribution network into the marketplace. So therefore lets start with the first thing, change of speed, speed to market ability to know what the consumer wants. It is no longer push oriented, it's pull oriented and therefore the speed has changed. So the buying and reselling that a department store has lived on must change. So it must get closer to the consumer and therefore it must disintermediate itself and let its vendors kind of get to them faster without this like extra three to five months of buying and selling that happens between them. And so we must find that change and that rapidity of getting there. Then what services do we provide in the department store? What are the value things? What are the ways in which we create continuity? What are the convenience tools and for a department store to survive and the mall is going to have to look at this too, is what are the services that I provide that in an aggregated assortment work? And that aggregated assortment may not be, you know, 70% apparel. It may be 55% or 50% apparel because there may be other goods that they're living their lives with. And we have to figure out how the department store will assort into that.

Steve Sadove:

I think your points are well taken. The inventory management of this thing. I'm not so sure the department stores, especially the , where , how it's operating today should be, or can be the buyers and be able to assort and make all those choices to the way that the consumer wants to be able to get product. The margin structure isn't right, buying other people's goods, reselling it at what the right margin rate is, who should own the inventory, who should take the risk on the inventory? All of that I think has to change.

Matt Rubel:

We're a hundred percent aligned, which means a big change, which has been happening over 20 years, but will now happen even more rapidly is the brands themselves become retailers. And so they must build out, they have more margin, they are narrower, but they have to figure out how to become retailers. Now it's done at the luxury end, it's done in some of the middle ends, but how do they find the best real estate at the lowest price? And a department store can offer that to them as opposed to the more expensive real estate in the mall itself, which ultimately leaves you, why some of the real estate REITs and things like that are actually going to have to go through restructurings.

Steve Sadove:

Butgo back to your question David about the department store. The department store and the CEOs of department stores for so many years, it was the merchants. That was the role. They were the editors, they were, they thought they understood their consumer and they would then go buy and go find those innovative new products for consumers. I'm not so sure that that's the world of what a department store is going to be in the future. I think that they're going to be an operator. They're going to run real estate. They're going to be able to have floor operations, moving of goods, and that the merchants are going to actually end up being the brands and that the brands as retailers, as Matt was talking about, taking it in the luxury side, Gucci brands like that. They're 80% retail already, but I think that the brands are going to be controlling much more about the innovation and the product side.

Matt Rubel:

The area that we've skirted around, but haven't directly dealt with, which is that when you don't have the ability to manufacture into a place where the merchandise rests, it changes your whole supply chain because you're waiting to see what your demand is. And so finding the tools that will enable you to test assortments, test ideas more effectively so that you know where to buy within your actual supply chain is going to be more critical. So how medium sized businesses embrace that will be very, very important.

Steve Sadove:

You're raising an important question, which is really the evolution of the role of not just test and learn, but analytics fact-based, if you start it and you look at the DTC companies and the Amazons of the world, they're very analytic data oriented. They understand their consumers really, really well. The traditional brick and mortar retailers, a lot of them really haven't had that level of capabilities of understanding their businesses, the way that , uh , a brand that started online does. And I think you're going to have to go back to where the investments have to be made. Anyone who started as a brick and mortar retailer Hasn't really gotten to that level of depth of understanding of their business. And they're going to have to make a lot more investment in analytics than they have in the past.

Matt Rubel:

You know, you have the consumer stuff that's measured, but also you can measure your sleep mattress. You can measure what happens at your workout. You can online stream your fitness experience. What are the things that you believe will change how we do engage and get people to be a part of the community? And what are the things that people should be thinking about is what I'd call, you know , kind of retail, entertainment or engagement. How different is it today?

Steve Sadove:

You're on an important topic, which is everything is about community. It's about measurement. It's about health and wellness. The consumer is focused on, especially because they've been so tied up in their homes in the last three months. And they've been in hibernation and they've had an opportunity to think about, you know, what's doing well, cooking and self-improvement and fitness. You see companies like Peloton killing it because people are now focused on measuring their own fitness. So I'm seeing that customers are much more looking at gosh monitoring my health. I'm thinking more about the role I have in my community, all of the social justice stuff coming out right now, people are really rethinking priorities.

David Shiffman:

You know, Steve, that's a good point about priority shifting. And actually in addition to these current conditions, it has a significant impact on supply chains. What do you think about that?

Steve Sadove:

I think you're going to see a fair amount of change in what we would call near sourcing. And I do think that as we look about the entire demand structure and speed to market, that we may trade off some of the costs side to go and have a much more locally sourced supply. I'm not sure how much you can do of it, but I do think that's going to be an area that gets them focused.

David Shiffman:

There were stores set with Easter fashion goods left on the floor when the stores went dark. How does a management team get their arms around clearing their existing inventory without scaring off their customer base, restarting the supply chain and flowing in goods that customers want on the scale that we're talking about here,?

Steve Sadove:

It's going to be a tough one. I remember back in 08-09, when we went through the recession at Saks and we were dealing with a 25% cut in demand. Now we're dealing with what was a 75% decline in demand. There's no simple answer. What you're going to have is some of the product that's sitting on the floor, you're going to have to clear at ridiculously discounted prices, 75% off let's say. Some of it's going to be put away and use til next year. Whatever they could, they pushed back on the suppliers and the suppliers were having to eat the product. And this is dealing with destruction of balance sheets across the entire spectrum. What they'll do is some of it will go to TJX and the other off price players. Some of it will be destroyed, and you're going to clear the balance sheet. Everybody's resetting their balance sheets. So they've written it off essentially already, just getting rid of it. What they want to do is create an open to buy. And the real trick is as they go into the fall and into the holiday season, how do you order in terms of how much do you order for? I've seen forecasts, and right now we're all excited because the opening has gone a bit better than anybody expected. Is demand going to be flat? Is it going to be growing? Is it going to be down 30 or 40%? So you've got to be very careful about ordering because, one there's a cash issue, but also if you order too little, you're going to be missing out on an enormous amount of demand. You order too much and you're right back into the markdown games . So there's a real balance in terms of the risk profile that you want to take going forward. But as it relates to the spring, a lot of this has just been written off on the balance sheet.

Matt Rubel:

We're in a false moment of utopia. The stock market is at or above last year at this point. And yet balance sheets have never been worse and operating profits are bad and people are unemployed at record numbers, but because they're getting the extra $600 from the government and other things on average, they're doing as well. So we better darn well figure out a way to get those jobs started before these unemployment benefits run out, or we're going to end up with this thing happening right at Christmas. When you know, people are going to expect demand to come back and it's going to be very, very choppy at the operational and street level. So keeping your powder dry, being agile. I mean, to me, if there's one other counselI could give anybody and running any type company, you must set yourself up to be more variable and more agile than ever before. And the dynamics of that on shorter time periods to get stuff done is without a doubt, the most important thing,

Steve Sadove:

Matt, you're absolutely right on that. I think agility is going to be key and I'd be really careful today. We're sitting here ,when we're recording and all of a sudden everyone's talking about the V recovery.Two weeks ago, we were talking about the swoosh recovery. Nobody knows the answer. We don't know what's going to happen on the health front. We don't know. There's so many unknowns and agility is the most important word that you can think about right now.

Matt Rubel:

And then there's one other thing that I just think people in any business that does global sourcing needs to think about. And that is that in the United States, we are in a trade war, whether or not it's stated. And we are in an economic war with China, it does not mean about political party on this comment. And that is going to lead to some very severe and stark differences and moments that are not elegantly managed by either side. And so I think that we, as a nation need to find ways to diversify, whether it's near shore or other, the ways in which we build our businesses. And if you're a multinational company and you happen to have a business over in China, you know, and it's a big growing part of your business where you better have an enterprise risk management plan that really deals with, well , what happens if we get into a fight and they shut me down.

David Shiffman:

So Matt and Steve, both of you have been longstanding business leaders, CEOs, board members and seen a lot of this world in the world of retail and consumer. What one piece of advice would you give to a sitting CEO who's about to reopen and coming out of this to steer through this and go on and prosper when we all play through this over time?

Steve Sadove:

I think that you have to think about agility. You have to really understand speed, e-commerce, inventory. You want to be flexible. You want to be moving as much as possible from a fixed to a variable cost base. You have to invest in analytics. The consumer is changing, but they're not. There are some basic values. So it may be in longer term. It's going to be a 20, 30% shift in how they think, but that's critical. My one piece of advice is really understand the value set of your company, your people in the end, it's about leadership. It's about creating a culture for your company and a set of values and are you during this difficult period, reinforcing the value set that you want for your organization? Are you treating people the right way in a difficult period of time? Are you being true to what you want to stand for as an organization? And are you communicating well? And I would tell you the communication over and over again, best communication is what drives organizations.

Matt Rubel:

To answer your question on what is the one thing that I would counsel people to do, and it is to listen. Listen to their consumer, listen to their marketplace, listen to their people and listen to that which can enable you to be the most effective with the constituents that you want to address and the business that you want to build. Then the tools of agility, the tools of today must come in to enable that listening more effectively so that you can dynamically address that which needs to happen in a marketplace of today. We will move faster. We are more fragmented, both on a social standpoint and from a consumer standpoint and an on a distribution channel standpoint. So listen, listen, listen. And if you listen, you will bring things together and you will be a winner on the other side.

David Shiffman:

Well, that's fantastic. So Steve and Matt, thank you very much for your time today. Your insights are always much appreciated and we look forward to more of these discussions. Thanks, David. Thanks, David. Thanks for listening to PJ SOLOMON Presentts. For more information, go to pjsolomon.com.

Sneak Peek
Five Years of Change in Three Months
Real Estate's Upended Supply & Demand
Is There Room for the Smaller Players?
The Future of the U.S. Department Store
Brands as Merchants
Restarting the Supply Chain
False Moment of Utopia
Prospering in the New Normal